Business Model Innovation, the Secret Success Formula
The most successful businesses often are not the outcome of brilliant strategy, contrary to what people normally believe, but rather the result of impressive business model innovations.
A business model, as the name says, is an overall picture of how an entity conducts its business operations, while creating value and making money. A typical business model has four dimensions: value proposition, key processes, key resources and the profit formula i.e. how it makes money
Business model innovation would then mean innovation in any or some of its dimensions in what is normally the industry practice. Usually, the innovation happens in one dimension only and appropriate adjustments in other dimensions are made in a way that they all support one another creating synergy i.e. 1+1 is more than 2.
Business comes into being when someone, call him or her an entrepreneur, discovers an unsolved problem, and comes up with a solution. The solution must have a perceived value with those who were previously directly affected by the problem thus bringing into effect the first dimension of the business model, the value proposition e.g. Amazon provides you hassle free, affordable shopping from the comfort of your home
The role of strategy comes into play when many more entities are already in the business of solving the same problem. The scenario becomes competitive and the one with the most potent competitive advantage, the crux of the business strategy, wins e.g. Honda has a competitive advantage in its state-of-the-art engine technology.
With business model innovation, you make the competition irrelevant by either trying to solve a real-life problem that’s vastly different from what competitors are solving, to solve it in a way that has no parallels in your industry sector or the way you make profits is far from the common industry practices
Walmart is a striking example of business model innovation. They innovatively used modern-day technology to introduce a real-time inventory management system that automatically places purchase orders to their suppliers when the current inventory of a particular item falls below a critical level. This efficient inventory management system saves them lots of money in inventory carrying costs which makes it possible for them to offer unmatched discounts to their customers still allowing them to make impressive profits
When a business solves a real-life problem, it creates value, which is its value proposition. The ingenuity lies in discovering a real problem that may not be obvious initially and which others have conveniently ignored. Once discovered and a way to solve it is found, it can bring remarkable successes.
Let’s take an example from a local crowded industry scene, the housing industry, the one of Bahria Town. One may not agree to some questionable practices by Bahria Town, but without being judgemental, we can see this as purely a case of marvellous success attributable to business model innovation.
Bahria Town didn’t take the problem it came out to solve as merely that of a housing shortage one for the middle-income groups. They probably discovered that our majority middle income classes dream to settle down in Europe or the Middle East and enjoy the living styles of secured, peaceful, just and fair societies of the developed world but can’t do so for obvious reasons. The desire is intense given our peculiar circumstances
Bahria Town realized that they couldn’t take them to Europe and the Middle East but they could bring Europe and the Middle Eastern living standards here. Their solution aimed at giving people a close to their dream living styles in various cities of Pakistan at prices they could afford. Sounds crazy. You bet. But Bahria Town made it real. That’s Bahria Town’s value proposition and the reason why they have imitations of various European and Middle Eastern icons at their premises such as Eifel Tower, London Bridge, Nielsen’s Column at Trafalgar Square, London complete with four lions, the ancient Roman style monuments around the entry gate of Bahria Town, Karachi, etc. The wide spread roads have the date and palm trees alongside them and Bahria Homes, built with a uniform yellowish outer colour tone makes one feel being in Dubai. Each Bahria Town, with most modern schools, shopping malls, hospitals, cinemas, amusement parks, zoos, golf courses, etc. takes one into the land of yet fairy tales for many
Next, the key processes that Bahria Town follows to deliver its value proposition are procurement of massive land at the cheapest possible rates, infrastructure projects to make its facilities accessible to people, collaboration with global partners, easier acquisition and transfer procedures, subcontracting, etc.
The key resources that Bahria Town deploys to flawlessly carry out above processes include: world-class construction machinery and equipment, roads and bridges infrastructure, civic facilities, security systems, an army of qualified professionals, IT infrastructure, etc
The last dimension i.e. the profit formula, how Bahria Town makes money is interesting. It largely leases the bulk land in suburban areas and sells at prices which still yield exorbitant profit margins even after paying for development work, standardization of houses and apartment designs significantly reduce fixed costs such as architects fee, speedy construction through improvements gained via learning curve theory, economies of scale in buying materials and supplies in bulk, etc
Another local examples of businesses that benefitted from business model innovation is . Imtiaz Super Market which delivers self-service trolley shopping experience to aspiring middle classes devoid of extra cash to spend at e.g. Aga’s Super Market or even Carrefour. Imtiaz makes this possible still making handsome profits by cutting down on overheads by carrying more merchandise per square meter than others, charging for shelf space and centralized bulk buying at higher discounts, higher product turnover rendering lower carrying costs per item, and volume sales
Business model innovation isn’t only for starters but existing businesses too can immensely benefit from it particularly in the dimension of key business processes especially by making use of emergent technologies such as process automation, business process optimization aiming to increase efficiency making optimal uses of finite resources possible and eliminating redundancies.
In short, large leaps of gains in value creation are possible by re-examining the existing business model, identifying areas of improvement and making use of technological or other innovations
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Director of Strategy at Firebolt63