Two Great Innovation Misquotes
Posted by Tim in book riffs, design, evolving economic entities on 27 January 2012
There are two popular quotes that often get used when discussing innovation that were never actually said or written by the people to whom they are attributed. Despite the fact that they are fake quotes, there are still things that we can learn from them.
The first common quote is attributed to Henry Ford:
If I had asked people what they wanted, they would have said faster horses.
This quote usually comes up when people are discussing focus groups, or design-driven innovation. However, there’s no evidence that Ford ever said or wrote it.
Even though it’s not a real quote, it raises some interesting points. You can interpret it as meaning “you should ignore customers,” or some people even seem to think it means “customers are stupid.”
But that’s not really what it’s saying at all. People do have limited vision if you ask them open-ended questions. And as innovators, our job is to invent the future. Nevertheless, there is useful information in the faster horses idea.
If people really had told Ford that they wanted faster horses, what would that mean? If you frame it in a jobs-to-be-done way, it means that the main job that they’re trying to do is to get somewhere fast. That actually is a pretty good argument in favour of automobiles.
In his HBR post on this topic, Patrick Vlaskovits sums up the issue well:
An innovator should have understanding of one’s customers and their problems via empirical, observational, anecdotal methods or even intuition. They should also feel free to ignore customers’ inputs. Because by now it should be clear that Ford’s adherence to his vision of the mass-market car and how to materialize that vision was instrumental in both his early success in growing Ford Motor Company as well as his later failure to respond in a timely and effective manner to rapid innovation in the marketplace.
The real lesson learned was not that that Ford’s failure was one of not listening to his customers, but of his refusal to continuously test his vision against reality, which led to the Ford Motor Company’s failure of continuous innovation, resulting in a catastrophic loss of market share from which it never recovered.
So the quote is useful, even if Ford never said it.
The second quote is a bit more problematic – this one is frequently attributed to Charles Darwin:
It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.
As with the Ford quote, Darwin never actually said or wrote this (he never wrote “survival of the fittest” either – that was Herbert Spencer building on Darwin). This one is a bit more problematic too, because it is actually a major misinterpretation of Darwin.
Consider the Large Ground Finch, one of the species from the Galapagos Islands described by Darwin:
In a remarkable research project that has spanned nearly 40 years now, Peter and Rosemary Grant have studied the evolution of Darwin’s Finches in the Galapagos (the work was beautifully described in The Beak of the Finch: A Story of Evolution in Our Time
Here is their key finding. When times are good, there is wide variation in the beaks of the finches. However, the Galapagos are subject to the El Niño/La Niña weather cycles, which means that they have frequent droughts. In times of drought, the finch populations dive. In the case of the Large Ground Finch, the individuals that survive these events have the biggest beaks. Why? Because the bigger beaks enable them to crack larger seeds, which would be ignored as too hard to crack when there are plenty of seeds around.
In other words, it is precisely the strongest of the species that survives.
The fake Darwin quote is completely wrong with regard to which individuals survive. But it might tell us something about which species survive. The reason that Large Ground Finches have been around for as long as they have is that there is enough variation in the species that whenever conditions are extreme, some individuals in the population will be able to adapt to the change.
If we apply this to innovation, you might think of it this way: products are like individuals and organisations are like species. To do well, products need to be the best at getting some job done for some group of customers.
However, for an organization to do well over time, it needs to be adaptable. This means that unless its environment is unusually stable, it needs to generate variety. Even though economic evolution is directed by the choices that people make, we still don’t have much control over which ideas work and which don’t. Or over which take off, and which never really click.
To maintain variety, to improve responsiveness to change, we must experiment.
Why have these two quotes become so widespread? It’s not the internet – both incorrect attributions were made in books. Both quotes are catchy and short, and they capture ideas that seem like they reflect what Ford and Darwin thought. Even though the Darwin quote is not very Darwinian, it reflects a very common misinterpretation.
The catchiness is one thing, but also, we like to argue from authority. If we don’t want to run focus groups, it’s easier to get Henry Ford to make the argument than it is for us to do it ourselves.
I wanted to think through these quotes for a couple of reasons. One is that they do offer some useful lessons. The second is that we need to figure out how to make compelling arguments ourselves. This is the key to getting our own ideas to spread – not by arguing from authority.
(The superb Large Ground Finch photo is from flickr/Steven Bedard under a Creative Commons License)
Please Reinvent the Wheel
Posted by Tim in innovation on 26 January 2012
How often have you heard someone say something like “No need to reinvent the wheel”?
It’s such a common phrase we don’t even think twice when we hear it. The thing is, a lot of the time there is a huge need to reinvent the wheel.
If we didn’t reinvent the wheel on a regular basis, we’d be driving using cars, bicycles, wheelchairs, shopping trolleys, vacuum cleaners, and an almost infinite number of other things using wheels that look like this:
That wouldn’t be so good.
If we never reinvented the wheel, we wouldn’t have things like the Osmos Orbital Wheel:
In addition to looking really cool, the Orbital Wheel has significant advantages over regular wheels in performance, reliability and safety.
Clearly there are good reasons to reinvent the wheel. How do we know when to do so? Here are some guidelines for wheel reinvention:
- Innovate in Your Core: you don’t need to be good at everything. In response to this statement “Leading practice companies need to follow leading practice for water management,” one of our research partners once said:
I disagree with that. Leading practice companies can’t be leading practice in everything. They need to be leading practice in the things that are critical for them, but for everything else they just need to be fit-for-purpose. For example, I don’t want to be leading practice in payroll – there are other people that I can outsource that to – we just need to be fit-for-purpose.
It’s probably smart to avoid reinventing the wheel in the parts of your operation that just need to be fit-for-purpose. However, in the operational activities that are critical, it can be highly profitable to reinvent the wheel. This is where new business models often originate.
- Explore related areas: a lot of fruitful wheel reinvention has come from looking at how the wheel might be applied in related areas. That is how we ended up using wheels in all of their various applications. This is what Steven Johnson talked about as “exploring the adjacent possible” in Where Good Ideas Come From: The Natural History of Innovation.
Saul Kaplan has expanded this idea very well in a number of posts. Here he discusses how to create space for wheel reinvention:
The trick is to explore and test new models while at the same time continuing to live within current ones. This requires establishing adjacent innovation platforms with the freedom to explore new ways to create and deliver value, especially approaches that are disruptive to the current model. Adjacent innovation platforms must have the freedom to experiment with different rules and financial models. Connected adjacencies require senior leadership sponsorship, support, and protection or they will fail. They must be free to recombine and connect capabilities in new ways unconstrained by the existing organization. Those working in the adjacencies must be empowered to borrow and flexibly deploy capabilities and technologies from inside and outside the organization in novel ways.
- Find areas of poor performance and innovate there: if you look at where the Osmos Orbital Wheel is being used, it is showing up primarily in racing applications. This is where its performance advantages show up the most. A lot of important wheel reinvention happens at the extremes – when we are trying to meet the needs of the most advanced (or the most reluctant) users.
I’m pretty happy that I’m not using crude wooden wheels everywhere these days. Reinventing the wheel is how we move forward. In many cases, the biggest innovations are not completely new ideas, but rather something that already exists being repurposed. That’s what reinventing the wheel is all about.
So by all means, please reinvent the wheel.
Three Signs of Business Model Innovation Opportunities
Posted by Tim in business models, evolving economic entities on 25 January 2012
How can you tell when there is an opportunity for business model innovation?
Recent events in higher education might give us a good indication.
There are a few issues in university education these days. The main one is that education is information based, and over the past 20 years we have seen nearly every single business model based on control of scarce information get disrupted. This has played out dramatically in the U.S.A. recently with the battle over SOPA/PIPA.
There are three signs that the business model for higher education provides real innovation opportunities right now. These probably apply to any industry approaching an inflection point:
- Everyone starts asking if your business model is broken: people like David Tapscott and Seth Godin have started talking about problems with the higher education business model. Questions have started to come from the inside too – David Parry and Joshua Gans have both discussed this issue recently. Clayton Christensen has even written a book on it.
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Where’s there is smoke, there’s usually fire.
- Business as usual stops working: there are plenty of things that are currently broken in higher education. I’m lucky in that things in Australia are better (for now) than most everywhere else. But the trends are unmistakable. See the infographic at the bottom of the post from OnlinePhD for details.
Budgets are getting cut everywhere, it’s hard to find new staff, the journal publishing industry is under pressure, everything on the delivery side is looking a bit shaky. These are all signs that the higher education business model is under pressure.
- Everyone starts experimenting (except for the incumbents): there are experiments happening all over the place:
- The post by Josh Gans talks about the alliance between Khan Academy and Vi Hart. Both have been testing out new ways to deliver material on video. Here is what Gans says about the alliance:
The fact that these two are getting together demonstrates something important regarding online education. Experiments are happening and the successful ones are complementary to one another. In particular, both Kahn and Hart have evolved a particular style of video instruction. It is a style that removes the lecturer from the picture. Previous videos for educative purposes did not do that.
…
There are people out there, for the most part far removed from traditional education, who are experimenting and working out how to make modular, compelling content that can free teacher time. They are finding each other and that is great news for the future.That is great news for the future – but it might not be for universities.
- Apple is trying to reinvent textbooks – a part of the business model that rarely even gets mentioned when people discuss problems in higher education.
- There are lots of experiments with massive open online courses. George Siemens, one of the pioneers in this area, talks about the big news this week, which is the foundation of new group that will do precisely this. The group is called Udacity, and it was put together by Sebastian Thrun, who ran a big open course at Stanford last year. It was wildly successful.
His response to that success: “I can’t teach at Stanford again.”
Even the experiments that take place inside of universities aren’t staying there.
Experiments are a key part of innovation, and that is how we find out what works. New business models in higher education will come about through experiments. And the people that do the experiments will have a lot of impact on what the new business models look like.
If you were a university right now, wouldn’t you want that to be you?
- The post by Josh Gans talks about the alliance between Khan Academy and Vi Hart. Both have been testing out new ways to deliver material on video. Here is what Gans says about the alliance:
Our job is to invent the future. When you start to see questions about what that future should be, major problems with business as usual, and a sharp increase in experimentation, that is a sure sign that there is a big opportunity for business model innovation.
If you’re in higher education, now might be a good time to start trying to shape that future, instead of letting the future happen to you.
Created by: Online PhD
Innovation Mistake: Thinking Tools Will Fix Your Problem
Posted by Tim in book riffs, The Innovation Matrix on 24 January 2012
I had lunch a while back with two executives from an organisation that the Business School does a fair bit work with. They wanted to improve innovation and that’s what triggered our meeting.
We talked for a couple of hours about what was happening in their organisation. We talked about innovation as a process, the different forms of innovation, incremental versus radical – all the big topics. It seemed like we were making some progress towards figuring out how we might be able to work together.
Then at the very end of the lunch, the one that’s actually in charge of innovation there leaned over and said “Look, just tell me what piece of software to get and I’ll get it.”
I was dumbfounded, because it had seemed as though we were on the same wavelength. However, theirs is a common innovation mistake: thinking tools will fix your problem.
They won’t.
Tools are great, but to fix an organisational problem, you need to figure out how tools interact with people and processes. If you don’t address all three, you won’t fix your problem (see for example, this, this, this and this).
This is where The Plugged-In Manager: Get in Tune with Your People, Technology, and Organization to Thrive
Griffith is an expert on organisational design, and her book is very useful. She talks about how to integrate people, processes, and technologies. Her definition of a plugged-in manager is one that is able to perform this integration successfully.
The guys that I was talking with were connected, but not plugged in.
Here is how Griffith describes plugged-in managing:
… organizational success more likely occurs when all three critical dimensions – technology, organization, and human capabilities and dimensions – are taken into account concurrently. There are no silver bullets. Even excellent management actions, if restricted to a single dimension, can never have the same success as when all three dimensions are managed together. Fredrick Brooks, summarizing the issues in a classic 1986 article, notes “There is no single development, in either technology or in management technique, that by itself promises even one order of magnitude improvement in productivity, in reliability, in simplicity.
And here is John Hagel in the forward to the book:
In a world increasingly entranced with technology, this is a powerful antidote to the claims of technology evangelists who attribute miraculous powers to their favorite new technologies. The truth that Terri’s book drives home is that technology in isolation is useless and perhaps even dangerous. Only by integrating technology effectively into a specific social and business context can we release its latent power.
If Hagel likes the book, you probably don’t need my recommendation on top of it. Nevertheless, I will say that it is well worth reading, particularly the second half, which is filled with outstanding case studies of how to make this work. There is also a quiz to test how plugged-in you are, which you can also take online.
This interaction between technology, people and process is a big part of what I am trying to get at with the innovation matrix. Technologies usually come into the innovation process as part of an increasing commitment to innovation. This is why I was having lunch with those guys, and that is why they wanted to know which technology to use.
However, the skill at actually executing ideas comes from people and process. In order to improve innovation, you have to both increase your commitment to it, which often includes adding tools, but you also have to improve your processes and the skills of your people. You have to move up both dimensions of the innovation matrix.
Tools don’t solve innovation problems, people do. You can use the principles of plugged-in management to integrate tools, people and process more effectively. Doing this will help you avoid a common innovation mistake.
Disclaimer: I know and like Terri, and I received a free copy of the book. I also bought my own copy. I’m writing about the book because of its quality, not because of who wrote it or how I got it.
(Photo from flickr/AndyArmstrong under a Creative Commons License)
Tools Should Be Invisible
Posted by Tim in business models, design on 23 January 2012
What is the most common mistake that I see when people try to implement management tools or frameworks?
By far the most common is mistaking using the tool for getting the outcome you are looking for.
I have been doing some consulting work recently where we are using the Business Model Canvas to develop a strategy for an engineering group inside a large organisation.
Read my previous post about this for a full description of the project. Today I want to focus on one particular part – the four ideal models that we built, and a tool that we used to conceptualise the models.
There are a couple of dimensions along which these models vary. In a couple of them, the team is responsible for identifying the problems to address, while in two others the they are working to specification as the problems are defined for them. The other source of variation is project management: how much of the solutions development process should the team be responsible for?
Manny and I took these two dimensions and mapped out the four possible roles for their Bespoke Solutions Team (BST). Here is the map:
In each quadrant, there is an indication of the project management responsibilities: I1 = problem identification, I2 = solution development, I3 = solution delivery to customers.
Last week, Manny made a revised version of that map. When he showed it to me, he said:
“I took out the I1, I2 and I3 indicators because they just seemed to confuse people.”
He was apologetic when he said because when we thought of that model, it gave us great insight into the project. But dumping it from the presentation that we give to people inside of the firm was exactly the right choice.
Here’s why.
This is a bed that my Dad made for me and Nancy as a wedding present:
He’s a very skilled woodworker, and the bed is gorgeous. But when he first finished the bed and brought it down to us, he didn’t set a saw on top of it to show us that he used that tool to build it. You can tell a fair bit about what he used just by looking at the final item. And in fact, the bed itself is what matters, not the process he used to put it together.
It’s the same with management tools. When you use tools, the important thing is the outcome, the conclusions that you reach and the actions that you take as a consequence. We don’t need to see the tools to understand that you’ve done good work.
Our I1,I2 & I3 construction was a very useful tool in developing the business models that their BST might adopt. It helped us identify the capabilities that they will need to have in each of the four scenarios we have sketched out.
But the important outcome will be the model that they decide to adopt, and the path they map out to build the skills that they need to execute this model. Even more important will be the business results that they obtain as they execute this model.
Don’t mistake the tool for the desired outcome. That’s mistaking the map for the territory.
Instead, figure out the outcome that you want first. Then think about what people and processes you need to achieve this, and identify the right tools to support your people last.
If you do this, your tools will be invisible. And that’s as it should be.
Lessons From Kodak’s S-Curve Problems
Posted by Tim in complex systems, time on 20 January 2012
With Kodak in big trouble this week, a lot of people have been reflecting on what went wrong. While many are using this an opportunity to talk about bad management, or missing the digital photography trend, I think there’s more to the Kodak story than this. Kodak’s problems illustrate two very important innovation problems.
The first is that new innovative new ideas diffuse much more slowly than we expect them too. This causes problems when you have to respond to a new competitive innovation.
Larry Keeley has written an excellent post about Kodak, and he says:
The demise of Kodak isn’t merely the classic disruption story that everyone loves to tut tut over. Nor is the company’s downfall merely a result of recent bad decisions or the mismanagement of senior executives. It is the more nuanced story of how easy it can be to get things wrong, even when trying with the best of intentions to do everything right. It’s a cautionary tale of the need for deeper understanding of what innovation really means, and how it is infinitely more vital than most people think it is, even as it isn’t about any single product or widget or technology.
Kodak knew all about the impending disruption of digital technology. As many have noted, they own the primary patents on digital photography and built one of the world’s first digital cameras in 1975. As The Economist reported recently, a report circulated among senior executives in 1979 detailed how the market would shift permanently from film to digital by 2010. This disruption was no surprise.
Here is an illustration of the problem:
Innovations diffuse following an S-Curve, and this causes problems. When a new innovation is really hyped, people expect it to follow diffusion Curve A – where at the end of time X it has taken over the market. The problem here is that the value for X is usually much higher than we expect, but more importantly, once you get through that time, you have only gotten to the point where the innovation is starting to take off.
If the expectation is that the innovation should have taken over the world at after time X, but it has actually grown slowly, then there are three possible future paths. The innovation could die, and people often assume that this it what will happen if it hasn’t taken over the world yet – that is Curve B. Many people are talking as though this is the mistake that Kodak made – that they discounted the potential of digital.
However, the real problem is trickier. As Keeley points out, they were fully aware of the potential of digital photography. It wasn’t that they ignored it. The problem was that they thought it would grow in a slow, straight line, like Curve C. This mistake is incredibly common.
The first lessons from Kodak’s demise are:
- New innovations take longer than we expect to become dominant, but when they finally take off, they move fast. Never assume that an idea will diffuse along Curves A or C – that never happens. Curve B is possible, and so is the S-Curve. Figuring out which is most likely is hard, but that’s what you need to focus on.
- There are no straight lines in business. If you ever find yourself making a projection like Curve C, you are almost certainly wrong. Be cautious of this, especially if this projection suggests that you have a long time to respond to changes.
Heres the second issue: performance also improves following an S-Curve. Disruptive products (P2) replace existing ones (p1) in a pattern like this:
This is the Innovator’s Dilemma. New innovations start out with lousy performance. They are crappy. If you’re a dominant firm on the P1 Curve, and you correctly predict the shape of the new curve, the question then is: when do you jump to P2?
Consider this from Adrian Wooldridge in The Economist:
Like Kodak, Fujifilm realised in the 1980s that photography would be going digital. Like Kodak, it continued to milk profits from film sales, invested in digital technologies, and tried to diversify into new areas. Like Kodak, the folks in the wildly profitable film division were in control and late to admit that the film business was a lost cause. As late as 2000 Fujifilm counted on a gentle 15 or 20-year decline of film—not the sudden free-fall that took place. Within a decade, film went from 60% of Fujifilm’s profits to basically nothing.
If the market forecast, strategy and internal politics were the same, why the divergent outcomes? The big difference was execution.
Fujifilm realised it needed to develop in-house expertise in the new businesses. In contrast, Kodak seemed to believe that its core strength lay in brand and marketing, and that it could simply partner or buy its way into new industries, such as drugs or chemicals.
In other words, Fuji jumped onto the P2 curve early, while Kodak figured that its core competencies would allow it to jump to the P2 curve right around time TC – right when digital started to outperform film. Mike Ryall taught a lot of Kodak execs in his MBA classes, and this is how he describes their thinking:
Why were they so optimistic? When challenged to discuss it in class, they proudly explained that Kodak’s “core competency” was “color”. The reasoning went something like, “We understand color and its application to photography better than any other firm. This knowledge will be as important for success in digital applications as it was in analog film. Therefore, we are wonderfully positioned for whatever challenges the market presents.”
Simon Waldman’s book Creative Disruption: What you need to do to shake up your business in a digital world
Newspapers, music retailers, book publishers etc are all used to operating in a market with a lot of businesses that are essentially clones of each other [in terms of overall cost and revenue structure]. This is what ‘competition’ means to them. It is a world away from the sort of asymmetric warfare involved in dealing with a new, disruptive force – which will initially seem too small to even bother with compared to your traditional rivals. [eg: Craigslist vs Big Newspaper Co/ Play.com vs HMV/ Netflix vs Blockbuster]
He contends that Kodak was so busy fighting Fuji in the 80s and 90s that they seriously underinvested in digital. They just figured that they could jump onto the P2 curve when the time was right, using that core competency in color.
Scott Anthony comes up with two more lessons in this:
Start before you need to. … The challenge — what I call “The Innovator’s Paradox” — is when you have the freedom to change, you don’t feel the urgency. For example, in the early days of Kodak’s disruption, its core film business actually was growing. A lack of urgency allows a company to treat new growth efforts as science experiments that are academically interesting but not vital activities. However, once the urgency grows, freedom narrows rapidly, as attention goes to staunching the bleeding in the core business.
Place multiple bets. It’s always hard to know which idea is going to be “The One,” especially in fast-changing industries. An ideal response involves a portfolio and pipeline of growth strategies — again, started early enough that they have time to iterate, incubate, and grow.
The bottom line in all of this is that responding to innovations that disrupt your core business model is incredibly hard. You need to invest early, you need to have a clear idea of how you will compete in the new environment, and you have to have a reasonably accurate map of how the new innovation will disrupt your current products and services.
Having a good understanding of the innovation diffusion S-Curve will help with all of these steps.
How Apple Disrupts Markets and then Goes on to Dominate
Posted by Tim in innovation on 19 January 2012
By Greg Satell (mostly) and Tim Kastelle
The Three Horizons Model
A good lens for understanding how Jobs innovated is the three horizons model. This tool is designed to help you manage a portfolio of innovations that will have an impact over three different time frames.
When you innovate using the three horizons model, the first horizon involves implementing innovations that improve your current operations, horizon two innovations are those that extend your current competencies into new, related markets, and horizon three innovations are the ones that will change the nature of your industry. In general, H1 innovations tend to be incremental, while H3 are more often radical innovations.
You must have innovation efforts aimed at all three time horizons. If you only look at the exciting transformative H3 innovations, you’ll lose business to current competitors who are using incremental innovations to improve their operations. Consequently, you might have the best ideas for the future, but you’re no longer around to execute them.
On the other hand, if you only focus on H1 incremental innovations that make your current business better, you’ll end up being replaced by organisations that are driving disruptive innovations in your field. Using the three horizons framework helps balance innovation efforts between incremental and radical, which is important.
However, maintaining a balanced portfolio does not mean that you put 1/3 of your effort into each horizon. For example, Google uses a 70/20/10 split. About 70% of their innovation time and money goes into making them better at what they currently do, 20% goes to extending into new markets, and 10% aims at developing entirely new markets.
10% Blue Sky Projects
Every new Apple product started the same way. Jobs would see something crappy and want to change it. After he returned to Apple and launched the iMac, he looked at digital music players, concluded that they “truly sucked” and decided to do something about it. He envisioned 1000 songs in your pocket.
There was, however, a rub: the technology did not exist to do it (which is why music players were so sucky in the first place). His engineers cobbled together a suitable screen and battery, but couldn’t find a disc drive small enough. A while later, on a routine trip to Japan, one of his engineers came across a 1.8 inch disc drive that Toshiba had under development.
It was just the thing. Small enough, with a 5GB capacity or just enough to fit 1000 songs. Then came the design, the flywheel and the interface – all things that played to Apple’s strengths. The rest, and the breakaway success of the iPod, is history.
It was a pattern that was to be repeated time and again: Look for something sucky. Figure out what wouldn’t be sucky (i.e. 1000 songs in your pocket) and then work on technical specifications. Of course, he could have launched the iPod sooner with a standard disc drive, but then it wouldn’t have been “1000 songs in your pocket.”
20% Look at the 4 Forces
As his biographer, Walter Isaacson pointed out, Jobs revolutionized 7 industries: personal computing, animated movies, music, tablet computing, digital publishing and retail. Yet, no one considers Apple a conglomerate. In fact, most consider it to be a very focused company. The reason is that its expansions are into adjacent markets.
What’s an adjacent market? Take a look at Porter’s 5 forces framework:
What makes Apple such a dangerous company is that they are fearless in turning the arrows outward.
They didn’t worry about Post PC computing devices like phones and tablets invading their Macintosh environment, they invaded those spaces instead. They didn’t worry about music companies giving them lousy deals, they built their own environment. They didn’t whine about the retail environment their wares were displayed in, they revolutionized the space.
It should be mentioned here that Apple isn’t always successful in this regard. Their heavy handedness in demanding 30% of subscription revenues from magazine publishers appears to have flopped and their iAds program has suffered from high prices and poor service. Nevertheless, their hits have greatly outshone their misses.
70% – Focus on Your Business
When Jobs returned to Apple, he didn’t look first at how he could change the world. That came later. First, he killed most of the products they were producing so that he could focus on improving operations. He innovated not with breakthrough new products, but focused on the core desktop market that had fallen flat.
One thing that often gets overlooked is Apple’s incredible track record in operations since Steve Jobs’ return. They not only dream up the next big thing and come up with breakthrough products in adjacent markets, they are also a low cost producer. That’s an incredible combination.
And it didn’t just happen, but is an indication of how much focus they put on operations. After all, it was operations maestro Tim Cook who replaced Jobs, not design genius Jony Ive. That focus on pays off not only in lower prices and higher margins, but also in their ability to improve their products significantly with each generation.
Those improved products increase scale, which improves their negotiation leverage with suppliers, which leaves room to add more features at lower cost and on it goes.
Innovative Discipline
The three horizons model is pretty simple, which begs an even simpler question: Why doesn’t everybody do it? The answer is discipline.
Jobs wanted to launch a tablet computer years before he actually did, but chose to do the iPhone first. He realized that he couldn’t do both. In other words, he limited the 10% to 10%, even if he wanted to do more. He never attacked more than one adjacent market at a time and kept the company focused on improving existing products, even though it was the new ones that got the headlines.
Further, he resisted calls to use Apple’s enormous cash hoard to make a major acquisition and kept breakthrough new products under wraps until they were ready to launch. His focus wasn’t on useless headlines or accolades, but focused on making products that didn’t “suck.”
And that’s the crux of the three horizons model, that business innovation is a business activity. While we would all like to dream up the next big thing, unless we’re focused on our core market, we won’t be able to support breakthrough innovation. If we don’t look beyond our direct competitors, we we’ll always be beholden to industry ups and downs.
Three Mistakes We Make With Models
Posted by Tim in book riffs, business models, innovation on 18 January 2012
Imagine that you live in Australia and you would like to eat a good, genuine bagel. After fairly extensive research, I have discovered that there are two places that you can go. One is called Bagel Nook, and it’s here in Brisbane. Not many people know about it, and one of the reasons is that it’s really hard to find.
Here it is on a map:
Here’s why it’s hard: it’s address is Creek Street, but you can’t actually reach it from Creek Street. To get to Bagel Nook, you have to go down that tiny little laneway that comes off of Adelaide Street. It’s a classic example of the map not being the territory.
The other place in Australia with good bagels is Glicks in Melbourne. It’s also on a tiny hard-to-find street, so to get there you need an equally detailed map.
Now, imagine making an Australian Bagel Road Trip and travel from Bagel Nook to Glicks. If you start with the map with Bagel Nook, and stick with maps of that scale, you’ll need roughly 8,335 pages to cover the trip that you’ll take.
That’s no good. Instead, for most of the trip, this map is what you need:
Maps are models, and we use models all the time to help us understand the world. We use models of roads to help us get around. We use models in science to help us understand physics, the way that economies work, and many other things. John Kay makes a good point about how we use models:
All science uses unrealistic simplifying assumptions. Physicists describe motion on frictionless plains, gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. To put such models to practical use, you must be willing to bring back the excluded factors. You will probably find that this modification will be important for some problems, and not others – air resistance makes a big difference to a falling feather but not to a falling cannonball.
Our use of mental models is so ubiquitous that we’re often not aware of using them at all. However, we can use the Australian Bagel Road Trip and the quote from Kay to look at three common mistakes that we make with models:
- Using the wrong scale: just as we need a map at the right scale to get from Bagel Nook to Glicks, our business mental models also need to be at the right scale.
In her excellent book The Plugged-In Manager
Terri Griffith talks about the thought process that a manager goes through in making the decision to start using the cloud for some of their computing functions. She talks about how to make this decision, you have to think about how the technology, your people, and the organisation’s processes interact.
But it’s also important to have a good model of how cloud computing works. And this means having a model at the right scale. For most managers, you don’t need a hugely detailed model that includes servers, packet-switching and communication protocols. That’s the wrong scale – too small. But you do probably need to have a model that includes issues like back-ups, security and mobile access.
If you use a model that is the wrong scale, it will be very hard to make good decisions. That’s the first mistake to avoid.
- The map isn’t the territory: even if you have the map for Bagel Nook, it’s hard to find it. You need to be on the ground to figure out to go into that little laneway.
Mistaking the map for the territory is a huge problem in business. Roger Martin addresses this in his book Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL.
Martin talks about the difference between the real market and the expectations market. In the real market, firms make and sell real goods and services, and their performance depends on how effectively they do this. The expectations market is the stock market – and here, a stock is a model of how the firm is expected to do.
Steve Denning talks about the implications of mistaking the expectations market (map) for the real market (territory):
“Maximizing shareholder value” turned out to be the disease of which it purported to be the cure. Between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990 , CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.
Meanwhile real performance was declining. From 1933 to 1976, real compound annual return on the S&P 500 was 7.5 percent. Since 1976, Martin writes, the total real return on the S&P 500 was 6.5 percent (compound annual). The situation is even starker if we look at the rate of return on assets, or the rate of return on invested capital, which according to a comprehensive study by Deloitte’s Center For The Edge are today only one quarter of what they were in 1965.
In other words, mistaking the model for reality has destroyed shareholder value, the opposite of what was intended. We always have to be aware of the models we’re using, and ensure that we’re managing the reality, not the model.
- Using the wrong map: a lot of people contend that a significant cause of many of the recent stock market crashes has been the use of incorrect models. That’s the fundamental issue that Nassim Nicholas Taleb keeps trying to get people to acknowledge. His contention is that the market models in use have vastly underestimated the probability of large price fluctuations. Consequently, when these fluctuations do occur, things blow up.
The post by John Kay addresses the problems with this, as does this one by Mark Buchanan, and they’re both worth reading. The key point though is simple: if you use a model that isn’t accurate, you can’t make good decisions.
Models are an important part of how we make sense of the world. However, we often make mistakes in our use of models. To avoid these mistakes, try to make sure that the model you use is at the right scale for the decision you’re making, try to manage the real market, not the model built on top of reality, and try to make your models as accurate as possible.
And if you know of any other good bagel places here in Australia, please let me know!
Three Things You Can Do With a Business Model
Posted by Tim in business models, experiments, innovation strategy on 17 January 2012
Yesterday I looked at Eight Models of Business Models and Why They’re Important. However, in writing about how different people conceive of business models, I didn’t have enough space to address the really critical issue with them:
What can you actually do with a business model?
Once you’ve defined your business model, here are three ways that you can do with it:
- Test Your Organizational Design for Consistency: one of the key issues in looking at business models is that they must be internally consistent. If your value proposition is that you’re the cheapest, this has a direct impact on the choices you need to make about who to hire, how to train them, the relationships you’ll have with customers, who your customers need to be, etc.
In response to yesterday’s post, Graham Hill said on twitter:
None of the business model work passes muster. There are dozens, maybe hundreds of dependent variables. Not repeatable.
This is a valid point, if your objective is to try to replicate someone else’s business model. Bob Sutton makes a similar point in a great review of Inside Apple: How America’s Most Admired–and Secretive–Company Really Works
by Adam Lishinsky. It is one of those reviews that is just a nice piece of writing – worth reading whether or not you’re actually interested in the book.
Sutton raises an important point:
Apple is nearly the exact opposite of the kind of organization hyped by people like Gary Hamel and even Peter Drucker. It is centralized, secretive, fear-ridden, punitive, and not much fun for most people who work there. But it works because the pieces of the “organizational design” fit together, or at least did fit together when Jobs was there, in an elegant way. The secrecy is so severe that, when products are launched, even senior people are surprised by the final product because people are on a strictly “need to know” basis. But this is offset with a system of roles and responsibilities — and crucial to all of it– is what Apple calls the DRI, the directly responsible individual, a centerpiece of the organization. There is clear responsibility placed on individuals, not so much on groups and committees. Although groups and some committees do exist, the DRI can always be found and is where attention is focused. Which means that that it is clear where to go to provide guidance, to integrate their work with others, and who will be fired, blamed, and replaced — and celebrated too.
…
My point here, and this follows an old conceptual perspective called “contingency theory,” is that other organizations that want to be like Apple –and that seems like so many now — need to be especially careful about copying individual pieces, because the reason it works is that the multiple elements fit together.The point here is to be wary of picking up one part of someone else’s business model and dropping it into yours. If the whole business model isn’t consistent, you’ve got problems. So unless you have Apple’s intuitive sense of what customers need, it’s very dangerous to say “Apple doesn’t do focus groups, so we won’t do focus groups.”
- Innovate the Business Model: Henry Chesbrough and Richard Rosenbloom tell two stories of business model innovation in the copier industry in their paper The Role of the Business Model in Capturing Value from Innovation. When Haloid Corporation tried to launch the first Xerox machine, they used the same business model as the mimeograph machines that they were competing against.
The initial launch of Xerox machines failed, because they cost six times the machines they were competing against. It took an innovation in the business model to succeed. Instead of trying to replace a mimeograph, Haloid decided to try to replace a secretary. This meant a new value proposition, a new market segment (only large firms), a new revenue model (leasing instead of purchasing), and so on. With the new business model, and with no change to the underlying technology, the Xerox machine took off.
Haloid Corporation changed their name to Xerox, and they dominated the market for nearly 30 years. Until another business model innovation started to seriously erode their market share.
Business model innovation is a powerful form of innovation. So once you’ve described your business model (or that of your industry), start thinking about how you can change it.
- Use it to Test Your Market and Your Assumptions: Steve Blank likes to say that a business model is just a set of hypotheses about the market. So you can use the business model to test your assumptions about what will work as you introduce new ideas.
Experimenting is a crucial part of innovation. You can use business model analysis to identify the assumptions that underlay your innovation – this tells what experiments you need to try.
Blank documents the process in his fantastic Lean Launchpad series, where he talks about nine teams in his entrepreneurship class at Stanford used the business model concepts to launch start-ups. Here is a description of one of the experiments:
The first team to present was D.C. Veritas, the team building a low cost, residential wind turbine. During the week they interviewed 7 more companies and consultants, developed case studies for 20 different cities in 5 states, and finalized the bill of materials for the wind turbine. But the big project for the week was testing and analyzing Customer Acquisition Costs. The team put together their sales funnel and started testing demand.
The results were disappointing. The most optimistic estimates showed that the residential wind turbine market was less than $20m in year 5 and the costs to acquire the customers made this a money-losing business.
After regrouping the team decided that a major pivot was in order. Perhaps residential customers were the wrong target? Maybe the wind turbine they were building was better suited to a different customer segment? They had gotten feedback from consultants and industry experts that cities and utilities might be a more receptive audience. What if they redesigned the wind turbine to be embedded into street and highway light poles? Then they could serve cities, lighting companies and utilities. Using the business model canvas, the changes to their business were obvious.The business model can be a great tool for guiding innovation experiments.
Yesterday we mainly talked about how business models can be described. Once you’ve described your business model, then what? These are three ideas – you can use it to: test your organisation design, innovate the business model itself, and define innovation experiments to test the assumptions of your firm.
Mimeograph photo from flickr/nicksarebi under a Creative Commons License.
Eight Models of Business Models, & Why They’re Important
Posted by Tim in business models on 16 January 2012
The term Business Model is one that gets thrown around a lot these days. Even though it might sound like a buzzword to you, it’s important to understand what a business model is, and how they are useful.
One of the confusing things about the business model concept is that there are a wide variety of models of business models, and it seems as though everyone that talks about them makes up a new one. This can be frustrating if you are trying to figure out how to use the concept.
At their core, all business models address this questions: how do we sustainably deliver value to our customers? In this instance, the sustainable part refers to your organisation – how can you deliver value so that you’re still around in the future?
In a special issue of the journal Long Range Planning, Charles Baden-Fuller and Mary Morgan say that business models can serve three different purposes. They can describe different kinds and types of businesses. This is critical if we are trying to study them analytically. They can be short-hand descriptions of how firms operate – the primary value here is that you can use the business model to ensure that you have strategic fit across activities. Or they can be role models – you can use them to describe how you want your organisation to function.
More recently, Steve Blank has added another use – he says that business models are hypotheses about how your organisation might be able to create value for customers (see my discussion of this here).
To help illustrate some of the important points about business models, here are some of the models of business models that I’ve run across. The list isn’t comprehensive, so I apologise to anyone that I’ve forgotten – it’s simply due to my ignorance.
- Value Networks from Verna Allee: Verna was working with some of the basic concepts of business models in the 90s. One of the tools that she developed is Value Network Mapping:
Key points: value creation and exchange is at the core of understanding business models. You need to clearly articulate how you create value, and for whom. The other key point here is that value isn’t just about money. You can also create and exchange intangible value. You can see her latest work here in her book Value Networks and the True Nature of Collaboration.
- Henry Chesbrough: described business models in an article with Richard Rosenbloom and in his book Open Innovation. Here is what his business model looks like:
Key points: new innovations often require new business models. This is where the idea of business model innovation really started to gain traction. Chesbrough didn’t just describe business models, he also discussed how changing a business model can be an innovation just by itself. I’m beginning to suspect that all new innovations require new business models…
- Strategy Diamond: this is a strategy tool developed by Hambrick & Fredrickson. They talk about the importance of having an integrated strategy, which looks like this:
Key points: the first key point here is that a good business model is integrated. All of the elements need to be consistent with and support the others. If you change one element, it’s likely that you’ll need to change all of them. Second, this model illustrates how closely linked strategy and business models are. When you design a business model, you can’t do it without clearly articulating a strategy.
- Patrick Staehler: wrote a PhD called Business Models in the Digital Economy that was published in 2001. His business model looks like this:
Key points: the thing I like best about Staehler’s model are the three bottom boxes: Leadership Style, Relationship Style and Values. Think about that in relation to the point above about integration. If you change the relationship style within your organisation, you’ll likely need to change the rest of your business model as well. Furthermore, this business model innovation could be a source of competitive advantage. This is a very powerful point.
- Business Model Canvas: around the same time that Staehler was writing his PhD on business models, Alex Osterwalder as also writing a PhD on business model innovation. He developed a tool called the Business Model Canvas. He has subsequently published a book called Business Model Generation, which is all over the place now, along with a number of other analytical tools. Here is his version, as modified by Steve Blank:
Key points: this is where the business model concept has started to go mainstream – it’s astonishing how well this version of business models is doing right now. Osterwalder has done a great job of promoting the idea, and making it genuinely useful. This version of business models proves that it is a practical tool that you can use to figure out where your organisation should be heading.
- Long Range Planning: the special issue mentioned above makes a couple of important contributions. There is a new model of business models in the paper by David Teece, but it is more of a model to use in description if you are trying to study these academically. It’s not really one that you could use very easily within a firm for analysis.
Key points: the issue with the Teece model illustrates the point that Baden-Fuller and Morgan make about the different uses of the business model concept. Teece’s model is designed solely for description/classification. So you can run into approaches for business models that aren’t as practical. The second point in the special issue is this: about 2/3 of businesses surveyed in one of the papers can’t articulate what their business model really is. This is alarming. It also raises the point that every organisation has a business model, whether you have consciously thought about it or not. If you’re trying to develop business strategy, it is essential to actually give this some thought.
- Seizing the White Space: Mark Johnson works with Clayton Christensen, and Johnson’s book from last year has another model of business models. The website has a bunch of useful resources, and the book has some great stories about business model innovation. His model looks like this:
Key points: so now we have models of business models with 4,5,6,9 and 12 components. The same core elements keep turning up. For me, I don’t care which business model version you use, and picking the right one depends on what you’re trying to accomplish. Personally, I like the Chesbrough version because of the emphasis on networks, which I think is critical. On the other hand, the Business Model Canvas is getting easier to use now because of the substantial amount of resources that are building up around it.
People build their own model for different reasons, but it’s important to understand that they are all trying to find ways to get at essentially the same issues. There isn’t one that is absolutely correct. So pick whichever one resonates the most with you to use.
- Escape Velocity: the latest book by Geoffrey Moore is fantastic. In it he includes a 9-point Market Strategy Framework, which includes elements like Target Customer, Compelling Reason to Buy, Partners and Allies, etc. If you look at it, it’s outlining a business model.
Key points: like I said earlier, any time you start thinking about strategy, you’re thinking about business models. So even frameworks that aren’t being put forward as business models really are business models.
Business models are important. They are an important tool that can be used to augment product and service innovations, to link innovation to strategy, to co-ordinate activities within an organisation, and they can be a source of innovation as well.
There are many models of business models out there. You can use whichever makes the most sense to you. But it’s important to use one.
Follow up post: Three Things You Can Do With a Business Model.
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Tim was named #5 in the Top 40 Innovation Bloggers in 2011 at Innovation Excellence.
Tim and John were both named in the Top 40 Innovation Bloggers in 2010 at Innovation Excellence.
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