These cycles, when aligned with company goals, reinforce competitive advantage.īy making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players. Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles-similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy.

However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. There has never been as much interest in business models as there is today seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey. Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.

A good business model creates virtuous cycles that, over time, result in competitive advantage. Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.

However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion-just as engineers test new technologies or products. Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so.

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