Seizing the white space
Innovating business models for expansion
Description
Companies often fail in new ventures outside their core business due to using old business models. To succeed in white space activities, it's crucial to develop a new business model tailored to that opportunity. This involves rethinking the customer value proposition, profit formula, key resources, and key processes.
Stretching the existing business model for new opportunities usually leads to failure, whereas a new model designed for the white space can significantly increase the chances of success. The right business model is key to thriving in white space.
Table of contents
01White space in business: the four-box model
White space emerges when a corporation identifies a potential commercial venture that lies outside its primary area of expertise, extending beyond the markets adjacent to its core business. This represents an opportunity to cater to a new customer base in ways that are fundamentally different from the past. The secret to capitalizing on a white space lies not in attempting to serve this new market with the existing business model. Rather, it necessitates the creation of a novel business model, a fresh and customized amalgamation of elements such as the customer value proposition, the formula for profit, essential processes, and crucial resources.
Achieving the correct new business model enables the conquering of the white space opportunity. Companies that are well-established often have markets where they feel comfortable and achieve success. These markets typically align well with the company's strongest capabilities, honed over years of matching their offerings to customer needs.
Many companies excel at gradually enhancing and expanding their core businesses over time. They might even venture into adjacent markets successfully, perhaps by offering similar products to different market segments. However, a white space commercial opportunity represents a distinct challenge. It invites the company to venture into unexplored territories.
To thrive in this new domain, the company must determine its ability and willingness to embrace a new business model—a different approach to generating revenue, leveraging diverse expertise, and coordinating resources and activities in new ways.
For instance, Apple Computer's journey exemplifies the successful exploitation of a white space opportunity. Initially, Apple was a dominant force in the personal computer industry, but its market share plummeted from 20 percent to less than 3 percent during the 1990s. Upon Steve Jobs' return as interim CEO, he introduced upgraded computers. However, the game-changer came in 2001 with the launch of the iPod, which Apple hailed as “the world’s first digital music player,” despite Diamond Media having released a similar MP3 player in 1998.
The iPod's success was not solely due to its technology; rather, it was Apple's innovative business model that made the difference. The introduction of the iTunes store eighteen months later, offering legally downloadable music at competitive prices, was a strategic move. Apple priced the music nearly at cost, focusing instead on profiting from the sales of the iPod device.
Within three years, the iPod/iTunes combination evolved into a $10 billion product, accounting for 50 percent of Apple's revenue. This success significantly increased Apple's market capitalization from $2.6 billion in 2002 to $133 billion in 2007. This strategic move also transformed Apple's identity from a computer manufacturer to a leader in lifestyle media.
Apple's triumph was not merely due to the iPod's quality as a product, as other media players offered similar functionalities. The key to Apple's success lay in its business model innovation, with the iPod/iTunes combination serving as a novel and innovative approach to the market. This underscores why business model innovation has become a buzzword among executives.
02Three times to innovate business models
After spending a considerable amount of time observing the dynamics of the marketplace, one might become aware of emerging jobs-to-be-done or newly identified customer needs that one decides to address. This could lead to the formulation of a completely new customer value proposition.
At this point, the pivotal question that arises is whether to capitalize on the strengths of your current business model or to create an entirely new business model for the commercialization of this newfound opportunity. This dilemma typically arises under three distinct circumstances: firstly, when you aim to cater to the unmet needs within your existing customer base; secondly, when you endeavor to make your offerings accessible to a broader consumer base; and thirdly, when you seek to capitalize on fresh opportunities that arise from significant industry disruptions and changes.
The primary challenge lies in identifying the most lucrative opportunities and pursuing them in a methodical and replicable manner. A new business model becomes imperative when there's a shift in your current profit formula, when the development of new resources and/or processes is necessary, or when fundamentally different metrics, rules, and norms are required to operate your business.
In every market, the basis of competition evolves over time. Initially, when a market is formed, customers are willing to pay a premium for products that offer superior functionality. As products across the board achieve a satisfactory level of quality, customers then begin to seek and are willing to pay for higher quality and reliability. At this stage, process innovation becomes crucial for success.
Once the market reaches a point where all products are reasonably functional and reliable, customers are only willing to pay more if the products or services are delivered more swiftly, more conveniently, or in a manner that is tailored to their specific needs. To thrive at this stage of market maturity, a transformation of your business model is necessary.
When competitive offerings become virtually indistinguishable in terms of performance, the competition shifts almost entirely to cost. To gain an advantage, companies must innovate their business models to achieve greater efficiency, which can then be passed on to customers through progressively lower prices.
As the basis of competition shifts from performance and reliability to convenience or cost, it signifies a fundamental change in the customer's basic job-to-be-done as well as in the customer value proposition that must be delivered to remain competitive. To foster growth, companies must embark on business model innovation.
03Making business model innovation repeatable
In the realm of achieving growth, it is imperative to understand that relying solely on luck and intuition is not the most effective strategy. Instead, innovating the business model should be approached in a structured and systematic manner. This approach ensures that the process becomes repeatable and, as a result, can be fine-tuned and optimized. To effectively capitalize on the available opportunities, it is essential to follow a three-step process.
The creation of a truly innovative business model does not necessarily have to stem from pure imagination, inspiration, serendipity, or mere chance. It can, instead, be a methodical process that leverages structure to foster creativity, rather than relying on creativity to bring structure. At the core of this process is the four-box business model, which serves as a framework for generating pertinent questions and assumptions. It aids in organizing and categorizing these elements in a constructive manner and facilitates the implementation, testing, and learning about them in a sequential order. It is crucial to remember that innovating a business model is an iterative journey, requiring one to oscillate between the different components until the right combination that synergizes all four elements is found.
The challenge lies in devising a new business model that is neither a mere extension of previous endeavors nor a slight enhancement of what competitors are already doing. To achieve groundbreaking success, it is necessary to identify significant, unmet needs within the market and devise profitable solutions for them. This requires viewing the market with a fresh perspective and integrating the four critical components of a business model to bring about the desired outcomes.
Business model innovation should aim for lofty goals such as revolutionizing an existing market, creating entirely new markets, or transforming an entire industry. Innovators in this field should aim to be hunters of significant opportunities, leaving the optimization of core assets to others. This pursuit of grandeur is what distinguishes true innovators in the business world.
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