Want to avoid being disrupted? Transform your business model.

I have long been a fan of Clay Christensen who wrote Innovator’s Dilemma and advanced the concept of disruption.  He identified situations where new entrants to a market start with a basic product that only appeals to the lower end of the market.  The upstart then continuously improves the product, through interaction with customers, until it has knocked off the incumbent.  We can look back now and see many examples where this has happened and I expect we will see an increasing number in the future.  Incumbents don’t have to stand by helplessly while this happens.  The key to avoiding disruption is to transform your business model.

There are two ways to do this.  One way is to incubate new business models that have the intention of disrupting your existing business.  We have often heard the expression “Disrupt your own product before someone else does.”  This is a proactive approach to avoiding disruption.  To do this requires a completely independent venture that can operate outside of the existing business.  This venture has the freedom to explore new business models without interference from the vested interests that exist in any organization.  Every company should be doing this on an ongoing basis since virtually everyone will face a disruptive innovation at some time.

The other way to avoid being disrupted is to react quickly when signs of disruption start to emerge.  A recent Harvard Business Review article pointed out that few disruptive innovations are a direct hit on the incumbent business.  There are still many things that the incumbent does better at the time of the initial attack.  The existing market leader has to create a new business model that incorporates the strengths of the current business model.  This approach also requires an independent venture that will incubate the new model.  The company has to manage the process of pulling the existing strengths from the old business model into the new one.

I have mentioned in prior posts that business model innovation is critical at a time when technologies can be copied or leapfrogged.  Business model innovation can be used to create a brand new market, make a move to disrupt an existing market, prevent disruption by innovating your own business model or reacting to the early stages of disruption.

A hybrid business model

There is a person in a country somewhere in the world who has initiative and insight and wants to make a difference.  There is a drive and independence that makes this person an ideal entrepreneur.  Finally and most importantly, a burning social need has been identified that should be addressed.  How does this person move forward to resolve this need while also earning some return for the time being expended and risk being incurred?

Our entrepreneur spends time to analyse this need to find out who has it, whether they consider it significant and that they want to do something about it.  In speaking with the people with the need this person finds that there is little ability to pay for the currently available solution.  There is also little ability to pay much for any solution.

The venture has to be able to produce a low cost solution that is affordable for the target audience.  There are also opportunities to look at the need in a way that current service providers don’t.  A sub-segment of the target market for the existing solution finds that one to be costly and more complex than they need.  They have the ability to pay for the new solution.  Between lowering the cost, developing a new business model and finding a group that can subsidize other users our entrepreneur has a way to provide a solution for the need.

The initial working capital to get the venture off the ground may have been provided by a development grant or loan, personal savings, a social venture fund or a member of the community that is able to assist.  The objective of the business is to get to sustainability quickly using revenue from sales to carry the business.

Our entrepreneur has created what would be called a social enterprise that serves a social need but also uses market mechanisms to generate revenue and sustain the business.  At no time in this story did this person think about whether to start a not-for-profit or profit-driven enterprise.  There was no struggle with whether it was ethical to make profit while solving a social good or whether there was a sufficient return for a venture capital investor.  A need was found and our entrepreneur found a way to meet it using a business model that fit the situation.  There was a clear objective and the measure of success was the ability to meet this social need by creating and delivering value someone was willing to pay for.

If these types of enterprises form in large numbers what will that do to the existing not-for-profits and companies serving low end markets?  Will they be so caught up in their current models that they become irrelevant in these circumstances or will they find ways to evolve to keep pace?  There is a need to put aside pre-conceived notions of what a social enterprise is and focus on the jobs to be done.

Demystifying the lean startup methodology

There has been a lot of momentum around the lean startup methodology that has its origins in Silicon Valley.  The momentum is starting to create a flavour of the month backlash.  Much of this backlash, as with some other developments in the past, is the result of misunderstanding what it is and how to adopt it.  I wanted to offer some thoughts that might help demystify this lean startup thing.

The lean methodology incorporates all of the considerations that should be in any traditional business plan.  A company has to understand the need it is addressing, the solution to address the need, who the customer is, how they will interact with those customers, resources they will need, pricing and cost structures and key activities.  What is different is how a start-up considers all of these factors.

Traditionally a start-up takes a book or software application and prepares a complete business model with exact details on how the plan will be executed.  There is no explicit acknowledgement that the plan is full of assumptions and not known facts.  The start-up team might even go beyond the plan and start spending time and money building the solution.  It is only when the team has its first interaction with customers that it finds out that many of their assumptions were wrong.  Compounding this oversight is that, with a plan, there is a tendency to forge ahead despite negative market response.  The team decides that the customers just don’t get it and flounder around constantly revising their message in an attempt to convince them that they want something they don’t.

The lean approach in contrast is based on the premise that everything in the initial business concept is an assumption.  Rather than building a detailed plan the lean approach starts with a short form description of the business model as the start-up team envisions it.  Each of the elements of the business model will be tested with customers as early as possible starting with the need being addressed.  As the team learns from its customer interactions it is able to make course corrections before it has committed a lot of time or resources.  Effectively the start-up team is building a business plan but is doing it in partnership with its customers.

What the lean approach does that the traditional approach doesn’t is allows for a business concept to be abandoned or adjusted at any time it becomes apparent that the market has no need.  The team can then move on to another idea that may have more market acceptance while they still have resources and time to do so.

I don’t mean to trivialize the difficulty in implementing the lean approach.  It requires a new way of thinking than we have been taught or continue to be taught.  I will discuss implementation challenges in future posts.  My objective in this post was to point out that we are not being asked to throw out the fundamentals of business building and start from the ground up.  We are just being encouraged to take a different approach to planning and executing these fundamentals.


Social entrepreneurs as catalysts for building entrepreneurship

In the last post we identified the need to have entrepreneurs become the leaders in building an entrepreneurial society.  We also acknowledged that these entrepreneurs would have to choose to take a leadership role and that is not always easy to encourage.  But there may be a sub-segment of the entrepreneurial community that would be predisposed to leadership and that is social entrepreneurs.

Social entrepreneurship is a rapidly emerging segment and will eventually evolve to the point where the social prefix will no longer be necessary.  But social entrepreneurs do bring a unique approach and that is one of being substantially driven by passion.  They also have to overcome many obstacles not experienced by traditional entrepreneurs since they tend to work with difficult problems.  Finally, they have been forced to support each other since they fall into a gap between traditional not-for-profit and traditional private enterprise.

It might also be possible that regions with low levels of entrepreneurship have more social issues to deal with compared to thriving entrepreneurial communities.  We should consider starting to build an entrepreneurial community with social enterprises led by social entrepreneurs.

Social entrepreneurs will also rely on the same support networks that traditional entrepreneurs require.  As the entrepreneurial community builds the support networks will become stronger.  These entrepreneurs will also serve as role models and mentors for traditional entrepreneurs.

Finally, if we look at a major objective of an entrepreneurial society it is to resolve the challenges we face through multiple entrepreneurial ventures.  Since that is what social ventures are about we could find ourselves better off by having them take the lead.

The role of inventors in an entrepreneurial society

Most of the new business ideas I see are technology related to services, digital media or software.  This trend should be expected since there are many great opportunities in these sectors.  But I am beginning to feel like we have given up on making things.  If this belief I have is true it is unfortunate for us as a society.  We still buy things and the creation of things puts people to work and gives them a sense of accomplishment.  The people employed are also not likely to find a comparable opportunity in the digital or service based markets.  For these reasons I think we need to find and nurture the inventors in our society.

There is a substantial group of people who are garage tinkerers and basement inventors.  Maybe they have seen something that could be done better and tried to build it.  Often they just love to build and fix things without any real thought as to the immediate need or size of the market.  That is a lot of ingenuity, energy and passion that could be put to use in building an entrepreneurial society.

There are other trends taking place that could magnify the impact of these inventors.  Technology such as social media and ecommerce combined with 3D printing and other low tools make it possible to create distributed and low cost manufacturing.  Build things where the markets are, customized to the needs of the buyer.  Not everything needs to be mass produced.

The cost advantages in remote countries is also declining with rising wages, supply chain complexity and increased transportation costs.  Interest is growing in the US in bringing production back from overseas.  We need to make sure the same trends happen in Canada.  But we won’t necessarily be bringing back the old model of large scale operations employing hundreds of people.  We should leverage the new business models and home-grown ingenuity to create a new manufacturing industry.

The first step is to surface these garage inventors; find out who they are and engag them.  From there we can work with them to build business models, fill in the gaps in their teams and provide support and financing.  Instead of two or three plants employing hundreds of people maybe we have a number of plants that each employ 10 to 50 people.  There would be less exposure from the failure of a single business and I suspect people would enjoy working in these smaller environments.

What is a business model?

In my last post I discussed the need for business model innovation to enable entrepreneurs to find solutions to the problems and opportunities we face.  In this post I will expand on that by proposing some structure around the term business model.  Having this structure is important if business model innovation is going to be a major driver of an entrepreneurial society.

We have all had discussions with colleagues and clients around an idea or concept where we all believed we had a common understanding.  Later when we tried to execute what we had discussed we found that we didn’t have common ground at all.  That is the danger with certain terms we use in business such as business models or innovation.  We each have our own interpretation of the terms and often believe that everyone in our discussions has the same one.  It will be difficult to have a conversation with a potential investor, customer or supplier if we don’t all have a shared interpretation of what a business model is.

Saul Kaplan, the founder of the Business Model Innovation Factory defines a business model as  a “story about how organizations create, capture, and deliver value.”  This is a good one line definition but doesn’t provide enough structure to build a business on.  Fortunately a structure has emerged from work done by Alexander Osterwalder that is outlined in his book Business Model Generation.

In Business Model Generation a business model is comprised of a set of interrelated building blocks:

  • Customer segments
  • Value propositions
  • Channels
  • Customer relationships
  • Revenue streams
  • Key resources
  • Key activities
  • Key partnerships, and
  • Cost structure.

A worksheet has also been designed that summarizes all of these elements on a page to facilitate the development and evolution of business model generation.  There are also good resources on this framework at www.BusinessModelGeneration.com.  These tools are used in conjunction with the lean approach to business startups.

Using the canvas a founding team can quickly develop a version of a business model in order to get the startup process moving.  It is understood that the first draft of the business model is based on the founding team’s assumptions about the various elements.  Each of these assumptions will need to be tested resulting in successive iterations on the business model design.  Ultimately the team will end up with a final business model that has been vetted by customers and may look quite different from the initial concept.

The structure proposed in this post is not the only way to look at business models but it is becoming widely adopted and it is the one we will use when discussing business model innovation.  We will expand on the list of business model elements in future posts as we explore business model innovation.


Finding a real world problem to solve

As I have mentioned in previous posts a wave of entrepreneurs creating new ventures has a greater ability to solve the problems and capitalize on today’s opportunities than existing top down institutions.  Since that time I have had the opportunity to work with many entrepreneurs and speak with other mentors and funders of entrepreneurship.  While there are many good venture concepts that could lead to improvements in the world there are still many entertainment or recreation based ideas.  These ideas add value by raising an interest in entrepreneurship, testing business models and advancing the technology itself.  Now it is time to start turning the attention of entrepreneurs to serious problems and opportunities.

I have also discussed in previous posts that the entrepreneurial process starts with the problem and not the solution.  The success of an entrepreneur that finds a problem that their potential customers consider worth paying to solve is substantially higher than the ones that start with a solution and try to find acceptance later.  So we should start with the problems to solve.

The good thing about starting with problems to solve is that we have alot of them.  And many of these are worth solving with people willing and able to pay for the solution.  We need to look around us and see where we can improve life for ourselves and others.  The problems don’t have to be the huge, change the world in one day kind.  Often we are better to start small since we expect the ventures to build momentum over time as they grow and merge with other ideas.

Being critically observant or curious is a trait is essential to finding truly unique but important problems to solve.  When you see things that don’t work as they should we can ask ourselves why and what would need to change to fix it.  We should look at the system of cause and effects that created the problem.  Use a series of questions to drill down to root causes.  The first things we see are usually symptoms but not the cause of the problem.  A systems view is important to understanding a problem well enough to begin looking for a way to solve it.

Many solutions will require the use of a unique business model to deliver it successfully.  It is often not enough just to find a problem and build a simple solution. In the next post I will spend time talking about business model innovation and how to incorporate that.

For some background on finding problems to solve I refer you to the first three chapters of Innovator’s Solution by Clay Christensen.  I also encourage you to work in small teams since people often see things from different angles.  So I leave that as a starting point to find problems that matter where the solution helps the society we live in.

Moving from the lab to the practical world

There is constant research going on in government, university and corporate labs but we are left wondering how much of it is actually commercialized.  By most estimates only a small proportion ever is.  Presumably the rest sits on the shelf in the hope or expectation that someone, someday will find a use for it.  Too often we expect that the breakthroughs discovered will be self evident and the market will come to them.  There is a way to try and improve on this record by going back to our jobs to be done analysis.

As we have discussed in a number of posts, a technology will be marketable if it helps someone do a job they are trying to do better than they could without it.  If there is a solution in a lab that will fit this purpose then it has an opportunity for commercial success.  When we find a job to be done that we believe can be done better we can look then to research breakthroughs to see if there is something we can utilize.   By framing the breakthrough in the jobs to be done analysis we start to bring it out of the lab into the practical world.  From there we can apply the business plan process to test it out in the market and, hopefully, scale up a business around it.

There is another trend happening that creates a variation on the jobs to be done analysis.  Organizations are performing meta analysis where they gather data from basic research that has been done and look for ways to put some breakthroughs together in a useful manner.  If this form of analysis shows some patterns with a potential market viability we can then look for jobs that would be effected and determine if they could benefit.  While we have gone about it in a reverse manner (i.e. starting with the technology) we still need to tie it to jobs to be done before we can assess the potential for market success.  A technology that does not provide a practical world solution will not be successfully commercialized.

I believe that the reason universities and some corporate research facilities fail to commercialize technology breakthroughs is their technology first mindset.  They assume that any breakthrough has value in and of itself.  They need to link these technologies to uses in the market which is something they have little experience in.  That is why corporations have to ensure there is a good communication flow between their business units and their research facilities.  There a further opportunity for corporations to make breakthroughs they can’t use available to other organizations who can capitalize.  This step would create additional value for the company doing the research turning their facilities into profit centres.  It also benefits society when value is created from something that would otherwise sit on a shelf shielded by patent protection.

Universities and government labs have to ensure they work with private enterprise or even other government departments to find market benefits.  The non-research government departments need to start becoming more market aware as well.  There is no reason why it should only be private enterprise commercializing technology.  Governments around the world are facing critical financial problems that need innovative solutions.  Maybe they should be looking in their own research labs.

There is a hesitation in sharing that results from parties wanting to monopolize the financial and publicity benefits of their discoveries.  However these benefits will not arise if there is no commercialization.  So universities, government labs and corporations need to work out reasonable profit sharing models or we will be here next year, and the years after that wondering why we can’t commercialize discoveries.  It all starts with the people making the discoveries working with the people looking for ways to improve on the jobs being done.

Putting productivity into perspective

I read yet another column in the Globe and Mail that states that productivity improvement is the key to the future.  This productivity improvement was also the key for lower wage earners and the sustainability of a middle class.  That may be true depending on where the productivity improvement comes from.  If there is an increase in productivity from existing companies it could result in an increase in revenue and profits from sales to new customers.  It could also result in no new revenue and increased profits from reducing the need for people.  The former could help or sustain the middle class and low income earner while the latter will further erode them.

If we get productivity improvements from new companies that hire people then that is definitely a potential lifeline for middle and low income earners.  But first we have to start these new companies.  In that regard new enterprise creation is by far more important than productivity improvements.

The benefit that new enterprises have over existing ones is the absence of legacy infrastructure and corporate culture.  There is an opportunity to build in cost structures that enable them to compete on a global basis.  They can utilize technology and business model innovation with specific cost structure targets in mind based on the need to compete.  But there is also a need to have products or services that the world wants.

We need to lever Canada’s natural advantages and one of them is natural resources.  But we need to innovate around these to make more from value added production and the creation of new technologies and services.  There are other sectors besides resources where we can start to build enterprises around existing strengths and experiences.  This need was discussed in an earlier post.

The point I am making here is that a knee jerk comment that we need more productivity has no merit on its own.  But we do need to wake up and start looking for opportunities where we can build competitive new enterprises that have the appropriate cost structure built in.  That is the key to a sustainable future for Canada all of its people.

Where does Canada fit in a global economy?

As a country we have not been successful in building companies that have been successful in a global marketplace.  We have also been concerned about our inability to grow companies into strong mid or large market competitors.  There is a relationship between these two issues.  Canada is not a large market that is capabable of sustaining larger companies with a few execptions in protected industries.  We need to be able to build success in international markets if we are to create the kinds of companies that become long term success stories.

There is a constant complaint that there is not enough risk capital or follow on funding to build large companies in this country.  But I think we have this backward.  Capital follows opportunities and if we had the kinds of enterprises with growth potential then we would find the capital was there.  So we should start with the opportunity side of the equation.

If we try to mimic the Americans by competing in all market segments we will find ourselves spread too thin to match up to them.  We don’t have the population, management depth or financial resources to do this.  We have to look for areas where we have natural strengths and start focussing there. 

We have vast natural resources which is what has been sustaining a large part of our economy in recent years.  We have huge expanses of farmland and one of the worlds largest supply of fresh water that can make us a power in food production.  But despite these two obvious advantages we still fail to fully capitalize on them.  That brings me to the next step which is finding the right opportunities within these areas of strength that will have a global impact.    

We can sell raw materials such as oil and mineral or wheat to international companies that in turn process these into finished goods or we can find a way to do some of the processing ourselves.  If the world needs food and resources then they have to come to us.  All of the low cost labour in the world can’t make up for a shortage of water or arable land.  We will need to understand what products the world needs in these areas and start finding a way to produce the finished products ourselves using innovative techniques to keep our cost structure low.  This process will take some time to fully develop but we need to get started. 

We want to make sure we participate in technology innovation as well but here we also need to determine which technologies we have the best chance of success at.  We can try to compete against the world in digital media and computer technology and we will have some successes.  However, we may also find these markets much more competitive than ones where we have a natural advantage.  Competing in these markets is a numbers game.  The more participants we have the more successes we will have but the percentage will be small and it will be difficult for us to build sustained global market leaders.  There may be better ways to spend our money.

Turning again to food and natural resources there are many technology development opportunities.  With a capitve market sector we have a built in lab to test out and develop new technologies.  These technologies can be used by our producers to build competitive business models and to sell into international markets.  Right now we do not have strength in these markets and it will take time to build them.  But done with focus, we should be able to build some world leaders more cost effectively than competing in other areas of technology.

We can expand our advantages further by looking at agriculture not just as food production but as a health and nutrition market.  This expanded perspective will enable us to develop broader knowledge around health and nutrition that we can use to build stronger competitors in our own country but also to inform and consult to global food and health product producers.  We can do the same by looking beyond oil and gas to energy and environmental management.  We can use this wider scope to become world leaders in alternative energy and environmental technology.  We should also be able to provide expertise to other countries in natural resource management in mining and oil and gas.

If we could teach our telecom companies and banks how to compete globally, without the market protections they have enjoyed at home, we might be able to offer additional services to the world.  They will need to grow autonomous units that have low cost models before this opportunity becomes available but they have the resources to launch these ventures. 

Building strong global leaders in key markets will also build strong domestic companies especially in services.  We will need professional and financial services to support the companies with Canadian head offices.  Other support sectors in retail, hospitality, entertainment education and healthcare will thrive with a strong base of global competitors.  Without the ability to compete globally we will be just providers of natural resources and we will see our support economy continually hollowed out.

We obviously can’t solve all of the challenges preventing Canada from competing globally in one post.  There are other factors we will cover in future posts such as the need for private companies and owners that want to grow businesses and not just flip them at the first opportunity.  But the point I wanted to make here is that we need to work with the natural advantages we have in this country that will become increasingly larger in the future.  We have to focus and start now to build on them.  We have to push aside the notion that innovation only means IT and social media or that anything to do with natural resources or agriculture is old school.  We also have to avoid thinking we have to be smaller version of the US.  The same way we can lead the world when we focus on certain sports in the Olympics where we have an advantage we can do in business.