📖 The Story of Business Model
Innovation
Imagine you’re the CEO of a tech company. Your team says, “Let’s build a better product than
Apple or Samsung!” You smile — but you’ve heard this before. You’ve done this before. And
still, you’re not winning the market.
That’s when it hits you: It’s not just about building better products. It’s about building a
better way of doing business.
Welcome to the world of Business Model Innovation.
🔍 What Is Business Model Innovation?
It’s a change in how a company creates, delivers, and captures value — not
just what it makes.
Instead of focusing only on new products (like a better smartphone) or more efficient processes
(like faster assembly), you change the system:
●​ What activities you do​
●​ How you link them​
●​ Who does them​
You redesign the architecture of your business, like rethinking the blueprint of a house — not
just repainting the walls.
🧠 Why Business Model Innovation Matters More Than
Ever
●​ Product innovation is expensive, risky, and easily copied.​
●​ Process innovation hits diminishing returns over time.​
●​ Meanwhile, business model innovation can:​
○​ Open new revenue streams,​
○​ Deliver sustainable competitive advantage, and​
○​ Be much harder for competitors to replicate.​
In a global survey, 54% of managers said new business models would be their main source
of competitive advantage, not new products.
🏗 The Apple vs. HTC Case: A Tale of Two Companies
🍏 Apple: The Master of the Model
Let’s rewind to the early 2000s.
Apple wasn’t just selling a sleek MP3 player. It redefined the music industry:
●​ Created the iPod (product innovation),​
●​ But more importantly, launched iTunes — a legal, convenient, user-friendly music store
(business model innovation).​
This was not just a product. It was a system:
●​ Hardware (iPod),​
●​ Software (iTunes),​
●​ Ongoing revenue (songs, apps),​
●​ A locked-in ecosystem (App Store, iCloud, iPhone, iPad).​
Result? Apple didn't just sell razors, it sold razors and blades — and earned money every
time you shaved.
Pointer: Lock-in, complementarities, and a new revenue model = business
model innovation gold.
📱 HTC: The Innovator Who Missed the Model
Now meet HTC — a great product innovator. It built some of the first Android smartphones,
won awards, and had cutting-edge hardware.
But unlike Apple, HTC:
●​ Had no software ecosystem,​
●​ Relied on Google's OS,​
●​ Had no service revenue,​
●​ Sold hardware through third-party stores.​
In business model terms:
HTC sold amazing razors — but no blades.
📉 Over time, HTC's product innovation couldn’t protect it from declining margins and shrinking
market share.
🧩 The Three Levers of Business Model Innovation
To innovate your model, you can change:
1. Content – What activities you do
Example: IBM shifted from hardware to services like IT consulting, reinventing its
business model.
2. Structure – How activities are linked
Example: Priceline let customers name their price — flipping the traditional
seller-buyer dynamic.
3. Governance – Who does the activities
Example: 7-Eleven Japan used franchising in a new way to overcome strict retail
laws and scale fast.
🎯 Four Value Drivers of Successful Business Models
Think of these as ingredients of a great recipe:
1. Novelty
Do something new.​
e.g., Prosper’s peer-to-peer lending — borrowers and lenders connect directly.
2. Lock-in
Keep users from switching easily.​
e.g., Nespresso’s machines only use Nespresso capsules.
3. Complementarities
One part boosts the value of another.​
e.g., eBay + PayPal = seamless transactions.
4. Efficiency
Save cost through smarter design.​
e.g., Walmart’s logistics system with cross-docking reduced warehousing needs
and cut costs.
🛠 Framework: Six Questions to Guide Business Model
Innovation
Managers should ask:
❓ What unmet need can we serve?​
2.​ 🧩 What new activities are needed?​
3.​ 🔗 How should they be linked?​
1.​
👥 Who should do them — us, a partner, the customer?​
5.​ 💰 How does each participant benefit?​
6.​ 📊 What revenue model lets us capture value?​
4.​
📘 Another Example: Taco Bell
In the 1980s, Taco Bell rethought its restaurant model:
●​ Turned kitchens into simple assembly units.​
●​ Moved cooking, chopping, and cleaning to central facilities.​
●​ Result: Lower costs, higher consistency, and more customer space.​
Even though this wasn’t a radical product change, it transformed operations — a smart
business model shift.
🔋 Final Example: Better Place (Electric Vehicles)
Better Place didn’t make cars — it offered charging services for EVs.
Like telecom companies, it:
●​ Charged based on usage (miles driven).​
●​ Built partnerships with governments, energy firms, and carmakers.​
●​ Focused on system-level infrastructure, not products.​
It was a bold attempt to change the revenue model and activity structure of the electric car
ecosystem.
🌍 The Big Picture
In today’s fast-changing world, it’s not enough to ask:​
“What product can we build?”​
You must ask:​
“What system can we redesign?”
Just like Apple changed music, Dell changed computer sales, and Netflix changed video
rental, your company’s advantage may lie not in what you make, but how you make money.
🚀 Takeaway Message:
Don’t just innovate the product — innovate the business.​
Think like an architect, not a carpenter.
—----------------------The article "What Is Strategy?" by Michael E. Porter provides a
comprehensive framework for understanding and achieving sustainable
competitive advantage. It meticulously distinguishes between operational
effectiveness and strategy, arguing that both are crucial but serve different
purposes.
Here's a comprehensive explanation of the key headlines, including subparts
and examples:
I. Operational Effectiveness Is Not Strategy & Operational Effectiveness:
Necessary but Not Sufficient
●​ Explanation of Operational Effectiveness (OE): OE means
performing similar activities better than rivals. This involves efficiency,
minimizing defects, and developing products faster. For decades
leading up to the article's publication, management focused heavily on
improving OE through various tools and techniques such as Total
Quality Management (TQM), benchmarking, time-based competition,
outsourcing, partnering, reengineering, and change management.
These methods led to significant improvements in productivity, quality,
and speed.
●​ Why OE is Not Strategy & Its Limitations: Despite the dramatic
improvements, many companies struggled to translate OE into
sustainable profitability. The core problem is that best practices and
management tools are easily imitable. When all competitors adopt
similar practices, it leads to "competitive convergence," where
companies become indistinguishable, resulting in a "zero-sum
competition" where profits are eroded and primarily captured by
customers and suppliers. Therefore, while OE is necessary to remain
competitive, it is not sufficient to achieve a lasting advantage.
A Company Can Outperform Rivals Only If It Can Establish a Difference
That It Can Preserve.
●​ Explanation: This statement is a fundamental tenet of the article. It
asserts that true superior performance and sustained profitability come
not just from being better, but from being different in a way that is
difficult for competitors to copy. This enduring difference forms the basis
of competitive advantage and prevents the erosion of profits seen in
competitive convergence.
Japanese Companies Rarely Have Strategies
●​ Explanation: The article uses Japanese companies as a prominent
example. While they were pioneers and masters of operational
effectiveness, often excelling in efficiency and quality, many of them
struggled with strategy. Their focus on continuous, incremental
improvement and a desire to satisfy every customer need across all
product lines led them to imitate each other rather than developing
distinct strategic positions. This ultimately trapped them in mutually
destructive competition within their industries.
II. Strategy Rests on Unique Activities & The Essence of Strategy Is
Choosing to Perform Activities Differently Than Rivals Do. : differentiation
●​ Explanation: This is the heart of Porter's definition of strategy. Strategy
is about deliberately choosing a different set of activities to deliver a
unique mix of value. It's not about being "the best" at everything, but
about being unique in what a company offers and how it offers it. This
means either performing different activities altogether or performing
similar activities in different ways.
●​ The Origins of Strategic Positions / Finding New Positions: The
Entrepreneurial Edge / Strategic Positions Can Be Based on
Customers' Needs, Customers' Accessibility, or the Variety of a
Company's Products or Services: Strategic positions emerge from
three distinct, often overlapping, sources:
1.​ Variety-Based Positioning:
■​ Explanation: This involves specializing in producing a
specific subset of an industry's products or services. It
focuses on the product or service itself rather than a
particular customer segment.
■​ Examples:
■​ Jiffy Lube: Specializes exclusively in automotive
lubricants and does not offer general car repair. This
narrow focus allows it to provide faster, lower-cost
service compared to full-service garages.
■​ Vanguard Group: Offers a focused selection of
common stock, bond, and money market funds known
for predictable performance and low expenses,
achieved by avoiding speculative investments and
minimizing trading costs.
2.​ Needs-Based Positioning:
■​ Explanation: This involves serving a specific group of
customers with differing needs, tailoring a comprehensive
set of activities to meet those unique needs.
■​ Examples:
■​ Ikea: Targets young, first-time furniture buyers who
prioritize style, low cost, and a willingness to
assemble furniture themselves. Its entire
system—from modular designs and in-store displays
to self-service and flat-pack delivery—is tailored to
these specific customer needs.
■​ Bessemer Trust Company: Focuses on extremely
wealthy families (over $5 million in investable assets)
who prioritize capital preservation and personalized,
highly customized service. It employs dedicated
account officers to build deep relationships. This
contrasts with, for instance, Citibank's private bank,
which targets clients with lower minimum assets and
offers more standardized services.
3.​ Access-Based Positioning:
■​ Explanation: This involves segmenting customers based
on their accessibility, even if their needs are similar to
others. Different activities are required to reach customers
in different locations, scales, or distribution channels.
■​ Example:
■​ Carmike Cinemas: Operates movie theaters
exclusively in small cities and towns (populations
under 200,000). This niche allows Carmike to achieve
a lean cost structure through standardized, low-cost
complexes and centralized management, avoiding
head-to-head competition with larger chains in major
metropolitan areas.
III. A Sustainable Strategic Position Requires Trade-offs
●​ Explanation: For a strategic position to be sustainable and defensible,
it must involve trade-offs. Trade-offs occur when activities are
incompatible, meaning that more of one thing necessitates less of
another. They prevent competitors from easily imitating a successful
strategy by "repositioning" (trying to match a superior competitor) or
"straddling" (trying to match a new competitor's benefits while
maintaining their existing position).
●​ Reasons for Trade-offs:
1.​ Inconsistencies in Image or Reputation: Trying to offer
conflicting values can confuse customers or damage a company's
credibility. For example, a company known for premium quality
might undermine its brand by launching a very low-cost, no-frills
product.
2.​ Activities Themselves: Different strategic positions demand
different product designs, equipment, employee skills,
management systems, and processes. Trying to combine
incompatible activities within the same company creates
inefficiencies and compromises.
3.​ Limits on Internal Coordination and Control: Companies that
try to be everything to everyone often lose focus, becoming
inefficient and difficult to manage.
●​ Example (Continental Lite's Failure): Continental Airlines' attempt to
"straddle" by launching a low-cost, no-frills "Continental Lite" service
alongside its full-service operations failed dramatically. The two services
had incompatible activities, conflicting employee incentives, and
confused customers and travel agents, leading to losses and ultimately
the termination of Continental Lite. This perfectly illustrates the costs of
failing to make trade-offs.
Fit Drives Both Competitive Advantage and Sustainability
●​ Explanation: "Fit" refers to how a company's activities interrelate and
reinforce one another to create a mutually supporting system.
Competitive advantage stems from the entire system of activities, not
just individual strengths. This system is much harder for rivals to imitate
than a single best practice because they would have to replicate the
entire network of interconnected choices. The article describes three
types of fit:
○​ First-order fit: Simple consistency between each activity and the
overall strategy.
○​ Second-order fit: Activities are reinforcing (e.g., brand
recognition campaigns and highly trained service staff reinforce
each other).
○​ Third-order fit: Optimization of effort, where activities eliminate
redundancy or minimize wasted effort (e.g., coordination across
activities that eliminates the need for certain inspections or
adjustments).
●​ Impact on Sustainability: The more a company's activities are
interconnected and mutually reinforcing, the more difficult it is for
competitors to copy the strategy. This system of activities creates strong
barriers to imitation, leading to sustainable competitive advantage.
Rediscovering Strategy
●​ Explanation: This section serves as a call to action. Porter argues that
managers need to "rediscover" the true meaning of strategy by moving
beyond the pursuit of operational effectiveness alone. It advocates for
re-embracing fundamental strategic principles: making clear strategic
choices, accepting the necessity of trade-offs, and configuring a
company's entire system of activities to create a unique and defensible
position. True strategy requires discipline, a long-term perspective, and
the courage to make tough choices about what not to do.
—-------------The document "Sustaining Competitive Advantage" from Harvard Business
School provides a comprehensive look into how companies can achieve and
maintain superior profitability over extended periods.
Here's an in-depth explanation covering all its key headings and topics:
1. Introduction
The introduction sets the stage by highlighting the central challenge: while
many companies achieve profitability, very few manage to sustain
above-average returns for long. This sustainability is crucial for long-term
success, yet it's often eroded by competitive forces that quickly imitate or
innovate around any advantages. The reading aims to explore the
mechanisms through which companies can resist this erosion and maintain
their competitive edge.
2. Essential Reading
2.1 Changes in Returns over Time
This section analyzes the observed trends in financial returns, particularly
focusing on the "decay of abnormal returns." It notes that firms which
outperform the market often see their exceptional returns diminish over time.
This decay is attributed to the competitive environment, where rivals naturally
seek to replicate successful strategies or seize market share, thus normalizing
returns across the industry. The speed of this decay can vary by industry,
influenced by factors like the intensity of competition, barriers to entry, and the
nature of the advantage itself.
2.2 Hypercompetition
The concept of "hypercompetition" is introduced as a theory suggesting that
competitive advantages are inherently temporary and rapidly eroded. In a
hypercompetitive environment, firms constantly disrupt existing advantages
through innovation, strategic maneuvering, and aggressive competition. This
leads to a dynamic cycle where sustainable advantage is elusive, and
companies must continuously adapt and innovate to stay ahead, rather than
relying on static positions of strength.
2.3 Sources of Sustainability
This is a core section of the document, detailing seven primary mechanisms
that enable companies to sustain their competitive advantages against market
forces:
●​ Taste-Based Loyalty: This mechanism describes how consumer
preferences, often shaped by initial experiences or strong brand
associations, can create a lasting demand for a product or service. Even
if competitors offer similar or identical products, loyal customers may not
switch due to ingrained habits, trust, or emotional connections.
Examples often include long-standing brands that consumers have
grown up with, making it difficult for new entrants to gain traction.
●​ Uninformed Consumers: When consumers lack complete information
about product quality, features, or pricing, firms can exploit this
asymmetry to maintain higher margins or market share. This is
particularly relevant for products where quality is hard to ascertain
before purchase or where search costs for information are high. By
controlling information or leveraging reputation, companies can reduce
price sensitivity and sustain a premium.
●​ Switching Costs: These are the actual or perceived costs—financial,
psychological, or operational—that customers incur when moving from
one supplier or product to another. High switching costs "lock in"
customers, making them less likely to defect even if competitors offer
slightly better prices or features. Examples include the effort involved in
changing bank accounts, learning new software, or migrating data.
●​ Network Effects: This powerful mechanism implies that the value of a
product or service increases for each user as more people use it.
○​ Direct Network Effects: The value directly increases with the
number of users on the same network (e.g., social media
platforms, communication services).
○​ Indirect Network Effects: The value increases due to the
availability of complementary products or services that arise as
the user base grows (e.g., operating systems and compatible
software applications).
○​ Cross-Side Network Effects: Common in two-sided or
multi-sided platforms, where an increase in users on one side of
the platform attracts users on the other side (e.g., online
marketplaces attracting both buyers and sellers). Network effects
can lead to "tipping points" where a product rapidly dominates a
market, creating a strong barrier to entry for rivals.
●​ Learning: Often represented by the "learning curve," this mechanism
suggests that as a company accumulates experience and output, it
becomes more efficient and reduces its costs. This creates a cost
advantage over less experienced or smaller competitors. The
accumulated knowledge and expertise become a difficult-to-replicate
asset. However, the benefits of learning can diminish or be lost if the
learning process is not continuous or if knowledge is not effectively
retained and transferred within the organization.
●​ Economies of Scale: This refers to the cost advantages that larger
production volumes bring. As output increases, the average cost per
unit decreases, allowing larger firms to offer lower prices or achieve
higher profit margins than smaller competitors. These economies can
stem from bulk purchasing, specialized machinery, efficient division of
labor, or spreading fixed costs over a larger output.
●​ Intellectual Property Rights (IP): Legal protections like patents,
copyrights, trademarks, and trade secrets grant firms exclusive rights to
their innovations, creative works, brands, and proprietary information.
These rights prevent others from using, producing, or selling similar
offerings, thereby providing a temporary monopoly and allowing the
innovator to recoup R&D investments and generate profits. The
document might discuss the strategic use of IP, including licensing, and
how IP protection influences the competitive landscape.
2.4 Threats to Sustainability from Actors Beyond the Market
While the previous sections focus on market-based competitive dynamics, this
section broadens the scope to include external factors that can undermine
even the most robust competitive advantages.
●​ Government Intervention: Governments often regulate markets to
promote competition, protect consumers, ensure public safety, or
achieve social objectives. Such interventions (e.g., antitrust laws, price
controls, industry regulations, or changes in trade policy) can
significantly alter the competitive landscape and erode a company's
sustained advantage.
●​ Systemic Challenges: Broader societal, environmental, or
technological shifts can also pose threats. These might include
demographic changes, climate change impacts, new technological
paradigms, or global economic crises. Companies that fail to adapt to
these systemic challenges may find their competitive advantages
rendered obsolete.
2.5 Conclusion
The conclusion synthesizes the insights, emphasizing that while sustaining
competitive advantage is challenging in dynamic markets, it is achievable
through a combination of strategic foresight and the judicious application of
the mechanisms discussed. It likely reiterates that a deep understanding of
these sources of sustainability, coupled with an awareness of external threats,
is crucial for firms aiming for long-term superior performance.
3. Supplemental Reading
This section briefly touches upon horizontal and vertical heterogeneity,
particularly in the context of network effects.
●​ Horizontal Heterogeneity: This refers to differences in preferences or
characteristics among consumers within the same market, where no
single product is universally preferred by everyone. For example, some
users might prefer a social network that is exclusive to certain
institutions, while others might prefer a broader network. This concept
can explain how new entrants can gain ground by targeting specific
niches or segments, even when dominant players benefit from strong
network effects. Facebook's initial strategy of targeting specific
universities and then expanding to neighboring ones, rather than directly
competing with established networks, is used as an example to illustrate
how horizontal heterogeneity can be leveraged to overcome the
strength of existing network effects.​
●​ Vertical Heterogeneity: This relates to differences in quality or features
across products where one product is objectively superior to another for
all consumers. While not explicitly detailed in the provided snippet
beyond its mention, in the context of network effects, it could imply that
even a superior product might struggle to gain traction if it lacks a
sufficient user base to generate network effects, or if the "better" quality
isn't enough to overcome existing network benefits or switching costs.​
●​ Taste-Based Loyalty:​
○​ Folgers in the coffee market.
○​ Godrej in the consumer goods sector.
●​ Uninformed Consumers:​
○​ Bayer aspirin maintaining a significant price difference over
generic alternatives due to perceived quality differences.
●​ Switching Costs:​
○​ The effort involved in changing online banking accounts.
○​ The historical non-portability of cell phone numbers.
●​ Network Effects:​
○​ Direct Network Effects: Wireless services like Verizon and
AT&T, and social media platforms like Facebook, where value
increases with more users.
○​ Indirect Network Effects: The relationship between razors and
razor blades, or personal computers (PCs) and compatible
software, where the availability of one increases the value of the
other.
○​ Cross-Side Network Effects: Platforms like online
marketplaces (e.g., eBay) that connect buyers and sellers, where
the value for one group increases with the number of users in the
other.
●​ Learning:​
○​ Ford's Model T production, which saw dramatic cost reductions
due to accumulated experience.
○​ Surgical teams improving efficiency and reducing costs with
repeated procedures.
●​ Economies of Scale:​
○​ Large companies like Walmart benefiting from their extensive
scale to negotiate lower prices from suppliers and operate more
efficiently.
●​ Intellectual Property Rights (IP): The document discusses how
patents, copyrights, and trade secrets legally protect innovations.​
●​ Horizontal Heterogeneity (under Supplemental Reading):​
○​ Facebook's initial launch strategy, targeting specific
universities and then expanding to surrounding institutions rather
than directly competing with established social networks,
leveraging geographic horizontal heterogeneity.