PFM No.184 - IMD Business School

Developing unique business models: Going beyond services/solutions

10 min.
May 2013

“If I hear the call to ‘innovate’ one more time…”

“Innovate! Innovate! Innovate!” It’s become a numbing mantra. Your company strives to innovate and differentiate, but do you have a sneaking suspicion that your buyers see less and less meaningful differentiation between your offer and that of your competitors? Is your pricing power eroding?

Take solace: you are not alone. This experience is becoming increasingly common as competitors replicate one another’s product value propositions more and more quickly.

Moving from products to services might help but might not be enough

Many firms across industries are beginning to realize that they cannot maintain significant product differentiation. Any product differentiation is quickly noted and matched by competitors.

So, companies are looking for salvation from product commoditization hell in “services” or, even better, “solutions.”

The move to services/solutions has its benefits. First, it provides a company with relational and informational advantages in terms of its customers. It enables a supplier to better understand and meet its customers’ needs. Second, establishing deep and efficient service/solution relationships takes time and effort for both parties, thus creating switching costs for customers. Both of these advantages are essentially defensive in nature. They are a way of holding on to existing customers, a way of locking in the status quo.

A third benefit of moving to services and solutions is  that  it  provides  a  longer-lasting  source  of competitive advantage (both for gaining and retaining customers). Successfully moving from a product-focused organization to a services/ solutions organization requires a very different business model. Since business models involve every central aspect of organizational design and often require a new organizational culture, they are even harder to replicate than products or even individual firm competencies. As a result, companies’ value propositions will be meaningfully and sustainably differentiated from those of competitors that are operating with a product- focused business model.

Thus, if you are looking to gain market share, ostensibly, moving to services and  solutions will be especially advantageous only  when fewer competitors are playing in that space. Unfortunately, many companies across a wide swath of industries are moving simultaneously from products to services/solutions. In many industries the initial profit potential of services/ solutions will be reduced as businesses make this difficult transition.

An old rule in competitive strategy is: If everyone is “zigging,” try “zagging.” This goes for business model innovation as well. The most sustainable competitive advantage will come from unique “zagging” business models. This is not to say that the move to services/solutions is a bad idea, many firms are indeed seeing higher profit margins in this part of their business. But why not try to look for radically unique business models.

A different business model yields a more sustainable competitive advantage

Let’s look at an example of a more radical business model adopted by Desso, a mid-sized European carpet tile manufacturer.

Carpet tiles are not sexy. And when Stef Kranendijk took over, the industry as a whole was only moderately attractive. Desso was seeing very modest 1% EBITA margins on its 15% market share. Most of the players had similar business models – selling weakly differentiated carpet tiles to contractors and often competing heavily on price.

Stef decided to completely transform the business model of the firm around Cradle-to-Cradle (C2C) design. C2C is a concept of designing products made of pure subcomponents to allow for easy disassembly and endless recycling without loss of quality. It requires and offers an entirely different way of doing business.


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