Archive for category business models
A Patent is Not a Business Model
Posted by Tim in business models, innovation strategy on 7 March 2010
A patent is not a business model, and we need to stop acting like it is.
One of the statements at the Australian Association of Angel Investors Annual Conference that really rubbed me the wrong way came from a person in a university technology transfer office who said something like: “Open innovation is dead. It was just a fad, but companies are now realising that they have to have protectable IP if they are going to succeed.”
This is wrong in just about every conceivable way.
Stefan Lindegaard is one person that provides an excellent set of resources concerning open innovation. In one of his recent posts, he included links to a HUGE range of resources on open innovation, including a list of firms using it (including 3M, BMW, Dell, GlaxoSmithKline, Huawei, and Unilever), and numerous open innovation intermediaries, software and conferences. The inclusion of firms like GSM and Unilever are particularly interesting, since they are both in industries that have the capability of benefiting from patent protection, yet they are still pursuing open innovation. This actually makes sense, because open innovation was originally designed as a method for getting more patented technologies into play. The idea is often caricatured by opponents as meaning ‘please take all of my ideas and use them’ – this is patently absurd.
However, my biggest problem with the statement is the contention that having protectable IP is the only way to succeed. I guess this is understandable coming from an organisation whose primary performance metric is patents generated. As John has pointed out, overall, patents are a lousy proxy measure for innovation.
The focus on patents and IP is simply another incarnation of the overemphasis on ideas. The built-in assumption here is that once you have an idea that no one can copy, then you’re set. But we know that’s not true. Ideas have to be executed, and they have to diffuse – and empirically we know that these are the parts with which most organisations have difficulty.
A great idea is a core part of any business model. However, it is simply that – one piece of the puzzle. You still need to know who benefits from your great idea, and how to get your idea embedded into the value network. You need to know how to generate revenue from your idea. Patents create scarcity, and that is one way to make money. But there are others. One of the reasons that open innovation being used more widely is that it lets you outsource idea execution and idea diffusion to partners that are better at it than you are. That is why many organisations use open innovation strategies to take advantage of ideas that have patented, but which they are poorly equipped to execute.
We have to stop thinking about patents and intellectual property as ends in themselves. They are components that can built into successful business models. They are one way of certifying that our ideas are good. But as we’ve said many times here, great ideas are not enough. Let me repeat that: great ideas are not enough. To succeed, we have to better than our competitors at executing our great ideas, and better at getting them to spread.
(picture from flickr/gurdonark under a Creative Commons License (of course!))
See Things Differently
Posted by Tim in business models on 4 March 2010
I ran across this story earlier this week about Ludwig Wittgenstein in an otherwise awful piece by Paul Monk in The Australian:
A student says to Wittgenstein, “You know, it’s really not surprising that people believed for so long that the sun revolves around the earth, because it looks like that is what happens.” To which the philosopher responded, “Really? So, what would it look like if, actually, the earth revolved around the sun, while turning on its axis?”
One of the key ideas in the business models research is that once a firm develops a successful business model, they tend to replicate it with all of their future innovations. Organisations get stuck in particular business models that become their dominant logic – and this often prevents them from innovating effectively.
Today I have some very simple questions for you: what parts of your business do you completely take for granted? What parts are so obvious that they look just like the sun revolving around the earth? What would happen if you thought of these parts using a different perspective?
If you start taking these questions seriously, you start getting into the area of design-driven innovation. I keep saying that we don’t need more ideas, we simply need better ones. This is one way to get better ideas. Take your foundational assumptions, and find a different explanation for them. This leads to new business models, and this is one of the most effective forms of innovation.
One of the key skills in innovation is seeing things differently. It’s the best way to create novel connections of ideas – and that’s the fundamental creative act in innovation.
Designing Espresso Innovation
Posted by Tim in business models, design, innovation strategy on 26 February 2010
Here are some thoughts on ‘design-driven innovation’ versus ‘design as making things look cool’:
Design-Driven Innovation – Nespresso from Tim Kastelle on Vimeo.
And here are some related points:
- We often think of design as making stuff look cool, but when we talk about design-driven innovation, we’re actually talking about creating new categories of goods and services based on a deep understanding of what our customers are trying to do.
- With many design-driven innovations, market testing is very difficult because it is extremely hard for people to envision how the innovation will work. However, this does not mean that mean that customers are unimportant in the innovation process. It simply means that they can’t tell us in advance what they want. So design-driven innovation faces higher levels of uncertainty than innovation processes trying to solve a known problem.
- The Nespresso case is apparently very popular in Europe, where the system was first launched (a full description of the way the system works can be found here). It is a great example of business model innovation (here is an excellent discussion of this). I talk about the importance of working from the espresso-making process out to the machinery instead of vice-versa – many of the innovations in the business model follow from this choice. By setting up the Nespresso Club to sell the coffee, they essentially built an iPod/iTunes style system – this model was just as innovative in coffee as it was in mp3 players.
- This is another great example of the difference between invention and innovation. The patent for the espresso capsule was granted in 1976, but the first Nespresso machine was not on the market until 1991. This is not at all unusual.
Nespresso is a pretty interesting case study. It shows some of the benefits of design-driven innovation, and the benefits of business-model innovation as well. It’s pretty good coffee too.
Building an Entrepreneurial Network
Posted by Tim in business models, innovation strategy, networks on 20 February 2010
What is the biggest challenge facing an entrepreneur? There’s coming up with a great idea, which can be hard. There’s finding funding, which is definitely a challenge. There’s getting your idea to work, and we’ve been arguing here for quite a while that execution is critical. But I think that the biggest challenge is actually building your network – and it’s one that people give almost no thought to at all.
On the last day of the Australian Association of Angel Investors National Conference yesterday, we started the day hearing elevator pitches from three start-ups. It was pretty interesting to listen to them, and there were some common themes. All three firms had what sounded like great technology. The ideas were clever, they appear to meet market needs, and all of them are far enough along that they’ve successfully executed the ideas. All of them need more money now to get to the point where they’ll cash in, but I think that to actually get to that point, they need better ideas about developing their networks.
There are two key parts to this. The skills you need to execute an information-based business model are aggregating, filtering and connecting. Building the entrepreneurial network is all about connecting – and also getting people to unconnect.
The first key part is linking into the value network which surrounds and supports your innovation. Entrepreneurs often focus too much internall, on their own ideas, and don’t think as much about this, but it’s a critical issue. Which parts of the economy support your idea? What is your relationship to them? Finding financing is part of this, and so is finding suppliers and distributors.
In large firms, these links usually already exist. That is the easy part for them. The hard part is getting their own internal systems to change – this often means they have to break some of the existing links in their system which is hard. Entrepreneurs have the opposite problem – they have no existing links at all. They have to build their own, and in doing this, they often have to get people to choose them over their current collaborators. In many cases, entrepreneurs are trying to build links to existing companies as part of their exit strategy. When I was working for a software start-up ten years ago, everyone’s exit strategy was to sell out to Microsoft. The conversation at the AAAI Conference shows that the strategy now is exactly the same, except that we’re all trying to sell to Google instead.
In either case, your position within the value network will determine whether or not this can happen. Alan Noble from Google said yesterday that in many cases they are waiting for software start-ups to demonstrate these links before they’ll consider buying the firm.
The second part of building the network is connecting with customers. With the large firms, it means that they either have to get current customers to stop using whatever they’re buying from you now and switching to the new innovation. Many firms resist this, because they don’t want to cannablise existing markets. The other option is to find new customers for the new idea. The problem here is that the new customers often require a completely new value proposition – and existing firms find it diffiult to create these.
Again, entrepreneurs face the opposite problem. They don’t have to worry about cannabilisation – in fact, they want to cannabilise existing markets! Their problem is that they don’t have any customer connections at all. And in many cases (as in all three firms presenting at the conference), the assumption is that superior technology will automatically win. We know this isn’t true, even when the technology is demonstrably superior along all technical dimensions (see the story of the 56k modem, for example).
The example yesterday came from a firm with a bunch of bioremediation technologies. One of them sequesters hazardous waste, and it apparently does it more cheaply and more effectively than the current technology. The potential market is very big, and they are in negotiations with a couple of major firms to buy the product. The problem for them is that everyone knows that the current technology works. Why take a chance on something new, especially if there are major downside risks if the new technology doesn’t work as advertised? How can you demonstrate that your new technology will work when it hasn’t been used in this exact application or on this scale before? It’s a big problem.
To break these existing bonds, you not only have to be better, you have to get people comfortable enough with your innovation that they are willing to abandon what they’re currently using – you have to get them to unconnect from something else before they’ll connect with you.
I think that entrepreneurs would benefit greatly from thinking about building a network. To me, the most interesting questions for these start-ups are: how will you link in to the value network? and who is your competition and how will you get people to unconnect from them? If I were investing my own money, I’d want good answers to both of these questions before I signed a cheque.
(Picture from flickr/Eole under a Creative Commons License)
Financing Innovation: Report from the AAAI Conference
Posted by Tim in business models, innovation on 19 February 2010
We keep talking about how it’s not enough to just have good ideas, we have to execute them to turn them into innovations. A lot of good ideas can be tested on a small scale to see if they’ll work, but many ideas need a fair bit of cash to execute. If you work in a big company, there should be some kind of process in place for selecting and executing ideas. If you’re an entrepreneur, you need to find the money yourself. I’ve spend the past three days at the Australian Association of Angel Investors (AAAI) National Conference 2010 in Adelaide, learning about innovation finance from the side of the people with the cash.
As with many important ideas about innovation, Schumpeter was the first to really draw attention to the critical connection between entrepreneurial idea execution and the importance of finance. The importance of that connection has only increased since he first made it in the early 20th century. Angel Investors are a key part of the finance ecosystem as they are the most common providers of seed funding. So the work with people that have great ideas, but often not a whole lot else. The venture capital funding doesn’t usually come into play until the idea is more developed.
Here are some of the things that I’ve learned while listening to talks at the conference:
- The finance people talk about ‘innovation’ the same way that we talk about ‘invention’ here, and we’re referencing the same thing – an idea that hasn’t been executed. As Dan Mothersill put it: “The net sum value of a killer idea is zero.”
- The bulk of the Angel investment in the US, Europe and Australia is going into biotechnology, software and medical devices. Cleantech and other energy related ideas have been the fastest growing sector over the past year or so. This is interesting because other stats that were discussed yesterday suggest that most successful start-ups are not reliant on Intellectual Property rights as a key part of their business model, but most of the money is going to industries with strong IP regimes (with the exception of software). I wonder if this reveals a problem in the screening process?
- Some interesting stats: according to Angelsoft, which compiles data from around the world on over 20,000 idea proposals per year, this is how many of those were evaluated and funded in 2009:
That’s part of why I’m wondering about the screening process. On the other hand, Angel investors that screen rigourously make a much higher return than those with less process (and the good processes are checklist driven!). The consensus is that about 50% of Angel investments result in all the money being lost, about 40% break even, and the whole game is worthwhile because of the payoffs from the other 10%.
- The vast majority of Angel investments exit and make money once the start-up is bought out. Initial Public Offerings of stock continue to be pretty much non-existent (13 in the US last year!).
- There appears to be a strong move towards collaborative investing. AAAI primarily represents Angel networks. They share the effort on evaluating ideas, and if the idea gets through all of the due diligence, then several members of the network will end up putting in money. Related to this, many of the conference participants are reporting that VC funds have been moving away from seed funding in recent years. The Angel networks end up filling this gap. My suspicion is that there is definitely a network analysis story in here. I bet that there are structural differences between the collaborative and investment networks of successful Angel networks compared to those of less successful ones.
- Sue Preston from CalCEF Clean Energy Angel Fund in the US and Nick McNaughton from Blue Cove Ventures in Australia both said that M&A interest in start-ups increased dramatically in December after over a year of being essentially dead in both countries. Others reported similar observations – this seems to be an interesting signal about the current state of the economy.
- McNaughton also discussed innovation in China and suggested that Angel investors are not paying enough attention to Asia. On his recent travels there he discovered that there are over 240 companies working on making electric cars in China. This is consistent with research that I’ve done in the area as well – the idea that the Asian economies are primarily driven by imitation rather than innovation is about 10 years out of date. We need to take this more seriously.
- When Eric Schmidt from Google spoke at TED last week, he gave everyone in the audience a free Nexus One smart phone. When Alan Noble from Google Australia spoke here, he gave all of us a free look at a Nexus One. Unfair!
The conference has been quite interesting, and I’ve learned a lot. I also have some thoughts on how entrepreneurs link their ideas into the economic network, but I’ll save those for another post. In the meantime, I think it’s sufficient to reflect on the critical importance of finance to innovation. It’s an idea that we probably haven’t discussed enough here, but I definitely aim to give it more thought!
Aggregate, Filter & Connect for Smaller Firms
Posted by Tim in aggregate, business models, connect, filter on 15 February 2010
We know the story by now: as it becomes less and less expensive to transfer digital content, the price firms can get for information-based products and services is being driven down. This has led to chaos in the music, news and publishing industries. So everyone in these industries is doomed, right? Wrong. I believe that successful business models in information-based industries can be built if you focus on three key skills: aggregating, filtering and connecting.
I’ve talked about how this is true for people, and also for large firms like Amazon. But what about medium-sized companies? Doesn’t all the money go to the big ‘aggregators’ like Amazon and Google? Not necessarily. A great example of a smaller firm that has been very successful in the information-based industry of publishing is O’Reilly Media. Today I’d like to talk a bit about why I think they are doing well. But first, let’s hear why Tim O’Reilly thinks they’re doing well:
Tim O’Reilly makes the argument for Open Publishing @ TOC 2009 from Open Publishing Lab @ RIT on Vimeo.
Right off the bat, he characterises the firm as ‘connectors’. O’Reilly works to spread ideas (connecting ideas to people), and then uses the connections that are made to generate money. It’s a pretty good business model, and one that I think will continue to work. Here are some more examples:
- First off, O’Reilly filters by specialising – they are not a general publisher. Here is Tim O’Reilly’s broad business goal:
Here’s mine: To become the information provider of choice to the people who are shaping the future of our planet, and to enable change by capturing and transmitting the knowledge of innovators and innovative communities.
To do this, they primarily focus on publishing books on the internet and open source technologies, programming, and systems administration are probably their core areas, but they also look at other digital topics like security, digital photography and information design. When building their business models the first thing that smaller firms need to do is to find something in which they can be the absolute best.
- Once they have filtered by specialising, O’Reilly aggregates in a couple of ways. One way is through the conferences that Tim O’Reilly mentions – they draw thousands of people that are interested in the O’Reilly core topics. It’s likely that most of the people that are interested in writing on these topics show up at these conferences. They also aggregate by building a community around their work. In addition to the conferences, they do this by hosting online user groups and forums, providing training, and giving away a lot of relevant content through blogs, white papers, and free downloadable copies of many of their books. All of these activities pull in the people that are most likely to contribute great new content themselves.
- When I talk about connecting at the personal level, there are two directions of connections. People connect up ideas, and this is how they create value. They then connect their ideas to people – this is how they get their ideas to spread. It is roughly the same for firms. First, they create value by connecting up their value network. In the case of O’Reilly, part of how they do this is by taking a highly activist role in the editing process. As John Scalzi humourously points out, publishers provide a number of services that are critically important to authors. Connecting authors to the right resources is a key part of building the value network at the back end – ultimately, it is the value network that creates economic value.
- The second part of connecting for firms is getting your ideas to spread. I think that this entails much more than marketing. It is built upon meeting the needs of your customers and business partners. Again, O’Reilly takes an approach that is different from most publishers. They have been much more willing to provide free downloads of books – sometimes this hurts sales, but sometimes it has driven sales. In both cases, it has helped to build the community. They also get their ideas to spread through the conferences. As this week’s TED conference has shown, when you have limited space available for a desirable event, you can charge people a lot to attend. One of the ways that people get their money’s worth from such events is to tell everyone they know about them – which spreads the ideas.
Tim O’Reilly wrote the book (well, the article) on Web 2.0 – and he uses the principles he has outlined to build his company. There isn’t anything new in any of the individual actions that O’Reilly Media undertakes – the thing that is unique is the way that they have combined things.
This is a great example of business model innovation. They are not delivering books, they are delivering ideas. Once you make that key switch, there are many new opportunities available. The O’Reilly Media business model is based on skills in aggregating, filtering and especially connecting. These are the three critical skills that you need to build successful information-based business models – whether you’re a person, a huge firm like Amazon, or a smaller firm like O’Reilly Media.
New Ideas in Old Systems
Posted by Tim in business models, evolving economic entities, networks on 4 February 2010
The fundamental point that I was trying to make in yesterday’s post is that most of us are facing the same innovation problem: it is extremely difficult to get new ideas to spread within most organisations. We are a bit deceived because we hear about innovation at Google, and 3M, and Apple, and we think that all of our organisations should work like that. Unfortunately, most of them don’t. My examples yesterday came from education, and I know that a lot of people in the public sector think that innovation is unusually hard in their organisations. But nearly everyone resists change. Here are some examples.
First off, here’s ex-Pitney Bowes CEO Mike Critelli on how they faced disruptive innovations:
In 1999, two start-up companies challenged us with online postage solutions. My chief operating officer, Marc Breslawsky, and I were in a minority among the senior team in believing that these companies posed no threat to us. Many employees and high-level executives, one or two board members and many shareholders told me that the world had changed and that I was in danger of ignoring potentially disruptive innovation. The reason Marc and I turned out to be right is that we understood that disruptive technologies are successful only when they are superior to the older technology they replace and when they can be marketed profitably. Neither condition was met.
The blog post discusses how Critelli has consistently had a world view that differed from those around him, and how this made it hard for him to get his ideas across. Many of his examples are cases where he was ultimately right – and in particular, I think that his experiences in changing healthcare are admirable. However, in this case, he wasn’t visionary – he was just lucky (be sure to read Mike’s response to this in the comments!).
Those two conditions are not actually required for disruptive innovations to succeed – especially the first one. Those two conditions are what entrenched incumbents always say when they discount the threat that new challengers pose. As the many studies by Clayton Christenson, Scott Anthony and others show, disruptive innovations are usually technologically inferior when they are introduced. This is precisely why the large firms don’t react – because they correctly perceive that their technology is better. The disruptive innovations change by creating a new market based on different business models, and different value networks.
This misperception of the threat posed by new technologies is one of the reasons that it is often very difficult to introduce innovations within established firms. The fact that P-B’s stock price is now 1/3 what it was when those threats appeared in 1999 suggests that a little more innovation would have proven useful for them.
Here’s another example – Kodak. Simon Waldman has a really nice post on some of the issues that Kodak was grappling with around the same time that Pitney Bowes was thinking about online competitors. He says that they didn’t react to the threat posed by digital cameras because:
* They were distracted by a ferocious price war with Fuji in the late 90s
* They were petrified of cannibalising their film business with digital (further compounding the impact of the Fuji price war)
* They massively underestimated how quickly consumers would ditch film
* Decades of comparable success had made them fat and way, way too happy with themselves
A few months ago, I asked this question to my favourite Swedish PhD student, Christian Sandstrom who has made something of a speciality of creating fabulous Slideshare presentations on the changes in the photographic industry. He responded quickly, but I never posted it here. You can see his answer here.
Here’s the quick summary
* Over aggressive diversification left them burdened with debt and in a weak financial state for dealing with the Fuji price war.
* They put too much focus on ‘hybrid’ solutions – using digital as a way to sell print (eg the Photo CD system)
To me, this sounds a whole lot like the problem that George Siemens is describing in education – they were trapped by their underlying beliefs and ideology. Their fundamental belief was that film would retain its dominance. Digital photos were technologically inferior (especially when they were first introduced), so why would anyone switch from film? Digital cameras took the normal route for disruptive innovations – they found a niche that would value their strength – people that wanted to post pictures on the web. They didn’t care about the poor quality – pictures looked lousy on the web back then anyway. And being able to transfer a digital photo straight to your computer was much easier and much faster than taking a picture, getting it developed, and then scanning it.
Like Pitney-Bowes, Kodak didn’t provide a great environment for innovators back then. Change was being fought hard.
Here’s a third example, going on right now – news. Here’s Felix Salmon arguing that the physical system of producing newspapers is one of the things that is making their transition to digital extremely painful:
Spencer Ackerman uncovers a bit of the hidden point here: newspaper conventions have been built for physical newspapers, and can look silly in the age of the web — especially when the stories themselves appear, pretty much unchanged, on newspapers’ websites. It might make sense for the physical LA Times to run one big story about Afghanistan, but once that decision is made, no one is going to chop that one big story into three smaller ones for the website.
Once again, inertia within the existing system makes it highly resistent to change, as we’ve discussed quite a bit here.
I think that the big difference between the public and private sectors in innovation imperatives is not that the private sector has the profit motive, but rather that occasionally private firms go out of business. It’s not Schumpeter’s “carrot of spectacular reward” that motivates innovation, but the “stick of destitution”. Even with this difference, fighting the inertia within established systems is our fundamental problem – no matter which sector we’re in. It’s hard to get new ideas to spread. That’s our challenge. We’ll keep talking about ways to meet it.
I Have No Idea How the iPad Will Do!
Posted by Tim in business models, innovation strategy, networks, time on 31 January 2010
With all the feverish discussion and prognostication about Apple’s preview of the iPad, I want to be the first person online to make this prediction:
I have absolutely no idea how the iPad will perform.
I’ll go one step further – neither does anyone else. The benefit of making predictions right now is that if you happen to end up being right, you can link back to your post in a few years. If you’re wrong, well, who reads blog posts that are a few years old?
One line of argument that I find really interesting, though, is being taken by people who are arguing that the iPad will revolutionise… something. The argument is by analogy – and what a lot of people are saying in response to critics of the iPad is that people hated the iPod and the iPhone when they were released as well. In particular, the initial response to the iPod introduction was pretty universally tepid.
Garry Tan from Posterous has collected a few of these, and this one pretty well sums them up:
I still can’t believe this! All this hype for something so ridiculous! Who cares about an MP3 player? I want something new! I want them to think differently! Why oh why would they do this?! It’s so wrong! It’s so stupid!
Haha! It wasn’t Apple that was stupid – they were stupid! Right?
Well, maybe. It’s easy now to look at the iPod’s 70%+ market share and wonder how anyone could have missed that it was a game-changing innovation. I’ll tell you how. The fact of the matter is that all the people that were skeptical about the iPod as a product innovation when it was introduced were actually completely correct. There wasn’t much there. Take a look at the iPod sales figures from wikipedia:
The first iPod was introduced at the end of 2001, and you can see that sales figures for the first three years were not good at all. By the middle of 2004, the iPod’s market share had been sitting in the 20-30% range for a while. By the end of 2005, that had shot up to over 70%. What happened?
iTunes happened.
Because the iPod and iTunes are so closely interconnected now, it is easy to forget that iTunes didn’t exist for the first years of the iPod. At the time, the iPod was just another mp3 player. The innovation with the iPod was not in the product – it was the innovation in the product’s value network. It was a similar story with the iPhone. And that is why nearly everyone that is yapping about iPad right now is completely missing the point. Because we don’t know what it’s value network is going to look like yet, and this is what will actually determine whether the iPad will take off quickly like the iPhone did, or slowly like the iPod.
Even when you make great products like Apple, your innovations never stand alone. They work within the context of their economic network. The better you understand this, and the more innovative you are in constructing your value networks, the more successful you’re likely to be.
So the next time someone talks to about all the great new features something has, ignore them. Instead, think about the business model and the value network that will support the great new thing.
Low Tech Innovation
Posted by Tim in book riffs, business models, innovation strategy on 28 January 2010
At start of my innovation courses, students often think that if their organisation isn’t inventing iPads, then they clearly aren’t (and can’t be) innovative. I end up spending a lot of time trying to help them see the many opportunities available for innovation, even within industries that appear to be pretty tightly constrained. In many cases, innovating in these industries ends up being far more important than coming up with flashy new gadgets. If you’re one of the first people to get one of the new iPads, and it fails miserably, will your life be materially worse than it is right now? Probably not.
Andrew Hargadon recounts an interesting story of failed low-tech innovation: construction companies in Florida introduced a new form of drywall, which has subsequently been found to be defective. The problem may affect as many as 100,000 homes, and the cost of replacing the drywall in all of them may run as high as $10 billion. Who pays is a bit of question too.
The point that Hargadon makes is that innovation in a very low-tech field like construction materials can actually have much higher stakes attached to it than innovation in gadgets. That is one of the reasons that these industries are very un-innovative – the cost of getting things wrong is pretty high.
Jeffrey Phillips, author of one of the best innovation blogs around, points out another reason that conservative industries don’t innovate – they often are heavily regulated. According to Phillips:
Too often, the regulations become a “ceiling” for new products and services. Rather than dream up new products and services that customers need, then try to revise the regulations to fit those products, firms use the regulations as a hard and fast rule, never to be breached or violated. They are in a box of their own making and own choosing, and careful never to question the box. Again, disrupters are going to seek ways to make that box obsolete, and the interesting thing about most regulated firms is that they employ lobbyists, whose job it is to influence or change regulations. A truly innovative firm would identify products and services that met customer needs, then lobby for the changes necessary to implement those products, and force the rest of the industry to follow.
Highly regulated industries are also often low-tech as well. The disenctives to innovation in these industries are substantial: the cost of getting things wrong is often enormously high; the stakes are much higher; regulations may make it difficult to bring in new ideas. So why try to innovate at all in these industries?
Phillips’ post starts to get at the reason – the risks are high, but the potential payoffs are also huge. Here’s an example:
There’s an excellent book on the history of shipping containers – it’s called The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson. The impact of containers has been gigantic. When they were introduced, they reduced shipping costs by over 60%. They quickly reduced the amount of labour needed to load and unload ships by over 95%! The first shipping containers were made in the 1920s, but Malcom McLean and his company McLean Industries did what Phillips suggests – he identified the customer need, and then fought regulations until containers went into widespread use in the mid 1950s.
A shipping container is about as low as low-tech gets. The container is one of the primary drivers of the huge increase in international trade from the end of World War II to now – it’s impact has been greater than that of all the high tech gear that gets shipped around, greater than that of the WTO, greater than that of all of the international trade treaties that have been signed.
What does this tell us? A couple of things:
- It’s another great example of the difference between invention and innovation. The box itself was invented 30 years before “containerised shipping” actually got the idea to spread. It’s not enough to have the ideas, or even to show that they work – you have to get your ideas to spread.
- Following directly from that, the big innovation isn’t in the low-tech shipping container, the innovation is in the business model built around the low-tech shipping container. The new business model includes the integration between the container, ships, trucks and eventually rail – a completely different value network. Revenue generation is different too – the cost-cutting through labour saving was unbelievable. All aspects of the shipping business model changed as containers became widespread.
- As in the drywall example, changing the most basic part of the system had a substantial knock-on effect. When McLean started with containers, there was little innovation in the industry. It was highly regulated, and very comfortable – so people weren’t trying many new things. Almost all of the innovative focus was on the high-tech end – making faster ships, increasing the capacity of trucks, and so on. However, all of these innovations only introduced marginal time savings – the bottleneck was still on the docks. The simple container is the innovation that got around that problem.
So here’s a question for you: what low-tech innovation opportunities are available to you? Particularly if you are in an industry with constraints, low-tech is probably the way to go. The challenge for the day is this – find the most basic part of your business model, and start thinking about innovations around that. This will often get you rethinking your entire business model. That’s what makes the stakes high, but it’s also what makes the potential payoffs high as well.
(Photo from flickr/photohome_uk under a Creative Commons license)
Changing the Game for News
Posted by Tim in aggregate, business models, connect, evolving economic entities, filter, innovation strategy on 23 January 2010
A lot of people have been talking recently about a Harris Poll that shows that 77% of people in the US say that they won’t pay for online news. Specifically, this is the question they were asked:
How much, if anything, would you be willing to pay per month to read a daily newspaper’s online content?
And 77% chose the answer “Nothing.” These poll results are absolutely useless – primarily because the question ignores innovation. Here are some things that these results do not say:
- They do not say that information wants to be free.
- They do not say that daily newspaper content has zero value, or value approaching zero.
- They do not say that newspaper readers (or people interested in news in general) are a bunch of freeloaders.
The only thing this polls tells us is that whoever set up the poll is incompetent, and probably shouldn’t be listened to on any further matters of importance. This is fundamentally the wrong question to ask.
If you had asked people in 1980 “How much, if anything, would you be willing to pay per month to watch a television channel’s online content?”, the answer would be “Nothing.” And yet, cable television did reasonably well.
If you had asked people in 1987 “How much, if anything, would you be willing to pay per month to have another phone in addition to the one that you already have? And also, it will have a different number.”, the answer would be “Nothing.” And yet, mobile phones did reasonably well.
Of course people say they’ll pay nothing for news online! What idiot would say that they would? They get it for free already, from a number of good sources. We’ve never really paid for news. Cable TV and mobile phones worked because they offered something fundamentally different from what people already had. Cable didn’t take off until people heard about 24 hour sports on ESPN, and 24 hour news on CNN, and 24 hour music on MTV. Prior to this, you had sports on the weekend, and news at 6 pm and 11 pm, and music, well, never. Cable changed the value proposition.
Mobile phones changed the value proposition too – they allowed you to use the phone anywhere. And eventually, they allowed you to send short text messages. Even still, for me at least, this had negative value until smart phones came along and gave me a portable computer with gps.
And the big problem is that you can’t ask customers what they would want with these things in advance, because we don’t know. You can just experiment. With phones, the telcos always thought that the market was for businesspeople. Initially it was. Once they introduced texting, all of sudden there was a huge market for teens, which drove further innovation.
News has to experiment now, and they need to specifically think about how they create value with Aggregating, Filtering and Connecting. I’ve talked before about many different possible approaches to this. We can develop new funding models, like Jeff Jarvis has. We can develop new value creation models, like Dan Gillmore advocates. We can consciously develop an aggregate, filter and connect model, like politico.com’s or Dan Conover’s.
The main point is that this situation requires business model innovation. To figure out how to do that successfully, we have to ask new questions. We need a news version of cable television. Or a news version of mobile phones. The entire model has to look different. Polls that ask if you’d pay for current content online are not just worthless, they’re harmful, because they prevent us from asking the questions that can lead us to genuine innovation.
Craft-Based Business Models
Posted by Tim in business models, innovation strategy on 20 January 2010
Today I talk about how you can use a craft-based approach to business model innovation:
Craft-Based Business Models from Tim Kastelle on Vimeo.
The key point is that you can create space for yourself, even in a crowded market, by doing something incredibly well. I use some more examples from the music industry.
Here’s the discussion of Kristen Hersh’s business model innovation that I mention, here’s one of the nice fan pages for Independent Project Records, and here’s my original post on craft versus scale.
Amazon’s Business Model Innovation
Posted by Tim in aggregate, business models, connect, filter on 15 January 2010
I thought I’d experiment with a video blog entry. I’ve got no editing software here, so everything was straight to tape. Well, straight to bits. Anyway, if it seems to work ok I’ll scale it up! It runs for five minutes.
Amazon & Business Model Design from Tim Kastelle on Vimeo.
To summarise my main point: the business model for amazon.com did not become profitable until they were doing all three functions necessary in an information-based industry: Aggregate, Filter & Connect. Yesterday I talked about the importance of filtering in scientific publishing business models – but for amazon, the key function is connecting. In particular, the killer app for amazon is their relational database – this allows them to connect related items for people. Amazon was always good at aggregating, and they’ve tried a few different filtering methods, which have all been reasonably effective. But it was only when they added connecting that their business model took off.
Know How You Add Value
Posted by Tim in business models, filter on 14 January 2010
A fundamental business problem right now is caused by the rapidly decreasing costs of storing and sharing data. The combination of these price drops with the increasing ease of sharing digital information has disrupted several industries – music, journalism, and book publishing among them. So everyone with a business model based on information being scarce and expensive is doomed, right?
Maybe not. There are some useful lessons to learn from one information-based industry that so far has avoided major turbulence – scientific publishing. Michael Clarke has written an excellent post addressing this called Why Hasn’t Scientific Publishing Been Disrupted Already? Here is how he sets up the issue:
When Tim Berners-Lee created the Web in 1991, it was with the aim of better facilitating scientific communication and the dissemination of scientific research. Put another way, the Web was designed to disrupt scientific publishing. It was not designed to disrupt bookstores, telecommunications, matchmaking services, newspapers, pornography, stock trading, music distribution, or a great many other industries.
And yet it has.
The one thing that one could have reasonably predicted in 1991, however, was that scientific communication—and the publishing industry that supports the dissemination of scientific research—would radically change over the next couple decades.
And yet it has not.
In his explanation of why scientific publishing has not yet been disrupted, he outlines three key roles for journals.
- Validation: Peer review before publication is designed to validate the findings reported in each article. There are some obvious problems with the peer review process, but in general it does a good job of ensuring that published research meets at least minimal standards of rigor in terms of research design.
- Filtration: As scientific journals proliferate, it is increasingly difficult to keep track of what is going on in any one particular field. Specialist journals allow researchers to keep track of what is happening by aggregating research findings concentrated in one particular area, which makes it a bit easier to cope with the amount of data being produced.
- Designation: Researchers are generally judged by the quality of their output. One way that this is measured is by the quantity of their publications, and by the quality of the journals in which they publish.
Clarke argues that new technology does not disrupt any of these three functions, and that consequently scientific publishing will continue to function much as it does now.
I’ve seen all sides of this process – I read a lot of journal articles, I’ve written a few, and I’ve processed a lot as Managing Editor of Innovation: Management, Policy & Practice. Overall, I’m not quite as confident as Clarke is concerning the robustness of this business model. On the other hand, there are reasons for optimism.
I’ve talked before about how successful business models in information-based industries must be built around three functions: aggregate, filter and connect. You can see from the brief discussion of Clarke’s post how scientific publishers are doing all three things. In particular, there is a strong filtering element in all three of his key functions. Validation is meant to filter out sub-standard research, Filtering is meant of filter out irrelevant research findings, and Designation is meant to filter out researchers that perform poorly. Journals also do some aggregating, and referencing is pure connecting – there is a common thread through all of the lines of scientific enquiry. This suggests to me that scientific publishing may well have a future that looks somewhat similar to its present.
This might all seem fairly boring to someone that isn’t in the middle of performing and publishing research, but I think there is an important general lesson here. I would argue that the main reason that the scientific publication business model has survived the internet relatively intact is that scientific publishers have explicitly recognised that their aggregating, filtering and connecting functions are central to their business model. Several of the industries that have been severely disrupted by the internet have not understood this – with the music industry in particular being a poor example.
In order to survive disruptive change in your industry, you must first know how you add value for your customers. The value in information-based industries is driven by firms that successfully aggregate, filter and connect. If you understand this, you have better chances of survival. If you fail to understand this, you’ll end up protecting the wrong parts of your business model – and that’s fatal.
Three Ways to Win With Your Great Ideas
Posted by Tim in business models, innovation strategy, networks on 12 January 2010
I’ve been spending a fair bit of time recently talking about how ideas are cheap. I’ve been doing this for two reasons: the first is that ideas really are cheap; the second is that organisations often overinvest in idea generation when they’d be better served by getting better at executing ideas. I ran across two different things today that add some support to this idea.
The first is from an interview with the economist Robert Fogel in From Poverty to Prosperity by Arnold Kling and Nick Schulz:
We tend to heroize the person who gets there first, but usually there are a dozen people who were so close that you can feel their breath on the back of their neck, so that if one guy stumbled, it wouldn’t be that that scientific stream wouldn’t materialize. It would be that some other scientific group or individual is the one whose name is attached to it.
I really think science is a collective enterprise. What you can do depends not only on what happened before you but on what everybody else around you is doing. You’re talking to each other and hoping you’ll be a little bit luckier, or a little bit cleverer…
And then I saw a post by Fred Wilson talking about how a third of his firm’s VC portfolio is being attacked by ‘patent trolls’:
But anyone who has spent a significant time in technology based businesses will understand that two groups working completely independently from each other will often solve a problem similarly. One group is not copying or ripping off the other group. They are simply coming to similar conclusions about how to get something done.
In these cases, it makes no sense to protect one group from the other. Nobody has taken anyone’s “intellectual property.” Both groups should own their inventions outright without having to license technology from the other.
In my experience, this has been generally true (although Michael F. Martin doesn’t buy Wilson’s argument). For the moment, let’s assume that this is the case – whenever a new idea is ‘in the air’, several people or organisations will be working simultaneously to operationalise that idea so that they can make money on it. What’s the best way to do this?
I don’t like patenting or other legal IP approaches for a number of reasons. The main one being that in the end, legal protection doesn’t offer you much actual protection. And from a psychological point of view, I think that most people with a great idea want to make money off the idea itself, not from lawsuits. I’m not saying don’t patent, but rather that you should think carefully about three other ways to make money off your great ideas.
- Win through better execution: Edison was at best the 24th person to invent a working incandescent light bulb. Why do we think of him as its inventor then? He had much better execution than the previous 23 teams. His light bulb had a better filament, so it burned longer. More importantly, his group actually got electrical power stations built, and electrical cabling laid.
- Win by having a better network: Stefan Lindegaard revisits the Sony Betamax story today. My thought while reading his post is that Betamax really failed because its value network was worse than that of those backing VHS. Lindegaard frames it as a problem with insufficient openness, but ultimately, you win by having a stronger value network (and a better position within it). The Apple iPhone versus Google Android battle will not be won by the better technology, but ultimately it will be won by the better network.
- Win with a better business model: The Nintendo Wii is a good example of winning with a better business model. The product itself is technologically worse than Playstation or XBox – at least in terms of processor speed and graphics, which is what everyone thought they were competing on. But the innovation with the motion sensor in the controller meant that Nintendo had a different value proposition (play activity-based games), which allowed them to pursue a vastly different market segment (people other than 18-30 year old men).
These strategies obviously overlap a fair bit. For example, your value network is part of your business model, so if you innovate in one it’s likely that you’ll be innovating in the other as well. But if you are in an industry that can not take advantage of legal IP protection, then you must use one of these approaches in order to benefit from your great idea. I would argue that even if you are in an industry with a strong IP regime, you will benefit from thinking about these strategies. They will help you find a way around the problem of working on an idea that others are attacking at the same time. They will help you win with your great idea.
Note: We are seeing an increasing amount of work being done on business model innovation, which is great. I tend to use Henry Chesbrough’s approach, but you can also find some great resources on the websites of Alex Osterwalder and Anders Sundelin. With all these people working on the same idea at the same time, I guess the one that wins will be the one with the best execution. Of the best network. Or even the best business model!
Innovation Diffusion Lessons from Edison
Posted by Tim in business models, innovation strategy, replication on 8 January 2010
How do we win with innovation? I’ve been arguing strongly that one of the key changes in thinking that we have to make is shift from an emphasis on the importance of ideas to one on the importance of execution. In other words, instead of spending so much time trying to have ideas, we’d be better off putting our time and resources into getting our best ideas to spread. Everett Rogers wrote the definitive book on innovation diffusion (unsurprisingly called The Diffusion of Innovations), and here’s what he had to say about the issue:
Many technologists think that advantageous innovations will sell themselves, that the obvious benefits of a new idea will be widely realized by potential adopters, and that the innovation will diffuse rapidly. Unfortunately, this is very seldom the case. Most innovations in fact diffuse at a surprisingly slow rate.
Let’s go back to the innovation metaphors that I was talking about yesterday – light bulbs versus shovels. Edison is famous because he invented the light bulb, right? That’s why we always use the light bulb as the symbol of innovation. One problem: at least 23 other people invented working light bulbs before Edison did. Twentythree!
Why does Edison get credit for the light bulb then? Because he was the first one to build power stations and distribution cables so that everyone could use his light bulb. He did it by paying people to dig up New York to put in the copper wires to carry the electricity from his Pearl Street Power Station.
This story reinforces a few conversations that we’ve been having here recently:
- Edison’s key innovation was actually in the business model. He built a fundamentally different place for himself in the value network. Instead of waiting for others to build the infrastructure needed to get his idea to spread, his company built what they needed. Edison gets the credit because of the shovel, not the light bulb.
- Second, to get his idea to spread, Edison had to get people to unconnect (literally) from their existing value network (gas lighting), and get them to reconnect to his new value network (electricity). The gas industry didn’t just sit by and watch the electrical cables get laid – they fought it all the way. The first 23 teams to invent light bulbs didn’t fight this battle – but Edison’s team did. The network that you’re trying to tap into and the strength of connections within it determines how quickly your new idea can spread.
- Finally, I can’t think of a better illustration of why idea execution is more important than idea generation. If all that matters it the idea, we’d be talking about one of the other 23 teams that invented a working light bulb, not Edison’s.
If that doesn’t convince you of the supremacy of the shovel over the light bulb, I don’t know what will!
(pictures from Global Edison)
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