Today’s business world is no longer stable and predictable. It cannot simply evolve from the past and extrapolate into the future. Yet too managers hope that their old models will continue to work. They seek to replicate the success formula of the past, to continuously enhance and improve the status quo, and trust that their luck will continue into the future. We call this a fixed mindset. Instead they need to break free, with a growth mindset.
“The best way to predict the future is to create it” said Abraham Lincoln.
Markets are more crowded than ever before. Competition is intense, from across geographies and sectors, whilst customer aspirations are constantly fueled by new innovations and possibilities. Innovation is continuous and essential. Yet too much innovation is just improvement, keeping pace, not getting ahead. It is quickly imitated or redundant, the advantage is lost, and investment is squandered.
“This is the age of disruption … which is not simply about disruptive technologies, but dramatically changing how people think and behave” says Sebastian Thrun of Udacity.
New business models
New business models are the most effective way to transform organisations, to innovate the whole way in which the business works. Inspired by a new generation of businesses – Airbnb to Uber, Dollar Shave Club to Netflix – we see dramatically new business models in every market, through collaborative platforms, data analytics and personal recommendations, or subscription-based payments.
Airbnb makes money by helping you to make money out of your spare room, connecting host and guest, then taking a small fee from each. Nespresso makes great coffee, selling discounted machines, and then getting you to sign up to an everlasting and incredibly profitable direct revenue steam of coffee pods.
What if your business started leasing rather than selling, became part of the sharing economy? What if you simply facilitated an exchange between buyers and sellers and took a cut? How about moving to a subscription model, or a freemium model, or a referral model, or an advertising model?
We used to just think a business simply made things, and sold them. Now its much more complicated. Or rather, there are many more innovative ways to achieve success …
The term “Business Model” is over used and under defined. Business models explain how organisations work – how do they create value for customers, and in doing so how they create value for all other stakeholders. They can map the current business, or explore options for the future.
The approach originates from mapping “value networks” in the 1990s, understanding the systems across business and its partners through which value (both financial and non-financial) is created and exchanged – by who, how and for whom. I remember working with Pugh Roberts to create a multi-million dollar dynamic model for Mastercard which showed varying any one driver – such as interest rates, or branding – affected everything else. And thereby being able to test new ideas and optimise the model.
Business models represent the dynamic system through which a business creates and captures value, and how this can changed or optimised. They are a configuration of the building blocks of business, and their creative reconfiguration can be a significant innovation.
Business models became fundamental to business strategy, driven by them but often driving them. Hambrick and Fredrickson’s Strategy Diamond is all about aligning the organisation, achieving an economic logic between strategic choices. They help to align the business, matching the right strategies for outside and inside, using the proposition as the fulcrum, and profitability as the measure of success.
Business models can often appear very mechanical, lacking emotion and easy to imitate. In 2001 Patrick Staehler, in particular seeking to explain the new breed of digital businesses, created a business model “map” driven by the value proposition, enabled by the value architecture, creating economic value and sustained by cultural values. The last point here is most interesting, in that it captured the distinctive personality of a business, its leadership styles and ways of doing business. This is much harder to copy, and also sustains the other aspects.
Alex Osterwalder’s subsequent Business Model Canvas emerged as the most common template on which to map a business model. He popularised the approach so much so that his supersized canvas now features in workshops throughout the world, always with an array of multi coloured sticky notes as teams debate the best combination of solutions for each box. Whilst the canvas lacks the sophistication of value driver analysis and dynamic modelling, it is about testing hypothesise in each aspect, and how they could work together, and that respect works as a thinking model.
Business models have become a practical tool for rethinking the whole business, seeing the connections and then innovating the business. In fact they offer a great platform to facilitate new strategy and innovation thinking. That’s why we’ve created the Business Innovation Program, which combines design thinking, new business models and strategic implementation – a great way to engage your team, to think about new ways to grow, and to create the future, practically.
We explore at least 50 different business model templates which could transform your business. We start with the customer, to explore emergent needs and behaviours, shaping better propositions and solutions, then exploring how to deliver them commercially, and as engaging customer experiences.
0900 – 1030: CHANGING WORLD
Making sense of today’s world, the challenge and opportunity of relentless change
The future isn’t like it used to be, so we can’t keep doing what we used to do
100 companies changing the world right now. What can you learn from them?
Start with a future mindset, jump ahead, look forwards not backwards
Going beyond limits, how will you be the change, how will you achieve more?
Growth strategies – innovation beyond products, technology, and creativity
1100 – 1230: INNOVATIVE BUSINESSES
Starting from the future back – create the future you want, then work backwards
Working from the outside in – rethinking solutions through customer eyes
10 types of innovation – products and services to business models and experiences
Ecosystems, from make or buy, to partner and connect, platforms and communities
Innovation multipliers – accelerate ideas further and faster to accelerate growth
Creating a growth factory – portfolios, self-tuning and the invincible company
1230 – 1400: STRATEGIC INNOVATION
Business models – emergence of business models, 50 models to adapt and apply
Linking business models to strategy, business plans and organisation design
Rethinking your business model – what is it, and not – and different ways to define it
Mapping existing business model – simplifying how your business actually works
Innovating new business models – rethinking how your business could work better
Developing a business model portfolio – creating the invincible business
1530 – 1700: NEW BUSINESS MODELS
Innovation in your sector – how are others innovating, what are the new models?
Rethinking products and services – what would deliver the proposition better?
Rethinking channels and brands – how to build more inspiring connections?
Rethinking revenues and pricing – exploring alternative ways to make money?
Rethinking assets and resources – how to use what you have better?
Rethinking activities and partners – what do to do yourself, and by others?
1700 – 1830: DESIGNING YOUR FUTURE BUSINESS
Your products and services – what would deliver your proposition better?
Your channels and brands – how to build more inspiring connections?
Your revenues and pricing – exploring alternative ways to make money?
Your assets and resources – how could you use what you have better?
Your activities and partners – what do you need to do yourself?
How would you change Endesa’s business model? Where will you start?
We lease cars. We rent designer dresses. When the lease is up, we return it and get another.
Could a similar leasing model work for furniture? IKEA, the world’s largest furniture retailer, is launching a subscription model where people can lease everything from office chairs to kitchen cabinets. Imagine you’re ready to redecorate your office or update your kitchen. Instead of going through the rigmarole (and expense) of buying all new and getting rid of the old, you just return everything and pick out something else. It’s the same as leasing a car or a piece of designer clothing. Once returned, it gets cleaned up, refurbished, and goes back into rotation for someone else to rent.
IKEA will pilot the program in Switzerland starting as soon as this month. There’s no word yet how much subscriptions will cost or exactly which Ikea products will be eligible. If the subscription model goes well, Ikea may launch the program globally. The company will start by leasing office furniture like desks and chairs to businesses. Kitchen cabinets are also a possibility. Because of the way Ikea’s cabinets are designed, all you’d have to do is swap out the doors for a completely different look.
“Instead of throwing those away, we refurbish them a little and we could sell them, prolonging the lifecycle of the products,” Torbjorn Loof, chief executive of Inter IKEA, told The Financial Times.
Time to innovate your business model
“The failure of any business reflects at root the failure to innovate, failure to recognise change, and the inability to respond to change adequately or appropriately” says Langdon Morris in his great new book Business Model Warfare.
“Business model innovation is perhaps the most important form of innovation, because it’s available to any company of any size, anywhere in the world. All it takes is insight, and the willingness to listen well and try something new.”
Here’s a short extract:
Today, as we see that yet another massive wave of new technology is about to crash across the global marketplace — what with artificial intelligence, blockchains, machine learning, self-driving cars, robots, quantum computing, etc., etc., all arriving immanently, — we must therefore anticipate that every existing business model of every existing business is thoroughly and utterly subject to disruption. This is a stark warning about the need to innovate.
Wouldn’t it be so incredibly helpful if there were a formula to explain all this, to simplify it and make it useful in practice? And indeed there is, a simple, three element framework:
Outside: The company provides experiences to customers through the delivery of products and services. The current quality of those experiences is today’s reality; making them transformatively better is the vision.
Inside: The factors inside the organization make this delivery possible. These can be many and varied, including the product or service itself, the supply chain, the operations, and technology. These are the means.
The Bridge: And then the way that a company communicates this value proposition to customers through marketing and branding, which are the messages and means through which the company communicates. This is the story.
This formula for business model innovation immediately gives us three essential questions to ask about our own business model, and how to improve it:
What’s the best possible experience that our customer can have? (Vision)
How can we organize ourselves to deliver that? (Means)
What’s the best brand identity to represent it? (Story)
We also observe that the most successful business model innovators tend to focus obsessively on oneparticular aspect of their business means, and develop it innovatively and far beyond what’s been done before. That is, they push it to the edge, the absolute limit of possibility, and in so doing create an entirely new capability that they then leverage to define or enable an exceptionally better value proposition for their customers. (See the illustration at right.)
Let’s look again at some of the companies we’ve already been discussing to see how this applies: where did they push it?
Amazon: The company’s determination to leverage its core technology into every aspect of the customer relationship.
Apple: Obsession with the user interface design created an ease of use that is the basis for nearly everything else that Apple has accomplished.
Google: Obsession with creating user traffic on its platforms has driven two decades of growth.
Southwest Airlines: Obsession with reducing operating costs enabled an entirely new business model and created three decades of exceptional growth and success.
Walmart: Obsession with supply chain optimization is the foundation of its global retailing empire.
The word “obsession” shows up in each one for good reason, and in fact in each of these examples it’s a dual obsession. On the inside, it’s the obsession to optimize some aspect of operations; on the outside, it’s the obsession to optimize the customer’s experience.
Getting there may not be easy, though. Southwest Airlines had to endure a near-death experience during its startup stage before a core element of its eventually-successful business model became clear; it took Google years to figure out how to make money; Amazon and Uber are still losing money; and Apple was moribund as late as 1997, and it was only in about 2005 that its many decades of persistence began to pay off.
How does this work in practice? Business model innovators often begin with these questions simultaneously at the forefront of their thoughts:
The first is simply, What would make the customer’s experience better? Answering this question well requires a detailed understanding of the tacit dimensions of the user experience.
The second is, How can we achieve that? This is the means.
The third question then focuses the compelling story, the critical importance of branding.
Yes, the table is of course a simplification (and possibly an over-simplification), but isn’t it interesting anyway? Do you agree with all the labels I’ve chosen? Perhaps not. But it does convey some important ideas that you need to think about with respect to your own business model:
Can you articulate what your business model is about clearly and concisely?
Does it tell a story that matters to your customers?
Can you deliver on the promise?
Notice that nowhere on the chart is the story or the experience actually the technology itself. Thus, it becomes clear that the importance of new technologies is that they’re the means through which new and better experiences are delivered, but they should rarely be the focus.
Mediocre marketers sell technology. But people buy the hole, not the drill, so skilled marketers sell the hole.
That is, the best business model innovators figure out how to deploy new technologies in order to create better experiences for their customers, while the non-innovators push technology without considering what it means for their business model, or how their business model should be designed to create optimal experiences.
If you look at the up-and-down history of retailers like Best Buy, this is one of the key lessons. They originally designed their stores as temples for people to come and worship technology, which immediately got them commoditized, and soon squeezed by Amazon and Walmart. To turn the business around they had to make it experiential and thus interesting, which they did by turning the stores into brand bazaars, collections of interesting shops in one big box. To complete the turnaround they’re now developing the new brand identity, an essential element of all business models.
The ability to “pivot” your strategy, maybe to reinvent your entire business, is essential to being able to survive and thrive in fast-changing markets.
We used to define a clear vision, develop a long-term strategy, then move ahead with clarity and confidence. We used to be able to take the past as a guide to the future, then extrapolate forwards. We used to boldly launch our new ideas, determined to deliver, and reluctant to change.
Today’s markets don’t allow such certainty, or blinkered determination. Success lies in the ability to stay agile, to keep testing and learning as we go, to keep a vision in mind but strategy fluid. And most of all, be willing and able to change direction, when or before we have to.
Small businesses are like speedboats, they can chase new opportunities as they emerge, but they can equally move away and to somewhere better, as soon or before they need to. Big companies are more like supertankers, finding it much harder to change direction, hence the need for structural and strategic agility.
In recent years, the best pivots can be seen in digital start-ups. They have adopted a new mindset in everything they do which gives them this agility. They are guided more by a purpose to make life better in some relevant way, rather than by the rigid structures of a product or process-based strategy. They are typically much more virtual, sourcing capabilities rather than developing them in-house. They are much leaner in their implementation, fast and experimental, constantly testing and learning.
Facebook famously began life as Facemash, the slightly questionable comparison site developed by Zuckerberg for people to vote “hot or not” between two pictures. Whilst he caused uproar amongst Harvard’s female students, he soon pivoted to a path that made him $50 billion.
Instagram was originally called Burbn, a location based service similar to Foursquare, whether you could share your whereabouts and even earn points for hanging out with friends. Then it realised the $20 million power of the images people were sharing, and changed direction.
Flickr used to be called Game Never-ending, a massively puller multiplayer game with roleplaying around 2002-2004. Key to the game was the sharing of images which it then realised was much simpler and profitable business. Flickr was sold to Yahoo for $40million in 2007.
Pinterest started life as Tote, helping people to explore online retailers and sending them updates about prices and availability. It realised users were mainly using the site to build and share ideas lists, and soon shifted course to focus on “pinning”.
Groupon began as a platform for social action called The Point in late 2007, asking for commitment only when the movement reaches a certain tipping point, before reinventing itself in the crowd-based local coupon business. Now worth $25 billion.
Ushahida started as an African elections monitoring service, a grassroots response to the unconnected infrastructure of local markets, before growing into a crowdsourced news aggregator which it has become much more successful.
Twitter emerged out of a mediocre podcasting concept called Odeo that was outshone by iTunes. Having struggled to stand out, the team soon realised that people were communicating in ever shorter messages, but still wanted to speak out to the world. The 140 character tweet was born.
PayPal started out as Continuity, a cryptography company designed for exchanging money over PalmPilots (remember them?!). It didn’t work, but Peter Thiel, Elon Musk and team soon identified a more lucrative market for taking credit card payments. Sold to eBay for $1.5bn.
YouTube founder Steve Chen spent his early years trying to make the site work as a video dating portal, before realising that people simply wanted to share videos for entertainment. Eventually he sold YouTube for $1.65bn to Google.
This leaner approach allows them to be much more responsive to change in markets – to anticipate changes in consumer aspiration, competitive challenge or economic turbulence. It allows them to react much faster. It also enables them to detect when ideas are not working well, and what tweaks or more significant changes are required to do better.
Sometimes a shift in strategy, not in everything but in certain aspects can be significant. Like in engineering, a pivot is a fast and decisive change, executing a sudden shift in strategy that turns hundreds of followers into millions of fans, an evolving idea into a billion-dollar company.
The ability to pivot, be it a subtle shift in direction, or a radical reinvention, is essential to scaling start-ups into commercial businesses.
Fail early and cheaply is a start-up mantra. Use prototypes to learn from customers, such as a paper-based process before investing in detailed coding, a Powerpoint before a website, testing with Google Adword before spending more. And keep learning from customers – insights about why some customers don’t currently get or want your idea, or exploring their real problems and aspirations more deeply.
Find well established partners to co-brand with, reaching out to their audiences, transferring equity from their brand, or maybe creating a better solution. Watch emergent behaviour, particularly people who adapt products for other uses, like engineer codes that become texting, or scarves that become snoods. And above all, stay passionate. If you aren’t truly excited about a concept, it’s unlikely your customers will ever be. Find what really excites you, and the people who will be excited by you.
Even the classic brands of today had to pivot to where they are today.
Wrigley’s gave away free gum whilst selling soap and baking powder, but found people liked their incentive more than the product.
Avon has a similar history, a door to door bookseller, that gave away perfume samples to attract women, before moving to a door to door cosmetics retailer.
Nokia started out as a Finnish forestry business, before moving into shipbuilding, and then into plastic (and wellies!), and then to electronics, most famously mobile phones, and now networks.
Sony’s first product was a rice cooker, and then an electric blanket. From homewares, they quickly moved to personal electronics, with global success.
HP focused on industrial solutions before finding consumers, although most recently it has swung back to its origins and separated its business.
Starbucks focused on selling coffee beans until Howard Shultz visited the coffee houses of Italy, and came back inspired to create his “third place”.
These companies had the focus to find their space, the boldness to shift from their existing world to the better world, and then shaped the market in their own vision.
Explore more about strategic pivots, in the Business Innovation Program which brings together all the relevant concepts to create better strategies and growth for your business:
Future scanning – finding the best opportunities for growth
Growth strategies – making the right choices, and defining the limits
Design thinking – deep diving to find new insights and ideas
Lean development – fast experimental development and delivery
Business model design – innovating the whole business to deliver
Customer value propositions – focusing on the right customers right
Minimal viable products – starting from the basics then building up
Virtual ecosystems – bringing the right partners together collaboratively
Agile leadership – staying strong and directional, flexible and fair
Exponential growth – turning ideas into fast and profitable growth