The Path to Competitive Advantage is through Business Model Innovation

Anyone who's been responsible for a business has asked this question: What is the most important next step? Do I expand into emerging markets to find pockets of rapid growth or lead the team to fight inch-by-inch for market share in existing product lines? Do I expand R&D or focus on core products? Maybe I step back and focus on building out the internal team?

So, we do our best to set direction and find the time to do the critical and still mind the urgent.

What’s the most important next step?

This question must be answered carefully after an honest and rigorous examination of your business and markets. But if one were forced to bet, the right bet is probably on building new business and revenue with a laser focus on hearing and responding to your customer base.

51% of C-Level executives surveyed by the management consultancy, Gartner, indicated that revenue growth is their main priority going into 2023. This remains the majority, but it holds a less commanding grip of the C-suite than in previous years. Other issues such as personnel and supply chain matters have increasingly been cited as the number one priority. But in the current operating environment the old tension between growth or profit is incomplete. The right kind of revenue growth will strengthen your top-line, improve valuation and improve pull-through and thus the bottom line.

The right type of revenue growth is aligned, diverse, and convergent.

By “aligned,” we simply mean to ground our call for growth in a practical reality: strategy and execution together yield change, apart they lead to badly used resources. One either does the wrong things or the right things poorly. Any new business or revenue streams should be in keeping with the vision, branding, and capabilities of the existing firm. This is particularly important in smaller, newer ventures where every transaction is viewed as a referendum on the brand.

This strategic alignment needs to be held in tension with diversifying revenue. Solving a need or just providing one product is not enough. Sustainably being the best at something the customer values is now simply the entrance fee —to win, one must diversify revenue creating whole new businesses and revenue streams.

Businesses usually have a process for maturing innovation, for a moment set those aside and reflect on two questions:

• What would my existing client base absolutely love?
• What do we already do that adjacent markets or customer sets would love if we could put in front of them?

These questions may point to whole new business ideas. A classic example is the Rolls Royce “power-by-the-hour” model. Rolls Royce is best known for their luxury cars, but much of their revenue comes from their aircraft engine business. The sale, however, is of a service-operating hours on the engine. This business model was started 1962 when the company offered the Viper enginer not as an equipment sale but instead as a fee per hour. This approach was the foundation of additional offerings such as a global fleet of repair facilities and remote diagnostic and even predictive engine health maintenance. This carefully aligned the needs of the customer with the work and capabilities of Rolls Royce. Together these create a profitable revenue stream for Rolls Royce while decreasing risk to the operations.

Also consider a regional manufacturer of pre-cast concrete components —the sort you might see in water infrastructure or building projects. They found that with the increase in utility-scale solar, the developers had a problem. Erection of the civil work underlaying solar PV arrays was delaying projects and adding uncertainty to schedules. The pre-caster identified some modular geometries that could be trucked to the site and quickly erected. The result was lower-cost solar sites and a new business stream for the pre-caster.

Look for convergence

An interesting article and POV was recently written by Chan Suh, CDO & Charles Gariepy, Engagement Manager at Prophet stated

Businesses that embrace convergence don’t just add new digital capabilities to solve existing problems, they use existing digital capabilities to work differently, solve new problems and deliver growth.

Convergence-revenue comes from working together with others as a unified whole to achieve some purpose. In some cases, like the pre-cast company, the capability to deliver on what the customer would love was all possible “within their walls.” More commonly, however, there will need to be a mixture of resources and capabilities from several firms. Consider a health app that typically tracks and recommends meals and workouts based on your goals and dietary needs. Now, imagine that the same app not only provides personal meal suggestions but provides the opportunity to order from a meal kit service within the app. This could lead to revenue growth for both the app (perhaps through an affiliate marketing relationship or even more formal M&A activity) and for the meal kit who has diversified the distribution channel to an entirely new user base.

Imagine a scenario with Swarovski, an Austrian maker of crystal jewelry and accessories. They hold a premium position and are a market definer leader in their space. Gucci, similarly, is a high-end luxury leader. Each company though, have a challenge. Swarovski needs to diversify revenue streams without cannibalizing core sales; Gucci needs to continue offering new high-end offering without diluting or confusing the brand. The “convergent” solution could be to collaborate-Swarovski crystals on first handbags and later other accessories. By starting with VIP customers this enhances the prestige of the offering, allowing it to support a whole new class of products.

Finding opportunities for convergence starts with one big question:

Why should this business exist?

This question increases clarity and alignment with the vision. Consider the health app example. If the developers had begun with the question “How do we increase monthly recurring revenue?” there is no insight or common purpose to lead to convergent revenue.

Each of these come back to a simple conversation—What would the customer love, and how can we help that come true? This will help bring clear understanding of the most important next step.