‘Innovate!’ has become the global mantra against a backdrop of intensified competitive environment. But focusing on product innovation alone is no guarantee of success; neither is bundling products with services in order to offer meaningful differentiation. Below, Michael Yaziji considers another approach – creating a radically unique business model to drive growth and market share.
Death by Product Innovation
The more you try to innovate your products, the harder it becomes to be different. Across the globe we hear the call to ‘innovate!’ in order to protect value proposition and margin, and not fall into the price erosion trap. You innovate and innovate, yet no sooner have you launched your new, different product, then so does the competition. Alarmingly, there is often little difference in the eyes of the customer, and then you are back to square one.
From Product Orientation to Service/Solution
There must be another way. Some firms have taken to bundling products with services to offer ‘solutions’ in their attempt to offer differentiated products. ‘Solutions’ sound sexy and hold out the promise of higher profit margins. They also offer benefits to the firm that product innovation doesn’t. The first benefit is a greater understanding of customer needs. There is no doubt that firms become closer to their customers and can thus generate benefits particularly in terms of a more useful flow of information back to the firm of what customers really want. Firms are also able to create switching costs for customers. The more time and money invested in the relationship, the harder it will be for customers to change. Yet there is nothing particularly long-lasting about these advantages. They are essentially defensive, and focus on the status quo rather than offering something radically different.
The biggest benefit to the firm is that a successful move to service/solution requires changing your business model. The complexity of doing this involves changing both cultural and internal processes. Yet the results of a successful transition are a longer-lasting source of competitive advantage in terms of customer attraction and retention, and a value proposition that is meaningfully differentiated from that of product-focused competitors. Many firms have seen higher profit margins when taking this approach.