CEOs Must Create The Business Model Innovation Sandbox
The worst place to develop a new business model is from within your existing business model. – Clay Christensen
The top 10 industries that are being disrupted the most by digital are media, telecom, consumer financial services, retail, technology, insurance consumer products, nonprofits, business and professional services, and education. 90% of the executives in these industries profess to having a digital strategy in place, so why are these business leaders worried about being disrupted? The research points to two perfect storm factors:
1. Low barriers to entry into these sectors lead to more agile competition
2. Large legacy business models
Incremental change will not prevent businesses from being disrupted. In fact, transformational change is a necessity for survival, requiring straightening of core business capabilities as well as investments in new business model innovation.
The difference between market takers and market makers is not product innovation, it is business model innovation.
To learn more about business disruption and what companies can do to prevent being disrupted by exploring new business model innovation, Ray Wang, bestselling digital business author and CEO of Constellation Research, and I invited Saul Kaplan, a business model innovation expert to our weekly show DisrupTV.
Saul Kaplan is the founder and Chief Catalyst of the Business Innovation Factory and author of The Business Model Innovation Factory. Kaplan started BIF in 2005 with a mission to enable collaborative innovation. The nonprofit is creating a real world laboratory for innovators to explore and test new business models and system level solutions in areas of high social importance including healthcare, education, entrepreneurship, and energy independence. Prior to focusing on business model and system level innovation at the Business Innovation Factory Kaplan served as the Executive Director of the Rhode Island Economic Development Corporation and as the Executive Counselor to the Governor on Economic and Community Development. Kaplan also served as a Senior Strategy Partner in Accenture’s Health & Life-Science practice and worked broadly throughout the pharmaceutical, medical products, and biotechnology industry. Kaplan shares his innovation musings on Twitter (@skap5), his blog (It’s Saul Connected) and as regular contributor to the Harvard Business Review, Fortune and Bloomberg BusinessWeek.
The Path to Sustainable Growth is Business Model Innovation
Business model innovation is key to business survival. So what is business model innovation? “This is all about the difference between incremental versus transformation change. We are living in a century that screams for transformational change. Most of our innovation processes are designed to help us do better than what we are doing today, not to completely change it. Business model innovation is not just about improving existing business models and becoming more competitive – which you must do. To avoid business disruption, you must be able to imagine, prototype and test entirely new business models. It is imperative for leaders today to do research and development for business models the same way they do R&D for products and technology,” said Kaplan.
“Today, we love creating new products and we love developing new technologies but let’s face it, we have more technologies than we humans know how to access and use to solve problems. What we are missing is the ability to explore new business models. We need to start thinking about minimum viable business models. How do we make it safer and easier to manage in the real world,” said Kaplan.
Innovation Junkies Are Not Tweakers
What is an innovation junkie and do you need to hire these types of contributors to avoid being Netflixed (disrupted)? “Innovation junkies are people who are always trying to improve things. They are always thinking about what’s next and always trying to re-imagine and re-engineer to continuously adapt and improve. We have big social challenges that we need to work on and tweaks are not going provide the solutions. We have a nation of tweakers and what we really need are more people and leaders and organizations that can actually get transformational idea off of the drawing board and onto the real world,” said Kaplan.
“Being an innovation junkie is a blessing and a curse. You are always trying to make people’s lives better and that’s a very cool thing. But at the same time, you realize that the job is never done. They minute you accomplish something, you immediately focus on the next adventure,” said Kaplan.
Market Makers Versus Share Takers
Kapan believes that companies are not getting high grades for avoiding disruption. We give variable grades to organization on strengthening and protecting current business models. For proper context, we should consider and understand the distinction between share takers and market makers.
“Share takers think and act like this: here’s the industry we compete in, here’s where we stack up relative to the competition, and here’s how we protect our share and ultimately take shares away from competitors who are ahead. Most of the world is comprised of share takers. This is what we were taught in business schools. But the real interesting area of study, especially as it pertains to disruption is not share takers, but market makers,” said Kaplan.
Market makers do not play by share taker rules. They don’t necessarily view themselves as part of an industry, but rather they focus on creating new industries. Eventually as market makers succeed, they start to behave like share takers and that’s when they are most susceptible to being disrupted. “We need more market makers. We need leaders to figure out how to do both – share taking and market making – and to create parts of their organization that are capable of market making. You cannot tap someone on the shoulder and call them the ‘head of innovation’ and then expect them to do both share taking and market making. Market making requires a different approach and point of view,” said Kaplan.
“Uber, Airbnb and Netflix completely disrupted industries by creating new business models. They didn’t invent anything new technologies, but instead they created new business models that delivered value to their customers in a better way. The incumbent industries and companies had all the parts and capabilities but what got in their way was the straightjacket of today’s business model and they didn’t have an innovation sandbox to do the R&D for new business models,” said Kaplan.
Solution to the Innovator’s Dilemma? Business Model Innovation Sandbox
The new strategic imperative for businesses is to invest in a business model innovation sandbox. “We know the approach to transformational change is different than the approach for incremental change. We also know that organizations have to do both and so organizing around incremental change is within the core of your business. You can create committees and sort ideas and use traditional financial metrics to manage and select different projects. You can predict which ideas add value to today’s business model,” said Kaplan.
However the sandbox is different. “To stand up the exploration of transformational ideas, the traditional approaches will not work. The notion that the CFO is using a spreadsheet that predicts how much revenue and how much margin you’re going to create is out the door. Companies must be willing to experiment with ideas, prototype the work and concept and test the market to see potential value and market need. Companies must give innovation junkies the space to explore. Kaplan uses the sandbox metaphor to illustrate the need for adoption and use of design and experimental mindset. “Most innovation does not require us to invent anything new. We already have the technology. Innovation is about combining the parts in different ways to change the value equation. The reason we don’t do it is because we are locked in the straightjackets of today’s business model. We need a sandbox with all the capabilities there that we can combine in a new and different ways to change how we deliver and capture value from the customers,” said Kaplan. All disruptive companies use a sandbox to redefine new business models with existing technologies, in new combinations, that incumbent companies also had access to.
Kaplan believes that cloud computing is the perfect and most effective solution for companies to develop a business model innovation sandbox. The cloud can be an amazing feeder of capabilities into a sandbox, to enable ongoing business model exploration. The most disruptive companies in the world have leveraged cloud computing technologies to service and connect with customers in a whole new way. Kaplan points to companies that fail to gain momentum because they ignore scaling challenges using traditional management practices – the lifecycles vary, meaning exploration and optimization require different set of skills and capabilities.
CEOs Must Lead Business Model Innovation
Kaplan is starting to see more executives at the highest levels including CEOs, thinking more about new business models. CEOs are leading digital business transformation across all industries. Leaders are more open to invest in the sandbox. Kaplan advises CEOs to delegate the responsibility of managing the core functions to the chief operating officers, so they can spend more time on exploring new business models. Kaplan believes that new business model innovation sandbox is part of the answer to the innovator’s dilemma. Organizations will always choose incremental transformation and strengthening the core existing capabilities versus transformational change. The nuance here is to strengthen the core and at the same time create the condition for exploration.
Business leaders must explore and answer the following: Which business models are feasible? Which models do I want to create separate business from? Which models can lead to separate models or spin offs? Too many leaders answer the change management questions before they settle on the model.
The Minimum Viable Business Model
Kaplan points to entrepreneurs being taught about the minimum viable product and yet no one is discussing the importance of the minimum viable business model (MVBM). They pour all of their efforts and investment dollars that they raise into the product, not answering the simple question of what business model is needed to take the idea or working prototype into the real world with paying customers. Does the business model support the product use cases? Does the product solve the customer’s problem or create incremental value? Worry about scaling and change management and how hard it is for the rest of the organization to do it. Worry about developing a MVBM. Too many leaders get bogged down very early in the scale and change management questions, killing the opportunities that exist to do transformational work.
The power of storytelling is a key ingredient to any innovative process. – Saul Kaplan
Kapaln invites the most amazing innovation junkies (or storytellers) to attend an annual event called the Business Innovation Factory (BIF). Kaplan launched BIF 12 years ago in order to invite and cultivate an innovation community with the purpose of enabling ‘random collisions of unusual suspects’ – or making a ruckus. BIF is a community of innovation junkies (including some of the most influential business executives of the biggest companies in the world) from around the globe. The BIF event is quite intimate – Saul and his team purposefully limit the attendance to approximately 500 innovators in order to ensure meaningful connections are made at a comfortable and highly inspiring setting. Storytellers (32 guest speakers) share intimate stories with no slides and references to companies or products, leaving it to the audience to recognize innovation and meaningful patterns. This is a very intense and inspiring two-day event where very deep connections are made with incredible change agents and explorers. I so much enjoy the BIF event that I volunteered my time to serve as a BIF Board member.