Guest post by Vala Afshar, Chief Digital Evangelist, Salesforce
The top 10 industries being disrupted the most by digital are media, telecom, consumer financial services, retail, technology, insurance consumer products, nonprofits, business and professional services, and education. But 90% of the executives in these industries profess to having a digital strategy in place, so why are these business leaders worried about being disrupted?
The research points to two "perfect storm" factors:
- Low barriers to entry into these sectors lead to more agile competition.
- Large legacy business models Incremental change will not prevent businesses from being disrupted.
In fact, transformational change is a necessity for survival, requiring straightening of core business capabilities as well as investments in new business model innovation.
To learn more about business disruption and what companies can do to prevent being disrupted by exploring new business model innovation, bestselling digital business author and CEO of Constellation Research Ray Wang and I invited business model innovation expert Saul Kaplan to our weekly show DisrupTV.
Here's the video; below is a text summary of our conversation.
Business Model Innovation = Path to Sustainable Growth
Business model innovation is key to business survival. So what is business model innovation?
“This is all about the difference between incremental versus transformation change. We are living in a century that screams for transformational change. Most of our innovation processes are designed to help us do better than what we are doing today, not to completely change it. Business model innovation is not just about improving existing business models and becoming more competitive — which you must do.
"To avoid business disruption, you must be able to imagine, prototype and test entirely new business models. It is imperative for leaders today to do research and development for business models the same way they do R&D for products and technology,” said Kaplan.
“Today, we love creating new products and we love developing new technologies but let’s face it, we have more technologies than we humans know how to access and use to solve problems. What we are missing is the ability to explore new business models," he said. "We need to start thinking about minimum viable business models. How do we make it safer and easier to manage in the real world?”
Innovation Junkies Are Not Tweakers
What is an innovation junkie and do you need to hire these types of contributors to avoid being Netflixed (disrupted)? “Innovation junkies are people who are always trying to improve things. They are always thinking about what’s next, and always trying to re-imagine and re-engineer to continuously adapt and improve," said Kaplan.
"We have big social challenges that we need to work on and tweaks are not going provide the solutions. We have a nation of tweakers and what we really need are more people and leaders and organizations that can actually get transformational idea off of the drawing board and onto the real world,” he said.
“Being an innovation junkie is a blessing and a curse. You are always trying to make people’s lives better and that’s a very cool thing. But at the same time, you realize that the job is never done. They minute you accomplish something, you immediately focus on the next adventure,” said Kaplan.
Market-Makers Vs Share-Takers
Kaplan believes that companies don't get high grades for avoiding disruption. We give variable grades to organizations on strengthening and protecting current business models. For proper context, we should consider and understand the distinction between share-takers and market-makers.
“Share-takers think and act like this: Here’s the industry we compete in, here’s where we stack up relative to the competition, and here’s how we protect our share and ultimately take shares away from competitors who are ahead. Most of the world is comprised of share-takers. This is what we were taught in business schools," said Kaplan.
"But the real interesting area of study, especially as it pertains to disruption, is not share-takers, but market-makers,” he said.
The difference between share-takers and market-makers is not product innovation, it is business model innovation.
Market-makers do not play by share-taker rules. They don’t necessarily view themselves as part of an industry. They focus on creating new industries. Eventually, as market-makers succeed, they start to behave like share-takers — and that’s when they are most susceptible to being disrupted.
“We need more market-makers. We need leaders to figure out how to do both share-taking and market-making, and to create parts of their organization that are capable of market-making. You cannot tap someone on the shoulder and call them the ‘head of innovation’ and then expect them to do both share-taking and market-making. Market-making requires a different approach and point of view,” said Kaplan.
“Uber, Airbnb, and Netflix completely disrupted industries by creating new business models. They didn’t invent any new technologies, but instead they created new business models that delivered value to their customers in a better way. The incumbent industries and companies had all the same parts and capabilities, but what got in their way was the straitjacket of today’s business model. And, they didn’t have an innovation sandbox to do R&D for new business models,” said Kaplan.
Business Model Innovation Solves The Innovators' Dilemma
The new strategic imperative for businesses is to invest in a business model innovation sandbox. “We know the approach to transformational change is different than the approach to incremental change. We also know that organizations have to do both, and organizing around incremental change is within the core of your business," said Kaplan.
"You can create committees and sort ideas and use traditional financial metrics to manage and select different projects. You can predict which ideas add value to today’s business model,” he said. "However, the sandbox is different."
“To stand up the exploration of transformational ideas, the traditional approaches will not work. The notion that the CFO is using a spreadsheet that predicts how much revenue and how much margin you’re going to create is out the door," said Kaplan. "Companies must be willing to experiment with ideas, prototype the work and concept and test the market to see potential value and market need. Companies must give innovation junkies the space to explore."
Kaplan uses the sandbox metaphor to illustrate the need for adoption and the use of design and an experimental mindset. “Most innovation does not require us to invent anything new. We already have the technology. Innovation is about combining the parts in different ways to change the value equation. The reason we don’t do it is because we are locked in the straitjackets of today’s business model. We need a sandbox with all the capabilities there that we can combine in a new and different ways to change how we deliver and capture value from the customers,” said Kaplan. All disruptive companies use a sandbox to redefine new business models with existing technologies, in new combinations, that incumbent companies also had access to.
Kaplan believes that cloud computing is the perfect and most effective solution for companies to develop a business model innovation sandbox. The cloud can be an amazing feeder of capabilities into a sandbox, to enable ongoing business model exploration. The most disruptive companies in the world have leveraged cloud computing technologies to service and connect with customers in a whole new way. Kaplan points to companies that fail to gain momentum because they use traditional management practices and ignore scaling challenges — the lifecycles vary, meaning exploration and optimization require different set of skills and capabilities.
CEOs Must Lead Business Model Innovation
Kaplan is starting to see more executives at the highest levels, including CEOs, thinking more about new business models. CEOs are leading digital business transformation across all industries. Leaders are more open to invest in the sandbox.
Kaplan advises CEOs to delegate the responsibility of managing the core functions to their chief operating officers, so CEOs can spend more time on exploring new business models. Kaplan believes that the business model innovation sandbox is part of the answer to the innovator’s dilemma. Organizations will always choose incremental transformation and strengthening the core existing capabilities over transformational change. The nuance here is to strengthen the core, and at the same time create the condition for exploration.
Business leaders must explore and answer the following: Which business models are feasible? Which models do I want to create separate businesses from? Which models can lead to separate models or spinoffs? Too many leaders answer the change management questions before they settle on the model.
The worst place to develop a new business model is from within your existing business model. - Clay Christensen
Entrepreneurs are taught about the Minimum Viable Product (MVP), Kaplan said, and yet no one discusses the importance of the Minimum Viable Business Model (MVBM). Leaders pour all their efforts and all the investment dollars they raise into the product, without asking or answering the simple questions: What business model is needed to take the idea or working prototype into the real world with paying customers. Does the business model support the product use cases? Does the product solve the customer’s problem or create incremental value?
Yet they worry about scaling and change management, and how hard it is for the rest of the organization to do it, when instead they should be worrying about developing a MVBM. Too many leaders get bogged down very early in the scale and change management questions, killing opportunities to do transformational work.
The BIF Summit: Transformation Stories By Innovators
Kaplan invites the most amazing innovation junkies (or storytellers) to attend an annual event called the BIF Summit. Kaplan launched the BIF Summit 12 years ago, in order to invite and cultivate an innovation community with the purpose of enabling ‘random collisions of unusual suspects’ — or, making a ruckus. The BIF Summit is a gathering of a community of innovation junkies (including some of the most influential business executives of the biggest companies in the world) from around the globe. The BIF Summit event is quite intimate — Kaplan and his team purposefully limit the attendance to approximately 500 innovators, in order to ensure that meaningful connections are made at a comfortable and highly inspiring setting.
The 32 guest storytellers share intimate stories of transformation, with no slides and references to companies or products, leaving it to the audience to recognize innovation and meaningful patterns. The result is a very intense and inspiring two-day event where very deep connections are made with incredible change agents and explorers. I so much enjoy the BIF Summit that I volunteered my time to serve as a BIF board member.
I highly recommend that you follow Saul Kaplan on Twitter at @skap5 to learn more about BIF and business model innovation. And if you are interested, here is my life transformation story that I shared at BIF.