Feature Discussion: Business Model Innovation Killers

Every one to two weeks we will feature a new major business model discussion on the Hub. Hopefully we can mobilize all the brainpower, experience, and knowledge of the Hub members to have a high-quality discussion that helps us all advance.

We will kick-off the forum with a first question:

What are the most prominent business model killers in established organizations AND start-ups that you have experienced? What is holding business model innovation back?

Pls bring in examples from your own career or existing case studies to make the discussion as tangible as possible and not only opinion-based.

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Permalink Reply by Mike Lachapelle on February 25, 2010 at 1:08pm
In the government sector one of the toughest challenges to building innovation is transient leadership that have short term windows, as their performance is measured in 6 month to one year chunks. The very nature of government leadership is chaotic. Every time there is a change of government, rotation of ministers, or change of executive bureaucrats, deputy ministers (DM) or assistant deputy ministers (ADM), the focus and priorities of the organization are likely to change. As each new leader may come in with a new mandate, or the leader feels they have to change the direction to demonstrate they have left their mark on the department.

Creating sustainable innovation is, for the most part, a longer term prospect. There is a substantial engagement phase to build commitment and understanding. Then there is the analysis phase of the current business (which most often is starting from scratch with building the as-is model). Having completed that, one can move into the design phase of looking to the future. Government organizations are large beasts for the most part, and the building of momentum can take quite a while, particularly when innovation is such a new concept to them. But it doesn't end there, the new business model is of no use without an implementation phase. Some of the innovations may be quick hits, but often many will take a couple of years or more to fully implement. This whole time frame is where the clash between long term vision and short term leadership can happen.

Practical example:

I have written a few times about my adventures in creating a new business model for a government department of the federal government here in Canada. We enjoyed many successes and brought to them a few practices they had not used before - co-creation, business models, visual thinking. Well, here's where it went off the rails.

Our engagement and analysis phases (concurrent) took the better part of 8 months. We made presentations and demonstrated the process through case study business models from the DM down through 4 layers of leaders. We got commitment from the DM and ADM to look at a 5 year window. In the fall we began the design phase. Over the winter we took the prototypes across the country to the operations people for review and input. We were set to have leaders, in a strategic meeting, decide the future business model. Enter the new ADM.

When the new ADM came in, she felt we had spent far too long on one strategic initiative, the business model, and she wanted us to get it done and "out of the way" so we could move on to her priority. Reducing the number of transactions our operations people did by shifting the low level workload to other departments. We were told to finish the business model ourselves and present it as a finished product to the DIrectors General and the line directors. In the final session we were given 10 minutes to explain the new model and take questions. The natural result of that shift was we lost most of the momentum and commitment from the leaders. It became just another exercise that went nowhere as far as they were concerned. To our pleasure though, there was a small core of leaders who had internalized the business model innovation approach and implemented it within their authorities - to carry on the fight.

In the six months that followed, we were given enough space to create the strategy maps to implement the changes we had identified. At one point the ADM gave us a direction that we were not to use the term business model any more in our strategic discussions. "It has been done, and it is time you people move on to more important projects that we have to complete by year end." Over that period my work was shifted to a business case for new funding for the department.

I have left that job and moved on to another department with a new project to implement business model innovation. I am stubborn enough to try again. My understanding is my old bosses are biding their time until the ADM leaves (March 31) and they will try to renew the initiative with the new ADM. Meanwhile they are using the work as a foundation for other projects.
Permalink Reply by Kevin Donaldson on February 25, 2010 at 5:14pm
Some thoughts on this:

Large and Small
* Lack of Understanding of what 'business model' really means and a common framework to work from

Large Companies
* too many business models (different products, departments etc)
* who owns it
* make it out to be a bigger exercise than it needs to be



Startups
* Sense that its a 'big company' exercise
* opinions like: 'we don't need a business model', or we are to busy for this
* founder is a 'technician' and is focused on the product instead of the market problem
Permalink Reply by Ralf Lippold on February 25, 2010 at 9:24pm
For as I have seen so far the most eminent business model killer is:

the tinyness of a small prototype that doesn't generate huge revenues from the first moment!

Small is beautiful is a great saying. It only applies not too often in business reality.

Cheers and happy to have connected (found Alex' recent comment on Twitter)

Ralf
Permalink Reply by Ravila White on February 25, 2010 at 9:39pm
Two simple questions for which the answers may be complex. Based on experience, conversations and observations the success of systemic business modeling correlates to the learning type of the organization. In the states there is traditional and learning.

Traditional organizations make decisions and receive business education at the top leadership layers only. As the layers are peeled back, siloed business units and siloed interactions are revealed.

Learning organizations are a contrast in that they encourage all employees to participate in building and supporting an organization based on their role. It is about cohesion vs. separatism. At the base of learning organizations is Systems Thinking. Taking in a whole and understanding the connecting parts.

IMHO, business modeling success is defined when an organization embraces it from the top down. It does not mean that every employee must become an expert; however, each employee should be aware of which facet of business modeling they affect/support. Employees should understand the business model of the organization and what actions could impede the success of the chosen model.

Transparent conversations must occur with leadership to understand the culture and long-term strategy of an organization. The decision still may be to leave business modeling to leadership. However sharing the business model (i.e. make it visible) with the entire organization promotes cohesion. For learning organizations, the same questions may be asked. The difference is a plan can be provided to promote systemic integration of business modeling. Of course there is an associated cost and leadership must be convince and shown the ROI.

I pose a question to close. Is business modeling a one-dimensional task? It can be however, given today’s landscape of out-sourced and managed service providers I would suggest that business modeling is multi-dimensional. Multi-dimensional business models are not easily consumed; a tiered business model may be better understood. For any organization, there is the master business model. Then there is the traditional (static) business model (e.g. Operations: finance, HR, facilities) and the innovative (dynamic) business model (e.g. marketing, customer segment, IT). The innovative business models must feed into the master business model. As an organization matures, the traditional business model should mostly be on ‘auto-pilot’ with periodic bench marking. The innovative business models will continue to evolve and shift to adapt to customer requirements, market share and competitors.
Permalink Reply by Larry McManis on February 25, 2010 at 9:41pm
My opinion, and I could be wrong about this, is that often in larger more established organizations senior leaders responsible for business model innovation fear what I would call the "career risk" associated with the fundamental changes innovation would imply. It is presumed safer for a leader's career to continue the status quo than to risk the potential for presumed catastrophic failure associated with significant change. I would also suggest that that is why most major innovation or change to business models is often driven by leaders new to the organization who are often given a "reset" of business objectives with the opportunity set a new course and also new startups who have less to lose and much to gain by innovation.

A second factor I see holding back business model innovation is lack of knowledge. Many businesses do not have an understanding of business models or the language and skills to affect business model change. To this second point, I see Alex Osterwalder playing a very important role in providing keen insight and a well thought out approach to the topic and I am very appreciative of his work.
Permalink Reply by Stephen Walli on February 26, 2010 at 7:14pm
I spent 1999-2004 in Microsoft. Any thing new was constantly attacked as not relevant compared to the primary cash streams of Windows and Office. This wasn't as simple as "we don't do business that way." This was because the systems and processes in the organization had evolved to exactly continue driving and protecting their successful revenue streams. There was also the problem Mike Lachapelle mentions: a lot of people switched jobs every 18 months. This was part of the culture (like Google's 20% rule) so as to keep people "fresh" and "challenged". It means, however, consistency and long term vision and change are really difficult to enact.

I've also been involved in a few start-ups. Certainly my first, from 1995-1999 was beset by problems we created for ourselves by not thinking about the business model as a whole connected system with the company as an "implementation" of the model. We knew what we were doing. We were funded so we didn't have the natural feedback of revenues to see what we should tune.

I'm an enormous fan of Christensen's work. The first two books describe lots of examples of systems successful companies put in place that would prevent business model evolution. The Innovator's Dilemma is a bit academic to read, but invaluable. The second book, The Innovator's Solution is brilliant at demonstrating how successful companies rightly get in their own way.
Permalink Reply by Deborah Mills-Scofield on February 27, 2010 at 3:29am
In my experience working in both established companies and start-ups, in having clients at both ends of this spectrum, and as a partner in an early-stage Venture Capital firm (which all shape my viewpoints), here’s my take:

Established Organization:
- Products/services are perceived as easier to prototype and trial than a business model so perceived to be less risky
- Current management is more ‘comfortable’ with a failed launch or execution of a product or service – it’s more ‘socially/professionally’ acceptable and can be more easily ‘contained’ whereas I think biz model failure is perceived to be more widespread, not as easy to contain and more profound and damaging in terms of risk to corporate brand, revenue and profits.
- Lack of understanding of biz model innovation – I hear, “oh, that’s just marketing” a lot – they think it’s either learning to market to different customer segments or it is a pricing strategy – just ‘jargon’
- Not a ‘tried and true’ way to innovate so it can be a ‘bet your career’ type of move because one is challenging so many aspects of the business instead of 1 discreet, well understood aspect
- Structurally, most companies that are organized by function don’t have a ‘function’ for this so who owns it? Who’s ultimately accountable and responsible? How would they ‘handle’ this? It doesn’t fit nicely and neatly – which is part of the problem and part of why they don’t get it

Start-ups:
- Some of the same issues of the bigger companies in terms of thinking business model innovation is really marketing or pricing
- If technology-based start-up, the CEO is usually the techie so s/he may have trouble with many of the business aspects, not just biz model…this is a typical problem with startups – the ‘innovator’ isn’t the person to run the biz, but try telling him or her that (sometimes you can, and sometimes they see it)
- Many do get it, but then don’t have the patience to stick with a business model long enough to let it play out and succeed; sometimes this is because they really need the revenue, either to fund the biz, to meet milestones from investors, to raise more capital, or to court buyers.
Permalink Reply by Stephen Walli on February 27, 2010 at 8:51pm
Excellent point on not having the patience to stick to the model. A failure of ours in the late nineties was very much in this vein. We tried a number of strategies to get over the "chasm". Our VC laden board would beat up the VP Sales at board meetings, who would put the pressure on the sales team, who would pursue anything that looked like an opportunity rather than sticking to the model. Then the next board meeting. Rinse. Repeat.
Permalink Reply by Deborah Mills-Scofield on February 28, 2010 at 9:48pm
Being a partner in an early-stage VC company, it's really important to very thoroughly analyze the biz model before investing - not that you can ever really predict or know, but you can ask a ton of questions to try to vet it as thoroughly as one can. Then, once invested, it's important to monitor progress and keep questioning the underlying assumptions - especially if the company's product/service is disruptive - and to have patience. It's not for the faint of heart or the invest and flip types
Permalink Reply by Ralf Lippold on February 28, 2010 at 10:31pm
Hello Deborah,

Yes you are right investing a lot of money into a startup has risks.

The question however is "how to minimize the risk in order to get the startup lifting off?" What small steps can be funded in order to make the dynamic growth of the startup possible.

A lean startup is what comes to my mind. We practice this approach with setting up a CoWorking Space in Dresden, Germany. There is no need for large investment, especially as the concept is mainly based on intellectual property and knowledge working. BUT there is of course not much gaining in the beginning as the project is small as a "baby".

Interested in what you think of that.

Best regards, Ralf
Permalink Reply by Deborah Mills-Scofield on February 28, 2010 at 10:43pm
Exactly! That's why we usually take a staged investment approach - and since we're early stage (after friends/family/angels but before the 'big guys'), we will invest a few hundred thousand dollars, with some milestones and then review before we put in more - the staged investment process does mitigate risk. Many of the deals we see are 1-3yrs old and there is usually proof of concept (perhaps even some small sales) and proof of market - the key is marketing and sales and that's where we see most start-ups having trouble - their approach to the right market(s).

There have been some instances, tho rare, where it's so obvious that the company will take off that we will invest more up front, but in most cases, we usually monitor the deal(s) carefully - and notice how much I used the word 'usually' - we do have exceptions. In all, tho, out of 14 deals we've done in 4yrs, only 2 have gone belly-up - 1 of which we shouldn't have done at all but did. What does this prove? We know what we're doing? We're lucky? Both (probably more the latter!)
Permalink Reply by Petrick de Koning on February 28, 2010 at 9:32pm
I saw this one on HBR. Not my own but still interesting in this context I think. http://blogs.hbr.org/anthony/2010/02/want_to_kill_innovation_keep_a...

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