Why Business Models Matter

This is MadeMeThink – A Weekly Publication with Curated Content for Visionaries, Innovators & Critical Thinkers Exploring the World of Tomorrow. Written by Prof. Thomas Metzler, Ph.D.

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Why Business Models Matter

In this issue of MadeMeThink we look at why (digital) business models can be important drivers of innovation and differentiation. I teach a course on "Digital Business Models" at the Vorarlberg University of Applied Sciences, from which the following thoughts originate.

At the beginning of the course, I always ask the students what characterizes an innovative company or a young, successful startup? When I discuss this question in class, most students think of new technologies: AI, Web3, the Metaverse. But hardly anyone thinks of business models. But often it's simply a “new” business model that does the trick, not the technology ??

Let me explain this with an example. Do you know the brand Gymshark? Gymshark is a British fitness apparel and accessories brand, that has risen from being a side-hustle to a unicorn. The two 20-year-old school friends Ben Francis and Lewis Morgan founded Gymshark in 2012. Francis was still working as a Pizza Hut driver when the company was founded. This is the guy...

So how did two 20-year-old school friends manage to grow a global fitness clothing brand? I mean, the apparel market is not exactly easy to conquer with established rivals like Nike, Adidas, Under Armour or Puma. So did these two dudes develop new textiles that are 10x better than the others or was it smart textile technologies that gave Gymshark the competitive edge? Nope. It was probably the lack of budget that gave Gymshark its competitive advantage by forcing the founders to focus its efforts on a specific marketing channel: Social media. The big established brands didn't really take social media seriously back then, which is how Gymshark became one of the first brands to work with influencers… and those were the days when not every micro-influencer wanted to be paid big bucks $$$ for a post.

If you now look 9 fields of the Business Model Canvas (see below), the decisive change in the business model of Gymshark mainly takes place in a new design of the "Channel" field. So a small change to a business model can have a big impact ?? That fascinates me time and again. Often people think that all 9 fields of the Business Model Canvas have to be structured different for business model innovation, but this is not the case. Sometimes it is simply changes in selected fields of the business model canvas that have a big impact (Not really familiar with the Business Model Canvas? I wrote a longer version of this article for my students, which also includes an explanation of the Business Model Canvas, read it here).

Think of Dollar Shave Club. A successful startup that made an exit to Unilever for 1 billion in 2016. What did Dollar Shave Club do? Have they developed a new AI-powered razor that adapts perfectly to the shape of your face? Did they have blades so sharp that even Superman could cut himself with them? Nope. In fact, their razors were probably even worse than those of the competition because they were low-cost products. They simply had a different business model: Sale and shipment of razors as part of a low-cost subscription for cost-conscious (and convenience-oriented) customers (“for a dollar a month”)… and okay, they also had a really funny promotion video:

Here should be a video now, but Linkedin won't let me upload one to the newsletter. The video is really funny, so you should watch it on my publication MadeMeThink.xyz - and subscribe to my weekly newsletter there for all the content ????

Many others have followed the subscription business model, and now a lot of things can be bought as a subscription, from socks to diapers. For these companies, the new business model was more of a differentiator than their product.

So if business models can offer differentiation and a competitive advantage, it makes sense to design them to your own advantage, or as Robert Kiyosaki says:

?Life isn’t fair. It never will be. Quit trying to make it fair. You don’t need it to be fair. Go make life unfair to your advantages“? - Robert Kiyosaki

This also applies to the business (model) world. Make it unfair to your advantage. When designing a business model, think about how you can achieve a competitive advantage through the business model. Because it is difficult for a challenger to attack an established player with the same business model, or as Reid Hoffmann puts it:

?If you’re a scrappy startup who wants to slay giants, you have a better chance than you think. But only if you know where your true strength lies. Try to fight the giant on his own terms, he’ll crush you where you stand“ - Reid Hoffmann

So what does it mean from a business model perspective to beat the giant on its own terms? For example, if you wanted to gain ground in the insurance industry with a digital business model, you would set up the business model in such a way that traditional insurance companies would find it difficult to follow. You could develop a business model in which the traditional sales team is completely eliminated and you rely on direct sales via the web (see slide below for more information). Going down this path would already be a challenge for many established insurance companies, because as you can imagine, their sales team wouldn't be happy if they now relied heavily on direct sales via the web. You therefore would create an Innovators Dilemma…

ChatGPT please explain to my readers what an Innovators Dilemma is according to Clayton Christensen:

The Innovator's Dilemma is a concept introduced by Harvard Business School professor Clayton M. Christensen in his 1997 book of the same name. It describes the challenge that established companies face when they need to adopt new technologies or business models that disrupt their existing markets. These innovations often start as lower-quality or less expensive alternatives to existing products but gradually improve over time to meet the needs of a broader customer base. The dilemma arises because focusing on current customers' needs and maximizing profits from existing products can prevent companies from adopting new technologies that do not initially meet the demands of their mainstream market.This can lead to a situation where companies are overtaken by more agile competitors who embrace these new technologies and eventually capture market share by offering superior or more cost-effective solutions. The Innovator's Dilemma highlights the difficult balance companies must strike between exploiting current opportunities (incremental improvements to existing products for current customers) and exploring new ones (investing in potentially disruptive innovations that may not initially appeal to their current customer base).

Thanks ChatGPT, good having you. As you can see, business models are highly important for the creation of new value propositions and in terms of competitive differentiation. This is why (understanding) business models matters…

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Disclaimer: The thoughts published in this publication are my personal opinion and should not be considered as investment advice or a recommendation for any type of action. I am not a financial expert. The startups, organizations or corporates highlighted in this publication have caught my interest. This mention is not an endorsement or recommendation to engage with them. Readers should always do their own research.