A pugnacious CEO once told me that there are three ways to lose money: gambling, divorce, and innovation. With annual US research and development spending amongst Booz & Company's Global Innovation 1000 at over $500 billion, companies are paying heavily for the ambition to create. But how do you plan for new growth and innovate in those markets where too many businesses are armed against commoditization with glib value propositions and over-reliance on cost containment, promotions, product extensions, and price competition?
According to a global study by IBM, today's CIO spends an average of 55% of his or her time on activities that spur innovation, and the key component underpinning all successful innovations is the business model. For a business model to be of value, it must have three core elements: a unique central idea that defines who you are, a grasp of future market trends, and profitability from either lower cost base or an offering that cannot be easily copied. An example is Gilt Groupe, whose business model covers all three, and has allowed them to continue to innovate across several categories. One of the hottest startups in New York, they expect to generate up to $500 million in revenue this year, up from $170 million in 2009.
Implementing a differentiated business model can successfully unite silos across the enterprise, turn around opportunities faster, get customers to stay longer and pay a premium, resolve internal crises quicker, and better leverage the allocation of resources. Nice to have, but where do you start? The solution is a combination of insights from Booz & Company, Michael Porter, and Philip Kotler that blend into a six-step process that can guide organizations to conquer the challenge of building a business model geared for innovation and business transformation.
1. Know Thyself
The first step of this process is a brutal assessment of what business you are in, how the business is differentiated, and if and why it is trapped in price competition hell. It is then a question of knowing the appropriate innovation strategy for an ambitious, audacious, and imaginative response. Booz & Co. have succinctly identified three types of businesses that are strategically placed for innovation:
Need Seekers research customers to explore new products and services based on insights, such as Microsoft with Windows 7;
Market Readers like Groupon's daily deals, focus on value through incremental change with proven market trends;
Technology Drivers, such as Facebook, who is constantly rolling out new releases, seek to solve the unarticulated needs of customers via new technology.
Identifying which approach is relevant for the business model has huge implications for the outcome of the innovation process and the allocation of resources.
2. What Was, Was
The second step is to create a simple idea with sophisticated delivery by looking at the business from the outside-in, not the inside-out. Often, existing customers are not visionaries and cannot imagine beyond their existing experiences, so it is essential to realize that innovation needs to be market-driven, not solely customer-driven. Apple has built an empire from anticipating market needs. Steve Jobs wants customers to have memorable experiences when they try something new on an Apple device: "You try to do something you hadn't done before, and it works, and you think, 'Hey they thought of that, too.'"
Consequently, it is essential to become the ruthless enemy of ambiguity and ask entirely different sets of questions about the business: how will you innovate and evolve the brand? An excellent framework for analysis can be found in Michael Porter's five forces: the degree of rivalry in the category, threat of new entrants, the chance of substitution, buyer power, and supplier power. In basic terms, the framework requires that an organization evaluate their strategic position relative to the forces. By understanding influences such as competitive threat and supplier bargaining power, a business can generate an edge in the category.
Behemoths like McDonald's, PepsiCo, and Amazon are thriving global businesses because they fully understand the dynamics of Porter's five forces and have successfully adapted their business models to influence the category in their favor.
3. Aim Past the Target
The third step of creating a new business model is to redefine the business you are in and ascertain whether the aims are to attract more users and/or devise new uses for the product, service, or experience that will be innovated. Critical a successful business is an analysis of Philip Kotler's 6 Ps:
People - who is your target customer and why are they buying your product?
Product - what is it and why is it unique in the category?
Price - what must be set to cover fixed and variable costs with a just profit?
Place - where have you chosen to do (e)business and why?
Promotion - how do customers buy similar products and how should you sell?
Performance - what are the key metrics against which success will be judged?
Companies like Penske have built efficient, hyper-competitive businesses by consistently honing their business model to the ever-changing dynamics of the market place using the 6 Ps. Roger Penske, Founder and Chairman of Penske Corporation starts with People: "Want more customer focus or more sales? Ask every manager at every level to call on at least ten customers per week. It is also a great way to stay atop of trends. Twenty percent of my time is spent actively calling customers."
A robust plan must also layer in government regulations and laws currently in the market space - an essential component often overlooked. "When evaluating countries for investment or opportunities, look first at a country's geopolitical stability and its laws protecting property rights: these issues tend to provide a better long-term view on market risk and opportunity than economic indices," says Dr. Alan Greenspan, former Chairman of the U.S. Federal Reserve.
4. Lead, Follow or Get the Hell Out of the Way
The fourth step requires forming a strong leadership team with a shared vision that will be at the center of the business, balancing contention with compromise while simultaneously maintaining focus on the brand and business goals. Contrary to popular belief, business innovation is not about isolation and competition; it is more often about cooperation and collaboration inside the business. This is best achieved by treating the leadership team as venture capitalists who have a stake in the program's success. However, the leadership team cannot lose sight and define success as simply reaching targets; without non-financial goals, the ship is rudderless.
Therefore the leadership team needs to define the overarching ambition for the business that can help steer the future and act as a compressed management tool when making decisions. Richard Branson, Chairman of Virgin Group, confirms that the brand vision must come before financial goals: "I can honestly say that I have never gone into any business purely to make money. If that is the sole motive, then I believe you are better off doing nothing."
5. Big Results Require Big Ambitions
The fifth step frames the financial and strategic objectives of the business. Jim Collins, author of Good to Great and Built to Last, asserts that "a conservative, disciplined approach to growth is a critical factor in sustaining a great business model. Though it may seem counterintuitive, great companies willingly leave short-term growth on the table if it means abandoning proven methods of long-term growth."
According to McKinsey, 84% of executives believe innovation is extremely important for their company's growth strategy. However, the successful implementation of innovative products, services, and experiences is a road paved with strain and failure. While building the business, do not let short-term growth override the long-term vision. This approach separates immediate appetite from real business requirements, providing a strong, steadfast strategy to move forward. Facebook has built an unrivaled network of highly engaged users, allowing them to share information with their friends. From this powerful network and content sharing mastery, Facebook has also been able to create a standard for single sign-on and open applications.
6. Don't Say, Do
The secret of business innovation is to think big, act small, fail fast and learn rapidly. It is key not to let pre-determined goals undermine future success. As Paul Graham, entrepreneur and Founder of Y Combinator said, you need to "get up and running (bugs and all), gather feedback, tweak and grow." Therefore, to avoid flailing around like a loose fitting part in a machine, you need to find the magnetic core inside the business that will draw together the company. "A common vocabulary is not a common culture" former IBM CEO Lou Gerstner said of business transformation. "It requires focus, leadership, and commitment" to create an authentic community of motivated thinkers and doers that can open new channels for the business and industry.
Google encourages big ideas in compact time amongst its engineers, giving them one day a week to work on a side project. It has been tremendously successful, yielding more than half of the company's new offerings in a typical year! So, whether it is busting a new category or pushing the boundaries of the establishment, people are organized and compelled by ideas that have a clear strategy, form, and expression.
On the Front Foot
With the 21st Century on fast forward, never has there been a more important time to innovate in the face of new faster global competition. Entire new industries and many existing ones have transformed to become creators of valuable ideas and experiences. Increasingly, civilization is organizing itself to maximize the generation of new and better ideas, creating the infrastructure, education systems, and innovative organizations that will solve problems, create value, and change the world. This six-step process helps businesses differentiate in crowded markets and positions them for successful implementation of innovation. So let us say yes to delighting customers and celebrate imagination and indefensible creativity to advance humanity into a brighter future.
Method’s diverse and talented individuals are shaping the future of products, services, and entire industries. Written by our own leaders, 10x10 is a series of thought pieces which highlights new approaches and ways of thinking about varying industry challenges, needs, and trends.
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