Monthly Archives: April 2013

Taking a Page from Biology

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Ecosystem:  A community of organisms together with their physical environment, viewed as a system of interacting and interdependent relationships and including such processes as the flow of energy through trophic levels and the cycling of chemical elements and compounds through living and nonliving components of the system.  Source:  American Heritage Science Dictionary

Borrowing from biology 101, most organizations today understand the essential role a network of business relationships – suppliers, distributors, customers, competitors – plays in bringing products and services to market.  Put simply. it’s the idea that each partner in the “ecosystem” affects and is affected by the others, creating an evolving set of relationships in which participants must be willing to bend and adapt in order to thrive.

In his book, The Wide Lens: A New Strategy for Innovation, Ron Adner, a professor of strategy at the Tuck Business School at Dartmouth, brings this point home by citing many commercial flops (e.g. Sony’s 2007 e-Book Reader; Hollywood’s attempt to bring digital cinema to American theaters in the 1990s) due to a failure to see the whole ecosystem.  His point:

“Greatness on your part is not enough. You are no longer an autonomous innovator. You are now an actor within a broader innovation ecosystem. Success in a connected world requires that you manage your dependence. But before you can manage your dependence, you need to see it and understand it. Even the greatest companies can be blindsided by this shift.”

Taking stock of the ecosystem required by new innovations is a core tenet of Business Model Innovation (BMI).  We advise clients that mapping stakeholder relationships (see illustrative graphic below for an IT department in a financial services company) surrounding the innovation is instrumental to illuminating the risks and dependencies that could catapult or kill a great idea on its way to success.

Ecosystems_6

Identifying the potential land mines in the ecosystem is only a starting point.  To vet the implications of the relationships on the innovation’s business model, organizations must run a series of experiments with stakeholders, focusing on each point in the ecosystem where uncertainty is greatest.  Through testing, organizations will gain the requisite insights for de-risking the partner selection process and the terms and conditions governing their roles.  As the business model evolves, so must the ecosystem to ensure that all interests between stakeholders and their end consumers remain aligned.

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Departmental Innovation – Big Change, Tiny Footprint

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One of the concerns we have heard time and time again when discussing innovation with established companies is the resistance to change from other areas of the business. Sure, the department or business unit would love to try something different, but they are convinced that doing anything too dramatic would inevitably be crushed by some other power in the same company.

This challenge is hardly anything new, and has been a major change management concern for decades. However, when it come to business model innovation, there is a clever way to contain the magnitude of outward-facing change, while at the same time allowing for substantial change “behind the curtain.”

Departmental innovation usually takes the following form:

  • Provide something new (the “what” – usually a new offering or service)
  • Deliver the offering or service in a new, innovative way (the “how” – ideally with an optimized business model)

It is critical to recognize that BOTH are equally important to ensure full value delivery to the customer / constituent group, and that both will likely need to evolve as validated learning happens. That said, of the two forms, the department has most control over its own business model, with limited external stakeholder interference. So how then can a department contain the amount of change associated with the offering itself?

Simply put, don’t try wide-scale rollout all at once. Instead, leverage the “wedge” principles – find a needy segment with truly underserved opportunity and one that would likely sing your praises should you succeed (see “The Wedge” post here for more details). Let a small success story be your momentum builder, while keeping the amount of stakeholder management very focused on just that initial segment… there is no need to convince everyone across the enterprise all at once that your new innovation is worthwhile. Then, let your first few successes be the mechanism through which you turn the tide of enterprise thinking.

dept-wedge

Bottom line, departments within a large structure DO actually have the ability to innovate, and innovate substantially. But, do it smartly, where the biggest change happens behind the scenes. The “external” footprint starts small and only expands with success as its driver.

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The Wedge

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Assume the following:

  • New innovation idea has been qualified, with clear value and growth hypotheses
  • Target customer segments have been identified
  • The business model has been designed to support the optimal delivery of the idea
  • Innovation accounting principles have been employed to determine the appropriate metrics to track

Now the challenge becomes how to validate the idea (WHAT) and the business model behind it (HOW). Enter the “Wedge” approach to experimentation and deployment…

Wedge

Much as the name implies, a wedge approach to experimentation starts small – you insert the tip of the wedge where it is most likely to have positive effect (e.g. the door jam, or parallel to the seams in a log). In business terms, pick a customer segment that has the most underserved opportunity, and ideally is one that could have ripple effects across other segments when these needs are met. Put another way, pick a high-profile segment where success is very likely to build momentum.

It is rare that an actual wedge reaches its ideal state without a few taps – the experimentation version of the wedge works the same way. Given that this is early stage experimentation, start by validating the fundamentals of the idea – the value and growth hypotheses – with direct segment interaction. Note that traditional metrics (e.g. profitability, growth, retention, etc.) are NOT relevant for this early stage. Assuming both can be validated, then progressively add more detailed idea validation with the target segment, making adjustments at every stage based on validated learning. The key principle to abide by is to front-load the biggest, most uncertain assumptions early in the experimentation process. Using Ries’ Minimum Viable Product (MVP) principles is an excellent way to put this theory into practice (see illustration below).

MVP Illustration

So assuming the commercial viability gets validated, and now the time comes to deploy… what do you do? You keep using the wedge approach! This method is just as relevant for deployment as it is for experimentation.

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Know What your Customers Want

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I sit on the board of an emerging asset manager that has a truly breakthrough innovation in global equities index investing.  The investment strategies have the same risk and liquidity profiles of traditional index funds yet consistently deliver superior risk adjusted returns above the benchmarks.  Our CIO has a stellar reputation, having successfully managed >$75 billion in institutional assets over a thirty year career.  His personal relationships with the heads of largest global pension and sovereign wealth funds also mean we have a target list of accessible prospects.  Despite these advantages, something was constraining AUM from taking off more quickly.

Through trial and error, we learned that our sales motion was not adequately tailored to how our target clients – institutional and non-institutional investors – vet and select new managers.  Following a series of sales calls, we took our learnings and recalibrated the entire sales process to better align with the stage gates commonly used by investment committees in the segments we serve.  Becoming more in tune with what our customers want has begun to pay off – AUM has grown threefold in less than a year.

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Look Forward and Then Act

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I had breakfast yesterday with a longtime colleague who was in town visiting with clients. After 20+ years in senior executive roles with global 500 companies, she decamped to a mid-sized firm that was trying to get to the next level.  Like many industries, this company has been reeling from disruption caused by the rise of digital technologies, and investors were expecting bold ideas.  With a board meeting just around the corner, the CEO challenged my colleague to work with the leadership team figuring out how to position the business to become more like a technology-led company?  Looking for guidance on how to proceed, my colleague asked, how do we do this?   As we spoke further, several issues emerged:

  • The company’s vision lacks a bold purpose
  • Clarity what it takes to look, feel, and act like a technology company is limited
  • An understanding of how its markets and customers are changing is not fully formed
  • Open collaboration and communication are the exception rather than the rule

Without a clear template for the future state, addressing these issues would be a challenge.  How could the organization make bets on its people, operations, and partners without first formulating its purpose and deciding what businesses it should enter? Like many companies, this organization seemed to attempting to optimize for the current rather than future business.  Its strategic planning process further reinforced this thinking.

As we parted ways, I left my colleague with the following food for thought:  set aside conventional wisdom about strategy formulation and take a hard look, instead, at who your future customers will be in the future and what they want.  Customer-centric thinking will clarify the types of businesses the organization may wish to pursue.  Apply this customer understanding to how the business could create and realize value from a new mix of offerings.

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Patterns’ Power to Inspire

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There is a broad spectrum of solutions helping companies identify new innovation ideas, from a departmental suggestion box, to studying the best practices of others, even to the vaunted halls of big data analytics. However, I wanted to throw an often underutilized source into the mix – business model patterns. What is a business model pattern? As Osterwalder & Pigneur define in their Business Model Generation book, business model patterns are similarities in how the individual business model building blocks behave (with similar characteristics and/or arrangements).

There are plenty of patterns to choose from – OPEN, Long Tail, FREEMIUM, SaaS, etc. – and each has its own characteristics. For example, the FREEMIUM pattern has unique Revenue Streams and Customer Relationships behavior. Could these be leveraged by a shared service function trying to redesign its future operating model? Maybe. Can the pattern inspire one of the function executives to put her own unique twist on the way they manage relationships, or secure their funding? You bet!

BM Pattern - FREEMIUM

The power of patterns’ ability to inspire innovation was illustrated in a recent client engagement. We used a business model pattern presentation as a lead-in to a focused business model design session. The executives in attendance were asked to make notes of key building block features that they found interesting for each pattern discussed, and which might have relevance for their area. As we then moved into the actual business model design activity, it became clear that the participants had not only identified new possible variations on their offerings (the WHAT), but also specific business model changes they wanted to make to deliver that value (the HOW). Furthermore, they had already started to make the connection between the new ideas and their specific areas (i.e. made a preliminary implication analysis).

So, although ANY solution that leads to innovation is a step in the right direction, executives who don’t add business model patterns to their idea generation arsenal may be missing a relatively simple, golden nugget.

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Getting started

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Given the very positive interest we have received with our new Business Model Innovation (BMI) offering, we have decided it was time to open a blog outlet focused on the topic and our experiences taking this thing to market. Stay tuned for regular updates and hopefully plenty of thought-provoking perspectives – most should be directly or indirectly related to BMI.

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