Business model innovation for entrepreneurial success
Date: Sunday , September 30, 2007
Most successful startups get created through some form of innovation in a fast growing market. Innovations are needed for building a new technology (e.g. RFID, Virtualization, Optical Networks, Wi-Fi), or leveraging existing technologies to build innovative products (e.g. iPod, Search Engines, Enterprise Applications, Web 2.0 Social Networks etc.), or in some cases innovation can come from the business model itself. In this article, I endeavor to focus and highlight our discussion on the role and significance of business model innovation for entrepreneurial venture success.
Business model of a startup represents the fundamental architecture of the company upon which you build the business logic (organizing customers, partners, value propositions, employees, capital, etc.) in a way that creates unique and hopefully sustainable advantage for the firm. Why is business model important? Well, in simple terms, if you are trying to get your company to scale, or are trying to get VCs, private equity firms to invest in your venture, you can choose to build fundamental business advantage through your business model innovation. Good business models provide a sustainable architecture for two very important questions: 1) What are you doing differently from others in your industry or segment? And 2) How are you doing them differently? Both the “What” and the “How” are critical questions to ask and you have to be comfortable that you can differentiate your startup along both of these vectors.
In my own experiences as an entrepreneur, I always pay attention to how the business model of my ventures are shaping up in comparison to other players in the industry, and is it something which can be easily replicated? If other larger companies could easily duplicate the business model, then chances are that you may not have thought through the right business model for your venture. Let me cite an example. Let us say, if you are trying to get a software company off the ground, you want to make sure that how you gain customer traction is something which other established players like Oracle/SAP/others are not able to readily duplicate. So, for example, you may choose to build a “proprietary” reseller network, which other established players may not have, thereby giving you sustained competitive advantage in your business model. Or in some cases, you may choose to deploy a telephone based sales model, when your other competitors have physical face-to-face direct sales force. Another good example could be that you may choose to deploy a “network effect business model”, whereby your new customers directly benefit from the cumulative data present in your current customer systems. A good example for this business model could be right here at SiliconIndia.com, where every new member in SiliconIndia.com network benefits from the content and contributions from the previous members, therefore creating a network effect business model.
So, What are the possible business models that you can explore for your next or current startups? Here are a few sample business models to consider as you innovate with your own business models.
1. Online business model: Fundamentally offering your value proposition online and changing the economics of how you deliver, sell, and market your value proposition. E.g., Amazon.com.
2. Network effect model: Here every new customer benefits from the prior customers in the network. A good example is social networks like Facebook, SiliconIndia.com, where every new member adds value for the next member.
3. Direct selling model: Where you dis-intermediate the value chain and help deliver the value proposition directly to the consumer, reducing middlemen in the process. If you recall, Dell computers built a “direct-to-consumer” business and dis-intermediated the market.
4. Exchange business model: Where you bring together the buyers and sellers in some sort of a marketplace or exchange, enabling them to transact with market forces in play. For example, eBay deploying an auction exchange model in a market where prior startups were deploying direct to consumer models. Google Adwords is a great example of an exchange business model, where advertisers are coming together to compete for ad space on Google search results.
5. Free offering coupled with premium offering: Many web 2.0 companies provide free ad supported services, but truly build their business model around delivering premium offerings at a subscription or transaction price. So, for example, a healthcare site can offer free content and advise to build traffic and brand momentum attracting large number of consumers, but it may build its business model around charging these consumers for premium services like “online consultations,” etc.
6. Subscription business model: Many of the software-as-a-service companies like salesforce.com are creating subscription or on-demand business models, helping their customers through monthly subscription relationship.
7. Reseller business model: Fundamentally, here you are dependent on your network of distributors or resellers to offer your value propositions to the customers. This model has been used quite successfully in franchised operations like Subway or McDonald’s; and at Cisco selling networking gears through a large network of system integrators and resellers.
I see a lot of entrepreneurs paying attention to be “first movers” in their respective industry segments. Be the first to invent a new technology, product, or a service. I don’t mean to diminish the value of being a first mover, however, it is the power of an innovative business model that ensures that you are the “last one standing” and hopefully dominating your segment or market. Tech industry is rife with examples, like Google (Ad-word exchange business model), Infosys (Flat world sales/service business model), eBay (exchange business model) where business model innovations have played a significant role in their long-term success and market dominance. I would like all of you technologists, business strategists, and entrepreneurs to think about “business model innovation” as you engage in your business activity.
Business model innovation requires strong creativity and “out-of-the-box” thinking. Hence, it needs a true innovator’s mind to seize the market opportunity at hand! I would like to challenge the SiliconIndia community here to raise their personal bar on how they think and incorporate business model in their respective businesses.
The author is the Chairman of SiliconIndia.com and MetricStream. An internet pioneer, he was the co-founder and President of WhoWhere? Inc., a Internet directory services company acquired by Lycos in 1998 as well as eGain, an online customer service company. Sinha can be reached at firstname.lastname@example.org