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Archive for April, 2010

The World’s First Social Media Expert

Before I tell you about the world’s first social media expert, consider this: Alan Mutter has a nice review of possible pay models for news, and here is how he sums things up (Free Advice on How to Charge for Content):

Pick a system, any system. Or make up your own. It won’t matter what pay model publishers choose, unless they produce unique and compelling content, tools or applications that readers can’t find anywhere else.

This is an absolutely critical point. Just changing the way you charge makes no difference at all – it is only part of the business model. If you are going to innovate your business model, you need to come up with something that is integrated.

A new method of charging requires a new method of creating and delivering content. It’s that simple. You can’t just take what you’re currently doing and hide it behind a paywall, or port it directly over to the iPad. You have to change the way you deliver value.

That is the benefit of thinking about business models – if you do it correctly, you’ll realise that all of the components have to work together. It’s not enough to just change one thing.

ok, now I can tell you about the world’s first social media expert. I’m pretty sure it was Lloyd Dobler in Say Anything:

I don’t want to sell anything, buy anything, or process anything as a career. I don’t want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or … processed. You know, as a career, I don’t want to do that.

There are 15,740 social media experts on twitter. Well, there were as of four months ago – I’m sure the number is higher now. 79 of them are ‘social media ninjas’.

I wonder how many of them have a sound business model, and how many of them are like Lloyd? One thing that I’ve learned over time is that you can’t define yourself by what you’re not. That was Lloyd’s mistake. But you also need to deliver tangible value within an integrated business model. So you can’t just call yourself anything.

The thing that brings these two observations together is this: to succeed in innovation, you need a strong business model to support your great idea. A business model is an integrated system for delivering differentiated value, for generating revenue and profits, for fitting within a value network and for meeting your customers’ needs. You need to have all the parts of a business model, and they need to work together.

The news organisations that Alan Mutter is talking about, Lloyd Dobler, and I suspect most of the 16,000 social media experts on twitter all have partial business models. This won’t work. You need to think through your entire business model to innovate successfully.

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Creating Value Through New Connections

Tim does a really nice talk on the invention of the computer and he has posted the slides on this blog. While he uses the story to discuss the difference between innovation and invention, I think there are a lot of other really interesting lessons here. Firstly, I’d like to add to Tim’s story by claiming that Hindus invented the technology that allows the modern computer to exist and then I’d like to make the observation that the fundamental difference between innovation and invention is connections.

So, what was the amazing technology developed in India nearly 2000 years ago? Quite simply, it was the number 0. Before this invention, there wasn’t a numerical way of describing nothing. It seems such a trivial idea, but it the basis for the digital economy. The first record of a 0 in use can be found in a temple in India where the inscription dates to 876 AD (the inscription below is the number 50).

The number "50"

The idea of 0 is an invention but it becomes an economically valuable invention (an innovation!) when it gets connected to other things. When we combine 0 with other numbers then we can start to develop some pretty powerful mathematics, which become more valuable when we connect them to systems of accounting and government. It isn’t surprising that the Moghuls were masters of empire building through careful accounting and measurement of every activity. Fibonacci brought the decimal number system to Italy at the beginning of the Renaissance , which set the Medici family on the path to greatness through the development of modern banking. Imagine trying to perform complex financial calculations with Roman numerals!

Finally, when we connect the humble 0 to 1 to develop binary code and then connect this to other inventions such as transistors and silicon chips, we get the computers and their applications that would have been unimaginable for the Indian mathematicians who invented the 0 in the first place.

The point is that valuable innovations come about through connecting things together so that there are new applications for things that already exist. It’s a bit like the conservation of matter principle. Matter can’t be created or destroyed but we can get new combinations of matter that are innovations.

I think what this means for firms is that they can’t think of managing innovation without thinking about managing connections. They are two sides of the same coin. Tim and I get to see many firms who have innovation management processes but few consciously think about the role of connections. One exception though is one of our research partners, Rio Tinto. They don’t describe themselves as being particularly innovative, although we can see many incremental innovations that have resulted from their community of practice program that tries to bring people together to match solutions to problems.

If we are getting serious about managing innovation then we need to start to understand the connections that are behind them. One way of doing this is through network analysis and we are currently looking at how network structures in firms influence innovation performance (there is a chapter by us on this subject in a recent book published by the Australian Business Foundation).

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Innovation: The War of Ideas

Innovations are ideas. Even if your innovation is a new gizmo, it is essentially an idea. Once you have a great idea (by making a new connection), you have to figure out how to get it to work, and once you’ve done that, you have to figure out how to get the idea to spread. The last part is often the tough part. Consider what Machievelli had to say about it about 500 years ago in The Prince:

There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things… Whenever his enemies have the ability to attack the innovator, they do with the passion of partisans, while the others defend him sluggishly, so that the innovator and his party alike are vulnerable.

Machievelli was talking about innovative political ideas, which is why he refers to “the innovator and his party”, but the same idea holds in economic innovation. Innovation is tough – and new ideas get attacked. This leads to a common mistake that smart people make – they often think that a great new idea will sell itself. In the fantastic new book Seeing Further: The Story of Science and the Royal Society edited by Bill Bryson, Rebecca Newberger Goldstein shows that even Galileo made this mistake:

Galileo, for his part, could be high-handed in regard to experimentation, writing, for example that it was only the need to convince his ignorant opponents that made him resort to ‘a variety of experiments, though, to satisfy his own mind alone he had never felt it necessary to make any’. As [historian of science E.A. Burtt] has written, ‘If this was seriously meant, it was extremely important for the advance of science that Galileo had strong opponents…’

In this case, experiments were critically important because those are what demonstrate that Galileo’s theories were right – that they worked when you applied them out in the world. It’s the same with innovation – we need to show that our ideas work. And then we need to get them to spread, which usually means defeating the opponents of our ideas.

Machievelli’s enemies are Galileo’s opponents. Whenever we come up with great ideas of our own, we have enemies and opponents too. One way or another, our innovative ideas have to displace ideas that are already out there, to which people often have strong attachments. To get our ideas to spread, we have to break these attachments.

This is a large part of why business model innovation is so attractive. When we innovate our business models, we are creating new space, where the competing ideas aren’t as strongly embedded. The drawback to this is that it is harder to prove to people that the ideas work, because there are fewer references points. The advantage is that there are also fewer pre-existing connections that have to be broken.

Getting ideas to spread is challenging. It’s a mistake to think like Galileo and to believe that it’s simply enough to have the great ideas in the first place. We have to show that they work, and then we have to enter the battle that Machievelli describes. This is often hard, because many innovators are ideas people. But it’s much more satisfying to see our ideas adopted. So don’t just have the great ideas, show that they work, and get them to spread.

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Innovate It Like Beckham

Take a look at David Beckham’s goal against Greece that sent England to the 2002 World Cup Finals:

If you ask famous athletes how they do things like that, they find it difficult to explain. How can you make a ball dip a meter while curving two? Who knows? Actually, there are some researchers that know – four physicists published two articles shortly after that goal called ‘The Curve Kick of a Football’ (summarised here). According to their simulations, to get that kind of spin, you kick the ball like this:

So if the physicists can explain it, and anyone can read how to do it, why can’t we all bend it like Beckham? According to John Kay in his new book Obliquity: Why Are Goals are Best Achieved Indirectly, it’s because it’s impossible to navigate complex systems rationally. In order to succeed in complex systems (like top tier athletics, or, more importantly for our purposes here, the economy), you succeed through expertise, practice, and judgment. When Beckham kicks it like that, he’s not solving a long series of differential equations in his head on the way to the ball – he’s applying years and years of knowledge and judgment based on experimentation and practice.

This is why experimentation is an essential part of innovation. It’s also why we need to innovate. The economy is a complex system, which makes achieving our goals difficult. Kay contrasts two approaches, the rational direct approach, and the oblique experimental one:

Direct action

* Objectives are clear
* Systems are comprehensible
* We know the available options
* What happens happens because someone intended it
* Rules can define the system
* Direction provides order
* Good decisions are the product of good processes

Obliquely does it

* We learn about our objectives as we strive for them
* Systems are complex and depend on unpredictable reactions
* We can consider only a few possibilities
* There is no clear link between intention and outcome
* Expertise is required, tacit knowledge is essential
* Order often emerges and is achieved spontaneously
* Good decisions are the product of good judgment

One of the reasons that people are often uncomfortable with innovation is that it doesn’t fit with the rational direct approach. We can’t show a net present value calculation that demonstrates guaranteed returns, we are actively courting uncertainty, and the links between what we are trying to achieve and our actual outcomes are unclear and difficult to unravel.

This requires an oblique approach. We need to settle on our general goals, and then experiment. As we learn what works and what doesn’t we build up our tacit knowledge and our judgment. Experiment, learn, improve. That’s how to innovate like Beckham.

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Three Ways to Experiment for Innovation

I think that a lot of time when we talk about the importance of failure in innovation, people think about big, major failures like the Ford Edsel and the Apple Newton. But the whole point of driving innovation through experimenting is to figure out ideas that won’t work early. We want to find our failures before they are fully-fledged product, that’s expensive to produce and launch. The way to do this is to experiment. In a really nice post, Andrew Dick talks about how to use the scientific method in business, including these steps:

1. Find phenomena that you want to understand (more)
2. See what information there is about this phenomena, or similar phenomena
3. Collect data of the phenomena using whatever methodology seems appropriate
4. Construct a hypothesis as to why this phenomena occurs
5. Test your hypothesis through experiment and data analysis (start again if it doesn’t)
6. Draw conclusions

Here are some examples. First, you can use customer data to drive experiments to discover the experiments to which people are most likely to respond. Tesco does this their ClubCard program to experiment extensively (it’s described at the end of this case). They have a couple hundred thousand members, and by offering discount for using the ClubCard, Tesco gathers a huge amount of data on what people are buying. This includes information on brands, amounts, combinations of items, and so on. The experiments come in two forms. They test out new products with special offers to ClubCard members, and they test out incentives to offer the club members. Each year they run thousands of these kinds of experiments. Each one teaches them something. Sometimes it’s what works, others it what doesn’t.

Amazon does similar experiments with their homepage – they offer many different versions to people and discover what works and what doesn’t. Similarly, Google experiments with hundreds of tweaks to their search algorithms each year. So data-driven experiments are one way to improve innovation.

A second way to use experiments is through finding a small-scale method to test out products and services. I’ve talked previously about how Unilever Hindustan tested out a radical new business model in India. They started a program that transformed the way that the entire company does business in that market by setting up just seventeen women in the new business model. The point of the experiment was to figure out if they could help these women set up their own successful businesses by helping them build their skills, to figure out if there was sufficient demand for these products in the poorer regions of the country, and to sort out how to best build the distribution network.

Once they discovered what worked and what didn’t, the slowly expanded the program to include 45,000 women serving over 100,000 villages throughout India. If the initial trial had failed, the cost would have been minimal. And because it wasn’t a big flashy launch of a full new product or service, no one would have even known about it. The second way to innovate through experimenting is to find a small trial.

The final way is even cheaper and faster – and that is to figure out a way to try an experiment with an idea. That’s what we’re doing here on the blog. There are over 300 experiments here. Some of the ideas have worked, and some haven’t. The ones that worked have been scaled up into public talks, sections of lectures, article ideas for magazines and journals, and, if everything goes according to plan, a new executive education program that we’re aiming to roll out later this year. That’s a lot from just testing out ideas.

So the point with experimenting to drive innovation is to do it as cheaply and quickly as possible. If you can trial ideas, do so. If not, figure out a way to test out new products and services on a small scale. And if you have access to lots of data, then you can use this to drive multiple small-scale experiments.

Try things, learn, and scale up. That’s using experiments to improve innovation.

(photo from flickr/steve.hubbard under a Creative Commons License)

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The Exercise Equipment Theory of Innovation

I’ve been thinking of the issue of process versus tools, and I thought of a good analogy. Innovation management for organisations is like fitness training for people.

How many of you have ever bought a piece of exercise equipment because you thought that having the tool would make you more motivated to exercise? I have, a few times.

The fault in the logic is this: the exercise equipment doesn’t make you fit. Having a commitment to fitness and a plan for improving your own fitness is what makes you fit. Once you have the commitment and the plan, then you can get equipment if you need it. But the thing that you discover is that once you have the commitment and the plan, you don’t really need the equipment at all. It can help, but if you’re really committed to fitness, you’ll find ways to exercise whether you have the equipment or not.

Managing innovation follows exactly the same logic. Lots of people start with the tools – brainstorming, communities of practice, stage/gate, etc. But innovation tools are just like exercise equipment. Having the tool doesn’t give you the motivation to be more innovative. You have to have the commitment to innovation first, and a plan for managing the process. Innovation tools can be really useful, and once you have the commitment and the plan, then you can pick the tools that will provide the most help in meeting your goals.

But if you have the commitment and the plan, then you might not need the tools at all. That holds true both for fitness and for innovation. Make your innovation management healthier by building commitment to innovation, and a plan for managing the process.

(image from flickr/.Rouzeh under a Creative Commons License)

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Three Key Ideas for Leading Innovation

I just finished doing a series of talks for the Australian Industry Group. I was on an expert panel with Kate Morrison and Roger La Salle and we discussed the topic Innovation: Where to next for your company? We spoke to 200 people over four events in Brisbane, Sydney, Melbourne and Adelaide. It was great to get out and hear about what firms are thinking and doing about innovation. It was also great to meet a few of the blog readers in person!

Here is my talk from the Melbourne event (hit the green arrow to hear the audio, and the slides will advance automatically – it runs for 16 minutes, and if my voice sounds really weird, you need to download the latest version of flash):

In my talk, I looked at three ideas that you need to understand to lead innovation within an organisation. Most of the people at the breakfasts were owners or managers of small firms, so the ideas were organised around themes that might help them. The three key ideas for leading innovation will not come as any surprise to regular readers here – they are:

  • Invention is not innovation: Invention is coming up with a great idea, innovation is executing a great idea and getting it to spread. If you think that managing innovation is all about ideas, you end up trying to capture lightning in a bottle – you have to figure out a way to generate and capture more ideas. However, most organisations actually have plenty of ideas – their problem is in selecting and executing the best ones, and getting the ideas to spread. That’s innovation – and if you think about it that way you realise that it is a process that can be managed.
  • Innovation is more than just new products: We often think that innovation is only about new products and services. However, there are many ways to innovate. An important one that is often overlooked is business model innovation. This is basically finding new ways to bring a product or service to market. The example that I use in the talk is Better Place – an electric car manufacturer. They have an innovative product, they have an even more innovative business model. Their cars perform like petrol-powered cars – which makes it a vehicle not just for people that want to be green, but for everyone. Most importantly, they are charging by the kilometer rather than selling cars outright. This allows them to use a novel method for recharging and switching out batteries. It’s an inventive business model, and a good illustration of how business model innovation can work. It’s something that more organisations need to think about.
  • Innovation is a process: This follows directly from the first point. Innovation is a three step process – you need to generate new ideas, you need to select and execute the best ones, and you need to get your new ideas to spread. John and I like to use the innovation value chain to measure and manage this process. It is a method that seems to work pretty well. At the last three events, Kate asked the audience how many people had a managed innovation process in place. In each location, only one person did. That’s about 2% of firms! There is a huge opportunity for firms to manage innovation more effectively by thinking of it as a process rather than an event.

If you understand and act on these three ideas, you can improve your innovation performance. Since it seems like relatively few firms do, it gives you a chance to become an innovation leader.

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Is Business Model Innovation Just Another Name for Strategy?

If you have been following the posts over recent days you can probably guess that Tim and I have been talking a lot about business model innovation. To quote a phrase, we know business model innovation when we see it and some business model innovators such as Ryan Air and Ikea have become global market leaders. Also, there is good evidence that business model innovators have superior performance compared to other forms of innovation.

I’m thinking about this because I am actually a strategy guy and in my MBA classes and corporate seminars I also talk about companies such as Ryan Air and Ikea because they are examples of successful strategy. This leads to the question of whether business model innovation and strategy are really just the same thing? Certainly successful business models should also have sound strategic principles behind them and one of these is the central concept of ‘fit’. This is an old idea made popular by Michael Porter in the 1980s and it is really about lining up all of your business operations behind a central logic of value creation.

Using Ikea as an example of strategic fit, the fundamental logic of the business model is creating value through economies of scale. Large self-service stores in near wealthy population centers, products with shared components and flat-pack design all support the logic. Often when we see businesses getting into trouble it is because they are trying to mix different value propositions together or the established business model gets surpassed by others with better business models with superior value propositions. Saab is an example of business model failure with no clear value proposition. There was not enough scale to compete on costs and not enough differentiation through superior technology and design to command a price premium.

In my strategy seminars, I use a diamond model developed by two US academics, Hambrick and Fredrickson to talk about strategic fit. A good business model like Ikea can demonstrate how all of the components of the diamond fit together and reinforce each other. Ikea’s business vehicle is organic growth which gives them control over the operation. Their differentiators are well designed products at a competitive price and staging of growth has been rapid to capture scale. Fit can also be a source of competitive advantage because it is hard to replicate. Organizations are complex beasts and making everything work together takes time, effort and leadership.
strategy diamond

To return to the original question, I think incremental business model innovation is the same as executing a good strategy. Apple has just posted a stellar 90% increase in profit and much of this growth is based on a suite of products closely related to each other and not to far from the business model that Apple has had for a few years now. The strategy is well thought out and successfully planned and implemented. However, I think that strategy and business model innovation diverges when we talk about radical business model innovation. Why? Because strategy is still based upon conventional thinking about planning, prediction and measurement. Moving to very different business models needs the tools and concepts from innovation management rather than predictions and plans from strategy textbooks. Tools such as real options and the three horizons will help stage the innovation process to reduce downside risk and capture the upside. Innovation jams and lead-users might be useful to get new ideas on other business models. Stage-gate methods might enable us to trial new business models and scale up as some models show signs of being successful.

The potential of business model innovation is enormous. One of the most basic definitions of innovation is doing something different in a way that creates value. Innovation managers have focussed on the ‘doing something different’ part of the definition but we are a bit fuzzy about the value thing. When we take an innovation and build a reinforcing set of activities around it that are underpinned by a central customer value proposition then we really have the whole innovation thing working- and the observation that business model innovators top the class becomes perfectly understandable. I’m pretty excited to see how strategy and innovation can actually work together. They are two sides of the same coin.

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How to Win in a Network Economy

The economy is a network. I’m Reading Smart World by Richard Ogle and he talks about a couple of the important implications of this. The networked nature of the economy tells us a lot about how innovations diffuse – particularly some the difficulties new ideas face in getting adopted. It sheds light on some questions like: how did Xerox go from having a 75% market share in photocopiers to a 37% share in less than five years in the 1980s? How did Google enter a crowded search market and come to dominate it so quickly?

It turns out that long periods of stability punctuated by sudden unexpected change a very typical of networks, and Ogle explains why in the book (which is very good). The stability is driven by the tendency of the rich to get richer in networks. What we see in networks based on personal interactions is that people, ideas, websites and products that are well-connected to start with tend to be more likely to attract new connections than those that are less connected. Researchers call this “preferential attachment” – and that is what drives both winner-take-all markets like search, and oligopolies (a handful of major firms dominating a market). The rich get richer effect keeps the major players in a market in power, making it very difficult for new entrants to get in. That’s what gives us the long periods of stability.

However, when the structures of these markets change, the usually do so incredibly quickly. How? The Google and Xerox examples show two different ways this can happen.

The Google example is simplest. The Google search algorithm was enormously better than anything else around at the time. When Google started, there were a bunch of different search engines. Yahoo, Lycos and Alta Vista all covered generic search – and for a long time all of them had actual people linking websites to search terms. Ask Jeeves was slightly different, as it attempted to answer natural language questions. If you were using the internet through the 90s, you’ll remember how horrible the search results tended to be. It was often even difficult to find a particular site by searching for its name! It’s part of what gave the web it’s serendipitous nature. That was cool (and a bit whimsical), but it limited the overall usefulness of the web.

The innovation of the Google algorithm then was able to take over the market very quickly simply by being better. It provided usable results, which were usually much more accurate and complete than those from other search engines. They also automated scanning the web for new sites – so you no longer had to submit your website to the search engine so that it would know that you were there.

So one way to effect a rapid change in a networked market structure is to introduce an innovation that is substantially better than what is out there. This is particularly effective if the market is still relatively new, and people are still trying to figure out what works best.

However, once you have a dominant player in place, simply being better doesn’t work as well. I’ve done some testing, as have a few other people, and it looks like the results from both Yahoo and Bing might be a bit better now than those from Google. And yet, people aren’t switching. Once a dominant player is there, you not only have to introduce an innovation that is substantially better than what they offer, you have to get people to break connections with that competitor. This is often incredibly difficult (or impossible) to do. Think of the Dvorak keyboard versus QWERTY, and Beta versus VHS for just a couple of examples.

If better doesn’t work, what can you do? This is where business model innovation comes in – as illustrated in the case of Xerox. In the early 1980s Xerox dominated the photocopier market. They sold high-volume machines to big corporate users. If you were small, you either used technology that was 40 years old, like mimeograph machines, or you went to a copy centre where there was enough volume for them to justify buying a big xerox copier. Then firms like Canon and Ricoh decided to enter the copier market. Did they make better copiers? No. They actually made copiers that were much worse on nearly all dimensions. They were slower, they were less reliable, they were of lower quality. So why did people buy them? Because they were affordable, even if you were a small office.

Canon and Ricoh innovated the other parts of their business model as well to support cheap copiers for everyone. They dumped expensive in-house professional sales and service – selling their copiers through office supply stores and letting independent contractors service the machines. So their innovation was not in the technology – it was pure business model innovation – they figured out a way to connect up with a huge number of people that had previously thought that a copier in their office was far too expensive to ever consider. They expanded the network.

Xerox’s market share didn’t drop because they were losing sales so much as it dropped because the number of copiers being sold overall went through the roof. It wasn’t until about 10 years later that Xerox was in trouble – that’s how long it took the new companies to develop the capabilities they needed to compete directly against Xerox in the high-volume part of the market. This is a classic disruptive innovation strategy, and a great example of business model innovation.

When these kinds of changes happen, they are incredibly rapid. Both the stability and the rapid changes are due to the fact that the economy is a network. Understanding this can help us develop more effective strategies for getting our innovative ideas to spread.

(Dvorak keyboard picture from flickr/lezoni de stile under a Creative Commons License)

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Sustainable Business Model Innovation?

I had a meeting today with Terry Cutler, and he told me about a couple of interesting examples of business model innovation. The striking one comes from Chile. As in many other countries, Chile’s old-growth rainforest has been severely depleted through logging and land-clearing. There have been major international protests against the logging practices of the two leading Chilean timber firms – Arauco and CMPC, which have led to boycotts of their products in the United States and Europe.

This has caused some problems for Arauco and CMPC, particularly when firms such as Home Depot and several other major timber purchasers pledged to stop buying Chilean timber.

They came up with a pretty interesting solution to the problem – they innovated their business model. How? By forming a strategic alliance with several of the NGOs that were leading the boycotts including (in the U.S.) American Lands Alliance, Natural Resources Defense Council, Greenpeace and Rainforest Action Network, (in Chile) Defensores Del Bosques Chileno, Instituto Ecologia Politica and Greenpeace. The agreement brings the NGOs into the forest management process of Arauco and CMPC, which are obviously of critical strategic importance to the firms.

This is an enormously creative solution to the problem. The idea of negotiating with people that appear to be trying to put you out of business would strike many firms as unproductive. And yet, by doing so, Arauco and CMPC gain access to an important market, they make themselves demonstrably more sustainable, and they go some way towards making themselves genuinely green.

That’s the power of business model innovation – it gets you into completely new space. When you do this, you are essentially creating markets. The huge benefit to this is that when you create a market, you don’t have to put as much effort into breaking existing ties between your competitors and their customers.

Here’s an interesting question – where are there similar opportunities?

Terry put forward an interesting idea. One of the areas of research strength in Australia is genetically modified food. There are bans against selling GM food in Australia and Europe. He suggested that the organisations with this specialty have an opportunity to generate a similar innovation in their business models.

Business model innovation is something that is worth considering – especially if you find yourself facing seemingly intractable problems.

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