Tag: Lean Startup

Business Model Innovation: The Attacker’s Advantage

If you’re a startup attacking a large, established competitor, you don’t have too many advantages. The incumbent already has a lot of existing customers – that’s why they’re large. They have clear channels to market, established supply chains, revenue, money in the bank. They have everything. How can they lose?

If you attack them head-on, you don’t just need to be better, you need to be 10X better. That’s a big jump.

What should you do?

Your one big advantage is that your business model is not locked-in, but your opponent’s probably is.

Here are two examples. First, the New York Times. Stowe Boyd points to a great quote about them from an interview with Felix Salmon and Jonah Perretti:

I was a little bit surprised that the report didn’t spend much time tackling the hardest issue, which is why do they need to have so much revenue? It’s because their cost structure is made for print. When you look at how much revenue comes from print and the scale of their operation because of print, the challenge that they’re facing moving forward is how do they move into a post-print world….

It just seems like if you’re reading a secret internal report for The New York Times, the things that people would be stressed about, isn’t that, oh, the website’s not good enough, or they haven’t moved fast enough with this feature or that feature, but more like how do we deal with this very different cost structure of our future business, compared to our past business.

As the competition shifts to online, the size and clout that has been the competitive advantage of the NYT for years is now a problem. All the innovation initiatives in the world don’t matter if your strategy isn’t right.

When digital-only competitors like Huffington Post, Politico, and the myriad blogs and news sites that have arisen over the past few years started out, they didn’t try to compete with the Times head-to-head. That is a losing proposition. Instead, they innovated the business model. This is nearly impossible for the large incumbent to copy, because they can’t easily change their cost and revenue structures.

The second example is Barnes & Noble. In the 80s and 90s, B&N and Borders became enormously successful because they became enormous. Instead of carrying 10-20,000 titles like most bookstores did at the time, they created a competitive advantage by carrying 120,000 titles.

That worked fine, until Amazon. When Amazon started to carry all the books, then 120K wasn’t much of an advantage. On top of that, B&N and Borders were competing with a firm that had a much lower cost structure, since Amazon didn’t have to invest in all the prime real estate that you need to carry a lot of physical books. The size, which had been their key point of difference, was now a big disadvantage.

And yet, smaller bookstores that stand for something are doing pretty well these days. They’ve found innovative business models that help them successfully compete not just against other big stores like B&N, but also against Amazon.

Business model innovations are extremely difficult to copy.

If you’re starting out, you don’t just need a great idea. You need an innovative business model too – this is the best weapon you have against large incumbents. The one big advantage that you have is that you’re not locked into whatever business model is currently the dominant one. Here is how Benson Garner puts it:

Contrary to popular belief it’s not finding a great idea that is the most challenging part in a corporate or start-up venture. One of the most difficult tasks is the search for the right business model to support your idea. It’s hard work and the threat of failure lurks around every corner.

As we face competitive turbulence, the key question to ask is: if we were starting our business right now do, would we do this? If you were starting a newspaper right now, would you invest 90% of your assets and resources in print? If you were starting a bookstore, would you make it massive and undifferentiated, in a retail location with high rents?

No.

That’s the attacker’s advantage – every time the answer is no, they don’t have to do it the old way. They can innovate the business model.

17 September 2014
We Don’t Care About Your Features (Create Value Instead)
Over the past few months I’ve seen a lot of pitches from people with ideas for new stuff. One thing that I’ve observed is that people tend to be obsessed with the features that they’ve come up with for their new product, or service, or app, or whatever.

Here is how it plays out: someone is explaining the market gap that they are filling, and they say something like: “Facebook is great for sharing, but it doesn’t let you share one particular type of data in the precise way that this feature in our thing will.” And that’s the justification for their business opportunity.

It’s great to see their enthusiasm, but there’s one big problem with this:

I don’t care about your features.

No one else does either.

What we all want is for you to solve our problem. One feature that I would love to have in Facebook is something that would map out my friends as a social network, with data that I can download into Social Network Analysis software. And I want it not just for me, but for anyone.

You can build a social network that has this feature, but even though I’d really like it, it’s not enough to get me to switch from Facebook.

Why not? Because Facebook does a bunch of other stuff that your social network probably won’t do as well. On top of that, all my friends and relatives are already on Facebook, and I don’t think I can get them all to switch over to your new social network. So you may have come up with the one feature that I’d really like, but you still won’t win.

I don’t care about your features, I care about getting problems solved. Tell me about that.

Alex Osterwalder addresses this problem with his Value Proposition Canvas:

This is a great tool that I think all startups should be using. The first post that I linked to explains what each of those six categories are, and what questions to answer to help decide what your value proposition is (download the pdf to get all of this on one big page). Osterwalder followed that up with a post explaining how to use it.

Here are the advantages he sees:

Firstly, the VP Canvas gives you a simple and practical way to rapidly sketch out WHAT you are building and how you believe this will create customer value/benefits, as well as WHY your are building it: which customer jobs, pains, and gains you intend to address.

Secondly, the VP Canvas helps you distinguish between Product/VP and Customer assumptions. If you “just” build an MVP to measure and learn, you won’t know if a negative outcome of your experiment is related to your MVP or to a lack of customer interest.

In other words, it helps you sort out what problems you’re solving. Once you’ve done that, then you can think about features. But when you’re pitching your idea, we only care about the value you’re creating, not the features.

At one of the events, I had a guy ask me “What do you think about apps?” I wasn’t quite sure what he meant, but after we talked a bit it became clear that he was wondering if I thought his startup should be building an app. Once we got that sorted, I told him that was the wrong question. The thing that he should be thinking about is what problem he is trying to solve, and for whom. Once he has answers to those questions, then he can figure out if the best vehicle to use is an app, or a website, or a door-to-door salesforce, or whatever.

This isn’t just for startups either. Word became a big, bloated memory hog because Microsoft became obsessed with features too, instead of creating value. This is a great approach to take any time you are interested in business model innovation. Of course, if you do use this approach as a startup, it does improve your chances for becoming an innovative firm.

If you’re pitching, you should be using Guy Kawasaki’s 10 Slide framework. He says:
If you must use more than ten slides to explain your business, you probably don’t have a business. The ten topics that a venture capitalist cares about are:
1. Problem
2. Your solution
3. Business model
4. Underlying magic/technology
5. Marketing and sales
6. Competition
7. Team
8. Projections and milestones
9. Status and timeline
10. Summary and call to action
The Value Proposition Canvas gives you the information you need for the first two slides. If these are good, then you’ll have an innovative business model on slide three. Slide four is the only one where you might mention features – but even here, we don’t care about your features. We care about the bigger picture – how will you solve this problem?

So please don’t tell us about your features. We’re much more interested in learning how you’re going to create value. If you have that figured out, then you have a shot at changing the world.
4 November 2013
Here is Why Business Model Innovation is Powerful
A Business Model Problem – Copying Everyone Else

Business model innovation is too often overlooked by firms. I ran across a great example today of the kind of opportunity that is available. Check out this graphic from Lean Analytics by Alistair Croll and Ben Yoskovitz:

This shows the response to the question – “how do you set your price?”

The response is mind-boggling. More than half of the firms surveyed just take prices from their competitors. A quarter use cost-plus, which is a terrible tool too. But at least it relates to some kind of real number from inside your own firm. 18% guessed.

Eighteen percent guessed!

And just over 20% based their price on data gathered from their own customers.

At a minimum then, 70% of firms put no strategic thought at all into how they set prices, which, arguably, is one of the most important metrics in your business.

Business Model Opportunity – Make Up Your Own!

Innovative new products and services work best when they are supported by an innovative business model. If 70% of firms aren’t even thinking about how they set their prices, then how many are thinking about innovating their entire business model.

Not very many.

This is a huge opportunity – this is a big part of why business model innovation is so powerful.

Here are some ideas for taking advantage of this opportunity:
- Be a Lean Startup. Lean startups turn into innovative firms, because they are built on an experimental, data-driven culture. If you are using lean startup correctly as an approach, then you will end up as one of the 21% of firms that sets your price based on customer data. Better yet, your entire business model will be based on hypothesis testing. Lean Analytics provides a great set of tools for doing this. Croll & Yoskovitz match metrics with where you are in the growth trajectory:
  1. Empathy: where you identify a real problem for people that needs solving.
  2. Stickiness: where you prove you have a solution to the problem that works.
  3. Virality: where you structure your solution so that the idea will spread.
  4. Revenue: where you start making money.
  5. Scale: where you get big.
- Use Lean Startup Principles in an established firm. Lean Analytics suggests that intrapraneurs go through the same five steps with new innovations as startups, but with one big additional step: find an executive sponsor. In a large firm the process looks like this:
- Test Your Business Model Like a Scientist. The point with all of this is that you can build a new business model based on data. The stats on pricing show that only about 20% of firms are doing this right now. Imagine the advantage you can gain if you base your entire business model on genuine feedback from customers.
When you get right down to it, innovation is about solving real problems for people. That’s how you create value. Even if your solution to a problem is genuinely novel, it’s extremely hard to get people to listen to your idea if you cram it into the same old business model that they’re used to seeing.

That’s why copying from competitors is such a bad idea. There’s nothing distinctive about that.

So go out and talk to people. Identify real problems that they face, and build a hypothesis about how to solve one of them. Then test that hypothesis carefully. If you do that, you’ll build an innovative business model on top of your core innovation.

The thing that makes business model innovation so powerful is that so few people do it. You should give it a try.

Related articles
23 July 2013
Why Lean Startups Turn Into Innovative Firms
One of the exciting trends in innovation right now is the lean startup idea. The basic premise is that when ventures are starting out, building a scalable business model needs to be a top priority. People like Steve Blank, Eric Ries, Ash Maurya and Alex Osterwalder are all doing great work in this area.

I’m all for lean startups, and if you’re building a new venture, this is an essential approach. However, the area that I keep focusing on is this: how can we make established firms more innovative? One of the reasons that I love the lean startup movement is this: it embeds the innovation DNA into the venture from the word go.

I’ll use The Innovation Matrix to illustrate:

As I’ve said before, most startups begin as accidental innovators. They have to successfully execute an innovation, or they won’t survive, but they don’t have any kind of innovation infrastructure in place. The problem is that if they don’t think about how to embed innovation, then even if they are successful, they are likely to become less innovative over time.

This is largely due to the management structures that you need to put into place as you scale. Ben Horowitz describes this well in a great piece about how to scale effectively:

When you scale an organization, you will also need to give ground grudgingly. Specialization, organizational structure, and process all complicate things quite a bit and implementing them will feel like you are moving away from common knowledge and quality communication. It is very much like the offensive lineman taking a step backwards. You will lose ground, but you will prevent your company from descending into chaos.

Horowitz’ approach is built around managing communication above all else in building your organisation, and this makes good sense. The problem, though, is that often the structures that we put in place end up impeding innovation as it gets stifled by other management processes. On the innovation matrix, this is shown by the blue arrows, as the firms lose their innovation capability over time.

This is where the lean startup approach is particularly useful. If you successfully execute one of the lean startup approaches, you will move in the direction of the red arrow. At worst, this will leave you as a fit for purpose innovator, but in the best case, it will set you up to become a world class innovator.

Here’s how:
- The first management structure you put in place is an innovation process. Lean startup is a management process. Or as Eric Reis puts it, “entrepreneurship is management.” Here is how he frames the problem:
  
  I think the root cause of these mistakes is the fact that most MBA’s are not adequately educated about entrepreneurship. The problem afflicts general managers who try to innovate within big companies, too. In fact, I hope longtime readers will recognize these as the exact same mistakes that afflict us as entrepreneurs when we try to hold ourselves and our teams accountable. Are we making progress? Is what I’m working on creating value? What should I work on next? These are the enduring startup questions.
  
  By putting these questions up front, the lean startup gets the management thinking about questions that are important not just for startup success, but also for long-term innovation success. The lean startup approach makes your first management systems innovation systems. These are the kinds of skills that you need to be building in firms. This increases innovation commitment.
- Lean startup approaches also increase innovation competence. Of course, one of the core insights from using The Innovation Matrixis that increasing Innovation Commitment by itself isn’t enough – in fact, it can often be dysfunctional. The overall objective must be to improve your ability to successfully execute ideas.Lean startup techniques do this.First off, the lean approach forces you test hypotheses as you build a dynamic business model. Ben Yoskovitz has a great post explaining how to do this:
  
  Try structuring your hypotheses this way:
  
  “I (or We) believe…”
  
  Finish that statement and see what comes out of it. Each key element in that sentence is a variable in your experiment, and potential feature/component of your MVP. Each variable in your experiment has to be properly tested. If a variable passes a test it may very well become a cornerstone of your value proposition. Remember: The statement has to be testable, and it has to have the potential of failing.
  
  If you do this, you are building a culture of experimentation into your venture right from the start. This increases your Innovation Competence from the word go.
- Lean Startup builds a competence in business model innovation. I am starting to suspect that to be successful, any new innovation will require a business model innovation as well. Alex Osterwalder says that you can compete on business models, and I agree. He identifies four levels of business model mastery:
  
  Level 0 Strategy – The Oblivious: Focus on products/value propositions alone rather than the value proposition AND the business model.
  Level 1 Strategy – The Beginners: Use the Business Model Canvas as a checklist.
  Level 2 Strategy – The Masters: Outcompete others with a superior business model where every one of the business model building blocks reinforce each other (e.g. Nintendo Wii, Nespresso, Dell).
  Level 3 Strategy – The Invincible: Continuously disrupt themselves while their business models are still successful (e.g. Apple, Amazon.com).
  
  Apple and Amazon are two of the firms that most people think of as World Class Innovators. The point is that by using the lean startup approach, you build a competence in business model innovation from day one. This is necessary if you are going to hit the Level 2 or Level 3 strategies that Osterwalder describes.
The best way to be an innovative big firm is to start out as an innovative small venture. The lean startup approach helps with this in several ways. It has a focus on innovating the business model, which is a critical skill to build. It helps a venture develop a culture of experimentation, which is also essential. And it helps to build an management structure that supports innovation.

If you’re starting out, this is the way to go.

If you’re already big, this is what you’ll be competing against. So how you can you build the same skills? Find an answer to this question, because you’ll need them.
3 September 2012