Business Models are often blamed for limiting what we want our organizations to become. The reason: dominant logic. Learn how to decode the mental models that keep us trapped.
Clayton Christiansen, the late father of disruption theory, concisely defined the conventional wisdom about business model transitions.
The reason why it’s so hard to innovate from within: Dominant Logic.
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 Alphabet, Facebook, and Apple. 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, The Dominant Logic: a New Linkage Between Diversity and Performance (paywall).
Prahalad was researching the failure of diversified conglomerates in 1986, when voguing was in vogue and conglomerates were all the rage, when he reached that conclusion. He found that a top executive group’s ability to manage a diversified firm is limited by the dominant general-management logic it already knows.
If the companies in the conglomerate are similar in type and from the same industry, as, for example, at P&G, then this logic—applied to spending on R&D, product development, marketing, and organizing and incentivizing employees—can work to its advantage. But when the companies in the conglomerate are deeply diversified, the situation gets complicated.
As Prahalad observed, “Typically, the dominant logic in diversified firms tends to be influenced by the largest business or the ‘core business’ which was the historical basis for the firm’s growth. The characteristics of the core business, often the source of top managers in diversified firms, tend to cause managers to define problems in certain ways and develop familiarity with, and facility in the use of, those administrative tools and are particularly useful in accomplishing the critical tasks of the core business.”
When management’s mindset favors the core business at the expense of preparing for technological, market, and social/cultural change, its dominant logic can undermine the company’s chances for survival.
Anyone working in the innovation department of a Fortune 1000 company knows in their bones that the dominant business model can kill breakthrough growth ideas.
The thinking goes like this: “You can tinker with our product, spend countless hours investigating corporate ethnography, or design thinking exercises, drum circles, and lean-start-up experiments. That’s fine. But as soon as you mess with the way we’ve been making money, you will be escorted swiftly out of the building.”
So how do you organize a business model innovation effort at your organization?
The work is both qualitative and quantitative.
Before you begin, map the dominant logic of the organization, and the industry that you are in.
You don’t need to start analyzing spreadsheets or operational reports. Instead, begin qualitatively.
Ask your most design-thinking-minded empathetic listener to start capturing the stories that people tell themselves, and each other, about the business.
Joan Magretta, writing in the Harvard Business Review after the dot com crash, reflected that:
Business models are “at heart, stories — stories that explain how enterprises work.
A good business model answers Peter Drucker’s age-old questions,
‘Who is the customer?
And what does the customer value?’
It also answers the fundamental questions every manager must ask:
How do we make money in this business?
What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
You can even see how this set of questions can work on any organization, including non-profits and governments.
The work of business model innovation is multilingual – translating the stories about the organization and the numerical tales that can be told from more analytical frames. In addition to collecting qualitative stories, you’ll want to also see the stories in the numbers, and then see what stories can be told through an analytical frame.
Map out all of the different ways people tell this story, and then map those stories against the power structure of the business. What stories are told in the key decision rooms like board meetings and annual budgeting cycles? Make these stories known, and transparent. People tend to tell those key decision feedback stories anyway, whether they are accurate or not.
Dominant Logic definition is highly context specific – the nature of your organization and industry will define the scope for how to pursue. For advice on how to approach your Dominant Logic story and how you might map out the current thinking, please reach out to me at Reason Street.