Monthly Archives: June 2009

when is a fundamental change needed?

According to authors: Johnson, Christensen, and Hagerman, in the December 2008 copy of the Harvard Business Review, maintaining a thriving business is different than simply maintaining the business that you are in. The hard part they say, is getting back to fundamentals – and not letting prior fundamentals stand in your way.

A survey conducted by the Economist (and independently confirmed by IBM) indicates that about half of all CEOs report a need to adapt their business models. Additionally two thirds of them feel that extensive changes are needed.

What they are less certain about – and would be more informative – is the percentage of middle and senior managers who feel the same way. How many for instance, feel that business model innovation is their work to perform?  (or feel that it is their work to guard against?) In any case, the prevailing gales of creative destruction have executives and managers alike battening down the hatches for “permanent shifts in their market landscapes”.

In the The Stuff of Thought, Steven Pinker explains how language can inadvertently limit our imagination. Which partly explains why it is hard to get back to fundamentals. Many people in your company might plainly agree on being led by the customer, giving voice to the customer, and or being human centered, but how easy is it to align with the strange perspective of another?

Senior managers at incumbent companies thus confront a frustrating question: Why is it so difficult to pull off the new growth that business model innovation can bring? Our research suggests two problems. The first is a lack of definition: Very little formal study has been done into the dynamics and processes of business model development. Second, few companies understand their existing business model well enough—the premise behind its development, its natural interdependencies, and its strengths and limitations. So they don’t know when they can leverage their core business and when success requires a new business model.

Like Steven Pinker, authors Johnson, Christensen and Hagerman, think that part of the problem is semantic. i.e. Few people share a common, serviceable definition. But the second reason they claim, is that few companies understand their business model well enough in the first place. Not knowing the detailed analysis, makes it hard to notice vulnerabilities. Moreover, it can also mask when a new one is needed to keep the company vital.

Curiously they claim that you don’t begin the work of business model innovation by thinking about the business model at all. In stead “It starts with thinking about the opportunity to satisfy a real customer who needs a job done.”

They elaborate that a business model is made of four interdependent parts:

1)   The Customer Value Proposition, 2)   The Profit Formula, 3)   Key Resources, 4)   Key Processes.  

The article takes one into great detail about how the ‘true’ meaning of these terms. And the observation that “often this [work] begins with a very simple realization” about what your end-customers are doing. Disruptive innovations aren’t inherently radical (as in, “wow that is such a crazy idea that you have!”) they are radical to our engrained ways of thinking about customers, our industry, our rivals and the company we work for. In other words disruptive innovation isn’t just a game changing maneuver that applies to rivals – this kind of innovation is disruptive at home. 

All of which comes back to cultural norms and metrics – within the corporate – that limits imaginations, and obscures the emergence of that “very simple realization”. Long after a company develops an effective theory of business, it’s fundamentals are decomposed into practices, norms and metrics. It is the fundamentals of the incumbent order, that will continually find fault with propositions of the new.

Financial

gross margins, opportunity size, unit pricing, unit margin, time to breakeven, Net present value calculations, fixed cost investment, credit items.

Operational

end-product quality, supplier quality, owned versus outsourced, customer service, channels, lead times, throughput.

Other

pricing, performance-demands, product development life cycles, basis for individual rewards and incentives, brand parameters

read more here Reinventing Your Business Model – HBR.org .

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