Why Business Models Evolve and How to Stay On Top

by Eric Tsai

A business model is the framework of how a business generates revenue and profits. While most proven business models can be profitable for a long time, it is just as important to realize that they evolve.  And when they do things could fall apart quickly.

If you’ve been keeping up with my Twitter tweets lately, you know I’ve been linking some statistics about how newspaper is going away and landline telephones are dying. Both are  examples of an older business model getting obsolete in favor of newer models.

Business models evolve for 3 reasons:

  1. Technology Disruptions – Technology changes consumer behaviors and the perception of value.  It is also the main driving force behind creating new technology.
  2. Commoditization – When a product or service lacks tangible value, it becomes a commodity that simply competes on price alone.  When a business model is commoditized, it will be forced to sell on quantity to scale the business.
  3. Competition – While competitiveness is good for most industries, excessive competition or lack of competition can result in a changing business model.

The perfect example for technology disruptions is the impact of internet on print media.  Instead of reading the newspaper, there is now a better way to get the same information faster, easier, and freely  You get the information you want on-demand and can share it with anyone while reducing paper usage.

The commoditization of cell phones is the end of landline telephones.  Today everyone I know carries a cell phone–even the elementary school kids.  I turned down an offer for a year free landline telephone service by my Internet provider Cox Cable simply because I see no value in having it unless they pay me.

Competition is the most obvious element of why business models evolve but it’s also a contributing factor to the first two elements.  Similar to the “the tortoise and the hare” story, the lack of competition can kill innovation if the market leader starts to relax and falls asleep on the competition.

A good example is the rapid adoption of Google Apps over Microsoft Office. For a long time Microsoft was at the top, in control and profitable…then came Google with its “freemium” business model, earning consumer trust and gaining user base faster than ever.  Once thought of as just a search engine company, Google is disrupting the space that Microsoft created, forcing it to lower its price, commoditizing its own product.


So How Do Businesses Stay on Top?

If your business doesn’t create the technology and you don’t have unlimited resources and capital, the best way is to focus on creating value for your business.

Here are some business drivers to consider:

  1. Focus on customer retention and satisfaction
  2. Build a recurring revenue stream
  3. Expand your offering and create value-added product or services
  4. Strengthen your brand and build equity in your business
  5. Build barriers to insulate competition and commoditization
  6. Execute on broader vision and take calculated risks
  7. Don’t rely on technology – become a platform company
  8. Network with strategic partners and empower your management

It takes a combination of all the above to stay near the top in a highly competitive landscape.  I will discuss them in details on later blog entries.

What are you doing to stay on top in this recession?

Further Reading

Comments Closed

1 Comment

Comments are closed.