Why Business Model Innovation Is the New Competitive Advantage

IntroductionMichael Porter, a relatively unknown face at Harvard Business School during 1985, published a book, Competitive Advantage. The book highlighted that companies have to optimize their value chain in order to consistently outperform their rivals. Porter highlighted that the firm can have competitive advantage either by focusing on low cost or the differentiation strategy. The book became an instant success in academics and in industry and that is from where Michael Porter became The Michael Porter. Over the years, the basic building blocks of business model have changed and Porter's work has been put to question. Rita Gunther McGrath in her book, The End of Competitive Advantage has contended that sustainable competitive advantage in today's turbulent business environment is no longer possible and has in fact advised firms to seek out transient advantage. Further, many other researchers have criticized Porter's idea of cost and differentiation as a competitive advantage because first, it is very difficult for a firm to calculate its own and competitors' cost of operations, second, new products and services are easily imitated. Further, research has shown that value for money has become a preferred strategy for businesses success, and according to Porter it is being stuck in the middle of the road and an absolute guarantee of failure.Looking at today's business scenario, neither view holds true and none represents today's fast changing business environment. Companies like Uber, Airbnb and Xiaomi have been able to dominate their respective industries because of their unique business models. According to Osterwalder and Pignuer (2010), business model describes the rationale of how an organization creates, delivers and captures value. These companies have totally disrupted their respective industries by changing the basic building blocks of their business models. These companies, beyond any doubt, have been able to dominate and in some way monopolize their industries. Studying these companies little closely, it is obvious that the source of competitive advantage has changed. They have no revolutionary products and services but unique business models. Business model innovation has helped these companies to deliver more sales, higher profit margins and greater cash flows than their competitors. These companies have no defined value chains and have in fact no fixed costs in terms of plants and machinery.Economist Intelligence Unit (2012) surveyed more than 4,000 senior executives worldwide on the subject of innovation. The findings highlighted that executives do not prefer new products and services as source of future competitive advantage but new business models. A similar type of study by IBM (2006) highlighted that due to intensive global pressures, the focus of top executives on business model innovations has increased and reached much higher than expected before. The study further highlighted that companies who outperformed their rivals and whose operating margins have grown at a much greater pace in the last five years were putting twice as much focus on the business models as the underperforming companies.Relevance of Porter's Competitive AdvantageIn late 1980s, Michael Porter published a book, Competitive Advantage, which in no time became the bible of businesses and academicians. There have been many management ideas and books that sold millions of copies over the last couple of decades, but none has been as influential as Porter's Competitive Advantage. Porter argued that a company can achieve competitive advantage by providing buyers more value at a lower cost (low cost) than their competitors, or by performing activities in unique ways that create more value than their competitors and therefore charge a premium price (differentiation). Porter suggested that a firm can dominate its competitors either by being cheap or by being different or perceived to be different by customers. …