A system for innovating business models for breakaway growth

Strategy and Leadership

Volumn 38, Issue 6, 2010, Pages 5-15

  Leavy, Brian ^a  

^a DUBLIN CITY UNIVERSITY   (Ireland)

Author keywords

Business development; Innovation; Modelling; Value added

Indexed keywords

EID: 78149267882     PISSN: 10878572     EISSN: None     Source Type: Journal    
DOI: 10.1108/10878571011088014     Document Type: Article

References (40)

1. Foreword to Mark W. Johnson (2010), Seizing the White Space, Boston: Harvard Business Press.
2. Porter, M.E. (1980), Competitive Strategy, New York: Free Press.
3. Porter, M.E. (1985), Competitive Advantage, New York: Free Press.
4. Peters, T.J. and Waterman, R.A. (1982), In Search of Excellence, New York: Harper and Row.
5. Mintzberg, H. (1994), The Rise and Fall of Strategic Planning, Englewood Cliffs NJ: Prentice-Hall.
6. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Boston: Harvard Business School Press, p. 84.
7. Christensen, C.M. (1998), The Innovator's Dilemma, Boston: Harvard Business School Press.
8. Kim, W.C. and Mauborgne, R. (2005), Blue Ocean Strategy, Boston: Harvard Business School Press.
9. Prahalad, C.K. and Krishnan, M.S. (2008), The New Age of Innovation: Driving Co-created Value through Global Networks, New York: McGraw-Hill.
10. Verganti, R. (2009), Design-driven Innovation, Boston: Harvard Business Press.
11. Hamel, G. (2007), The Future of Management, Boston: Harvard Business School Press (with Bill Breen).
12. MarkW. Johnson is chairman of Innosight, the strategic innovation consultancy which he cofounded with disruptive innovation guru, Clayton M. Christensen of Harvard Business School. He previously worked as a consultant with Booz Allen Hamilton, and before that served in the US Navy during the first Gulf War. He holds an MBA from Harvard Business School, a master's degree in civil engineering and engineering mechanics from Columbia and a primary degree in aerospace engineering from the US Naval Academy
13. The concept of "adjacencies" was popularized in the strategy literature by Chris Zook and colleagues as part of a long-running research effort at Bain Consulting aimed at uncovering the keys to sustained and profitable growth. This research produced three well-received books all published by Harvard Business School Press, Profit from the Core (2001), Beyond the Core (2004) and Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Growth (2007). Each concentrated on a different part of the puzzle, the second developing the idea of diversifying into adjacencies as the most attractive and least risky approach to pursuing growth opportunities outside the core. See also Davidson, A. and Leavy, B. (2008), "Interview with growth consultant Chris Zook: a less risky path to business model innovation," Strategy and Leadership, Vol. 36, No. 1, pp.27-32.
14. This is supported by the key insights developed by Michael Porter in two more recent publications in which he sought to distill the essence of clear strategic positioning, "What is strategy?", Harvard Business Review, November-December, 1996, pp.61-78.
15. "Strategy and the internet," Harvard Business Review, March, 2001, especially the sidebar on "The Six Principles of Strategic Positioning" on page 71. Two of these six principles emphasize the importance of (1) a clear value proposition and (2) a uniquely "tailored" configuration of value activities to support it. The clearer the focus of the value proposition and the higher the degree of fit among the elements in this tailored activity system, the more sustainable and difficult-to-imitate the competitive advantage
16. For more on this "jobs-to-be-done" idea, see Christensen, C. M. and Raynor, M.E. (2003), The Innovator's Solution, Boston: Harvard Business School Press.
17. Anthony, S.D. (2009), The Silver Lining: An Innovation Playbook for Uncertain Times, Boston: Harvard Business Press.
18. See also, Leavy, B. and Sterling, J. (2010), "Think disruptive: how to manage in a new era of innovation (Interview with Scott D. Anthony), Strategy and Leadership, Vol. 38, No. 4, pp. 5-10.
19. As A.G. Lafley has observed: "In my world consumers cannot really tell us what they want. If we exposed something to them as a stimulus, they can say, 'I like it,' or I don't like it,' and they can tell you why they like it or why they don't like it, but they cannot tell you what they want. Nobody told us they wanted Crest Whitestrips; nobody told us that they were dying for a Swiffer; nobody told us that Febreze would make their life better"
20. quoted in Scott D. Anthony, The Silver Lining: An Innovation Playbook for Uncertain Times, Harvard Business Press, 2009
21. The importance of focus has been emphasized by many management theorists and practitioners alike, and the willingness to accept the trade-offs that come with focus is one of Porter's key principles of strategic positioning. A.G. Lafley (2009) in his recent article, "What only the CEO can do," Harvard Business Review, May, pp. 54-62, said that the second most important decision that the company made under his leadership after deciding that "the consumer is boss" was "where P and G would play and where it would not play,"
22. while Lou Gerstner (2002) in Who Says Elephants Can't Dance, New York: HarperBusiness, observed: "I have learned that lack of focus is the most common cause of corporate mediocrity."
23. "Return on Assets" (ROA = Profit=Assets) is one of the most widely recognized measures of overall business profitability. When it comes to business model innovation it becomes insightful to break this ratio down into the product of two further ratios as follows: ROA=Profits=Assets=Profit=SalesbySales=Assets (Margin) by (Asset Productivity) What this highlights is how comparable levels of profitability can be achieved by different combinations of margin and asset turns. For example: a business producing 5% margin and 8 asset turns will yield the same ROA as one with 20% margin and 2 asset turns. However, two very different business models are implied. In practice, these ratios would need to be further finessed - but this simplified example gives the general idea.
24. The enormous potential value to be gleaned from drawing on the discipline of design in the search for innovative strategies and business models is the central thesis of Roger Martin's (2009), The Design of Business: Why Design Thinking is the Next Competitive Advantage, Boston: Harvard Business Press.
25. See also, Leavy, B. (2010), "Design thinking - a new mental model of value innovation," Strategy and Leadership, Vol. 38, No. 3, pp.5-14.
26. The idea that innovation is relevant to all phases of the product life cycle, but the impact of different types of innovation (product, process, renewal innovation) shifts over the different stages of the cycle, is a central theme in Geoffrey Moore's (2005), Dealing with Darwin: How Great Companies Innovate at Every Stage of their Evolution, New York: Penguin.
27. See also, Davidson, A. and Leavy, B. (2007), "Interview with innovation guru Geoffrey Moore: seeking solutions to intractable problems," Strategy and Leadership, Vol. 35, No. 5, pp.4-8.
28. See C.K. Prahalad's (2010), The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits (Revised and updated 5th anniversary edition), New Jersey: Wharton School Publishing.
29. Hart, S.L. and Christensen, C.M. (2002), "The great leap: driving innovation from the base of the pyramid," MIT Sloan Management Review, Fall, pp.51-56; and Immelt.
30. Immelt, J.R., Govindarajan, V. and Trimble, C. (2009), "How GE is disrupting itself," Harvard Business Review, October, pp. 56-65.
31. "White space between" opportunities tend to be a special case, with roots in difficult to predict transformational shifts in technology, market structure or government policy with wide ramifications. The search for clean energy solutions in the automobile industry is a case in point, and the initiative currently being piloted in Israel with the support of government by Shai Agassi, and his company Better Place to develop an innovative business model for the electric car is a featured example.
32. For more on the importance of these key constraints or barriers to consumption as potential keys to new growth opportunities, see Scott D. Anthony's (2009), The Silver Lining, already cited.
33. The notion of a "problem-solving continuum" presented here relates quite closely to the concept of the "knowledge funnel" at the heart of Roger Martin's (2009), The Design of Business, already cited; and the idea of contrasting business model archetypes ("solution shops" versus "value-adding process businesses") echoes the key distinction drawn by Geoffrey Moore (2005) in Dealing with Darwin, already cited, between "complexity businesses" and "volume businesses." As he put it in the Davidson and Leavy (2007) interview, also already cited: "The distinction we make between complex systems and volume operations is in our view fundamental to business architecture. Every function in the enterprise is organized, measured, and managed to diametrically opposed standards in these two models. Therefore, mixing the two is disastrous, as Compaq learned from its acquisition of DEC and Charles Schwab learned from its acquisition of US Trust. There are remarkably few synergies to exploit across this boundary condition - indeed, anti-synergies abound. So companies that embrace both models must do so with a 'holding company' mentality, realizing that the two models will compete with each other in the marketplace, and not play well together as siblings."
34. Johnson recalls the "milk-shake" example originally given in Christensen and Raynor (2003), The Innovator's Solution, already cited.
35. Many of the more prominent perspectives on value innovation offer their own helpful heuristics for trying to map the main elements of a current value proposition as a starting point to seeing where opportunities to innovate on key dimensions of value might present themselves ("value curve" in blue ocean strategy - Mauborgne and Kim, "nearest competitive offer" in discovery-driven growth - McGrath and Macmillan, and systematic "re-featuring" in disruption innovation - Christensen). Mark Johnson's notion of "levers" here is a further addition.
36. See also Joan Magretta (2002), "Why business models matter," Harvard Business Review, May, p. 90: "When business models don't work, it's because they fail the narrative test (the story doesn't make sense) or the numbers test (the P and L doesn't add up)."
37. This powerful technique of developing a reverse income statement is developed more fully in McGrath and Macmillan (2009), Discovery-driven Growth, cited already, and more fully again in
38. McGrath, R.G. and MacMillan, I.C. (1995), "Discovery-driven planning," Harvard Business Review, July-August, pp. 44-54. Also, in Discovery-driven Growth the authors identify the definition of the "unit of business" as fundamental to business model innovation. They define what they mean by "the unit of business' as "quite simply what you decide the customer is going to be paying you for," which lies at the heart of the revenue model and profit formula. So while the Customer Value Proposition should drive the profit formula rather than the other way around, playing around iteratively with their potential interaction can be a source of business model innovation.
39. This idea lies at the heart of Porter (1996), "What is strategy?", already cited, where he argues that fit among the many elements that make up a tailored activity system or value chain "is a far more central component of competitive advantage than most realize."
40. The kinds of organizational challenges presented by the core business to the successful incubation of new business models are more fully examined in Govindarajan, V. and Trimble, C. (2005), Ten Rules for Strategic Innovators: From Idea to Execution, Boston: Harvard Business School Press. Mark Johnson uses the playful metaphor of a new venture team in "Dog Inc" trying to put together a new business idea for a "Cat" to illustrate how much resistance an existing business system will put in the way of any new creature with an alien ("non-dog") DNA. A practical example of the consequences of the core trying to "dog the cat" is the US Army's Bradley Fighting Vehicle - 17 years and $13 billion in the making that ended up being a "troop transport that can't carry troops, a reconnaissance vehicle that's too conspicuous to do reconnaissance, and a quasi-tank that has less armor than a snow-blower but carries enough ammo to take out half of DC."