Business Models For Dummies
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To fully leverage a strong competitive advantage, you must shore up the other aspects of your business model as well. As a savvy businessperson, you must go further than competitive advantage analysis and explore all aspects of the business model. By doing so, you can unleash the maximum potential of the business.

Innovation and the business model

You need to take into account your company’s ability to innovate in order to fully evaluate its business model. Without innovation, your competitive advantage will weaken or disappear. Currently, iPad sales are outstanding. However, would you make a large bet that Apple continues to dominate this market for ten more years?

Without future innovation, competitors will catch Apple and eat into its market share. Not that long ago, BlackBerry had a dominant share of the cellphone market. A few years later, BlackBerry was teetering on bankruptcy.

Customer segments and the business model

What customer segment will the product attack? Competitive advantage is somewhat generic in regard to who the customer will be. It assumes that you’ll find the right one. However, chasing the wrong customers or market segment can destroy an otherwise solid business model.

Targeting your competitive advantage to the right customer or market segment makes a big difference, as the following examples demonstrate:

  • Motorola had a product well-suited for the military market in the Iridium satellite phone, but the company blew billions trying to market it to nonmilitary consumers who were unwilling to buy a $3,000 phone.

  • The U.S. military took five years to purchase 50,000 Hummers. In 2006 alone, General Motors sold 70,000 nonmilitary Hummers to the public.

  • After NASA was exposed for purchasing $129 pencils for space missions, Paul Fisher took it upon himself to invent a pen that would write in space. He succeeded, calling his invention the Space Pen.

    For many years, Fisher sold his pen to NASA for $4 (it cost him $1.98 to manufacture). However, the market for the space pen as a collectible item turned out to be much larger for Fisher. The pen sells many more units today for $20 than it did to NASA for $4.

  • Ivan Getting conceived of the GPS system in the 1950s. It took nearly 50 years and $12 billion to create a system for tracking military personnel, missiles, ships, tanks, and the like. The consumer electronics industry sold more than 1 billion GPS-enabled devices in just 15 years.

Pricing and the business model

What will you charge for the product? How high or low will the margin be? The answers to these questions are critical factors of the business model, but they aren’t addressed directly in competitive advantage. For example, Amazon has competitive advantage in its ability to distribute product conveniently and efficiently.

However, what will happen when Amazon is forced to charge sales tax and prices rise? What would happen if Amazon focused on the convenience of the online experience but charged 15 percent more than brick and mortar competitors? No one knows the answer, but these factors would affect Amazon’s competitive advantage.

Ability to sell and the business model

Without a proven and repeatable sales process, most business models fail. Unfortunately, the world doesn’t care if you have a better mouse trap. All products and services must be sold. It’s easy to forget this inconvenient truth as you look at the long line outside the Apple store with customers clamoring to buy.

However, don’t forget all those iPhone and iPad commercials on television, the publicity, paid product placements on shows like Modern Family, and countless other efforts to drive demand. All these things help to create that long line of eager buyers.

In order to finalize the marketing process, someone must purchase your product. A solid sales and marketing system must be used to realize the full potential of your offering.

Potential pitfalls and the business model

Competitive advantage doesn’t take potential pitfalls into account. You can call this factor the Taser test. Taser pioneered the stun gun business, holds many patents, owns the best brand in the business, and gets sued for $1 million nearly every week.

Taser has a good business model despite this pitfall. However, if you look only at Taser’s competitive advantage without regard to pitfalls, Taser’s business looks much more attractive than it actually is.

Continuity and the business model

A significant issue for mid-sized and small businesses is the ability to operate without the day-to-day input of the owner. If the business falls apart without the owner in the building, the business model is weak and the owner will never be able to sell the business.

Tom has a business that nets him $900,000 per year. The business has significant competitive advantage as witnessed by its profitability. However, the instant Tom stops showing up, the business nets $0. Many doctors, lawyers, accountants, architects, and other professionals face the same issue. The competitive advantage of these businesses is strong, but the business model still needs some work.

About This Article

This article is from the book:

About the book author:

Jim Muehlhausen is the founder and President of the Business Model Institute as well as consultant and speaker to businesses large and small. He is the author of The 51 Fatal Business Errors and How to Avoid Them and a frequent contributor to Entrepreneur, Businessweek, and dozens of other publications.

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