Open innovation is a big trend today in innovation management. Where are its strengths and limitations? A discussion with Atizo.

Today, I had a long chat with Isabel Steiner and Sabine Hofer from Atizo, an entrepreneurial platform for open innovation. Atizo is a platform where companies can post a question to a crowd to get more and better solutions. This is called open innovation since you are not looking inside your own firm for ideas but to a broader spectrum of people. Some call it crowd sourcing for ideas.

The idea behind open innovation is fascinating. With Atizo, you can address more than 8.000 people with ¾ with academic background to look for fresh ideas. The biggest advantage besides the size of crowd of the “innovators” is the fresh viewpoint on the problem. You take advantage that the innovators do not know the way you always have solved the problem in the past; they are not stuck with your dominant logic.

Atizo’s platform allows companies to generate ideas, evaluate ideas and develop the ideas into marketable concepts.

The idea funnel from Atizo

Depending from your scope you want to use, you can use either the whole crowd, a subsection of your customer and clients if you are a business or you can just invite your closest community for the innovation project.

The different crowds to source from at Atizo

Due to these strengths, open innovation became a huge success in the last years. Well-regarded firms like Swisscom, Mammut, Google or BMW have used Atizo’s platform for open innovation to find new solutions.

So, is Atizo a success?

Success Story Atizo

Yes, since most customers were positively surprised about the quality of the solution. The open innovation idea works. The open innovation platform is fast and cheap to generate idea.

However, as every innovator knows, having even great ideas is not enough. Ideas have to be implemented in the firm AND adopted by the customers. First, implementation in the firm is already difficult since so many impediments like lacking resources; different priorities of top management, wrong corporate culture, Not-invented-here syndrome etc. can and will mostly likely kill the idea.

Secondly, an innovation is not what you think it is, but what the customer adopts. Therefore, from the many great ideas only few have seen the market. The classic dilemma of all innovators.

It is the question, stupid!

Moreover, what Atizo also figures out is how important it is which question you ask. Quite often, the question is very closed and so narrowly defined that the ideas are typical MOTS ideas (more-of-the-same). Nevertheless, do not criticize the ideas and solutions. The problem is with the questions. These questions are so framed by the dominant logic of the current business that really break-through ideas cannot be found. This is the same criticism I have already raised in the case of “Design Thinking”. If you ask the wrong questions, you get irrelevant answers.

Solution anybody?

So we discussed how better questions can be asked. One option is to amend the open innovation process with a phase where the crowd can deliver insights into unsolved problems they see with a current solution. They could deliver insights in the jobs that are still unsolved. Moreover, with these fresh insights even better solutions and ideas could be found. Any other idea?

In the discussion on business model innovation an important point is missing: the culture in which the business is conducted. A business is all about people “creating” customers.

Businesses are not a technical machine with input and output factors. Businesses are places where human beings work together for a common goal and therefore the culture in a business is a defining part of a business and therefore also for the business model.

Most definitions of what a business model is are rather technical. We talk about components, patterns, building blocks. We make a lot of fuss about how we rearrange the components as if they were just Lego bricks. We believe that having in mind a great new business model is already a business model innovation.

Where are the people?

Ups, no! That does not work. Somehow the most important “building block” of a business is missing: The human being that designs, shapes and makes the business work and the customer who has to buy into the new value proposition and pay. And here again we have the human factor. “[I]nnovation is not what innovators do but what customers adopt.” We always have to remember what Michael Schrage is saying. It is the customer acceptance that makes an innovation.

Zappos and its core values as a business model innovation

A great example to see how the culture and values can be the uniqueness and differentiation factor in its business model is Zappos . Looking from a technocratic point of view, Zappos is just an eShop for shoes with a great customer services.

But with this limited view you forget that it is not just the great customer service that makes the difference. You need people that can provide this great service. You need values in the firm that helps you to make the right decision in favor of your customers. And your values should be reflected in your controlling systems since otherwise people just do what they are measured for.

Zappos gives a great example that culture and core values is more than just having an HR department with marketing material for recruting. Check out what Zappos is saying about its culture. This culture was Amazon worth almost $1 billion when it announced it wants to by Zappos in July 2009.

Culture and values are part of the business model

I use in change project where big corporations are looking for a better business model an adapted business model canvas. The canvas uses besides the main components value proposition, value architecture and revenue model also a box for culture and values. Together with my colleague Dr. Harry Wiener who is a psychologist by training we have developed three categories that make together the culture and values of a business.

• Leadership style answers the questions: How do we lead people? How much freedom do we give them in their daily work?
• Relationship style answers the question: How do we work together with our customers? How do we work together with our peers in the firm?
• Values answer the questions: What value governs our overall behavior? What values do we pursue?

I do use the adapted version of the business model canvas not in all cases since it must fit the task.

And the more components you have the less the people really try to grasp the complexity of the business. In cases where a cultural change is not needed I sacrifices  the culture for simplicity but add the culture and value dimension as soon as the new business model is designed and the implementation process is planned.

Unlearning and cultural change

From my work experience (having been a line manager for 7 years) and consulting experience the changes in the culture and values are by far more difficult than changing the business model since the traditional business model is so impeded in the heads of all people. Culture and values have to be unlearned and unlearning is the most difficult task as we see from all big American car firms or from the bankruptcy of retail conglomerate Karstadt/Quelle aka Arcandor.

[update:] Via netzwertig.com I found the following blog post of disgruntled journalist from the German media group WAZ. Unfortunately, the article is in German but it shows extremely well how people can react to changes. The journalist discuss if – as print journalist – they can be forced to take a camcorder with them when investigating a story. That sounds ridiculous for outsiders but the traditional culture of journalist is very class oriented and a print journalist is a print journalist and therefore he/she has nothing to do with pictures or even video.

So in the case of the WAZ their strong journalistic network in the Ruhrgebiet is not only an asset for their online venture (DerWesten.de) but also a huge libility due to its traditional core values.

Even when you have the best new business model you will fail if you cannot change the traditional values that impede change. So the culture should be included on the business model canvas if you do a business model innovation in a traditional firm. Otherwise, your business transformation will fail.

The newspaper industry is suffering these days. Besides the economic crisis that leads to less advertising spending the traditional business model is under attack by the Internet. The large papers have reacted with large Internet activities that attract a lot of traffic. But the revenues of the online ventures are not sufficient to compensate for the decline in print. So what shall they do?

I had the pleasure recently to be invited back to my university, the University of St. Gallen, to give a speech on business model innovation in the media industry. Prof. Martin Eppler was so kind to sponsor the discussion. I used 8 theses to present my thoughts. Below you find the slides of my presentation.

Tradition is not a business model

The media industry is an interesting case since their traditional business model is under attack by new technologies. I use the music and the newspaper industry as cases to make my points. Although both are affected by the Internet, they face very different challenges.

For the music industry the digitalization of the music led to disembodiment of the piece of music from the carrier medium like the CD or the LP. Unfortunately, the business model of the music industry is based on the sale of physical carriers of media. And with the disembodiment the emotional impact of the carrier medium like the LP’s cover vanished. And due to the easiness of digital distribution the value of owning a piece of music diminishes for the customer. Today, we have more music around then we can ever consume, we have thousands of songs on the hard drive, on the iPod. There are thousands of radio stations on the web. So music is around but not as a physical piece anymore.

The music industry reacted with the traditional way all endangered species do. They do not adapt, they just do more of what they did in the past. They publish even more CDs than ever before. And of course, they started to sue their best customers. But it did not work. The sales of music is still decreasing and the most interesting new business models like iTunes, LastFM, Spotify or Nokia’s “It comes with music” come from outsiders. At the same time people listen all the time to music and they spent fortunes to go to live concerts but they do not spend money for physical pieces of music anymore.

The newspaper industry faces a different set of challenges. Newspapers were in the last five years very active in the digital space and launched large digital sites that attracted users in great numbers. According to a PwC study the newspapers could double their online revenue share to 3-20% of total revenue.

Source: PwC newspaper publisher survey

The NY Times Corporation with all its newspaper sites (NYTimes.com, Boston.com, etc.) and also sites like About.com claims to be No. 13^th in America regarding traffic on the Web. The belief was that the digital business will compensate the loss in their traditional business, so they invested heavily.

But, it did not.

The revenue model on the Internet for traditional newspapers like the NY Times or Neue Zürcher Zeitung does not work. The digital space does not allow sufficient revenues to pay for the content. The newspapers reached millions of users but they could not monetize the users. Online might offer a contribution margin to the content production but print still pays the majority. The NZZ is loosing CHF 3 million on sales of 7 million.

Particularly in Germany, the publishers reacted by attacking the one firm that makes a fortune from the Internet, Google. The publishers claim that they provide the valuable content Google lives from. Again, a typical behavior of an industry under attack. Instead of changing their business model they attack somebody else. It is much easier to blame somebody else and play the victim instead of blaming oneself for not being innovative and for holding too long to a dated business model.

You can see easily from the two cases that there is not such a thing as ONE media industry and therefore not ONE solution. Music industry and newspapers have very little in common, except the traditional business model is challenged by the Internet. But the challenges are very different and just enforcing the copyright does not give the media companies their revenue sources back.

The problem does not lie in the copying of valuable content but in the weak value proposition. Times have changed but the business models have not.  So, dear politicians, please think first before you act.

Print is three completely different business models hold together by paper

I will elaborate in more detail about the newspaper industry and how they can change their business model. To start with it helps to understand the business model of today’s business and how they have reacted to the Internet. Let’s start with the former.

Let’s talk first about the value proposition of a traditional newspaper. To identify the value proposition we have to identify the customers. Newspapers have three very distinct groups of customers they serve. The first is the reader, the second the marketeer and the third is a person/company that places a classified. So what is the value proposition for them? And very closely related what is the revenue model associated with the value proposition?

• The reader is interested in the content in form of news, comments, insights and background stories that help him to stay informed about the world. At the same time the newspaper can be a past time and enjoyment to the reader. The classical newspaper serves also as a guide to local entertainment offerings like theater, museums, galleries or parties. The important function of the newspaper is to filter and classify which news and information are relevant for the reader. The reader trusts the paper that it makes the right choice for him. For the content and the classification the reader is willing to pay in the traditional world a price either in form of a subscription (great since you get the money for one year in advance) or just for a single copy at a newsstand. The subscriber gets the extra benefit of house delivery. Brand is in this context extremely important since you cannot test how much the information is worth to you beforehand since as soon as you have read the information the seller cannot charge you anymore since you have obtained the information without having to pay for the physical medium newspaper.
• The marketeer wants to reach its potential customers with his advertising message. In times before the Internet newspapers were a great medium to reach a great number of your potential clients. The biggest competitor in mass communication was TV that reached even a larger audience than newspapers. Newspapers were an efficient medium particularly, when the readers belonged to the groups of decision makers most marketeers wanted to address. The marketeers were willing to pay for the reach the papers had. The currency for the marketeers was how much they had to pay for thousand contacts or CPMs (cost per thousands contacts). Actually, the newspapers were selling the attention of the reader to the marketeers even when the readers did not buy the paper for being bombarded by ads. Readers accepted advertising as long it was not too intrusive.
• The third group of customers where people or corporation that wanted to close a transaction like selling a used car, filling a job opening, renting out a flat or offering sex services. These advertisers just want to find a counterparty for a transaction. The classified market works well with just text ads in papers. The value proposition of the papers was to bring buyers and sellers together. The reach of the newspapers was important since the chance to find a counterparty is much bigger if you reach thousands of readers. The price for a classified depended from the size and length of the text.

These three different value propositions of a newspaper were tied together by the physical medium paper. The classical newspaper is a bundle of three different business models that needed each other. No content without the income from classifieds and advertising and no reach without the content. All three businesses needed the other. Very simple! The classical revenue mix for subscription based newspapers is 30% from subscription fees and single copy sales and 70% from ads and classifieds.

Newspapers transferred their print content model to the Internet

So what happened with the advent of the Internet. Skeptical at the beginning the newspapers invested heavily into the new medium and build up large digital domains on the Web. Besides their content from the print edition they added video, blogs and comment functions to the Web. They connected to social networks like facebook and used user generated content from youtube et al. From their point of view the newspapers had transformed their content model to Web 2.0. Some newspapers like the NY Times wanted to play at the forefront of the development and opened their own R&D divisions to shape the development.

The online content model of newspapers is very much an information portal with news, information and background stories about everything and for everybody. The NY Times covers international, national, state news, culture, business, investing, gardening, you name it. And the newspapers are successful in their traditional metrics of success: reach. In America the NYTimes.com is No. 1 for content according to a Nielson study mentioned in the annual report of the NY Times Corporation.

So, the world could be great for newspapers. But it isn’t.

The Internet is not paper with multimedia and some interactive features

Newspapers managed to attract users (not just readers like with the print model) they lost two of their revenue sources. First, the subscribers turned their back on them. The willingness to pay for information is very low on the Web. The next free news site is just a click away. So, the first revenue flow vanished.

As did classifieds. What once needed the reach of the newspaper does not need editorial content anymore. To close a transaction you do not need thousands of readers but the few that are really interested in the transaction. And the Web is very good at matching even the most eccentric interests together. The Web is just made for longtail markets and most classifieds are longtail markets. To close a deal you just need one interested party not millions. So new marketplaces like Craigslist evolved and “nuked” the once very profitable business of the newspapers.

Ok, subscription fees and classified were lost on the Web but there is still the attention of your users you can sell. Right?

The newspaper makers believed that they could sell again the attention of their users to marketeers. But again, the Internet showed that having lot’s of readers does not automatically translate into a high income stream from ads.

Why? The Internet showed that it might be very efficient to reach thousand of users with banner ads but it also showed that this form of advertising is not very effective, meaning that banner ads lead to very few leads or actual sales. That might have already been the case in the print version but due to lack of more effective advertising marketeers had no other choice. But now, they have.

Internet advertising can be measured with click-through-rates or CTRs. So you see how effective your ad is and in the case of performance based advertising systems like Google Adwords you just have to pay when people click on your ad (pay-per-click).

Unfortunately, the reader of a news site is not really interested in anything else when reading an article on Obama than on Obama. He is not interested in health care insurance even when Mr. President talks about his health care reforms. With Google search it is another case. If you search for health care, you have a shown interest in the subject and therefore you might be open for ads about health care plans.

So the Internet proved to be very damaging for newspapers. They attracted millions of users but found no way to monetize their reach. And at the same time, their traditional print business model was under attack. In print they lose subscribers and readers. The classifieds have migrated totally to the Web and marketeers look for more effective ways of advertising.

Solution anybody?

So what shall they do? I have no shrink-rapped solution or one solution fits all. This is exactly what business model innovation is not about. Business model innovation is all about understanding your business and finding a solution that makes you distinct from your competitors. If everybody does the same nobody will profit.

Still, it is interesting to look at examples that work. First, there is a paper that has doubled its circulation in the last 10 years and that has increased its global impact. Well, it is not a daily newspaper but a magazine that does exactly what the dailies (should) do: Filter information for relevant news, provide insights, give background, analyse the global events, and give you information on areas most newspapers think are irrelevant to their local readers.

Any idea which magazine I have in mind? Well, it is The Economist. The Economist has a highly successful magazine on paper and it advertising market works as well. The Economist still calls itself a newspaper, not a magazine. Interestingly, their Internet version of The Economist does not work that well. Somehow it seems that the success of The Economist is bonded to paper. The content The Economist provides is very well suited and adopted to paper. The stories and analyzes just have the right length and style for paper. Will it work forever? Who knows, but it still works today very well.

Free commuters’ newspapers as a business model innovation: Using a clear customer insight

The second example is daily papers for commuters. The value proposition is very simple and is based on the customer insight that commuters that use public transport have time to read in the train or bus. But if they do not bring a paper from home or buy a paper at a newsstand, they have no easy access to a paper. Why not change that and use the attention you get from the commuters and sell it to marketeers? And since commuters are always in a rush the only revenue model that works is to give it away for free. Well, from this insight the free commuters’ papers were developed.

2 commuters' free dailies: 20 Minutes and Metro

The typical reaction of traditional publishers was to blame the “free” for the success of the new dailies. They argued that it is not difficult to launch a paper successfully if you do it for free. For them the free dailies were the ugly duckling in their industry. But it was the customer insight that commuters have time that made the commuters’ dailies successful. The brands of free dailies show exactly this insight: You have 20 minutes to read the paper in the Metro.

Solution: Understand the characteristics of the medium and look for fresh customer insights

So how can the newspapers escape their dire situation in print AND online? Well, the first tip is to understand what each medium can better than the other and than design your offering around the characteristics. We will see that the news will move online but the analytical background story and insights are well suited for paper. But the archive is again better hosted on the Web.

The second tip is to look at the behavior of your potential readers and users. When do they have time? When do your readers really read the paper? On the same day of the publication or when they have time? When are they not distracted by other media? Look not just at your current readers but at your non-readers. The commuters’ dailies attracted the young which were long lost to subscription newspapers. A generation of non-readers became readers again.

We will see daily newspapers that will be published not daily anymore. Sales on Mondays and Tuesdays are already low. Why not publish the “dailies” just on Tuesdays, Thursdays (with a big “must-have” section of the upcoming weekend events), Saturday and Sunday? Besides the commuters’ dailies the biggest winners in the German speaking press are the Sunday papers that focus on the news of the week. And of course, change the content: away from the daily news to background stories and analytics.

Is the loss of the daily paper a cultural disaster? No, when newspapers started the started quite often as weeklies and later with the advent of better dissemination of news via telegraph paper even had several editions per day. So we just go back to former times.

The Internet is not just another channel!

And what to do with the online version of the papers? The Internet is not just a new channel for the print content. And not just the traditional content with some Web2.0 features. The Internet has some characteristics that changes also the economics of the content business.

On the Internet you can reach users from little niches that were unserved in the past due to lack of medium that made it possible to reach tiny, dispersed interests for an acceptable price. The Internet is all about these longtail niches. You can serve the local community super local news and create a online community for the local community. [Update: Jeff Jarvis and his team have developed some interesting ideas and working business models on these hyperlocal news.] Some other interesting thoughts on how publishers should address the Internet provides Andreas Göldi, founder of namics, a large Internet consultancy in Germany and Switzerland.

Or you can create communities with a sharply cut interest. How about girls that are going to marry? Weddings are highly emotional and excellent made for exchange of tips and gossip. Why not give girls a platform for this important event? And important, weddings are expensive and therefore the marketeers of weeding related goods like rings, jewelry, hotels, restaurants, wedding planers would just love such a Website where they could address soon-to-become-brides without much loss.

And of course there is already such a site: Weddingbee.com where 20 real brides write in blog form about their weeding, their planning, their emotions. And the site attracts around 1.33 Mio. Unique visitors per month that is just 0.2 mio less than the Tagesanzeiger.ch, one of the biggest dailies in Switzerland. And what about the cost? The 20 brides do it part-time vs. the 150 plus journalist at the Tagesanzeiger. Do the economics!

Sure, it is unfair to compare a quality daily newspaper with a “gossip” page for brides. But it just shows how the economics of the business have changed. And the advertisers do not think in categories of unfair or fair, just what suits their needs the best.

Chance for newspapers

Newspapers have a chance if they understand what paper can do better than the Internet and if they start designing a paper that uses these characteristics of paper.

Newspapers have to understand better the changing customer behavior and find a customer insight on which they can base their offering. Commuters’ dailies or Sunday papers are examples.

And the Internet is not another channel for content plus some Web 2.0 features. So transfering your content online and adding some blogs and comments function will not work. Today’s online portals (online version of a newspaper) attract a high volume of users but cannot monetized on their great reach. So design an offering that uses the special idiosyncrasies of the Web. It might be the best local super local offering, it might be another niche but it will not be a portal about everything which you charge for.

Update: The presentation was summarized in French by Le Figaro. And Anders Sundelin from the Business Model Database just posted a summary of the New Business Models For News Summit at the University of New York. It is a great summary of all the fresh ideas for business model innovation in the field of media. Still, nobody has found so far the solution for this fighting industry.

These are the slides of the second part of my lecture I gave at Leuphana University in Lüneburg in May. The first set of slides you find here.

Business model innovations sound great as a strategy and if successful you can create a new market and escape the traditional competitors in your ex-industry. But the most important point in any innovation is not to have an idea, is not great execution, but the adoption of the innovation by  customers. And that is the crux of business model innovation: The diffusion of the innovation. The TiVo is a perfect example.

Ten years ago the TiVo digital video recorder was presented at a broadcasters’s convention in Las Vegas. People expected that the TiVo as an easy time-shift machine would change the TV industry for ever. The great opportunity for TiVo’s users was to watch a show whenever they wanted and without commercials since they could skip that annoying part. The latter was seen as the death of the TV industry as we know it today since their revenue model is based on these commercials that nobody needed to see anymore with a TiVo.  As predicted the TiVo sold well particularly as the price fell. But since 2007 the user base has fallen and the the TV industry is still existing as we know it.

It is the customer, stupid!

The Economist from April 25^th, 2009 summarizes the problem with the TiVo very well: “Just because technology enables people to do something does not mean they will, particularly when it comes to a medium as indolence-inducing as television.” But the dire fact is that so many great sounding innovations fail in the end since the customer is not willing to change their behavior.  With the TiVo customers needed to adopt their behavior to the new device. They had to learn the function of the device and become more active in devising their evening entertainment. No more the TV station commanded when you can see what but it was up to the customer to design its own programm. But did the customer really want to have that control? Was this the point of watching TV? Is watching TV all about controlling your destiny?

Jobs to get done

The TiVo fell into the trap of customers’ phlegm. Watching TV is definitely not about taking control over your destiny but about passive entertainment and lulling. The job you want to solve by watching TV is all about passive entertainment and the TiVo did not help with this job. The TiVo was great for early adopters since they bought the device to actively take control over their content but the majority of users has a different open job to be done.

Competition is just around the corner

But it is not time to relax for the advertising -supported television stations. People shift time away from TV to the Internet. And the Internet is all about interactivity and therefore better suited for business models that require activity from their customers. Hulu and other HD-video streaming services are becoming popular and they give control to the users. The question will be: Do the customers really want that much control? And there is competition from the low end and with lousy quality but where interactivity is the main feature. It is youtube.

Customer Adoption as the biggest hurdle in business model innovation

In this blog I will write about business model innovations as a new strategy type but the diffusion of the innovation will be also covered in this blog. A great business model innovation without adoption by the customers is not great at all. And the adoption is the biggest hurdle in the business model innovation process. It is difficult to find interesting fresh business models. It is difficult to get them through at corporate resource allocation process or venture funding. It is difficult to execute them well. But the biggest challenge is to change the behavior of your customers. And even if you are able to change the behavior, it takes a lot of time!

(The idea of the post was inspired by the article in The Economist.)