The surest way to develop successful new businesses – especially in transforming industries – is to focus carefully on an unmet market need and tailor a business model to meet it. This means developing business models for "getting the job done." This sounds straightforward but in practice it is devilishly hard because established, successful companies so often let structure (read: organizational baggage) drive strategy, rather than making strategy – choices about where to play and how to win – dictate the right structure.
Here’s something most companies are bad at:
Moving beyond their core — beyond what they’re good at, beyond what they’re comfortable with, beyond what they know.
“White space” is what Mark W. Johnson, co-founder and Senior Partner of Innosight calls this unchartered territory. White space is the potential that demands different business models to exploit.
Innosight co-founder Mark Johnson and author of Seizing the White Space: Business Model Innovation for Growth and Renewal
In his 2010 book Seizing the White Space: Business Model Innovation for Growth and Renewal (Harvard Business Press), Johnson argues that businesses’ habit of failing to capitalize on growth opportunities that didn’t seem to fit and businesses’ tendency to erect borders around what he terms their “core operating spaces” mean that what companies have to do is commit to reconfiguring. Commit to figuring out wholly new ways to act on opportunities that
- Serve new customers or existing customers in fundamentally different ways.
- Be ready to address the fact they may be a poor fit for the company’s core business.
Business model innovation isn’t a new idea, but it’s a hard one to implement. Johnson, a cofounder and senior partner at the innovation and strategy consulting firm Innosight, notes in his book that a 2008 IBM survey found that nearly all of the 1,100 corporate CEOs polled reported the need to adapt their business models. At the same time, no more than 10 percent of innovation investments at global companies are currently focused on business model innovation. Why the disconnect?
Innosight's chairman Mark Johnson discusses seizing the white space through business model innovation in this Business Innovation Factory interview.
Johnson writes.
“Companies can’t pull it off because, as familiar as the term is, very few people really understand what a business model is (and what it isn’t) or what model their organization is actually operating under, much less how they would go about creating a new one and why or when they should.”
In an interview with The Build Network’s managing director for new venture development George Gendron, Johnson talks about how companies need to look for the unmet jobs not getting fulfilled, see the business from the outside in, and think about developing a portfolio of business models.
GENDRON: Let’s start with an example. Towards the end of your book is the summary about Amazon. If you said to me, “Name a company I don’t ever want to read another word about,” it would be Amazon. And yet its history in terms of business model innovation made me think, what an astonishing story.
JOHNSON: It is. The amazing thing about Amazon is this idea of the user experience. What Jeff Bezos, Amazon’s founder and CEO, said was, “I’ve got to get good at what my customers want, regardless of whether I’m able to do it or not.” He didn’t let things get in the way of being able to make that happen. The company was able to focus on figuring out what is it exactly that its customer is trying to get done and how to put together the pieces of the puzzle that would allow the company to serve that customer.
GENDRON: Amazon starts in the retail arena, selling books online, selling consumer goods online, setting up a commission-based brokerage system for used books, opening its storefront to third-party retailers. And then, suddenly, they’re in IT services, creating online services for other sites and client-side applications for web developers. And then they’re building an e-reader, the Kindle. Those last ones are jarring, right?
JOHNSON: They are. And remember, Bezos and Amazon were pummeled. I have the picture of Jeff on the cover of Business Week when they came up with Amazon web services in 2006, and the cover line is “Amazon’s Risky Bet. ”
What Bezos and Amazon figured out was how to design around the job to be done, not their capabilities. Everybody focuses on their capabilities, how they can use their capabilities, and of course that’s important. But it has to be broader. What’s the job? What’s that user experience? Wrap the business model around that job, especially if you want to seize opportunities beyond your core business
Bezos put it this way: he said,
“If you want to continuously revitalize the service that you offer your customers, you cannot stop at what you’re good at. You have to ask what your customers need and want. And then no matter how hard it is, you’d better get good at those things.”
The Amazon story is that it’s built to transform. It had one profit formula at the beginning when it was just an online bookstore, then it went into this whole eBay-like brokerage thing of selling used books, then its web services, which was a huge, huge departure.
This serial process of business model innovation that Amazon has done, by the way, hasn’t really been repeated.
GENDRON: You also have looked at the way that Apple has been creative in business model innovation.
JOHNSON: Of course, in Apple’s case, the MP3 player was so powerful because you could customize your music. That was in place, and there were a whole bunch of MP3 player companies, and people said,
“Hey, this is really cool.”
Apple just blew it out of the water when it combined the hardware with the software with the service with iTunes to not only customize but make it extremely user friendly. It was easy to buy and download music onto your iPod. They made the experience seamless, they made it idiot-simple.
Apple is clearly not beholden to their existing structures. They’re figuring a way to not let the existing structure get in the way. They focus on the consumer and his or her experience and making it amazing, convenient, and simple. All the heavy lifting is behind the scenes, combining product with service with technology with software. The customer didn’t care about how hard it was behind the scenes.
GENDRON: Let’s step back. Why do you think this concept of business model innovation got so hot in the first place?
JOHNSON: I think it started with the whole dot.com wave, when the Internet began to allow for a different way to make money and a different way to operate as part of serving a customer. I talk about a four box business model framework, meaning the blueprint for how a company delivers value, at a profit, to a set of customers. It’s got four parts: the customer value proposition; the profit formula; the key resources needed to deliver that value proposition at a profit; and the key processes needed.
The Internet really turned things upside down. It created such a wave and a multitude of different businesses, and things were getting financed without any real way of making money
I think that caused a reflection, where people started to say,
“We need to think about ‘What is the business model?’”
Also, with the speed of information technology, the life cycles of businesses are, I think, shrinking more dramatically than ever. That leads again, intuitively, for people to say,
“We’ve got to get to the actual fundamentals,”
which is why is the business a business in the first place. What are the underpinnings of that? Let’s get beyond just the measurement and the norms and the culture of how things run to more fundamental questions, which goes back to the business model.
A true business model is an interdependent cross discipline set of pieces that are intertwined in a very unique way, developed over years. It’s not just about the financials. It’s tied to the operating model and how people organize people and processes.
GENDRON: We launched Inc. in 1979, and when we did our first Inc. 500 we were often dealing with CEOs who had started their businesses in the mid ‘70s. And we were seeing what I would describe as the last generations of cowboy capitalists. Real old style entrepreneurs. Many of them would say “business models are forever,” meaning that they had looked for a niche in the marketplace, found one, and they went off to operate that business with the expectation that they’d die behind the desk with the same model that they had started 20, 30, 40 years earlier.
JOHNSON: Established companies run a huge risk in becoming rigid. They think, well, our established profit formula and our established operating model — which we have honed and used all these years with the overriding rules and norms and metrics — will obviously work for serving a new customer in a new way. They think this because those things are so embedded in how the organization turns a profit and how it operates.
Financial people have a formula, and if new products don’t meet these growth margins, they’re not interested. It’s counter to the nature of business to say we’re going to entertain changes to the profit formula.
Instead, people have to be prepared to be open and diagnostic about how the ways that they turn a profit might change. I’m thinking about incumbents, mid-tier and large companies. They have to be willing to say, “Hey, we’re going to serve a new customer a new way. Is it possible that the way we turn a profit has to be different.” Or, “We may need to change our overhead structure to go after this new value proposition.” Or, “We may have to change the velocity with which we drive through products. We may need to become a high volume type of company as opposed to a high margin, low volume type.”
Companies can no longer continue to say, “We’re going to be a branded product company.” As soon as they say to themselves, “We can’t just think about breakthrough products,” then they open up the scope of innovation to say, “We have to think about the whole business model.”
GENDRON: How do companies do this? What’s your prescription?
JOHNSON: We talk all the time about how, if you’re trying to grow, it’s one thing if you’re sustaining your core business and you’ve been with the customer a long time and you’re doing incremental innovations to improve the product. You can get away with being “inside out,” as they like to say — with your focus from the inside, looking out. But if you’re really trying to create new growth, whether you’re a new entrepreneur or you’re an established company moving into new places, you’ve got to be so “outside in.” You really have to understand what the critically important unmet job is that’s not getting fulfilled. Because at the end of the day, what the customer does is hire the product to get a job done.
GENDRON: When you think about all of the material that you covered in the book, material that you put into practice every day, what’s the one aspect that you wish you knew more about?
JOHNSON: I have two. The first is that I’m still trying to figure out the right way to think about how much separation there needs to be between operating the core and coming up with a new growth opportunity and a business model. What’s the right interface between that new incubation growth group that is going to white space and the people executing the core competency?
GENDRON: That is a great question.
JOHNSON: There’s so much literature on it now, but I don’t think we’ve cracked it. New incubation groups are totally separate, they’re isolationist, but they can get crushed. It’s like this dance, and I haven’t seen it really nailed to a level that people can understand it and say, “This is how we’re going to do it.”
The second thing is a kind of the corollary to that, and it’s this question: Can a business unit operate two business models at the same time? I’ve always said no. I don’t think it can. But I don’t have all the data to know that that’s a hundred percent right.
GENDRON: I think you know intuitively that most people would agree with you, right?
JOHNSON: Yeah. I think most would. But I was just at a client who said, “Oh yeah, we’ve got a bunch of different business models.” I’m not sure if it’s truly a different business model or a nuance off of the existing model.
GENDRON: The way you talk about “design around the job to be done, not your capabilities,” sounds so right and appropriate. On the other hand, there are generations of leaders who grew up with the notion of core competence. It’s just been drilled into them, it’s part of their DNA. You’re talking about a huge change in thinking and framing.
JOHNSON: It is a big change, but I think it has to be framed the right way. It’s an “and” statement. Of course you want to leverage your capabilities and say,
“How do we have things that are consistent with our capabilities to continue to move the train in a forward direction, to move it along.”
Nobody disagrees with the core competence of the corporation to drive those things. Nobody, I think should disagree with that — it’s better to try to do things that are nearer in, if there are opportunities, as opposed to further out.
But on the periphery, you can have small innovations. You can have entrepreneurs that are looking at unusual opportunities that come at the intersection of different industries and disciplines that are too good to pass up. Or at least they’re too good to not at least investigate, to find out how it would fit with what your customers might want.
A company could be 90 percent, 95 percent focused on its core competence. But why not take five percent? If you’re talking about a big company, with $100 million of discretionary investment ability, that’s $5 million dollars. I think it’s more a sophisticated portfolio theory for companies.
GENDRON: Large companies as a collection of business models.
JOHNSON: Yes. A more sophisticated way to bet for the future.
COMMENTARY: For those of you who truly embrace strategic thinking, creative innovation and business modelling, the second video titled, "BIF Interview of Mark Johnson" really gets to the "core" of creating business models because its much more professorial.
Seizing The White Space is really about trying to leverage new opportunities and new places that require where the company has to change its existing business model in order to succeed. This means developing a new value proposition, revenue model, profit model and operating model.
In order to capitalize on new opportunities means managers need to venture into adjacent spaces, but you have to be careful not to venture to far off of your core competencies and end up in unfamiliar territories.
How does a company create, capture, and deliver value. That's the essence of what a business model is in the first place. If managers understand the basics, the underpinnings of business then they can venture beyond their core competencies and take advantage of new business opportunities.
Mark Johnson divides business model innovation into a four box matrix as follows:
Customer Value Proposition - How important an unmet job is going to be addressed by a company through a new offering, both through what they are going to sell, how they are going to sell it, the method of payment, and so forth
Profit Formula - How the company captures value and generate a profit for itself from the new business opportunity. The profit formula defines how the company is going to make money, including the price strusture, cost structure, target profit margins, target unit volumes, inventory turnovers, and so forth. Developing the profit formulat is giggest stumbling block for a company, because managers must understand their cost structure (fixed, variable, one-time and sunk costs costs, etc.), and competitive landscape, in order to develop a pricing model that results in a sustainable business model.
Operating or Delivery Model - This is what makes up the structure of an organization at a fundamental level. Consists of resources, processes, coming together in the right way for a company to capture repetitive value for itself. Transitioning from a high margin to a low margin business or going to a low volume from a high volume business can be difficult to change. The goal is how to best reach economies of scale and maximize value. This often requires fefining the manufacturing process, or bringing in new resources (new technologies, equipment, more knowledgable personnel). It's difficult to chanage a lot of the pieces in the operations model because they are systemic in nature. Manager's are stuck within their systems. They feel comfortable within the systems they have created. Latencies take foothold and managers feel boxed into existing systems.
Overlays of Business Models - These are the rules, norms and metrics, that guides the procedures, the rules that are in place so that people will adhere to a certain way of doing business that protects the underlying new business model so that business risk is minimized to achieve ultimate success.
How does a company go beyond the rules, norms and metrics and why leaders need a common language business model?
1) Ask yourself: Where is your business right now? Where are you in the first place? Managers must understand their existing business model, because without that knowledge, how can managers know where they want to go next, or how will they know that the new business opportunity they are pursuing really requires a new business model. What you don't want to do is create a new business model, just for the sake of creating a new business model.
2) Ask yourself: Is the new business opportunity something that leverages the core business in a real way that can be controlled and kept inhouse? Or, is it really a fundamentally different way of turning a profit and operating by which we need to manage things totally different. Without having a baseline understanding of what our existing business is, it is going to be really difficult to know what we are doing, and how new it really is.
Linking disruptive thinking to business model innovation.
Disruptive innovation or disruptive thinking is a strategic way of thinking. It's really about how you view a new business opportunity of having the best potential for success in the marketplace as it relatates to creating new growth. It's really an external management viewpoint.
When a company is disrupted by the disruptive opportunity, the reason why they are being disrupted, is that their business model is being negatively impacted in some major way by a new market entrant or existing competitor (the attacker). The attacker enters your market with a new business model that is disruptive to the company's existing business model. Examples: Steve Jobs disrupted the portable music player market and ultimately how music was delivered and priced by introducing the iPod and iTunes and incorporating digital music (mp3) as a viable competitor to existing CD music, music distributors and consumer electronics producers.
Steve Jobs and the Apple iPod and iTunes
When Steve Jobs introduced the iPod and iTunes, he was competing headon with Sony, the established leader in portable music players and a leader in music recording. Sony made the portable music player the accepted standard for storing and playing back music, which was primarily stored on music CD's, the existing standard at the time that had replaced music tape diskettes.
The iPod disrupted Sony's business model by not delivering music on CD's, but by allowing music lovers to download individual digital music files or MP3 files from Apple's iTunes online music store to their computer via the internet, then transferring those files to their iPod.
The iPod and iTunes disrupted the entire music entertainment industry value chain: recording studios (music CD's), distribution chain (retail music stores) and the consumer electronics industry (CD portable music players).
Steve Jobs changed Apple's business model and culture from a pure play computer company to one of the leading consumer electronics companies in the world. In so doing, he convinced his customers to pay for digital music, something they were not accustomed to do. He also convinced the music recording industry leaders to sell their music through Apple's iTunes online music store for 99 cents per title. Both of these were major hurdles for Steve Jobs, but Steve was very persuasive. Today, Apple is the dominant force in digital music streaming and consumer electronics products.
The Necessity For A Bigger Vision or Mission
I often site the need for a company to establish a grand vision or central mission for the business. This is the foundation upon which business models are built and take root. Mark Johnson did not address this in the above videos, but I believe it is very important to establish a grand vision or central mission before developing a business model. If your grand vision or mission statement and business model are not congruent then something is wrong. Steve Jobs established a grand vision for Apple by developing the Digital Hub Strategy, a subject I wrote about in a blog post dated October 6, 2011 and mention quite regularly in many of my blog posts about Steve Jobs and Apple.
According to Steve Jobs the personal computer would become the Digital Hub for the Digital Lifestyle, an emerging digital trend driven by the internet and an explosion in digital devices: digital camera's, videocam's, portable music players, PDA's and DVD video players. The PC would serve as a Digital Hub that would allow consumers to store, share and playback digital images, music and video files.
In the following video, Steve Jobs introduces the Digital Hub Strategy at MacWorld 2001. That was the key moment in history that defined Apple's purpose and the basis for its present business model. The Digital Hub Strategy accounts for the overwhelming string of successful consumer electronics products, including the iPod, iPhone and iPad.
Mark Johnson Bio
Mark Johnson is a Co-founder and Senior Partner of Innosight, a strategic innovation consulting and investing company with offices in Massachusetts, Singapore, and India, which he co-founded with Harvard Business School professor Clayton M. Christensen. He has consulted to the Global 1000 and start-up companies in a wide range of industries—including health care, aerospace/defense, enterprise IT, energy, automotive, and consumer packaged goods—and has advised Singapore’s government on innovation and entrepreneurship.
Mark’s most recent work has focused on helping companies envision and create new growth, manage transformation, and achieve renewal through business model innovation. This work is the subject of the McKinsey award–winning Harvard Business Review article, “Reinventing Your Business Model,” as well as his new book entitled Seizing the White Space: Business Model Innovation for Growth and Renewal, published in 2010 by Harvard Business Press. He is the author of the Harvard Business Review article "New Business Models in Emerging Markets" with Matt Eyring and Hari Nair. Mark has published articles in the Sloan Management Review, Business Week, Advertising Age, and National Defense.
Prior to co-founding Innosight, Mark was a consultant at Booz Allen Hamilton, where he advised clients on managing innovation and implementing comprehensive change programs. Before that, he served as a nuclear power–trained surface warfare officer in the U. S. Navy.
Mark received an MBA from Harvard Business School, a master’s degree in civil engineering and engineering mechanics from Columbia University, and a bachelor’s degree with distinction in aerospace engineering from the United States Naval Academy. He currently serves on the board of SemiLEDS, an LED manufacturing company, and the U.S. Naval Institute.
Courtesy of Mark Johnson and Seizing The White Space
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