Business Model Innovation: The Attacker’s Advantage

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If you’re a startup attacking a large, established competitor, you don’t have too many advantages. The incumbent already has a lot of existing customers – that’s why they’re large. They have clear channels to market, established supply chains, revenue, money in the bank. They have everything. How can they lose?

If you attack them head-on, you don’t just need to be better, you need to be 10X better.  That’s a big jump.

What should you do?

Your one big advantage is that your business model is not locked-in, but your opponent’s probably is.

Here are two examples.  First, the New York Times.  Stowe Boyd points to a great quote about them from an interview with Felix Salmon and Jonah Perretti:

I was a little bit surprised that the report didn’t spend much time tackling the hardest issue, which is why do they need to have so much revenue? It’s because their cost structure is made for print. When you look at how much revenue comes from print and the scale of their operation because of print, the challenge that they’re facing moving forward is how do they move into a post-print world….

It just seems like if you’re reading a secret internal report for The New York Times, the things that people would be stressed about, isn’t that, oh, the website’s not good enough, or they haven’t moved fast enough with this feature or that feature, but more like how do we deal with this very different cost structure of our future business, compared to our past business.

As the competition shifts to online, the size and clout that has been the competitive advantage of the NYT for years is now a problem.  All the innovation initiatives in the world don’t matter if your strategy isn’t right.

When digital-only competitors like Huffington Post, Politico, and the myriad blogs and news sites that have arisen over the past few years started out, they didn’t try to compete with the Times head-to-head.  That is a losing proposition.  Instead, they innovated the business model.  This is nearly impossible for the large incumbent to copy, because they can’t easily change their cost and revenue structures.

The second example is Barnes & Noble.  In the 80s and 90s, B&N and Borders became enormously successful because they became enormous. Instead of carrying 10-20,000 titles like most bookstores did at the time, they created a competitive advantage by carrying 120,000 titles.

That worked fine, until Amazon. When Amazon started to carry all the books, then 120K wasn’t much of an advantage. On top of that, B&N and Borders were competing with a firm that had a much lower cost structure, since Amazon didn’t have to invest in all the prime real estate that you need to carry a lot of physical books.  The size, which had been their key point of difference, was now a big disadvantage.

And yet, smaller bookstores that stand for something are doing pretty well these days.  They’ve found innovative business models that help them successfully compete not just against other big stores like B&N, but also against Amazon.

Business model innovations are extremely difficult to copy.

If you’re starting out, you don’t just need a great idea.  You need an innovative business model too – this is the best weapon you have against large incumbents.  The one big advantage that you have is that you’re not locked into whatever business model is currently the dominant one.  Here is how Benson Garner puts it:

Contrary to popular belief it’s not finding a great idea that is the most challenging part in a corporate or start-up venture. One of the most difficult tasks is the search for the right business model to support your idea. It’s hard work and the threat of failure lurks around every corner.

As we face competitive turbulence, the key question to ask is: if we were starting our business right now do, would we do this?  If you were starting a newspaper right now, would you invest 90% of your assets and resources in print?  If you were starting a bookstore, would you make it massive and undifferentiated, in a retail location with high rents?

No.

That’s the attacker’s advantage – every time the answer is no, they don’t have to do it the old way.  They can innovate the business model.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

7 thoughts on “Business Model Innovation: The Attacker’s Advantage

  1. Great post Tim – It reminds me of an idea I heard at an ISPIM conference a couple of years ago by John Bessant – a Professor in the UK. He talked about how the old idea of the “big guys” winning due to scale was not quite true; that it was actually access to diverse resources that was the key. Now, smaller players can have even greater access to diverse resources than “big guys” (especially those who are operate in a closed manner), and can use that access as a great source of competitive advantage.

    I tucked that idea away as something important – however, it seems difficult to attach specific value to an intangible such as access. I’m sure that this idea contributes to some of the innovative business models, just not overtly. Have you seen any examples of this?

    • Thanks for the comment Ellen. John is great, he’s pretty consistently interesting. I think about access in network terms – you can definitely build a competitive advantage based on the networks that you build. And the big advantage to this is that networks are relatively intangible, so it’s very difficult to copy them.

      In business model terms, this gets picked up explicitly in the business model canvas with the partnerships box.

      One good example of doing this is the Hindustan Unilever Shakti initiative in India (http://timkastelle.org/blog/2010/04/how-to-experiment-to-support-innovation/). This is a big firm, not a small one, but the big advantage they’ve built is the network of 45,000 entrepreneurs that are now selling their products in rural India. That’s a really difficult set of resources to copy (HUL already has the best people in their network), and a significant business model advantage.

  2. As I am reading this, I am reflecting on the great differences between businesses that harness technology to innovate and disrupt – and those that seek to maintain position. Innovative companies are using technology to put their customer at the center of everything that they do – contrast that with the Xerox companies who are missing the market foresight to pre-empt the competition.

    The app economy is exploding around us, companies blossom and fail with increasing velocity. With so much choice, perhaps the largest factor affecting success is customer fickleness?

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