Is your disruptive business model a pipe dream?
By Chris Aitken
WHAT DO WE MEAN BY DISRUPTION?
The term Disruptive Innovation was first coined by Clayton Christensen in 1995 (Steve Jobs referenced this guy) to describe a theory to predict the ways in which current market incumbents are likely to be disrupted by new comers to a market. In essence the theory states that new market entrants are likely to disrupt an existing market where they are able to initially successfully target low end customers and then improve their product to ultimately target mainstream customers.
Christensen observed that disruption is an evolutionary process that takes time, and that many successfully disruptive new comers to a market adopt very different business models to existing incumbents. Additionally, existing companies can counter by continuing with their existing business model until it is no longer profitable, and in the meantime establish a separate ‘start-up’ company that adopts a disruptive approach and business model.
If by ‘disruptive’ we mean ‘successful start-up’ – then Peter Thiel in his book ‘Zero to One’ offers some advice that is a little unconventional although bit hard to ignore. Thiel is a controversial figure – he is a member of Silicon Valley’s Paypal Mafia and highly successful venture capitalist Founders Fund but also supported Trump in the last American election.
Controversy aside, Thiel suggests that a successful start-up will have: a monopoly position in an initially small market, an ability to deliver an order of magnitude improvement in customer experience, unique knowledge about the market or technology (or both), equal emphasis on both their sales and product development capabilities, an ability to leverage networks either through the nature of their services or internal capability.
WHICH BUSINESS MODEL?
The question soon arises though as to how to choose the most appropriate business model to support your disruptive ambition? Conventional wisdom says that it’s a matter of selecting an appropriate business model architype or pattern to match your situation. Business model architypes (e.g., Freemium) are common patterns for business models to suit differing requirements. So simply identify your requirements, select your architype and job done – right?
Well maybe not. First up which set of architypes are you going to choose from? Alexander Osterwalder in the book Business Model Generation suggests there are 5 Business model architypes. Others variously suggest there are 8, 55,or even 110.
The point is – are they important? They all require customisation to implement within your particular context. Furthermore, each component of a business model needs to be evaluated in terms of its contribution to your (disruptive – e.g., Theil’s criteria) objectives, as well as its contribution to the model’s overall performance and coherency.
Furthermore, Gartner has indicated anecdotally that use of the Business Model Canvas is not that common amongst clients they interview. Bottom line? Business model design is difficult. Your business model is where your Value Proposition, Marketing Strategy, Service Delivery and Capability Platform and Cost Model all come together.
BUSINESS MODEL DESIGN
This article is the third in a series based on our Business Design Method. Because business models are complex they require that an intentional design process be followed. Business Model Architypes are great to get a sense of the possibilities – but there is simply no shortcut to working through your particular ambition and each of the elements that need to come together for a successful business model.
As you can see – Business Model Design falls at the very centre of the Business Design Method. This is because the Purpose Design, Value Model Design and Service Model Design activities all feed into the process of designing a business model.
BUSINESS MODEL DESIGN AND THE BUSINESS MODEL CANVAS
At FromHereOn we consider Business Model Design to be the process that defines four sub-models that together make up a complete business model. The process evaluates each of these against a given set of Strategic Goals, a Value Discipline, and the Brand Identity of a company.
The four sub-models that we define are the Market Model, Service Offering Model, Capability Model and the Sustainability Model. Each of these can be mapped to distinct elements of the Business Model Canvas.
The Market Model is concerned with understanding the market in which the business will operate and the way in which it presents its self to customers. The Service Offering Model describes the products and services, and the channels by which these are made available. This is where consideration is given to the ability of the business model to support what Eric Ries calls ‘Validated Learning’ in his book ‘The Lean Startup’ – which speaks to the need for a learning feedback loop in the way services are delivered. The Capability Model describes the capabilities needed to deliver the services into the given market, considers whether these need to be internal or outsourced and the level of coherency between them. This model also describes the capabilities that will provide the ‘Build, Measure, Learn’ activities at the core of any startup. The fourth and final model is the Sustainability Model which considers aspects of the other three to determine overall business model viability in terms of profitability as well as social and environmental viability.
Oliver Gassmann in his book The Business Model Navigator suggests that in order to be truly disruptive a business model requires changes to two or more of these sub-models within an existing business.
The process of Business Model Design breaks each of these 4 models down into their constituent parts and evaluates these against a defined set of desirability, viability, and feasibility objectives.
Viability: (Sustainability Model, MARKETING MODEL)
This view of the Business Model is what Eric Ries refers to as the startup “growth hypothesis”. Focusing on profit alone ignoring environmental or social impacts is an old trick we know how to do well. Business model viability into the future however, will need to deliver financial, social, and ecological sustainability. The increasing need for businesses to be both socially and ecologically sustainable is in large part driven by the combination of emerging first world economies of China, India and Brazil, global warming, and the disastrous consequences for everyone if these economies follow the same development trajectory as successful western economies. The concept of Circular Economies provides an interesting alternative that has the potential to describe ways to generate comfortable profit while delivering positive environmental and social outcomes as the consequences of conducting business.
Desirability: (Marketing Model, Services Model, Capability Model, Sustainability Model)
Not only is it important that your products and services are desirable to customer – but increasingly your business model itself needs to be attractive to consumers – witness recent reactions against Uber, and growing criticisms of Silicon Valley and monopolistic start-up culture and the Sharing Economy in general. A positive market perception of your company is worth something – the modern consumer wants value for money – but also a clear conscience – it makes it easier for me to do business with you.
Feasibility: (Capability Model, Service Model, Marketing Model)
Do you have the ability to deliver (i.e., both produce and sell) the products and services in the way that your desirability objectives demand? Feasibility considers your sourcing strategies, the front and back stage divide within your company, and your ‘secret source’ – your ability to deliver your unique proposition and customer experience, and your marketing strategy. It is not enough to be able to deliver highly desirable products and services – equal weight needs to be given to the ability to sell them. This speaks to the issue of Coherence Premium – the degree to which capabilities – internal or external are mutually reinforcing – and the additional value this represents to both business and customer.
Business Model Design needs to be a conscious and deliberate initiative. It is not enough to simply throw a series of good ideas together with liberal amounts of ‘gut’ instinct and industry experience to then expect great results. Business Model Design is hard, and requires what Thiel calls ‘Deliberate Optimism’. Obviously, a small investment in time to undertake deliberate Business Model Design has the potential for huge returns.
At FromHereOn we follow a divergent / convergent human centred design approach to Business Model Design. The process systematically considers all the issues we’ve discussed in this article and provides a way to rigorously design and test your business model for its ability to disrupt.
We can you give your disruptive business model a ‘reality check’ and help you to grow something that is truly significant.