I have been part of many discussions about the best way to build competitive advantage for a game company, and a recent article in the MIT Sloan Management Review has helped crystallize my thinking. The article, “Creating Value Through Business Model Innovation,” shows the benefits of focusing on creating competitive advantage through your business model rather than through product or branding. That is, it is more important to create a unique, sustainable and innovative business model than better games or unique branding. The article pointed to a survey by the Economist Intelligence Unit that found that a majority of business managers favored new business models over new products and services as a source of competitive advantage.
Reasons why business model innovation is so important
The article pointed to several reasons why business model innovation is so important for social game companies. First, it represents an often underutilized source of future value. Second, it is harder for competitors to copy. As we all know, if you create an innovative social game, multiple competitors will release clones faster than you can say “IPO.” It is much more difficult, however, for a competitor to replicate a unique business model. Third, because business model innovation is potentially so powerful, you must constantly be monitoring the competitive landscape, including companies you do not consider competitors. You only need to look at the overall game industry as an example. By the time Nintendo understood Zynga’s business model, it was too late for them to compete and instead they ceded a huge part of their market to a company they did not even consider a competitor.
How do you create business model innovation?
There are several ways to create business model innovation. The first of these is by adding novel activities. These undertakings can include either forward or backward integration. An example would be the iPod: Apple took the MP3 player and added an online music store.
A second way to innovate your business model is to change the structure. The article describes how Priceline used this strategy to create an online travel service with a competitive advantage. It took the traditional functions of an online travel service but rather than trying to create a prettier website or a better advertising campaign than Expedia, Travelocity, etc., they introduced a reverse market in which customers post desired prices for sellers’ acceptance. (I would say another example would be the introduction of the free-to-play model in the game space.)
A third method to innovate your business model is through governance, or changing who does one or several activities. The authors use franchising as an example of this strategy, when a Japanese entrepreneur franchised the 7-Eleven chain for Japan (franchising was new to Japan). In our space, I would say 6 Waves innovated on the business model by introducing the publishing model to social games, allowing developers to focus on the creation of games and instead focusing on marketing and distribution.
To increase the odds that your innovation is successful, there are four major interlinked value drivers of business models: novelty, lock-in, complementaries and efficiency. Novelty is how innovative the change actually is. Lock-in refers on how the activities create switching costs or enhanced incentives for customers and partners to stay in your ecosystem. Complementaries refer to the value-increasing effect of the interdependencies among business model activities, such as eBay’s acquisition of Paypal. Finally, efficiency refers to cost savings.
What to ask before changing
While it is great to innovate, sometimes it is not the right strategy. Innovation for innovation’s sake does not build your business—and could even kill it. You need to make sure the innovation will help make your social game company stronger. The authors of the MIT SMR article suggest asking yourself six questions before implementing a new business model.
- What customer or partner needs will the new model satisfy?
- What new and novel activities are needed to satisfy these needs?
- How could the activities be linked to each other in novel ways?
- Who in your ecosystem should perform these activities?
- How is value created through the novel business model for each participant?
- What revenue model fits with the new business model?
Normally, I would suggest some unique business model innovations for the social game space, but I really can’t tell you what fiveonenine will be doing in the next year. What I recommend you take away from this post is that the way to create a social game company with a strong competitive advantage is to innovate on the underlying business model, not simply create a better game with a better theme.