Transform or Enable? The Business Model Innovation Choice

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.

The headline that once said “Digital Transformation” was now in a box in
small font that sadly read “digital enablement.”

Digital Enablement

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.

Customers have

endless

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.

Data Driven Business – Data Case Studies at Strata+ Hadoop

Looking forward to emceeing Data Case Studies at Strata+Hadoop on Tuesday.

From banking to biotech, retail to government, nonprofit to energy, every business sector is changing in the face of abundant data. Driven by competitive pressures and rising consumer expectations, firms are getting better at defining business problems and applying data solutions.
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Companies like BBC, Walmart, GE, Merck and NGOs like Datakind and the DOT will share hard-won lessons, painful mistakes, and clever insights. We’re introducing a new Tutorial Day track packed with case studies, where you can hear from practitioners across a wide range of industries.

We call this track Data Case Studies. In a series of 12 half-hour talks aimed at a business audience, you’ll hear from household brands and global companies as they explain the challenges they wanted to tackle, the approaches they took, and the benefits—and drawbacks—of their solutions. If you want practical insights about applied data, look no further.

Join us at Strata+ Hadoop.

Design for the Angry Citizen

Airbnb and Systems of Trust

I was angry. It was 3:00 in the morning, and there was yet another springtime alleyway party in the Airbnb hotel behind my building. I live in the West Village of New York, which is home to a number of these buildings.

Let me describe how the Airbnb hotel works.

The Airbnb Hotel: An absent landlord owns a large building with multiple small units in a hard-to-reach location. The building itself is not well maintained, and the few rentals that exist suffer from high turnover because there are no services. When Airbnb came along, the landlords found that their profits rise substantially, sometimes generating 4-5 times what could be earned through longer term rentals.

The result: if you live near one of these buildings, you learn that they can change your life and your sleep patterns for the worse. You suddenly have 50+ short term one night tenants so the greater the likelihood of a loud late night.

The dance between Airbnb and the citizens, State and City of New York has been complex. Short term rentals are technically illegal. But most acknowledge the problem is not the long term tenant letting out her apartment for a weekend, but instead in the density of these multi-unit landlords churning through people. Various legislators have proposed bills and fines to punish bad actors in the system.

Don’t Galvanize Me

Airbnb’s initial attempt was to try to mobilize customers as citizens to protest and advocate on behalf of Airbnb renters throughout the city. The company covered highly trafficked subway stations and took out television and Youtube ads with heartwarming tear jerking stories. The widow who made pancakes for her guests was the most memorable.

I received emails urging me to protest against various measures – one in particular from Airbnb’s Global Head of Public Policy, urging me to: “Tell the City Council to protect middle class home sharers, not punish them. Sign this petition right now.”

I actually responded to this request, asking for a better interaction with the company. One that was more interactive. A chance for customer/citizens dealing with the unintended consequences of massive growth to have a considered dialogue with the company, to give constructive and even helpful feedback. I didn’t hear back.

Last week, Airbnb attempted to take one step forward to more interactive dialogue with citizens.

Airbnb Neighbors

Airbnb now wants to hear from neighbors like me. “If you think your neighbor is an Airbnb host and you have a complaint, we want to know.” The company asks you to submit a complaint, and if you do the extra work to find the actual listing on their service, they’ll follow up with you.

Airbnb Neighbors

 

Systems of Scale, Systems of Trust

Airbnb is one of the fastest growing revenue-generating systems we’ve ever seen in the history of business. The designer-founders who started the company and their design-minded team have put careful thought into how they encourage trust-based interactions between hosts and guests with messaging, and layers of reviews and reports.

It’s a beautiful system they’ve designed. But it’s not the whole system.

We are hosts, guests, but also citizens, and the way you feel about the company changes if you experience the negative consequences.

The neighbors interface on Airbnb is a baby step, but it’s a critical moment for companies like Airbnb to officially acknowledge citizens as stakeholders.

Stakeholder management is a theory for how to run a business in contrast to the shareholder-centric view. The belief is that companies need to engage all stakeholders in a system, including angry citizens, government bodies, and the environment. The reality is that stakeholder management is often just a theory, or relegated to “corporate social responsibility.”

Perhaps the future is to move stakeholder management outside of the communications silo and into product and service design. Stakeholder engagement shifts from theory to a designed and deliberate interaction.

Where could this future take us? How could you see design for the angry citizen affecting a company in a positive way? How would you design a more citizen-engaged Airbnb, Uber, or Amazon?

Customer Delight is Elusive – Focus on Customer Pain

Last week it was one of those rare perfect sunny days in New York City, and I found myself looking up at the sky as I crossed West 4th Street. I was soon to be punished for my reverie. While enjoying the sun, my glasses had slipped out of my pocket and onto the middle of the street, but I hadn’t noticed this yet.

ouch

Once I arrived at my destination a few yards away, I had that phantom limb panic. Where are my glasses? (If you’ve ever misplaced your phone – you know the feeling). As I retraced my steps, I found the remains of my Warby Parker frames and lenses strewn about, run over by a car, and unrepairable.

I was in the midst of a pain point. An ouchy, panicky pain point. How awesome for Warby Parker! Curious to see how Warby Parker dealt with broken  glasses – keep reading – but first…

What’s a pain point?

An emotional experience your customer is having

The pain is clearly identifiable in a customer journey

The pain is common to many customers, and customers use similar words to describe this pain

The pain is real, clear, and present, and she’s hunting for a solution, now

In innovation circles, pain points are what we seek when we introduce a completely novel solution – because it is typically only at that moment of clear and conscious pain that a customer will consider an alternative.

Clay Christensen, father of disruption theory, introduced this idea in his 2003 bookInnovator’s Solution. The secret to successful a successful innovation: don’t sell products and services to customers, but help people address their jobs-to-be-done. Once you look at the competitive solutions, analyze the pain points. Have any pain points been overlooked? Great! Now you know where to invest in emphasizing your distinctive strengths.

Before you move forward though, make sure the pain is clear, and present, and actually felt by the customer, versus something you think is painful. In my glasses story – you might have been in empathetic pain the moment my glasses fell out of my pocket. But I didn’t feel the pain until I had that phantom limb feeling, and then saw them on the street.

The distinction is critical – often when we build solutions, we try to solve problems that the customer doesn’t even know they have, rather than solve for the pain that customers are feeling. The only way to truly understand a customer’s pain is to talk to them, ideally when they are in pain, so that you can work through an ideal solution.

So here’s what happened. With poor eyesight, I used my friend Siri to find the 1-800 number and call Warby Parker. A kind man answered the phone. At that moment, I would have just re-ordered my glasses, but he pointed out that I was in a 30 day window, a no-questions-asked return policy. He would be sending me my new glasses for free, as long as I agreed to return what was left of the frames.

“Really? Really? But they were run over by a car!” I said.

“It’s ok. It’s a no-questions-asked return policy. We’ll send a label via email. Just send us the frames back when you get your new ones. We also expedite these to you. You’ll get them in 3-5 business days.”

That, my friends, is how you design for customer delight. Find the pain point, and solve the pain beyond all manner of recognition. I can say, in that moment, I actually wept a teeny bit out of a feeling connection, feeling cared for. I had already decided that I loved the Warby Parker experience, but now, I love the company.

In that moment, Warby Parker became better than the retail, in store, in person alternative. If I had purchased my frames at one of the stores like LensCrafters and Pearle Vision owned by Luxottica, the world leader in eye frames with over 80% market share, it would have been a different story. The 1-800 number would not have resolved the problem. I’d have to go the the store. I’d have to wait the typical number of weeks to have my lenses re-cut. In short, my pain would have been amplified at my most crucial moment of pain by the world leading solution in the market today.

When I received my new glasses two business days later, I danced a small jig, in public. I’m a practical curmudgeonly New Yorker type. But there they were again, exceeding expectations.

Net Promoter Score (NPS) is considered a key performance metric by e-commerce experts – the number one survey response you should track and optimize for throughout the customer journey. You know NPS: How likely are you to refer Warby Parker to a friend or colleague, on a scale of 0 to 10? If you score above an 8, you’re likely going to be ok.

Warby Parker, you get a 10.

To be sure, Warby Parker probably took a hit on my unit economics that day:  two pairs of glasses, in a short time frame, plus shipping costs and the customer service costs – I bet their margins were unfavorably reduced. But in exchange, I commit my lifetime value allegiance to Warby Parker, since it’s clear I’m not going anywhere else. I’ll also be back soon to get those prescription sunglasses. And of course, I will be telling this story to everyone I know and meet – and hope those turn into referrals for my favorite company.

What’s the lesson for your business? Talk to customers. Map your customer journey. Map their pain, described in their words. Move beyond observations and assumptions you may have about their pain, and talk to them about the role of the product, service, or experience in their lives. To affect your profit and value, look beyond the consideration and purchase funnel to the aftercare, use, and repeat purchase. Most critically, take risks in the short term for payoff in the long term and you may well be rewarded in repeat purchase and referral.

When N = All

Open Data and the Future for Startups

I’m at Startupfest Montreal today – come join me to talk about The Future of Open Data:

The rise of open data sets released onto the public commons has accelerated the birth of new industries, and new companies. Emerging as a government activity, now private sector companies are joining the movement to publicly source data, and contribute previously hidden data sets to open science activities. While huge stores of data remain locked away for reasons of inertia, cost, or competitive advantage, every day we are confronted with new data sets that can change the shape of how we see industry, culture, and our future.

What opportunities for startups exist when the data available to learn about everything that we do approaches a sample size of N = all? When we no longer have to sample a small set of data, because we are able to access the firehose of everything, and everybody? What is possible? What is terrifying? What will matter. When data is abundant, accessible, and free, served to us a public utility, will we still have a winner-take-all technology culture?

After all nobody but a few of us data nerds actually want data. What we all crave are answers, and wisdom. How will your startup contribute?

Jen’s High Res Photo

For events and public speaking:

Jen van der Meer High Resolution Phot

Jen van der Meer
High Resolution Phot

Jen’s Short Bio:

Jen is the Founder and CEO of Reason Street, where she helps companies find the right business models to make the greatest impact. A former Wall Street analyst and economist, Jen has practiced an approach that is equal parts data-driven and creative to understand and apply the opportunities for technology to transform the economy, society, and culture.

 

Can Smart Meters Drive Behavior Change

Beyond just changing light bulbs and cutting vampire supply power sources, people are more likely to make higher impact change if they understand the total energy output of their homes. Enter smart meter visualizations.

Wattson

Wattson

The Wattson has been the premier example of a smart meter – a beautiful object that tells you in pounds (it’s a UK company) or kilowatt hours your total energy consumption. But the US version of smart meters are utilizing data visualization techniques that could be more compelling. Here are three ways smart metering companies will offer tools for behavior change:

1. My meter gives me the power

Right now energy use is not linked to energy supply and demand on the grid. Utilities across the US are in drastic need of an overhaul, and some of them are investing not just in smart grids but in smart metering as they begin their upgrades.

The standard meters is strong, un-tamperable, and passively measure electricity. They also require an expensive service staff to come and check the meter, with no remote reporting, and they cannot measure energy given back to the grid (in the case of homes that rely on solar or other forms of energy that generate more than they can consume). Smart meters are connected electronically to the grid, and can do all of these things, including serving as a house-based thermostat, giving “power” to the end user to connect their actions with their electricity bill.

2. That’s how much is that toaster costing me?  

The idea is that a web interface will be the primary control thermostat for the entire house, with charts that show how much each appliance costs. You will be able to see how much your toaster, plasma television, and refrigerator actually cost you in dollars and kilowatt hours. Once you understand the power supply, you can make the choice yourself of how much you should be using.

3. We’re greener than the Joneses

As reported by The New York Times Green Inc. blog, Oklahoma Gas & Electric, a utility serving 765,000 customers in Oklahoma and western Arkansas, has recently teamed up in a pilot programwith Silver Spring Networks, a network hardware and software provider specifically marketing to utilities, and Greenbox, a company based in San Bruno, Calif., that provides the Web-based energy monitoring software.

Greenbox

Greenbox

A live demo of the system shows how much energy my own home draws, but also compared to my local community. Just as the West Village of NYC has higher recycling rates because of neighbor peer pressure (we see each other’s trash contribution and scold those that don’t comply), we’ll also be able to shame our neighbors that take extra long showers or burn their air conditioners on cool spring days. I’m looking forward to that future.