Nonlinear Thinking

Business Models and the Internet of Things

Two topics close to my heart - Business models and the Internet of Things

 

Eluding the Zeitgeist

Zeitgeist: [tsīt’gīst’, zīt’gīst’] n. The spirit or genius which marks the thought or feeling of a period or age.

The bandwagoneers that comprise and embrace much of the Silicon Valley monoculture have increasingly not been among the vanguard of enterprises that are delivering real change and innovation within and across traditional value chains and business models.  Perhaps that is the result of a zeitgeist that manifests in the Valley on a regular basis in which the thinking goes that if one successful business launch makes sense, then several dozen more incremental versions of said business make even more sense.  Paypal founder Peter Thiel has even commented: "There is so much incrementalism now."  Umair Haque, Director of Havas Media Labs, discussed the problem in a Harvard Business Review article back in 2008, lamenting that “… the malaise is deep and systemic. Many of you may disagree – but I’m vastly disappointed in the moral and strategic bankruptcy of today’s crop of venture investors and so-called revolutionaries.”

In a zeitgeist market, the number of new entrants is usually high, the ability to create differentiated offerings with unique value propositions (the strongest predictor of new product success) is more difficult to achieve, and new forms of business model innovation are required for success (e.g., service and solution innovation rather than product and process innovation; experiential innovation; legal rights and bundling innovation; privacy rights innovation; agency innovation, where businesses act on behalf of customers).

There are reasons for this creeping incrementalism and much can be blamed on the democratizing nature of the Internet as the ultimate platform for idea sharing.  Additionally, the ability to rapidly access formidable compute capacity, other technology infrastructure and agile development tools via the cloud allows today’s garage startups to create stepwise iterations of already buzz-worthy offerings in record time.  The “sharing” economy dynamic has already become over-saturated with new enterprises springing up to compete with the innovators that broke trail in the space – uber, lyft, airbnb, Getaround, Zipcar, Homeaway, TaskRabbit, Liquid, Dog Vacay, Fon – you get the idea.

Innovation Zeitgeist, a book by entrepreneur/author Alistair Davidson, drilled deeply into this dynamic several years ago. 

What I have observed is in the rush to make individual companies and product successful, managers have missed a larger trend - a Zeitgeist influence on what is getting developed and launched. Simply put, there are more entrepreneurs launching similar products than ever before. And because of the Internet, these product leak into other markets quickly.

Far more companies in Silicon Valley think they are creating viable business models and services that deliver real economic and societal value than those that truly are creating something both lasting and impactful.  Eluding the zeitgeist and focusing on addressing real issues, problems and opportunities is the challenge that needs to be met.

Diverse thinking is critical to an effective culture of innovation and Silicon Valley’s challenges with respect to diversity, particularly when it comes to enterprise leadership, has been well-publicized.  That issue/challenge may be the central contributing factor in a culture that eschews business model innovation for incremental uniqueness and a “me too” entrepreneurialism.

When we stop and ruminate on the many macroeconomic and core societal problems the world faces today, can we really say that there is a need for yet another social network variant that succeeds only in chewing up time and mindshare – Instagram, Snapchat, Vine, blah, blah, blah.

I don’t know.  Perhaps these are only the cynical musings of someone who thinks we can do much better, must do much better.

Business Ecosystem Redux

“Business ecosystem” may be a relatively recent entry into our business lexicon but it is, perhaps, not an entirely modern concept.  Confederacies of market participants have allied around delivering comprehensive offerings to markets across epochs.  One could imagine Christopher Columbus, operating in the context of emerging western imperialism and economic competition between European kingdoms bent on establishing trade routes to access raw materials, devising a business ecosystems of sorts – ships, private equity, spice merchants -  to reach the East Indies and gain a foothold in the spice trade.

That those collections of interdependent actors were not identified as a business ecosystem matters little as the basic construct existed within the business, industries and markets of their particular time.  The strategic planning idea of “business ecosystem” is more contemporaneous and could be grouped with all the other management buzzwords of the recent past if its practical application in the science and process of strategy development wasn’t so damned profound.

Technology-focused organizations were among the earliest to understand that the connection and interdependence of all the actors in an industry, or sub-segment of an industry, could provide tremendous insight into market dynamics and uncover potential white space/blue ocean opportunities for their products, services and solutions.  While the concept has remained resonant over the past two decades, its use has seemed to vacillate between being a primary pillar of strategic assessment or languishing on the periphery as new ideas have taken their turn at center stage.  Lately, it seems to be achieving a higher profile and once again assuming, what I consider, its rightful place in the portfolio of core market and strategic planning tools.

The concept was codified in a 1993 Harvard Business Review article by James F. Moore, "Predators and Prey: A New Ecology of Competition".   In that article, Moore cited the anthropological process of coevolution and the biological model of ecosystems to provide context for his definition of business ecosystems.

“To extend a systematic approach to strategy, I suggest that a company be viewed not as a member of a single industry but as part of a business ecosystem that crosses a variety of industries. In a business ecosystem, companies coevolve capabilities around a new innovation: they work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations.”

Moore expanded on the concept in his seminal book, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems.  In the book, Moore did not suggest that competition was going to vanish.  His thesis was that the old notion of competition, where like-minded competitors match wits in pursuit of a prospect company’s business, was no longer as viable in an increasingly connected world.  As vertically integrated enterprises became less and less common and the extended enterprise business model increasingly took its place, understanding the broader environment in which the business operates became the foundation for holistic strategy development, more interdependent partnering structures and management of assets – human, intellectual, capital and financial – that cross traditional enterprise boundaries.

An important consideration here is that, for a business operating in a world of constant change, what you do is not as important as how your capabilities relate to what others are doing.  In this accelerating business environment, strategy-making involves having an awareness of the big picture and finding ways to play a role in it.  For some, the rise of ecosystems thinking is an opportunity to create powerful new competitive advantage.

There is a real “the whole is greater than the sum of the parts” idea at work here.  Many ecosystems are created to pursue objectives that would be beyond the effective scope and capabilities of any of the individual ecosystem members.  Also important to recognize and incorporate in ecosystem thinking is that business ecosystems emerge, operate and evolve over time.  Key to achieving some level of success and stasis is that all members of the ecosystem either evolve or are replaced so that the ecosystem continues to deliver the value proposition(s) it was founded upon.

In the connected economy, the value of interdependent relationships – partnerships, alliances, collaborations – continues to grow and ecosystems thinking provides a discipline and framework for understanding where active and latent opportunities reside.  Identifying and delivering the value proposition that addresses those opportunities can be done more effectively, efficiently and expeditiously when understanding and leveraging the power of the business ecosystem in which the enterprise finds itself.

Ecosystem thinking is also about leverage.  As the enterprise better understands its role in its business ecosystem, they can more effectively integrate their operations with those of partners/allies and have more influence on how partner assets are deployed and employed to deliver a more robust solution to a broader customer base.

A recent report by Deloitte highlighted the impact business ecosystems might have as they become more recognized and utilized.

The rise of business ecosystems is fundamentally altering the key success factors for leading organizations, forcing them to think and act very differently regarding their strategies, business models, leadership, core capabilities, value creation and capture systems, and organizational models.

If you have not read The Death of Competition, I encourage you to seek it out as it remains as resonant and contemporary today as when it was first published.

The Shrinking Lifecycle of Business Models

McKinsey & Company continues to publish some solid thinking on innovation and the evolution of business models.  While I have long argued that business models are much more ephemeral owing to the continuing impact of digital technologies, I do think the article reinforces that thinking while providing a simplified approach to reframing one’s thinking about business models.  From the article, Disrupting beliefs: A new approach to business-model innovation 

Let’s face it: business models are less durable than they used to be. The basic rules of the game for creating and capturing economic value were once fixed in place for years, even decades, as companies tried to execute the same business models better than their competitors did. But now, business models are subject to rapid displacement, disruption, and, in extreme cases, outright destruction.

Every industry is built around long-standing, often implicit, beliefs about how to make money.  These governing beliefs reflect widely shared notions about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered inviolable—until someone comes along to violate them.

 

The Value Proposition Canvas

As someone who has spent much of the past 20 years defining, developing, and articulating value propositions to address all types of customer pains, I think this extension to Alexander Osterwalder's Business Model Canvas touches much of what I have come to think of as the formula for developing value propositions.

 

Alexander has a new book that details the process and journey to creating value propostions that match/address the pains your cusotmer is experiencing.

 

The Growth of the Internet of Things (IoT)

Cisco continues to be among the vanguard of enterprises that are embracing the emerging Internet of Things (IoT).  John Chambers, CEO of Cisco, recently delivered another speech on the concept and the bottom line, from Cisco’s viewpoint, is that the IoT is going to be a $19 trillion profit market in the next few years. That includes $2.9 trillion for manufacturing alone. Internet of Things is becoming the backbone (at least in rhetoric) of Cisco's overall business strategy, and Chambers pointed in that direction once again, stressing that Cisco's IoT game plan combines the company's cloud strategy with data analytics, mobile, collaboration, and most important of all, security.

White Paper - "Content is King, Context is Queen - Together They Rule!

One of the core themes of this blog over the years has been the impact of technology on the marketing art and science.  With the advent of digital, social, and mobile media, the strategy and execution of marketing has embraced and leveraged many new channels as avenues to influencing the target customer.  I have long viewed the development and management of quality content as critical to this new process, perhaps even more than during the decades of analog-only marketing.  With the "always-on" nature of digital/social/mobile communications today and the ability to gather real-time data on prospects, context is becoming increasingly critical to ensuring that valuable content is delivered at the most optimal point in the customer's decision process.

I thought this new model was important enough to author a white paper on it and you can access it by clicking on the image or link below.  Comments and critiques are welcome.

Download Content is King

Get Digital or Go Home

A recent study conducted by MIT Sloan Management Review and Capgemini Consulting suggests that organizations are now facing a digital imperative and must adopt new technologies effectively or face competitive obsolescence.

Among employees, while there is consensus on the importance of adopting digital technology, most find the process in their organizations to be too complex and slow and believe their leaders lack urgency and a vision for how technology can change the business. As with most initiatives, companies that successfully execute a digital transformation tend to have leaders who share their vision and define a road map, create cross-organizational authority for adoption and reward employees for working towards it.

 

Other key findings from the survey are:

• According to 78% of respondents, achieving digital transformation will become critical to their organizations within the next two years.
• However, 63% said the pace of technology change in their organization is too slow.
• The most frequently cited obstacle to digital transformation was “lack of urgency.”
• Only 38% of respondents said that digital transformation was a permanent fixture on their CEO’s agenda.
• Where CEOs have shared their vision for digital transformation, 93% of employees feel that it is the right thing for the organization. But, a mere 36% of CEOs have shared such a vision.

Companies that effectively manage the digital transformation can expect to gain in one or more of three areas:

• Better customer experiences and engagement
• Streamlined operations
• New lines of business or business models

Though innovative new business models are what every CEO dreams of, companies more often see digital technologies support a transformation of their customer experience or operations.

 

Why Business Models Matter Redux

As a strategist and market analyst, I have become prone over the years to collecting white papers, reports and any interesting treatment of key topics on my professional and personal agenda.  Then, every once in a long while, I go through the collection (mostly physical documents, to this point) and purge the ones that no longer resonate or seem to hold some continuing value.  Most of these end up in file 13 because their proposition or point-of-view was very much of the moment and that moment has passed them by, and the content is no longer relevant to my worldview.  A much smaller group consists of documents for which I can’t make a case for ever having wasted the time and paper to print them out.  The smallest and rarest of this library is composed of a few timeless treatments of topics that remain very close to my heart, falling generally in the strategy and marketing buckets.

Recently, I performed this cleansing process (and creating in the process, a great paper recycling event) and discovered several of those incredible reports and white papers that are actually more relevant now than they were when first published.  Perhaps, like a good Cabernet, laying them down for a decade or more has refined the cogent, cohesive and coherent arguments originally put forth by the authors.

One that emerged from the latter category is an article from the May 2002 edition of the Harvard Business Review addressing the key foci of my strategy work over the past two decades, that of business models.  Joan Magretta, currently a Senior Institute Associate at the Institute for Strategy and Competitiveness at Harvard Business School, authored the article, “Why Business Models Matter”, and after re-reading it several times over the past several weeks, I view it as perhaps the best rationale in support of the concept that I have encountered.

With that said, I thought it would be worthwhile and valuable to share some of Magretta’s key points in making the case for the importance of business models.

Business Models Tell the Corporate Story

• A good business model remains essential to every successful organization, whether it’s a new venture or an established player.
• The word “model” conjures up images of white boards covered with arcane mathematical formulas. Business models, though, are anything but arcane.  They are, at heart, stories – stories that explain how enterprises work.  A good business model answers Peter Drucker’s age-old questions:  Who is the customer? And what does the customer value?  It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
• A successful business model represents a better way than existing alternatives.  It may offer more value to a discrete group of customers.  Or it may completely replace the old way of doing things and become the standard for the next generation of entrepreneurs to beat.
• Creating a business model is, then, a lot like writing a new story.  At some level, all new stories are variations on old ones, reworkings of the universal themes underlying all human experience.  Similarly, all new business models are variations on the generic value chain underlying all businesses.  Broadly speaking, this chain has two parts.  Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on.  Part two includes all the activities associated with selling something:  finding and reaching customers, transacting a sale, distributing the product or delivering the service.  A new business model’s plot may turn on designing a new product for an unmet need.  Or it may turn on a process innovation, a better way of making or selling or distributing an already proven product or service.

Business Model Origins

• The term “business model” first came into widespread use with the advent of the personal computer and spreadsheet.
• Before the personal computer changed the nature of business planning, most successful business models were created more by accident than by design and forethought.  The business model became clear only after the fact.  By enabling companies to tie their marketplace insights much more tightly to the resulting economics, spreadsheets made it possible to model businesses before they were launched.

The Value of Business Models

• When managers operate consciously from a model of how the entire business systems will work, every decision, initiative, and measurement provides valuable feedback. Profits are important not only for their own sake but also because they tell you whether your model is working.  Business modeling is, in this sense, the managerial equivalent of the scientific method – you start with a hypothesis, which you then test in action and revise when necessary.
• When business models don’t work, it’s because they fail either the narrative test (the story doesn’t make sense) or the numbers test (the P & L doesn’t add up).
• The irony about the slipshod use of the concept of business models is that when used correctly, it actually forces managers to think rigorously about their businesses.  A business model’s great strength as a planning tool is that it focuses attention on how all the elements of the system fit into a working whole.

Business Models ≠ Strategy

• Every viable organization is built on a sound business model, whether or not its founders or its managers conceive of what they do in those terms.  But a business model isn’t the same thing as a strategy, even though many people use the terms interchangeably today.
• Business models describe, as a system, how the pieces of a business fit together.  But they don’t factor in one critical dimension of performance: competition.  Sooner or later – and it is usually sooner – every enterprise runs into competitors.  Dealing with that reality is strategy’s job.
• A competitive strategy explains how you will do better than your rivals.  And doing better, by definition, means being different.  Organizations achieve superior performance when they are unique, when they do something no other business does in ways that no other business can duplicate.  When you cut away the jargon, that’s what strategy is all about – how you are going to do better by being different.
• When a new model changes the economics of an industry and is difficult to replicate, it can by itself create a strong competitive advantage.
• Because a business model tells a good story, it can be used to get everyone in the organization aligned around the kind of value the company wants to create.

I encourage you to read Magretta’s complete article for a view of business models that remains incredibly contemporary and relevant.

Recognizing Strategic Dissonance

Operating in a world where the competitive landscape is ever more ephemeral, challenges to the status quo ever more profound, and the life of a successful business model ever shorter, aligning a corporation’s strategic intent and strategic action becomes ever more critical.  The more dynamic the industry, the shorter the duration such alignment is likely to be.  As intent and action become misaligned, that divergence creates what Andy Grove termed “strategic dissonance” in a California Management Review article he co-authored as well as his 1996 book Only the Paranoid Survive.

Arriving at a point of strategic dissonance suggests that the incumbent strategy no longer works as the underlying market and competitive dynamics have shifted enough to require a new strategy.  Grove termed these “strategic inflection points” to describe the giving way of one type of industry dynamics for another.  Strategic inflection points signal fundamental change in a business and require a new strategy, a modified business model, and a change in the way business is conducted.  The driver might be new technology, new regulations, emergent competition, or any structural dynamic that obviates the current environment.

The challenge for anyone, management or otherwise, is to recognize the strategic dissonance and, more importantly, to perceive the opportunity being created by the strategic inflection point and requisite new strategy.

 

Recognition that the changing nature of the enterprise’s operating environment is a true strategic inflection point occurs in stages:

• Initially, identifying and articulating the existence of strategic dissonance – the growing divergence between what the company views as its strategy and the actual actions of its management team.
• Then, confirming and accepting that the new set of circumstances is indeed a strategic inflection point that will require changes to the old way of business.
• Finally, understanding the new strategic priorities, creating a framework for overcoming the strategic dissonance, and formulating a new strategic intent.

To manage through the envelope of strategic dissonance that is driven by the emergence of a true strategic inflection point requires the management insight and discipline to see that during this period of transformation, both the old and new basis of competition, distinctive competencies, strategies, and strategic actions will need to coexist.

That is a distinctive competency in and of itself.