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How To Innovate Your Business Model In 5 (Not So Easy) Steps

2014 March 9
by Greg Satell
business model innovation

In the 1950’s, Haloid Corporation thought it had a winning product.  Through some clever engineering, it had created new technology that was leaps and bound better than anything that had come before it.  The only problem was that nobody wanted to buy it.

Then the company’s president had an epiphany.  If no one wanted to buy their copy machines, maybe some would be willing to lease?  That, it turns out, was a multi-billion dollar idea and the company, now known as Xerox, became one of the world’s leading companies.

Isolated innovations are unlikely to make a significant impact on performance unless there is a commensurate change in how the enterprise operates.  A new product, target market or revenue stream may move the needle slightly, but rarely more.  To create meaningful change, we need to transform the business model.  Here’s what you need to know:

1. Stop Planning And Start Preparing

In the post-war economy after World War II, we built enormous enterprises to mass produce products and mass market them to consumers.  It was then that strategic planning took hold.  Senior management would formulate a plan and those lower down would execute it.  If the machine ran well, things went smoothly.

Yet as Henry Mintzberg described in The Rise & Fall of Strategic Planning, by the 1980’s the seams started to show.  When Jack Welch became CEO at General Electric, he largely dismantled the strategic planning process and, as he detailed in this HBR interview, put his efforts into streamlining the organization.

Since then, others have questioned the legitimacy of strategic planning.  Roger Martin urges managers to not let strategy become planning.   Steve Blank says that a business plan never survives first contact with the consumer.  Strategy is becoming a Bayesian process.  We need  to put less effort into being “right” and more into becoming less wrong over time.

And that means we need to stop planning and start preparing.  While planning allows us to make decisions early, it is through preparing—by deepening and expanding capabilities—that we develop the ability to make decisions as late as possible and adapt to change in real time.

2. Think About How You Create, Deliver And Capture Value

While a business plan requires specific projections of revenues and costs, a business model does not.  It is, put simply, a coherent logic for how you create, deliver and capture value. Firms that can combine those three elements in a compelling way build enormously successful enterprises.

Unfortunately, in today’s world technology cycles have become increasingly short and, whatever business you’re in, you can be sure that at least one of the three elements is being degraded.  The ugly truth is that business models no longer last and you need to be constantly innovating yours.

Yet—and this is a crucial point—that doesn’t mean that you should constantly be turning everything upside down.  That will only throw your organization into disarray.  But it does mean that you need to be constantly reevaluating how you do things and asking hard questions.

How can we create new value?  Can we deliver that value in a different way?  Is there a way we can capture value more effectively?  It is through continually innovating the various components of the enterprise and coming up with new combinations that value will be unleashed.

3. Produce a Minimally Viable Product Along With A Business Model Canvas

I used to run a dominant digital business which commanded a 40%-50% share of its market.  That allowed us to build up considerably greater engineering resources than our competitors, which we saw as a crucial competitive advantage.  In order to capitalize on that advantage, we planned major projects that none of our rivals could match.

Unfortunately, what we found was that during the 6-12 month development process, needs in the marketplace would change and we would have to continually alter project specifications.  The result was that our massive projects were full of bugs, they came in late and then we had to spend even more time fixing them.

Finally, we got smart and started developing minimally viable products, which were usually completed in six weeks.  They didn’t set the world on fire, but they launched on time and we could gauge consumer reaction in the real world.  We would then use that knowledge to improve the next six week project.

It is in that spirit of iteration that Alex Osterwalder created the business model canvas, which clearly lays out which assumptions you have to test even before you build a product. It’s not designed to predict performance as a business plan is, but helps work through the logic of how you’re going to make money.  In the final analysis, that’s what really matters.

4. Scale Smart

Generating a successful business model is hard enough, but the real danger comes when it’s time to scale it.  As every entrepreneur knows, growth can kill a business.  As you bring in new people and resources to keep up with demand, performance often suffers.  Then comes the inevitable reorganization effort and from there things can go downhill fast.

Bob Sutton and Huggy Rao offer some great advice on how to scale smart in their new book, Scaling Up Excellence.  One of their central points is the distinction they make between “Catholic” and “Buddhist” organizations.  While the former relies on practices, the latter focuses on philosophy.

It’s easy to put out an employee handbook with a set of rules for employees to follow. What’s much harder is to communicate the logic of your business model and let your team decide how best to pursue objectives.  Yet to succeed in today’s fast changing business world, not to mention operate in diverse market conditions, that’s what you need to do.

5. Prepare To Fail

In the 20th century, the path to business success was paved by creating sustainable competitive advantage through continuous improvement.  Even a relatively small advantage, patiently pursued, could build into a commanding lead.

Yet now even the most dominant firms, such as Blockbuster and Kodak are being upended.  In fact, a study by Innosight found that the average life on the S&P 500 has declined from 61 years in 1958 to only 18 today.  That’s why Columbia’s Rita Gunther McGrath suggests in her book that we should not pursue competitive advantage but transient advantage.

And that, I think is the essence of innovating your business model.  It’s not a search for some timeless holy grail, but a constant pursuit for how you can best create, deliver and capture value.  Even the best models will eventually fail.  So it’s never too early to begin experimenting with a new one.

– Greg
 

2 Responses leave one →
  1. March 10, 2014

    Greg – keep up the good work.
    From my WSJ online commentary over the last week

    My father was in UPA.
    My father was raised by his older sister – who was married to a Polish lawyer. Most of his family had died of typhoid during the Russian Civil War and the Polish–Russian War. They were poor, so my dad grew up often playing in the shtetl. They didn’t starve as America was providing some humanitarian relief supplies to the war ravaged area through the Hoover Commission. My paternal grandfather was career military non-com – Austro-Hungarian. Not much pension from a defeated state that had disappeared into the dust of history.
    The invasion of Poland by nazi Germany and its ally, the Russian soviet union under Stalin started World War 2. With soviet occupation of the then Eastern Poland – now Western Ukraine – the soviets ethnically cleansed the upper echelons of Polish civil society from Eastern Galicia (Halychyna) when they deported hundreds of thousands of Poles to Kazakhstan.
    When the Russian NKVD sent my aunt and her Polish husband, along with their three little kids, off to Kazakhstan in a cattle car, my dad had the good fortune of being saved by the Russian NKVD officer. The Russian NKVD officer told him to run away as my dad wouldn’t survive – he’d probably be conscripted into the Red Army for cannon fodder or sent off to some gulag slave labor camp to help build the worker’s paradise.
    My mother’s family was small business people – exactly the type of entrepreneurially minded people who generate jobs and contribute to a growing national economy. However, in Marxist/Leninist terms, my maternal grandfather was a class exploiter since he had given people jobs. So the Russian soviets appropriated most everything my mother’s family had worked hard for generations for class re-distribution.
    Western Ukraine was part of pre-war Poland. Ukrainians were second class citizens in that long gone country. Since my mother’s family was entrepreneurial, in order to prosper in business the male children were raised Polish and Roman Catholic to get around discrimination against Ukrainians – while the women were raised Ukrainian Uniate (Greek) Catholic to maintain the family ancestry. Some families choose to be both Ukrainian and Polish at the same time.
    The original political movement of OUN was against the then occupier of Western Ukraine – Poland. Hard to be a bloodthirsty “Bandera” man when your family is both Ukrainian and Polish at the same time. Anyway, most everyone that was involved in what happened has died – or soon will – of old age.
    I really don’t know much what my dad did during the war, except he had shrapnel wound from a German grenade on his leg. The one thing he talked about – and was honored for – was being given the mission to help 4 escaping Dutch officers cross the UPA controlled Carpathian Mountains into Hungary. The Dutch officers had escaped a German wehrmacht POW transport train – and had fallen into the hands of UPA. My dad spoke 7 languages – read 5 – maybe that is why he was given the mission. The Dutch officers later stole a luftwaffe plane and flew to freedom. They kept in contact and exchanged Christmas cards for the rest of their lives. My parents were most proud of the support and work they did at Chicago’s Ukrainian Institute of Modern Art (UIMA) where one of the galleries is named for them.
    My late father-in-law and kids’ grandfather was an American Army (Ranger) veteran of WW2. He landed in Normandy on D-day +6. He was captured by the Germans during the Battle of the Bulge. As a POW, he was blind for a time. Like many veterans, he didn’t talk much about his experiences. We only found out at his funeral that he had won the Bronze Star for bravery under fire. We can’t get any other information because a warehouse storing WW2 records had burned down.
    My father-in-law, himself a first generation native born American of Greek/Polish background, taught me that while being proud of your ancestry, it’s best to leave the old hates behind; they are of no use to take into the future. Thank you Bill

    [Reply]

    Greg Reply:

    Great story! Thanks for sharing it.

    – Greg

    [Reply]

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