Reflections on Business Model Innovation

Earlier this week I forwarded a blog called Reflections on business model innovation, written by Kay Plantes. I follow Kay who is an MIT-trained economist, business strategy consultant, columnist, speaker and author. She writes on business model innovation and strategic leadership bringing an interesting blend of theory and pragmatic insights to her work. I decided to reply to her post as I often find business realities at odds with the very sensible advice she provisions. She responded with some really comprehensive and interesting observations on how the challenges I raised could be addressed.  Kay has kindly agreed to allow me to share her thoughts. What follows is a copy of our communications.

Reply 1:

While I agree intellectually with your views and most importantly the underpinnings of why management need to act thereon, I have found the practical realities somewhat different. Four quick points:

  1. I have found that most management teams find it very difficult to manage multiple business models simultaneously, never mind conceive of new ones. I have blogged on the subject as this is a major challenge.
  2. The large majority of successful management teams I interact with lack a consensual way of approaching business model thinking. The term has quite different meanings within the same team who often describe the workings of their core business model quite differently.
  3. Operating and optimising incumbent or proven business models requires significantly different skills to those needed in thinking and proving new models. The resource + process + operating habits + culture elements within the two environments are in my experience very difficult to manage within a single commercial entity, even if separated. ( I understand that there are case studies to the contrary). The core business tends to win out on most battles i.e. access to resources, sabotaging the chances of new success in subtle ways.
  4. Finding new opportunities with sustainable economic disequilibrium’s that have scale factors large enough to become material new growth platforms is tough. I have seen management teams walk away from interesting ideas because they do not solve the “growth gap”.

All of the above require significant leadership and management smarts. The competency of building and commercialising new models are competencies built over time, meshed in unwitting thinking flaws, mistakes, dead ends and failures. Things that many corporate’s have very little tolerance for.

Reply 2:

Thanks for your comments and you raise a great set of barriers to business model innovation that I have also observed. How might they be addressed?

First, it is vitally important that leaders separate their strategy process from their financial and operational management processes. I advise clients to (at least quarterly and ideally every month or two) assess their business models, the platforms and ecosystem they leverage, the assumptions on which they are designed (e.g., IT will control phone purchases at work) and strategic goals related to how the team aims to change the business. What’s changed in the external environment? What strategic issues are arising? Are we strengthening or weakening our differentiation, etc. are the kinds of questions asked in strategy meetings. “What do we need to do to make this month’s numbers?” and other questions of that type are excluded from the strategy meeting and when operational or financial issues arise, they are put on a parking lot list.

Second, leaders must hold as a goal creating a balanced portfolio of business models by age and cash needs, just as marketing/npd teams have held themselves to a goal of a balanced portfolio of new products (from line extensions all the way to new to market entrants). The portfolio aim demands leaders allocate money and time to test new business models and take those that work in pilots to scale. (Google is great at this.) Indeed, Kodak went bankrupt as it moved into printing way too late – i.e., when its film business’ cash generation could no longer fund the new business. (Whether or not printing was a good new business model for them is an entirely separate question.)

Third, recognize that organizational structure is in fact a strategy, not just a management decision. Design cross-functional business units around your business models and create cross-functional teams to manage each of your platforms. (It’s OK that people report to two people – welcome to the world of a more complex economy!) This approach to organizational structure will ensure that decisions will be made where resources and revenue accountability intersect and will help avoid macro/top-down decisions that lead firms to over invest in some places (e.g., the maturing core business( while under-investing in others (e.g., new business models).

The “It’s not big enough to fund our growth” barrier to innovation is a killer, for sure. Many large companies have turned into distribution channels, acquiring small start-ups that prove themselves (the new pharma approach). This may be wise (pharma’s assumption that discovery is scalable may be wrong and discovery might be best done in small companies). But oftentimes, leaders are assessing individual products versus large business models/domains of which the first product is merely the start. A lack of conceptual thinking leads them to not understand the full potential of a new idea. E.g., the iPod gave birth to the iPhone and iPad, for example. They are all part of a “mobile entertainment and communications” business. Assessing this size of this opportunity should come before assessing the iPad specifically. The iPad then becomes the first experiment in the “mobile entertainment and communications” business. Also, new products and services even if small in revenue keep brands energetic, a key ingredient driving brand equity.

Of course all these things are hard. But in today’s copycat economy, these kinds of management approaches are no longer nice, they are necessary.