Business Model Innovation

KEY LEARNING SUMMARY

for Creating New Markets and Transforming Existing Ones

featuring Mark Johnson

July 26, 2011

in collaboration with

2011 Harvard Business School Publishing. Created for Harvard Business Review by BullsEye Resources www.bullseyeresources.com.

Business Model Innovation for Creating New Markets and Transforming Existing Ones
July 26, 2011

Business Model Innovation for Creating New Markets and Transforming Existing Ones
Mark W. Johnson, Co-founder, Innosight; Author, Seizing the White Space: Business Model Innovation for Growth and Renewal Angelia Herrin (Moderator), Editor for Research and Special Projects, Harvard Business Review

OVERVIEW
Many companies fail to recognize that changed market conditions or the dynamics of a new and unfamiliar market compel not just new products or processes, but a fundamentally different business model. To seize some market opportunities, companies actually need to restructure themselves to make money in an entirely new way. Recognizing when and why a new business model is necessary is critical to the innovation discipline that companies need today.

Two kinds of innovationfor established businesses and new businessesmust be managed differently.

There are two fundamentally different kinds of innovation, which must be managed differently: Established business innovation. Innovation in an established, or core, business is about launching new products or changing internal processes to strengthen or extend the business. It is critical that companies continue to innovate in their core business; until a market becomes commoditized, there is always room for innovation. Because the customer, competition, and market dynamics in core businesses are well understood, innovation in the core involves a relatively high knowledge-to-assumption ratio. Financial scenarios are predictable. Accordingly, the innovation process is a very deliberate one. New business innovation. In contrast to established business innovation, new business innovation has much more uncertainty and involves a low knowledge-toassumption ratio. Markets that dont yet exist cant be analyzed; changed or unfamiliar markets are largely uncharted territory. The innovation process must take place in a gradual, emergent learningbased way. Companies typically start small and focus on testing assumptions in pilots with real transactions and real customers. Importantly, companies should not sacrifice core business innovation for new business innovation, or vice-versa. Both should take place simultaneously. Think and, not or.
To design a new business model in pursuit of new growth, break away from old thinking.

CONTEXT
Mark Johnson presented a roadmap and plentiful advice for effecting business model innovation, including how to create new business models and when to do so.

KEY LEARNINGS
Innovation isnt always about products and processes; sometimes business models need to change.

An example of a market disruption that compelled business model innovation is the MP3 player. As it rose in popularity, CD sales fell. Apple didnt invent the device but recognized that it represented a fundamentally different way that people would listen to music and innovated around improving that user experience. That meant not just introducing new products (iPods) but making money in a whole new way (the iTunes online music store). Conversely, Sony executives fell asleep, declining to reallocate resources to establish an MP3 presence. That is a common mistake, often made because companies identify more strongly with their historical core business than with opportunities presented by innovation.

A new business model should not be designed around a companys existing capabilities or the processes that work

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Business Model Innovation for Creating New Markets and Transforming Existing Ones
July 26, 2011

well for the core business. Fresh, blank-slate thinking is required. Forget how the company currently operates (except for its values) and examine the new market first through the lens of the customer. Determine what job the customer is trying to accomplish. Find a value proposition that helps the customer do whatever that is, cost effectively. The four-box business model framework shown below can help in thinking about business model innovation.

should be determined by the new jobs to be done, not by longstanding protocols.

You need to break tactical rules, norms, and metrics . . . and develop new processes."
Mark W. Johnson
Key traps that companies fall into, which present barriers to business model innovation, include:

Failure to allocate resources. The old Digital Equipment Corp. refused to allocate resources to developing PCs, which led to the companys downfall. Impatience for growth. Investments in new growth opportunities can take years to pay off, but can pay off big when they do. Attempts to cram new opportunity into old business models. Kodak developed great technology and actually launched the first digital camera, but did so without innovating the business model. The device was priced at $30,000, too expensive for anyone to afford.

Innovate the business model when market circumstances warrant.

Elements of this framework are: The Customer Value Proposition should be understood in the context of the new or changed market dynamics. The Profit Formula and Core Mission flow from that, and may well differ from how the company is used to making money. Key Resources and Processes are determined by the Value Proposition and Profit Formula/Core Mission together, and are affected by them as well. All of the boxes are interdependent. Creating new business models is difficult because people think about companies in rigid terms. Most people tend to resist new rules, norms, and metrics. Companies can get around this resistance by establishing separate business units focused on the new growth opportunity. These separate business units should have autonomous teams, their own processes, and new rules, norms, and metrics. The new ways

Companies must not just innovate in developing new products; they must recognize the need to design new business models. Situations when this is appropriate are when:

Transforming an existing market. As markets evolve, the basis of competition changes. Initially, market players compete on performance by launching product innovations; then on reliability, via process innovations; and finally on convenience and cost. But competing on convenience and cost tend to require business model innovation. Zipcar car-sharing service is an example of business model innovation that transforms peoples relationships to their cars. Zipcar competes against car ownership and rental models on convenience and cost. Navigating a changed market. Hilti machine-tool maker innovated on convenience, side-stepping commoditization of its market with a subscription model. Construction companies pay a monthly fee for continual

2011 Harvard Business School Publishing. Created for Harvard Business Review by BullsEye Resources www.bullseyeresources.com.

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Business Model Innovation for Creating New Markets and Transforming Existing Ones
July 26, 2011

access to tools. Construction customers no longer need to shut down sites when tools are lost or damaged.

Define strategy, then let structure follow."

Mark W. Johnson
In addition, be patient. Incubation and revenue acceleration periods can last up to six years. Then comes the transition phase of one to three years where revenue growth is rapid. Be patient for revenue growth, but impatient for profits. Amazon.com is a company built to continually transform itself, periodically introducing new ways to make money. CEO Jeff Bezos has said, If you want to continuously revitalize . . . you cannot stop at what you are good at. You have to ask what your customers need [and] get good at those things.

Creating new markets. It is critical to test assumptions about little-understood new markets. Companies that are entering emerging markets often assume that all they need to do to succeed is change the packaging and marketing on a product that is much loved in developed countries. But middle- or bottom-of-the-pyramid consumers may not have any use for such a product. To understand what value proposition would work for these customers, learn what jobs they hope to accomplish. For example, Indian manufacturer Godrej saw that nomadic families in India needed a portable way to keep meals fresh a day longer and drinks a few degrees colder. So the company designed a small, portable, batteryoperated refrigerator, which at $69 represented a good customer value proposition.

Business Model Innovation Pointers

Manage core and new growth innovation differently, because their knowledge-to-assumption ratios differ greatly. Design new business models to transform an existing market, create a new market, or navigate a market altered by industry change. Overcome barriers with new rules, an autonomous team, and different processes. Design rules, team, and processes around an important job that customers want to get done, not around your existing capabilities. Think big, but start small, and focus on testing assumptions in real-world ways with real customers. Be strong. Strong leadership is essential to business model innovation.

Make seizing new growth through innovation a repeatable process.

business

model

There is a three-step process for new growth development, which can be implemented over and over again: Define the customer value proposition. Start with understanding customers important, unsatisfied jobs to be done. If you can come up with an offering that helps get those jobs done at a reasonable price, you have a compelling value proposition. Draw a blueprint. Develop a technology and a business model system. Figure out the appropriate rules, norms, and metrics. Document assumptions. Build. Test assumptions in a foothold market with a pilot using real customers. Adjust the blueprint accordingly. Some 90% of successful new ventures change the business model before getting it right. Integrate new systems into the company.

2011 Harvard Business School Publishing. Created for Harvard Business Review by BullsEye Resources www.bullseyeresources.com.

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Business Model Innovation for Creating New Markets and Transforming Existing Ones
July 26, 2011

BIOGRAPHIES
Mark W. Johnson Co-Founder, Innosight; Author, Seizing the White Space: Business Model Innovation for Growth and Renewal

Mark Johnson is a co-founder and senior partner of Innosight, a strategic innovation consulting and investing company with offices in Massachusetts, Singapore, and India, which he co-founded with Harvard Business School professor Clayton M. Christensen. He has consulted to the Global 1000 and start-up companies in a wide range of industriesincluding health care, aerospace/defense, enterprise IT, energy, automotive, and consumer packaged goodsand has advised Singapores government on innovation and entrepreneurship. Marks most recent work has focused on helping companies envision and create new growth, manage transformation, and achieve renewal through business model innovation. This work is the subject of the McKinsey awardwinning Harvard Business Review article, Reinventing Your Business Model, as well as his new book entitled Seizing the White Space: Business Model Innovation for Growth and Renewal, published in 2010 by Harvard Business Press. He is the author of the Harvard Business Review article, "New Business Models in Emerging Markets," with Matt Eyring and Hari Nair. Mark has published articles in the Sloan Management Review, BusinessWeek, Advertising Age, and National Defense. Prior to co-founding Innosight, Mark was a consultant at Booz Allen Hamilton, where he advised clients on managing innovation and implementing comprehensive change programs. Before that, he served as a nuclear powertrained surface warfare officer in the U. S. Navy. Mark received an MBA from Harvard Business School, a masters degree in civil engineering and engineering mechanics from Columbia University, and a bachelors degree with distinction in aerospace engineering from the United States Naval Academy. He currently serves on the board of SemiLEDS, an LED manufacturing company, and the U.S. Naval Institute. Mark, his wife, Jane Clayson Johnson, and their children live in Belmont, Massachusetts.

Angelia Herrin (Moderator) Editor for Research and Special Projects, Harvard Business Review

Angelia Herrin is Editor for Research and Special Projects at Harvard Business Review. At Harvard Business Review, Herrin oversaw the re-launch of the management newsletter line and established the conference and virtual seminar division for Harvard Business Review. More recently, she created a new series to deliver customized programs and products to organizations and associations. Prior to coming to Harvard Business Review, Herrin was the vice president for content at www.womenConnect.com, a website focused on women business owners and executives. Herrins journalism experience spans twenty years, primarily with Knight-Ridder newspapers and USA Today. At KnightRidder, she covered Congress, as well as the 1988 presidential elections. At USA Today, she worked as Washington editor, heading the 1996 election coverage. She won the John S. Knight Fellowship in Professional Journalism at Stanford University in 198990.
The information contained in this summary reflects BullsEye Resources, Inc.s subjective condensed summarization of the applicable conference session. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the session. In no way does BullsEye Resources or Harvard Business Review assume any responsibility for any information provided or any decisions made based upon the information provided in this document.

2011 Harvard Business School Publishing. Created for Harvard Business Review by BullsEye Resources www.bullseyeresources.com.

www.hbr.org