The Three Disciplines of Business Models
A successful business strategy delivers its objectives. That means the revenue it generates must be profitable. Revenue, growth, and market share are irrelevant if your strategy does not achieve profitability. There are three disciplines of operating models or business models1. You must clearly lead in one discipline and be competitive in the other two.
A company that focuses on operational excellence focuses on eliminating costs and keeping the product simple. This includes
- Reasonable quality at a very low price
- Streamlined operations—no frills
- A focus on supply chain and volume
- A “Six Sigma” mindset
A company that is focused on product/technology focuses on the product itself. This includes
- High performance products with high margins
- Development, design, fast to market
- Dynamic markets
- A “Superior Innovation” mindset
A company that focuses on customer intimacy focuses on the customer experience. This includes
- Tailored products with large variation
- Reliability, relationships, and CRM
- A focus on solutions, delivery, and lifetime value
- A “Market Orientation” mindset
As an example, let’s consider three polymer manufacturers: Dow, DuPont, and General Electric (GE). Dow is an operational excellence-focused company. Their message would be “Whatever you want, we have it cheaper.” DuPont is a product/technology-focused company. Their message would be “We have a better product than what you’re using now.” GE is a customer intimacy-focused company. Their message would be “However you want the product, we’ll make it work for you.”
Key Elements of Business Model Development
There are four key elements of business model development:
1. Customer selection
- To which customers can I add real value?
- Which customers will allow me to profit?
- Which customers do I not want to serve?
3. Differentiation—Strategic Control
- Why do my chosen customers buy from me?
- What makes my value proposition unique or differentiated compared to other competitors?
- What strategic control points can counterbalance customer or competitor power?
2. Value capture
- How do I capture, as profit, the value I created for customers?
- What is my profit model?
- What products, services, and solutions do I want to sell?
- Which activities or functions do I want to perform in-house?
- Which activities or functions do I want to subcontract, outsource, or work with a business partner to provide?