With business models expiring faster than ever before, the companies that are successful are those that can diversify and create business model portfolios, writes Mary Cronin.

All organisations have a business model but many struggle to articulate it.  In the last 15 years we have seen new business models emerge and others die.  If you are not thinking about your customers needs and the problems you solve you’re likely to be overtaken.

What makes a business model successful hasn’t changed.  Companies need to focus on real customer needs with a scalable and profitable approach.

What has changed is that business models expire faster than ever before. Successful companies have the ability to diversify and create business model portfolios.

Dell had an innovative business model, but failed to reinvent itself. Kodak had an overreliance on a legacy business model in analogue film and lived very successfully off this for years. It was an innovative company and helped create digital photography.  However, it went bankrupt as its innovation failed to create a successful business model for digital.

Too many organisations are focusing on product or technology innovation when really the competitive advantage is on the business model (the platform that drives it).

Why is the iPhone still ahead? Apple did something much smarter than create great technologies and well designed products. It built a smart business model platform.  Apple’s real innovation was to make downloading digital music easy and convenient. Steve Jobs created ‘switching costs’.  Once you have 2,000 songs on your iPhone it’s hard to switch and customers get locked in.  Apple’s business model is based on low-margin iTunes music to lock into purchasing the high-margin iPhone. This business model defined customer value in a new way and created new solutions to solving customer problems.

Business model innovations have reshaped entire industries. For example, low-cost airline Ryanair grew from a dot on the radar screen to the largest European discount carrier. Nespresso sold high-end coffee-makers for years and had a monopoly on selling refills. By locking consumers in it created recurring revenues. However, in 2012 some of Nespresso’s patents on the first generation of pods expired. This brought new competitors and a huge challenge to the existing business model.

At the same time the mother company Nestlé, developed new ideas based on the technology, but with different business models. It created Nescafé Dolce Gusto and targeted the mass market mainly for cappuccino drinkers marketing it through the Nescafé brand.  It launched pods for specialty tea as a pilot in some markets to create a great tea experience. It targeted a different market and launched BabyNes (not coffee or tea!) – a baby formula in a pod: place the pod in the machine and in 30 seconds the bottle is ready. Here, it is using a different model and experimenting with rental as not everyone would buy these. Nestlé has now diversified and are managing a business model portfolio to sustain growth and diversify risk. The right business model can be the difference between success and failure for the same product.

Business model innovation (BMI) is nothing new.  Creating disruptive new business models is what start-ups do. However, in most large SMEs and corporations, business models are lower in the pecking order to brands, new products and services.

Your business model will your competitive advantage differentiator in the 21st century.  Companies that fail to reinvent or diversify could quickly become obsolete.  You need to challenge outdated assumptions, validate your value propositions and understand your customers’ needs.

A survey by the Economist reported that over 50pc of executives believe successful business model innovation will become more important than product or service innovation.  Many CEOs talk about the need to adapt their business models and say that extensive changes are required.  They are looking for more efficient ways to operate in existing markets.  They want to create entirely new markets, new opportunities and competitive advantages that will differentiate them.

In the end it’s all about what customers want.  Unfortunately, some companies have an overreliance on legacy business models.  Unless you want to be the next Kodak, innovating in the lab but not making it to the market it’s essential to be clear about your business model.

How are you sustaining growth and diversifying risk in your business model?

Mary Cronin is co-founder of ThousandSeeds, which was set up to stimulate entrepreneurship, innovation and business growth. On 19 September she will co-present Smurfit Executive Development’s Creating and Executing Innovative Growth Strategies Masterclass.

Link to Business and Leadership article http://www.businessandleadership.com/leadership/item/47394-re-inventing-and-diversifyi