Thanks to the business model canvas people are enthusiastic to build new business models and find business model innovations, but often they get lost in technocratic details. They just see building blocks but they forget the overal logic every great business needs.

Actually, you as an entrepreneur have to answer just one core question: Why should your firm exist on this planet? You need a Daseinseinsberechtigung (right to exist) for your firm. This is a very philosophical question. To be more operational, you can break down the Daseins question into four core questions. But still the answers will not come with a pure analytical process but with creativity and lot’s of empathy for your customers and their jobs they want to have solved. 

The technocratic approach is useless for finding love (source: http://xkcd.com/55/)

The four core questions on your business model canvas

1. Why should customers be excited to do business with you? That is the value proposition. You could almost go as far as asking: Why should customers love to do business with you?
2. How do you create the excitement of your customers in a productive way? That is the value architecture or operating model. Here you describe how you fulfill your value proposition.
3. How do you earn money? That is your revenue model or the profit formula and here you should be able to explain why you as the owner should be excited about the business.
4. What are your values you live up to in your team and with your customers and partners? That is the human side of the business and of utmost important, since it is the most difficult part to copy. I call it the culture and values of a business.

For these questions, you need compelling answers and the nine or elven building blocks are very helpful in answering the questions but do not get lost in details but look at the broader picture and see the interdependencies.  If you can answer the questions you have a great strategy that is customer-oriented, profitable and sustainable.

The bad part for any mediocre business is that you cannot answer the questions. Please all mediocre business, why don’t you try harder and work on “why should your customers be exicted about you?” instead of optimizing a dull business.

“What business are you in?” sounds like a simple question. But it’s not. How you define your business determines which direction your firm can go. Based on your answer, you define and limit your strategic options.

In a company, the business model is defined by a dominant group of people. They have a common understanding of what business they are in and how they create value. However, the business model is not an absolute reality. It’s a social construct of dominant opinion makers, e.g. your top management. This is important to understand.

By taking a different look at your business, and thereby challenging your dominant logic, you can identify more and different strategic options for your firm. But beware; by doing so, you are also challenging the top dogs in your firm.

Life is not that simple. Changing perspectives by xkcd.com

How you define your business depends on the dominant logic of your management

Considering the definition of what a business model is, it seems easy to describe the business model of a company. You can use  the business model canvas (Alex Osterwalder‘s or mine) and then you describe how value is created. Often we assume that regardless of who describes the business model, we will end up with the same description. This is a mistake.

Some hard facts like the value chain or the products can be easily identified but as soon as we approach the value proposition, things get a bit more confusing. Why is this? The answer depends on who answers the question.

Take groups close to your firm: Will the board of your company have the same view as your customers? What about your employees and top management?

Hopefully your executive board will answer the question very similarly. However as I have seen in many consulting projects, that is not usually the case. And even the simple question of who your customers are is a tricky one. Are your customers your users or your paying customers? This is a particularly tough question in double-sided business models.

If you sell to end consumers through retailers, are your customers your channel partners like Walmart or the end customers? This is exactly the discussion you might have within your firm.

Ask customers the question of your value proposition. The answer will be different again. Do your customers understand your value proposition? Do you offer the value you promise with your value architecture also? (see post on value perception vs. value proposition).

In well-managed firms, there is a common and dominant logic of your business

In well-managed firms, we see a common and shared view of the value proposition and of the other components of a business model. Management of these firms is much easier because there is a common understanding of what you do and what makes you unique. In such firms, micro management isn’t necessary since everybody understands his or her role in the company. Innovation is still hard work, but since you understand your customer well, you regularly bring out innovations for your current customers.

Caveat!

What sounds like a dream may be a double-edged sword. Dream businesses can exist if technologies develop along known paths, if you have a clearly defined set of competitors, if your customers have stable and predictable needs and if you have found a business model which can thrive in stable conditions. That’s a lot of ifs! If times are changing, you might be trapped in your way of looking at the world.

The better you adjust to stable business conditions (sustaining), the more difficult you will have with disruptions or unpredictable situations. This is what Clayton Christensen calls Innovators’ Dilemma. Your dominant logic works as a filter. Information is filtered and interpreted in a way that fits your view of the world.

Business Model(s) of the Yellow Pages

The best way to illustrate my point that business models are a social construct and not an absolute reality is to take an industry of business directories, like yellow pages. What is the business model of the yellow pages?

1. Yellow pages as publishers of Yellow Pages and other directories (a product based definition)

If we go back some 15 years, we could easily describe the business model of directories as publishers of paper directories in the form of white pages (private addresses) and yellow pages (business addresses). When you subscribe to this view, you might have envisioned an integrated value chain with its own printing facilities. Even the printing faction of the yellow pages businesses has shifted to online directory services. For such companies, going online was a great step forward, even if it meant simply transferring their business model from paper to online.

2. The search & find business

Another way to look at directory services is to look at the jobs or problems they solve for customers. Remember that the job-to-be-done is a core-defining element of the value proposition. Well, which job does a directory service solve for its clients?

Directory services offer the chance to FIND somebody when somebody else SEARCHes for them. So, the business can be called “Search & Find” business. In this view, one defines the business by the end users and the job you help them solve.

If your dominant logic is grounded in the Search & Find business, you probably understand that customers need more than a flat directory of businesses (today called yellow pages). How about adding recommendations to the business listings like Yelp or Qype are doing? How about making specialized sites for certain professions such as craftsmen or doctors like Angie’s List . After all, people are looking for the best doctor in town, not just any doctor.

When you see your business in this way, you move away from a flat search (finding little information about everything) to a deep search (finding specialized information about a niche). Think about it: Google will probably always beat you in flat search so you better go into deep search.

3. The lead generating business

A third way to define your business takes both the end-user and the paying customer into account. In the case of directory services, your customers are small and mid-sized businesses who you sell ads to.

What problem do the SMEs want to solve with an ad or a bold listing in your directory? Well, they want to be found in order to generate more and better leads with the ad. With these glasses on, you are in the Lead Generating Business. This is quite different from the other two perspectives.

What happens if you take this view? You will probably realize that you have one of the best local sales forces for SMEs as a key asset and part of your core capabilities. And why not leverage your key assets to sell a whole range of products to SMEs that help them to generate more and better leads? Why not sell Google Adwords? With this view of the world, Google is a partner and not a mammoth competitor anymore. Google’s weakness in local business is its weak sales force. They are a technology firm. You have a great local sales force and you will never beat Google in search. Why not join them? Google can be your partner.

In the lead generating business, you suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating business.

4. The Address source

A fourth way of defining what kind of business you are starts by looking at the core competencies. As a directory company, you have or had the best address material for individuals and businesses. You could call yourself an address business.

Potential strategic options would include moving into identity and address management for businesses and individuals. In this situation, you would sell addresses to business and keep the main address of individuals. Unfortunately, it’s a bit late for this kind of business because new directory services have appeared in the form of social networks like Facebook, LinkedIn and Xing. Now, individuals or business maintain their own profiles on these sites.

Conclusion: A business model is a social construct

All four perspectives of the business model are logical and supported by facts. They are totally different descriptions of the same business. Each view allows for very different strategic options. Even the competitors change with each different view of the business. of the business.

It is very important to understand that your business model is not a static and fixed model, it’s the construct of a dominant group of people in your firm.

Challenge the dominant logic with the business model canvas to see new strategic options

You see very different strategic options if you define your business differently. A great way to do this is to better understand the problem you solve for your customer.

Different perspectives open new options by xkcd.com

I illustrated this two years ago in a post on the newspaper industry. The classic business model of a newspaper consisted of three different businesses brought together by a shared medium: paper.

1. The first kind of business you are in concerns the reader. You provide news, background information and entertainment in exchange for the reader’s attention and a small amount of money (just 30% of total revenues, but even less of a contribution margin).
2. The second business you are in is to sell the reader’s attention to advertisers. And this is where the margins were made in the past.
3. The third is the classifieds business. Here, a paper functions as a market place. As we see on the Internet, you do not need content to sell advertising or classifieds. Google and Craig’s List have proven this.

The pity for the newspaper industry is that most of the costs come from the first business, the content, but the revenue comes from the second and third businesses (here a post on the changing economics of newspapers). In this case , the jobs-to-be done analysis is a frustrating one since you see that just moving your content online will never be a profitable business.

Ways to define your business model and starting points for innovation

Taking the yellow pages example, we can identify four defining elements

• The product you offer
• The problems and jobs you solve for your users
• The problems and jobs you solve for your paying customers
• Your core competences

But there are even more elements that you can define your business around.

• The core input or raw material used in your production. This is the way how the plastics industry defines itself. The oil industry and other traditional commodity industries do, too.
• The core production process. Food processing industries focus on this.

Reconstructing your firm by taking another perspective will allow you to see fresh, strategic options which will lead to business model innovations. Take the business model canvas and play with the components. You will see there are more options than you can handle. So please never say that you have no idea how to reinvent your business. Ideas come easily, but executing these ideas is the tough part.

Regardless of which definition you choose, be aware that it is only a construct able to be changed. Competition will not care about your definition. Your success will come from new ways of solving a problem for your customers. And do not complain of unfairness when a competitor enters the arena and breaks all of the rules that you thought were holy. All of these rules made sense in your way of looking at your business, but your competitor, who defines his business totally differently, is acting in a totally fair and just manner. This is what we see in the moment between the content industry which is being challenged by Google in the search and find industry.

Particularly on the web, we see a lot of copies of successful business models. How many clones are there of Groupon? How many competitors and incumbents wanted to copy Amazon in the late 1990s and failed? The core question is: Is it possible to copy a business model? In this post, I will elaborate on this topic.

During a recent interview for a bachelor thesis, I was asked: Under which circumstances is the transfer of a business model e.g. from a different country or from a competitor a useful strategy?

I must admit, I am skeptical about the outright transfer of business models from one firm to another. The reason is very simple. A business model is more than its technical components like your value chain, revenue model, your product etc. The business model also includes soft factors like the value proposition, your values and corporate culture or your core competencies. Remember the definition of core competency: core competencies have to be rare, difficult to copy and valuable.

Many strategists, VCs and purely analytical people think that it is easy to copy a business model. What they forget is that a business model is not just a technocratic combination of components, in fact, humans are involved with their values, cultures and hidden assumptions. You can copy the hard components, but the human aspect of a business model –values, culture, tacit knowledge – is difficult to copy.

Business Model transfer from Start-ups to Start-ups

The case is different for startups where the human aspect is not as developed as in more mature firms. To copy a business model that is not based on technology is easy. To copy a business model of a startup, whose uniqueness is based on proprietary technology is difficult.

Case: Business Model Innovation Groupon and its clones

An interesting case is Groupon and all its clones. Groupon is a deal-of-the-day website which allows consumers to shop for certain services or products for a large discount when a  sufficient number of users sign up for the deal within a short window of time. The value proposition for the user is simple: Get great deals for a hefty discount.

The value proposition for the businesses that offer the deals is less obvious. Why would businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business. Traditionally, this task “lead-generation” was offered by the Yellow Pages, classifieds or more recently, by Google Adwords. Now, there is a new way to achieve this task: a typical business model innovation.

The value proposition for the businesses that offer the deals is less obvious. Why do businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business (job-to-be-done by Groupon). Traditionally, the job “lead-generation” was offered by yellow pages, classified advertising or more recently by Google Adwords. Now, there is a new way how to solve this job: a typical business model innovation.

The traditional methods of “lead-generation” require the business to pay upfront without knowing what revenues would be generated. At the same time, businesses might be reaching people who are not interested in their goods and services. Google Adwords is already innovative. You only have to pay Google if a user is interested in your ad and clicks on it. So your ad is already much more targeted.

Groupon goes even a step further. With the Groupon model, the business targets and reaches only users that are willing to pay for their products and services, at, of course, a steep discount. Groupon’s value proposition is particularly well-suited for businesses that have a high contribution margin for every customer they serve. This is the case for beauty salons or massage parlors. Every customer via Groupon brings in business. That is quite an innovation in the “lead-generation” business where you usually pay money to get leads. With Groupon, you get leads and get business at less than 50% of the normal price.

The value proposition sounds very convincing but the big question for businesses is if they can transform Groupon users into regular clients who pay regular prices or if you just get one-time discount hunters.

Groupon’s History and its clones

Groupon started business in 2008 and rose to the attention of other entrepreneurs worldwide in 2009. In 2010, Forbes counted over 500 clones worldwide, with more than 100 such firms in the US alone.

In Germany, CityDeal rose to prominence when the Samwer brothers (well-know cloners of US internet business models) went from zero to 700 employees in half a year and then sold the firm to Groupon. This is a typical revenue model for investors of some copycats. Instead of earning money with its customers, the basic idea is to be acquired by the originator of a business innovation during their internationalization spree. For the Samwar brothers it already worked twice: First with their eBay clone and now with Citydeal.

Other clones focused on smaller markets that are less attractive than the big markets. E.g. DeinDeal works successfully in Switzerland.

Summary on startup business models

Yes, you can copy a business model from one market to another if the value proposition is also attractive to customers in other countries. If the business model is protected by core competencies or patents you cannot transfer the business model easily.

Business Model Transfer from Startups to Incumbents: Can they dance?

To take the Groupon case further, why did we not see copycats from firms that are already in the “lead generation” business like the Yellow Pages. These companies already have one of the core assets for the Groupon business model: Local sales teams for SMEs. So it would be easy for them to build successful clones.

But they didn’t. Why?

One reason is that they did not define their business by lead generation for SMEs, the job they solve for their customers. If you define your business by the product or around the value proposition for your users like local search, you do not see the threat your business models faces by Groupon. You believe you are in the search [] business but, actually, Groupon competes for the same bucks that you do. It is good that Groupon and all its clones [] are not taken serious, at least in the beginning.

So in the case of incumbents, the human aspect in their business model is the limiting factor to transfer the startup business model.

Amazon vs. Barnes & Nobels vs. BOL vs. Otto-Versand

Another great example is Amazon. Amazon was very easy to copy in the late 1990s. It was just an online book reseller. That is easy to copy. The incumbents were [] well aware of Amazon early on. They waited to see if Amazon could prove the business case of online book selling. When the incumbents saw that the take-up rate of online book shops was great, they responded with clones. Barnes & Nobel, an innovator in stationary book selling, entered the market, as did Bertelsmann in Germany with BOL. Were they successful?

Well, not really. Although they ventured into online book selling, the human factor in their traditional business model impeded success in their new venture. The incumbents always had the problem of cannibalization threatening the existing business that they wanted to protect. So the move into online book selling was seen as a defensive move. It was halfhearted. Meanwhile, Amazon was fully committed to being online; they had no other business.

And why did Otto, the largest mail order house in Europe, not react? Or the now defunct QuelleKarstadt? Again, it was the human factor of their traditional business model. If you are the king of the mail order business why should you be afraid of an online book seller like Amazon? In hindsight, Amazon is more than books, but the label “books” still sticks to Amazon. The incumbents in mail order never thought it would be possible for a newbie to build an infrastructure of warehouses and support systems they had until Amazon did it [] even better. The same is true for IBM or HP. Amazon is a big player in cloud computing, not the incumbents.

Summary

Incumbents can easily copy business models from startups. But often they do it only halfheartedly in order to protect their current business model. Here, the human factor on the side of the traditional business is the impediment for the successful transfer of a business model from one firm to another.

Business Model Transfer from mature firms

So what about transferring business models of successful, mature companies? Why do we not see more IKEA clones?

Here, yet another factor plays against the clones. The longer a company works under a successful business model, the more difficult it is to beat that company on their own turf. They have learned so much from their customers, they have gained so much tacit knowledge in how they run the firm that it is difficult to copy the business model. This is particularly true when the business model is based on a strong value proposition for customers and partners – like suppliers.

The Geberit case: a Business Model Innovation in the building industry

Geberit is a Swiss firm involved in plumbing and maintenance. Quite a commodity business, you might think. That is true if you think that you sell plastic pipes and other products. But they have developed a business model innovation. They do not sell pipes or other products but they sell you smooth and easy bathroom renovation and building. That is quite a different value proposition. So they have developed a system where everything is pre-assembled in a behind-the-wall system.

Of course, you can copy the installation systems of Geberit. There are just products. But what you cannot copy is the relationship Geberit has developed with its key partners, plumbing professionals. 30.000 professionals are trained every year on Geberit technology; these professionals plan their client projects with software from Geberit; they have been working successfully with Geberit products for years. In fact, the sanitary professionals know only Geberit nowadays.

So, Geberit is not just a product innovator but a business model innovator. It generated a lock-in with the most important influencer, the plumbing professionals. Geberit has developed a great value proposition for and some core compentencies around its partners like partner management or knowledge management.

Summary

To copy a business model of a well entrenched and successful business innovator is very difficult. The innovator has developed so many competencies and so much tacit knowhow that it is almost impossible to copy the business model. Of course, you can transfer the business model to other countries, but remember it will take time for you to build up knowledge and it also takes time to develop customers for a fresh business model. Customers do not adopt innovation quickly as they also have to learn new things about this innovation.

Summary: Transfer and Portability of business models

Today, we have much discussion going on about copying and transferring successful business models. What sounds so easy in theory and from consultants, is much more difficult to implement. A good business model is by definition difficult to copy. A good business model is not defended by patents or high-tech but by the excellent interaction of all its components and, particularly, by the human factor.

Long Range Planning, a prestigious academic journal on strategy, discovered the topic of Business Models and Strategy. It dedicated a whole Special Issue to Business Models. I have mixed feelings regarding the Special Issue. On the one hand it is great that academia takes up such an important topic; on the other hand, it is shows again that academia is a self-referential system which has a strong bias to not-invented-here syndrome since most authors do not reference earlier works that were published outside their closed community of Strategy professors. Sad. Many of the ideas I have read at other places before.

Already in May, I have heard that Long Range Planning had published a Special Issue on Business Models. Today, I got hands on it thanks to Andres Sundelin from The Business Model DataBase.

You can access the article via http://www.sciencedirect.com/science/journal/00246301 as a guest. Very interesting topics like “Business Models as Models” by C. Baden-Fuller and M. Morgan or “Business Models, Business Strategy and Innovation” by D.J. Teece are included, so the Special Issue is definitely worthwhile reading.  That is the happy part of the Special Issue.

C. Baden-Fuller, M. Morgan, Henry Chesbrough and business model

What makes me sad about the issue is the closed and self-referential world of the academia in Strategy Research. The topic was broadly covered in early 2000 at least in two Ph.D. theses, I know. However, so far I have found only two citation to Alex Osterwalder’s work in the article “Business Model Innovation: Opportunities and Barriers” by Henry Chesbrough and in the article by Wirtz & al.. Thanks Henry, that you take your open innovation approach also your research. Thanks Bernd.

I hoped to find some background on Business Models in Baden-Fullers and Morgan’s article. Negative. They seemed to have not heard from Osterwalder before, they do not cite him. They are not mentioning ideas of Gary Hamel on business concept innovation from 2000, a concept very close to business model innovation. They cite only their own kind. They still live in their closed community where it is extremely important from whom the idea is coming, even when the original idea is 10 years old and not even cited. That is what I call a long latency!

Origin of business model thinking

The origin in business model thinking dates back to the information management researchers that were building information systems. To do so, they needed models of the reality. They talked about data models, process models, enterprise models and later about business models. When the first Internet entrepreneurs were talking about their strategy, they talked naturally about their business model since that was a language familiar to them. From there, the term transcended to Strategy. E.g., I wrote my Ph.D. thesis exactly at this crossing of information systems and strategy. My supervisors were Prof. Beat Schmid, background in computer science and Prof. Georg von Krogh, a strong researcher in Strategy. Quite a balancing act.

Business model is just a model of a business

When I was writing my Ph.D. thesis, Prof. von Grogh told me that I needed a unit of analysis for my research. I know the traditional culprits like industry or firm but they did not fit into what we saw in the New Economy. Industry boarders become meaningless; competition came from competitors you had not even heard before.

Therefore, my answer to Georg was very simple: I used the business model as my unit of analysis. He said fine. Just define it. Well, easy said difficult done. I was positive at the beginning that there must be something since we all got Masters of Business Administration so Business should be defined. Nope. Not really.

And again, it was Peter Drucker who had worked on this. He asked the simple questions “What business are you in?” and “What is the purpose of a business”.  And this is exactly what a business model should answer when used for strategizing.

Chesbrough and Rosenbloom (2002) explain the antecedents to the business model concept in their article “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies”. It is interesting that it was not the academic world that saw the necessity to have the business in focus for strategy but the real world. The business is where the competition is. Welcome to the real world.

Hal Varian, the chief economist of Google and co-author of the seminal book “Information Rules” just publishes an article on the changing economics of newspapers. The paper and his blog post is worthwhile reading.

The articles goes well along my analysis of the newspaper market, where I argue that just a transfer of the paper business model to the Internet does not work since the business model of traditional papers is unbundled by the Internet. A newspaper is three businesses (content, advertising (selling of readers’ attention) and classifieds (bringing demand and supply together) bundled together by paper. And on the Internet, the glue of paper does not exists any more. So the revenue model of newspapers will not work on the Internet.

Varian argues that newspapers actually never earned money with news from their frontpages but from special interest sections like Automotives, Travel, Home & Garden or Food & Drinks. These sections attracted contextually targeted advertising which is much more effective than non-targeted advertising like you have in the news section.

And in the Online world, special-interest sites attract the search-engine traffic and not general-interest sites like the Internet pages of newspapers.

Well, when you follow his arguments than a mere transfer of the traditional business model to the web will never work for newspapers.

Simply put. The Internet is different. It has different economics and therefore you have to adapt your business model to the changing economics. Either you do it or you die! And this not only true for newspapers but also for other industries.

[update March 29th, 2010] Seth Godin writes in his blog what it means when the economics are changing in the publishing industry. He highlights the possibility that great authors have the potential to lead their own tribe. They will not be bond to the paper publishers any more. The text is worthwhile reading since it shows new business opportunities for authors.

[update August 5th, 2010] Google posted another paper on the subject. It comments in this paper the Federal Trade Commission’s News Media Workshop and Staff Discussion Draft on “Potential Policy Recommendations to Support the Reinvention of Journalism.” The paper is definitely more interesting than the title.

Google Comments To FTC

To be honest, I get a bit bored about the mantra that design thinking will solve the problems of large corporation. Well, when I go through the case studies at Ideo I am extremely impressed by their client list but not about the output. I have seen several design thinking sessions and I am not impressed at all with the output. The results are very often: More-of-the-Same but with fancier design.

Wer hat es erfunden? Novo Nordisk insulin pen

Where is the invention from design thinking that changed the industry? Where is the iTunes or the Kindle of Ideo? The problem with design thinking starts very early in the process with the problem definition phase. And that is where large corporations fail. They define the scope too narrow and than you get nice new things that sustain your current business but not new business models that rock your industry and yourself.

Ideo is a very good (self-) marketing & design firm but not an industry rocking firm. Large firms just love Ideo because Ideo just offers such a well designed process to solve the big problem of “being not innovative”. You hire Ideo for comforting yourself for not using your own common sense and your own customer insights. You just outsource your understanding of the customer to Ideo.

And how innovative are Ideo’s ideas?

Let’s take the example of the insulin pen Ideo describes on its homepage as a case [update 22nd Oct 2010, case is not available on IDEOs homepage any longer due to redesign of page]. They did the work for Lilly in 1997. Well, that is not really outstanding since the Danish firm Novo Nordisk introduced the pen in 1985. So Lilly was just catching up to this formerly unimportant drug firm from Denmark that solved 12 years earlier the problem that Ideo solved for Lilly. Novo Nordisk was a business innovator. Lilly is not.

Another show case of Ideo is the modular shopping cart they did in project for the TV channel ABC. Instead of having one big bulky shopping cart they came up with a modular cart that is better suited for today’s shopping habits. Definitely, the new shopping cart is nice but definitely not industry changing. Industry changing were such firms as Walmart or discounters like Aldi. They changed the retailing industry forever. For fashion retailers examples are Zara or H&M who saw that fashion is as much logistics as it is about fashion.

Adapt the Definition phase of design thinking

We have to watch out that design thinking will not become the next management fad like scientific management. I propose we go back to what God gave us, our common sense or in German “gesunder Menschenverstand” and that we use more our curiosity why the things are the way they are. The business model canvas will help us to understand the business we are in.

The business model canvas by Patrick Stähler

What is great about design thinking that is all about imagination of the unknown. But to really challenge the hidden assumption of any business more time should be devoted to the definition phase and to the unlearning phase. Only, when you challenge the hidden dominant logic of an industry you can rock the industry. If you do so, the design thinking process can be valuable to your company.

Unhiding the hidden dominant logic by looking at the jobs you do for your customers

So the best way to start is to unbundle your current value proposition. Ask questions like which job do you solve for your customers. And quite often, to your surprise, you solve very different jobs for different customers with the same product. And with dissecting the value proposition into job-to-be-done very interesting new problems emerge on which you can apply the design thinking approach.

I have done this several times already in customer projects and it works well. I used this job based unbundling on newspapers in my recent post on “Who says paper is dead?“.

I am interested in your experience with design thinking and business model innovations. Love to hear from you.

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.

Good news for all the evangelist of business model innovation. McKinsey has developed an innovation performance score (IPS) that shows that “a significant degree of business model innovation seems to be necessary for superior innovation impact.”

The idea of business model innovation was not developed at the large consultancy companies like McKinsey, BCG or booz. Probably they were too busy optimizing the current business of their current clients. And usually their clients are the incumbent in their respective business. Probably, the large consultancies are trapped what Clayton Christiensen calls resource dependency. Christiensen and others argue that you are dependent in your strategic decision from your main sources where you get your resources from and most of the time it is from your existing clients. In the case of the large consultancies the customers are the incumbents that lose the most from business model innovation.

Business model innovation as new strategy type

The idea stems from researchers like Alex Osterwalder, Gary Hamel (business concept innovation), W. Chan Kim and Renée Mauborgne with their blue ocean strategy or me. In stead of looking at the incumbents we were looking at entrepreneurs/ outsiders that created industries or changed their industries forever. While Alex and I came from New Economy side where we saw that new media allows new business models, Hamel, Kim and Mauborgne came from the traditional strategy schools at universities.

Measuring the impact of innovation is old subject but most measurement systems had severe shortcomings. For example input factors like R&D spending of a corporation were measured. Besides the flaw that input has little to do with output particularly in R&D, business model innovation do not get measured since you do not spent R&D on them. R&D is all about product innovation. Other studies measure the output of the R&D process like patents. Again, patents do not measure business or process innovation. Patents are just a sign of technological innovation. In Europe, you can not protect business models with patents.

So McKinsey started their research on an innovation performance sorce (IPS). McKinsey is still in an early phase but they say that the first results are promising. They use objective outcomes that take a broad view on innovation and take a long-term perspective. And instead of focusing on coporations they focus on business segments which in my opinion is key since the unit of competition is not the corporation but the business.

Business model innovation matter

And the results for us are promising. They state that they “found that business model innovation tended to generate bigger gains than product or process innovation, probably because the innovation was harder for competitors to copy and the advantages was therefore longer lasting.”

That is great news and we are waiting for more empirical evidence from the mighty McKinsey.

In formulated strategy we use a lot of words like innovative, based on core competencies, market driven, customer centric, operational excellence, best-in-class, top quality, leveraging existing brand, etc…. You named it and of course business model and business model innovation are now part of these buzz words. Are they still meaningful or did we forget the deeper concepts behind the words? Do we use the technocratic jargon to signal others that we are the experts?

doublethink by duncan

As I have argued in my last post, I think we use in strategy and in management in general too many generic and meaningless words. And I think we use also too many meaningless graphs and pictures to say nothing as a matter of fact. Visualization does not help you if your strategy is bad. Sorry, Alex for this .

Every decent firm claims in restructuring that it is concentrating on its core competencies when divesting or closing parts of its firm. Well, and often it is the same firm that argued some time ago that it was necessary to buy this now divested firm since it wanted to offer full service to its customers. We have so many words for “Sorry, it did not work. We just could not make it work”. Why are we so afraid about the truth?

Management Newspeak

In management we have invented Newspeak. Original, Newspeak is a fictional language in the novel Nineteen Eighty-Four by George Orwell. The basic idea behind Newspeak is to remove all shades of meaning from language. While in Orwell’s novel the government tries to introduce Newspeak to the people in order to make the people more compliant to its will, in the case of management it is our own fault. We managers use our own Newspeak and we have taken all meaning out of it.

Newspeak is all about saying almost nothing with great sounding words. Every bank had its risk management system in place, used sophisticated mathematical simulations, had dozens of compliance officers, trusted well-paid analyst in their triple A ratings. And what was the result? They did not see that a mortgage given to somebody with inadequate income will always be a bad loan regardless how often you mix it with other subprime loans and regardless how much financial modeling you apply.

And I will hear now all my friends from investment banking that you can decrease the risk by pooling loans. Well, this pooling works well with uncorrelated loans but if they are all bad loans in the same market, well, then bad stays and bad regardless of how much you diversify.

For a great overview of financial Newspeak,  click here for a pdf file. It is “The [now defunct] Lehman Brothers Guide to Exotic Credit Derivatives”. You will learn everything about Credit Default Swaps (CDS), Collateralized Debt Obligation (CDO) and their modeling. The basic ideas were great at the beginning but when the bankers believed that they could escape the laws of gravity the products turned into bombs to the world economy.

And this is typical for Newspeak, at the beginning the words had a meaning but when they became popular, the meaning was diluted and lost.

Please be politically incorrect in your firm!

In Nineteen Eighty-Four the government calls a thought that is against the common way of thinking a thoughtcrime. Thoughtcrimes are thoughts that are unorthodox and outside the dominant logic.

I want you to commit these thoughtcrimes in your firms. I want you to dig deeper when people use Newspeak. I want you to fight conventional wisdom. Conventional wisdom might be shared by the masses but is not necessarily true. Use your own sense and reason.

So if somebody uses the term core competencies ask him what competence he really means, ask him what consumer benefits the competence provides, ask him why competitors cannot easily imitate the competency and ask him if the competency can be leveraged widely across many products and markets. If he can answer all these questions clearly, well than the competency is really a core competence that is valuable and that should be nurtured and protected.

Our world of business model innovation is also full of words that many of us use meaninglessly. Business model in itself is such a word. We argue in strategies that we offer a great value proposition to our customers. And, of course, we are so unique. But is that the reality? Are the customers well acquainted with our unique business model or is it a great strategy plan we want to execute or is it just fiction with no support from reality?

Be cruel to yourself, the market is much harder!

Get real! Do not mix marketing talk with strategy!

Please, do not mix marketing talk with strategy. Marketing can be about pretending. Strategy and business modeling is not about pretending or self-denial. Strategy must be clear in language and free of Newspeak. The best is not to use words that are prone to Newspeak. The best way of getting a great business model is to answer simple questions with honesty and modesty:

• What job do you solve for your customers? What value or benefit do you offer to your customers? What excites your customers?
• How do you create the benefit/ value/ excitement for your customers?
• And how do you earn money with your business?

So the first question is about the value proposition (great example here), the second is the value architecture and the third is the revenue model. Simple! So simple is the definition of a business model. And below you find the business model canvas to describe your own business.

The business model canvas by Patrick Stähler

If you want to print the canvas, you find the pdf of the Business Model Canvas here.

And if you answer e.g. that your value proposition is to offer the best service in the industry, you have to be honest about your core competencies. Do they really support the best service? And don’t forget the culture. Do you have the right values and corporate culture to support the value proposition?

And please, do not claim that you are the lowest cost-provider with the best service. I won’t believe you unless you have a great value architecture to support that claim, but even then I would be skeptical because that would be a real disruptive business model innovation and they happen to happen rather seldom.

And please remember a great strategy is not something what looks great on a piece of paper. A great strategy what works in reality!

(photo: http://www.flickr.com/photos/duncan/ / CC BY-NC 2.0)

The question what  a good strategy is is difficult to answer. With hindsight it is easy: A good strategy is one that works. But in foresight? Many formulated, intended strategies are plain boring, generic and not customer centric, but focused on investors. Many business model innovators on the other hand have clear strategies that are focused on customers and on the value proposition.

Boring strategies

“We earn a premium on our cost of capital”

“We form the best team in industry”

“We help our customer to be more successful”

“We ensure sustainable development”

Have you found out which company has these pillars for its strategy?

Probably not. The strategy is so generic and interchangeable that it fits for almost any large company.

Are you attracted as a customer to this company?

Probably not, since so many companies claim to help customers to be more successful.

Does this spur emotions in you?

Definitely not! It is just plain boring!

How about this company: It claims that it is driven by “passion of success” that rests on “four cornerstones”: “superior brands”, “superior supply chain”, “superior talent in lean organizations”.

Do you know which company it is?

No, since it is so generic. It could stand for many companies in many industries. It is boring. It does not give the company any real purpose to exit.

Value centric strategies

So how about this:

“to organize the world’s information and make it universally accessible and useful.”

Do you think this is interesting for you?

Probably yes, if the company can fulfill its high aims.

Do you have any idea which company is behind this statement?

Probably, yes.

So how about this: “The [firms] Concept is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”

Interesting?

Yes, if you do not go for overpriced designer furniture.

Do you know the company behind it?

Yes!

All quotes are taken from the strategy section of the homepages of the corporations. So here is the solution.

Company 1 is BASF, one of the largest chemical companies of the world. Company 2 is Beiersdorf with its world-famous Nivea brand and with its daughter company tesa which produces the famous tesa tape (for Americans it is the European version of Scotch tape).

Company 3 you might have guessed is Google and Company 4 is IKEA.

You don’t win customers with your corporate strategy

Interestingly, all companies are well-know and have a record of success in their respective industry. But why did we think that the latter are inspiring and the former plain boring?

The latter are customer centric. These corporations put in their strategies customers first. Their business strategies focus on the value proposition to the customer. They describe what value they create for their customers and what makes them unique.

The former are corporate strategies that have an internal point of view and addresses investors and shareholders. The former are also good companies but their strategies are boring.

What can we learn from this?

• There are different layers of strategy in a corporation. All levels are important. Besides a corporate strategy, which explains which business the firm is in, business strategies must exist. In the business strategy it is where you explain your business model and try to find points that make you unique to your customers. Then the product strategies follow your business strategy. On top is the corporate strategy, then comes the business strategy and product strategy.
• It is the business strategy that makes you successful in the market place not the corporate strategy. You find customers not with the corporate strategy but with a great business model as the outcome of your business strategy! And remember Peter Drucker. For him the purpose of a business is to create profitable customers. A good business strategy is customer focused and explains the benefits in doing business with the corporation. A good strategy should not be generic but tangible for the customer. A good strategy explains your business model and what makes your business model unique for the customer.

Large corporations focused in the last years too much on their corporate strategies and forgot their business strategies. They entered new markets, bought new divisions with new businesses but too little focus was on the business aspect of the strategy of what makes the firm unique to their customers. In today’s recession the pendulum is back on business strategies since it is there where you earn money.