The Business Model Innovation Choice
20 years ago, I was a 20-something digital punk strategist. The internet was going to change the WORLD. I would ply my trade telling established Fortune 1000 clients that they had to move swiftly. Radically transform your companies into a digital businesses. Fast. Or risk annihilation.
What followed was one of the most rapid rise and fall in company bets and valuations ever seen in the history of business. When the dot com boom went bust and everyone came to their senses, digital was taken from the headlines and put into a box.
A box made from PowerPoint shapes.
Digital only helped industrial-era companies continue on the efficiency and optimization trajectory. The dominant business model stayed strong, made now more profitable by technology investments that made things cheaper, faster, with better margins. Pesky unscalable humans were designed out of many processes, all in the name of resource efficiency.
Digital enabled the leading companies of 20 years ago to believe that they simply had to optimize forever.
Oprah will tell you – don’t be the enabler.
Don’t enable that ex-boyfriend who keeps asking for rent money. He’ll never learn to take care of himself. In the same way, big companies that see digital as an enabler are less capable when it comes to transformation. All risk being left in the dust by the digital-native business model innovators today.
During the dot.com boom and bust many new companies launched with zero or negative profits all chasing the possibility of massive scale. The dot era startups new how to create value with free content, music, and technology, but not how to capture value in the form of actual money from customers. In the wake of the bust, the new era business model combinators emerged intent on massive value creation AND capture.
Today’s successful digital native companies are business model innovators at their core.
Digital transformation creates a new paradigm that makes the old business model obsolete. Business model innovators never stop evolving and combining.
Netflix started with experiments sending VHS tapes in the mail, before renting DVDs. The company quickly adopted the subscription business model, Netflix made a hard pivot to develop streaming services, and then made a big bet on original content. Lillehammer. House of Cards. Orange is the New Black. Now Netflix has such strong operating performance and financial leverage that they spend more money to develop new programs than any media company in the industry.
Amazon went from selling books on the internet to become the everything store now threatening the entire retail industry. The company didn’t have to optimize an industrial-era supply chain and data infrastructure dependent on external vendors to define their digital roadmap. They built their own, and then recognized that their cloud infrastructure was a business unto itself. Now, AWS (Amazon Web Services may be the company’s leading business model.
Meanwhile, most industrial era companies see all of this digital opportunity and are still just looking to optimize.
Only 20% are taking a digital-first approach to transformation, according to Gartner’s 2017 CEO survey. 29% are outsourcing digital to external providers. 17% per cent have no ambition for digital business at all. To be fair, Gartner was signaling success in this survey – finally CEOs are focused on growth, and digital. But when will n = all CEOs? Optimization only works for so long, until it becomes a burden, and you’re cutting into the muscle and bone of your organization.
What should you do if you are an innovation leader?
1/ Make the case for business model transformation
At the senior most levels, make the call- have you announced your business model innovation intentions? Are business model innovation goals built into your Key Performance Indicators? What are your criteria for investment in digital business model transformation efforts – for revenue, for customers, and for data? How are you encouraging your leaders to find new value propositions that creatively generate and capture value?
Enable no more.
We’re reaped many of the benefits of digital focused internal optimization and supply chain efficiency. But mobile phones/computers in the palms of more than half the world means that the balance of power has shifted to the customer.
choice. They can replace you with alternatives that are more convenient, compelling, and entertaining. It’s time to re-evaluate the value propositions you present to customers.
The supply side logic of the industrial era is already becoming supplanted by companies that own the demand chain. She who amasses the biggest and most engaged audience will win.
2/ Don’t start from a blank slate – know your current business model
The biggest mistake business model innovators make is to start with a blank page. Popular tools like the Business Model Canvas have been widely adopted in startups and large enterprises. But make sure before you start handing out the Sticky Notes and Sharpies – you’ll want to define the current business model.
Otherwise, the dominant logic will kill your idea before it begins.
Dominant logic is the disease that killed Kodak, Blockbuster, and Nokia, and it threatens every successful large-scale company facing disruption—which is all of them, including Google. The danger isn’t so much the disruption itself, a product of fierce new competition and shifts in the technology landscape; it’s the faulty mindset that hampers senior management when it’s preparing for and responding to non-linear change.
“Dominant logic consists of the mental maps developed through experience in the core business and sometimes applied inappropriately in other businesses.”—C.K. Prahalad.
Digital businesses operate differently than bricks-and-mortar models. Subscription models are driven by retention, which takes time, love and investment to earn. Two-sided marketplaces are driven by network effects. We have yet to see a successful subscription box company emerge from established CPGs or retailers for a reason – the time horizons and patience required do not fit neatly into the current KPIs.
Move beyond your lean experimentation efforts and build-to-learn innovation accounting. Show how your new business model complements or effectively disrupts the current model. Be explicit with numbers and projections shaping up the opportunity. Be creative in how you create value for customers. But also translate to speak in the language of the CFO and how your business model innovation will capture value.
3/ Define your North Star, and envision business model options for growth
At the same time, you don’t want to get lost in analysis paralysis and short termism, constrained by the quarter-to-quarter worries of the firm. To break out of the constrained dominant logic of today, develop a North Star vision.
Where are you headed? How do you measure your progress not in valuation, but in human lives served? How do we see a more just, ecologically sound, and better world?
Then anchor in on today’s dominant logic business model. What’s at stake? What do you have to lose?
From this perspective, you’ll be able to then launch into new business models, shaped around new value propositions that creatively address emerging and latent customer needs. Generate multiple options and multiple paths that could take you to your true north, and make sure your dominant logic is not constraining the space of possibility towards the most effective outcome.
Now is the time for Digital Business Model Transformation
My timing was wrong in 1997 about the need to urgently transform your digital business. I have also cried wolf every year since, so don’t listen to me.
Instead, observe the extraordinary business model combinator trajectories of Airbnb, Amazon, Google, Facebook, Apple, and the newly funded successful revenue juggernauts that appear out of nowhere.
Learn more about the Business Model Growth Map at Reason Street.