Archive for the ‘Business Model’ Category

When your company looks in the mirror, what does it see?

There are many types of companies, and it can be difficult to categorize them.  And even within the company itself, there is disagreement about the company’s character.   And one of the main sources of disagreement is born from our desire to classify our company as the type we want it to be rather than as the type that it is.

Here’s a process that may bring consensus to your company.

For all the people on the payroll, assign a job type and tally them up for the various types.  If most of your people work in finance, you work for a finance company.  If most work in manufacturing, you work for a manufacturing company.  The same goes for sales, engineering, customer service, consulting.  Write your answer here __________.

For all the company’s profits, assign a type and roll up the totals.  If most of the profit is generated through the sale of services, you work for a service company. If most of the profit is generated by the sale of software, you work for a software company. If hardware generates profits, you work for a hardware company. If licensing of technology generates profits, you work at a technology company.  Which one fits your company best? Write your answer here _________.

For all the people on the payroll, decide if they work to extend and defend the core offerings (the things that you sell today) or create new offerings in new markets that are sold to new customers. If most of the people work on the core offerings, you work for a low-growth company.  If most of the people work to create new offerings (non-core), you work for a high-growth company.  Which fits you best – extend and defined the core / low-growth or new offerings / high growth? Write your answer here __________ / ___________.

Now, circle your answers below.

We are a (finance, manufacturing, sales, engineering, customer service, consulting) company that generates most of its profits through the sale of (services, hardware, software, technology). And because most of our people work to (extend and defend the core, create new offerings), we are a (low, high) growth company.

To learn what type of company you work for, read the sentences out loud.

“Grace – Mirror” by phil41dean is licensed under CC BY 2.0

What should we do next?

Anonymous: What do you think we should do next?

Me: It depends.  How did you get here?

Anonymous: Well, we’ve had great success improving on what we did last time.

Me: Well, then you’ll likely do that again.

Anonymous: Do you think we’ll be successful this time?

Me: It depends.  If the performance/goodness has been flat over your last offerings, then no.  When performance has been constant over the last several offerings it means your technology is mature and it’s time for a new one.  Has performance been flat over the years?

Anon: Yes, but we’ve been successful with our tried-and-true recipe and the idea of creating a new technology is risky.

Me: All things have a half-life, including successful business models and long-in-the-tooth technologies, and your success has blinded you to the fact that yours are on life support.  Developing a new technology isn’t risky. What’s risk is grasping tightly to a business model that’s out of gas.

Anon: That’s harsh.

Me: I prefer “truthful.”

Anon: So, we should start from scratch and create something altogether new?

Me: Heavens no. That would be a disaster. Figure out which elements are blocking new functionality and reinvent those. Hint: look for the system elements that haven’t changed in a dog’s age and that are shared by all your competitors.

Anon: So, I only have to reinvent several elements?

Me: Yes, but probably fewer than several.  Probably just one.

Anon: What if we don’t do that?

Me: Over the next five years, you’ll be successful.  And then in year six, the wheels will fall off.

Anon: Are you sure?

Me: No, they could fall off sooner.

Anon: How do you know it will go down like that?

Me: I’ve studied systems and technologies for more than three decades and I’ve made a lot of mistakes.  Have you heard of The Voice of Technology?

Anon: No.

Me: Well, take a bite of this – The Voice of Technology. Kevin Kelly has talked about this stuff at great length.  Have you read him?

Anon: No.

Me: Here’s a beauty from Kevin – What Technology Wants. How about S-curves?

Anon: Nope.

Me: Here’s a little primer – Beyond Dead Reckoning. How about Technology Forecasting?

Anon: Hmm.  I don’t think so.

Me: Here’s something from Victor Fey, my teacher. He worked with Altshuller, the creator of TRIZ – Guided Technology Evolution.  I’ve used this method to predict several industry-changing technologies.

Anon: Yikes! There’s a lot here. I’m overwhelmed.

Me: That’s good!  Overwhelmed is a sign you realize there’s a lot you don’t know.  You could be ready to become a student of the game.

Anon: But where do I start?

Me: I’d start Wardley Maps for situation analysis and LEANSTACK to figure out if customers will pay for your new offering.

Anon: With those two I’m good to go?

Me: Hell no!

Anon: What do you mean?

Me: There’s a whole body of work to learn about. Then you’ve got to build the organization, create the right mindset, select the right projects, train on the right tools, and run the projects.

Anon: That sounds like a lot of work.

Me: Well, you can always do what you did last time. END.

“he went that way matey” by jim.gifford is licensed under CC BY-SA 2.0

The Power of Prototypes

A prototype moves us from “That’s not possible.” to “Hey, watch this!”

A prototype moves us from “We don’t do it that way.” to “Well, we do now.”

A prototype moves us from “That’s impossible.” to “As it turns out, it was only almost impossible.”

A prototype turns naysayers into enemies and profits.

A prototype moves us from an argument to a new product development project.

A prototype turns analysis-paralysis into progress.

A prototype turns a skeptical VP into a vicious advocate.

A prototype turns a pet project into top-line growth.

A prototype turns disbelievers into originators of the idea.

A prototype can turn a Digital Strategy into customer value.

A prototype can turn an uncomfortable Board of Directors meeting into a pizza party.

A prototype can save a CEO’s ass.

A prototype can be too early, but mostly they’re too late.

If the wheels fall off your first prototype, you’re doing it right.

If your prototype doesn’t dismantle the Status-Quo, you built the wrong prototype.

A good prototype violates your business model.

A prototype doesn’t care if you see it for what it is because it knows everyone else will.

A prototype turns “I don’t believe you.” into “You don’t have to.”

When you’re told “Don’t make that prototype.” you’re onto something.

A prototype eats not-invented-here for breakfast.

A prototype can overpower the staunchest critic, even the VP flavor.

A prototype moves us from “You don’t know what you’re talking about.” to “Oh, yes I do.”

If the wheels fall off your second prototype, keep going.

A prototype is objective evidence you’re trying to make a difference.

You can argue with a prototype, but you’ll lose.

If there’s a mismatch between the theory and the prototype, believe the prototype.

A prototype doesn’t have to do everything, but it must do one important thing for the first time.

A prototype must be real, but it doesn’t have to be really real.

If your prototype obsoletes your best product, congratulations.

A prototype turns political posturing into reluctant compliance and profits.

A prototype turns “What the hell are you talking about?” into “This.”

A good prototype bestows privilege on the prototyper.

A prototype can beat a CEO in an arm-wrestling match.

A prototype doesn’t care if you like it. It only cares about creating customer value.

If there’s an argument between a well-stated theory and a well-functioning prototype, it’s pretty clear which camp will refine their theory to line up with what they just saw with their own eyes.

A prototype knows it has every right to tell the critics to “Kiss my ass.” but it knows it doesn’t have to.

You can argue with a prototype, but shouldn’t.

A prototype changes thinking without asking for consent.

Image credit — Pedro Ribeiro Simões

Want to succeed? Learn how to deliver customer value.

Whatever your initiative, start with customer value. Whatever your project, base it on customer value. And whatever your new technology, you guessed it, customer value should be front and center.

Whenever the discussion turns to customer value, expect confusion, disagreement, and, likely, anger. To help things move forward, here’s an operational definition I’ve found helpful:

When they buy it for more than your cost to make it, you have customer value.

And when there’s no way to pull out of the death spiral of disagreement, use this operational definition to avoid (or stop) bad projects:

When no one will buy it, you don’t have customer value and it’s a bad project.

As two words, customer and value don’t seem all that special. But, when you put them together, they become words to live by.  But, also, when you do put them together, things get complicated.  Here’s why.

To provide customer value, you’ve got to know (and name) the customer.  When you asked “Who is the customer?” the wheels fall off. Here are some wrong answers to that tricky question. The Board of Directors is the customer. The shareholders are the customers. The distributor is the customer. The OEM that integrates your product is the customer. And the people that use the product are the customer. Here’s an operational definition that will set you free:

When someone buys it, they are the customer.

When the discussions get sticky, hold onto that definition. Others will try to bait you into thinking differently, but don’t bite. It will be difficult to stand your ground.  And if you feel the group is headed in the wrong direction, try to set things right with this operational definition:

When you’ve found the person who opens their wallet, you’ve found the customer.

Now, let’s talk about value. Isn’t value subjective? Yes, it is.  And the only opinion that matters is the customer’s. And here’s an operational definition to help you create customer value:

When you solve an important customer problem, they find it valuable.

And there you have it.  Putting it all together, here’s the recipe for customer value:

  1. Understand who will buy it.
  2. Understand their work and identify their biggest problem.
  3. Solve their problem and embed it in your offering.
  4. Sell it for more than it costs you to make it.

Image credit — Caroline

The Five Hardships of Success

Everything has a half-life, but we don’t behave that way.  Especially when it comes to success.  The thinking goes – if it was successful last time, it will be successful next time.  So, do it again. And again.  It’s an efficient strategy – the heavy resources to bring it to life have already been spent. And it’s predictable – the same customers, the same value proposition, the same supply base, the same distribution channel, and the same technology. And it’s dangerous.

Success is successful right up until it isn’t. It will go away. But it will take time.  A successful product line won’t fall off the face of the earth overnight. It will deliver profits year-over-year and your company will come to expect them.  And your company will get hooked on the lifestyle enabled by those profits. And because of the addiction, when they start to drop off the company will do whatever it takes to convince itself all is well.  No need to change.  If anything, it’s time to double-down on the successful formula.

Here’s a rule: When your successful recipe no longer brings success, it’s not time to double-down.

Success’s decline will be slow, so you have time.  But creating a new recipe takes a long time, so it’s time to declare that the decline has already started. And it’s time to learn how to start work on the new recipe.

Hardship 1 – Allocate resources differently. The whole company wants to spend resources on the same old recipes, even when told not to.  It’s time to create a funding stream that’s independent of the normal yearly planning cycle.  Simply put, the people at the top have to reallocate a part of the operating budget to projects that will create the next successful platform.

Hardship 2 – Work differently. The company is used to polishing the old products and they don’t know how to create new ones. You need to hire someone who can partner with outside companies (likely startups), build internal teams with a healthy disrespect for previous success, create mechanisms to support those teams and teach them how to work in domains of high uncertainty.

Hardship 3 – See value differently. How do you provide value today? How will you provide value when you can’t do it that way? What is your business model? Are you sure that’s your business model? Which elements of your business model are immature? Are you sure? What is the next logical evolution of how you go about your business? Hire someone to help you answer those questions and create projects to bring the solutions to life.

Hardship 4 – Measure differently. When there’s no customer, no technology and no product, there’s no revenue.  You’ve got to learn how to measure the value of the work (and the progress) with something other than revenue.  Good luck with that.

Hardship 5 – Compensate differently. People that create something from nothing want different compensation than people that do continuous improvement. And you want to move quickly, violate the status quo, push through constraints and create whole new markets. Figure out the compensation schemes that give them what they want and helps them deliver what you want.

This work is hard, but it’s not impossible. But your company doesn’t have all the pieces to make it happen.  Don’t be afraid to look outside your company for help and partnership.

Image credit — Insider Monkey

Innovation Truths

If it’s not different, it can’t be innovation.

With innovation, ideas are the easy part. The hard part is creating the engine that delivers novel value to customers.

The first goal of an innovation project is to earn the right to do the second hardest thing. Do the hardest thing first.

Innovation is 50% customer, 50% technology and 75% business model.

If you know how it will turn out, it’s not innovation.

Don’t invest in a functional prototype until customers have placed orders for the sell-able product.

If you don’t know how the customer will benefit from your innovation, you don’t know anything.

If your innovation work doesn’t threaten the status quo, you’re doing it wrong.

Innovation moves at the speed of people.

If you know when you’ll be finished, you’re not doing innovation.

With innovation, the product isn’t your offering. Your offering is the business model.

If you’re focused on best practices, you’re not doing innovation. Innovation is about doing things for the first time.

If you think you know what the customer wants, you don’t.

Doing innovation within a successful company is seven times hard than doing it in a startup.

If you’re certain, it’s not innovation.

With innovation, ideas and prototypes are cheap, but building the commercialization engine is ultra-expensive.

If no one will buy it, do something else.

Technical roadblocks can be solved, but customer/market roadblocks can be insurmountable.

The first thing to do is learn if people will buy your innovation.

With innovation, customers know what they don’t want only after you show them your offering.

With innovation, if you’re not scared to death you’re not trying hard enough.

The biggest deterrent to innovation is success.

Image credit — Sherman Geronimo-Tan

Choosing What To Do

In business you’ve got to do two things: choose what to do and choose how to do it well.  I’m not sure which is more important, but I am sure there’s far more written on how to do things well and far less clarity around how to choose what to do.

Choosing what to do starts with understanding what’s being done now.  For technology, it’s defining the state-of-the-art. For the business model, it’s how the leading companies are interacting with customers and which functions they are outsourcing and which they are doing themselves. In neither case does what’s being done define your new recipe, but in both cases it’s the first step to figuring how you’ll differentiate over the competition.

Every observation of the state-of-the-art technologies and latest business models is a snapshot in time.  You know what’s happening at this instant, but you don’t know what things will look like in two years when you launch. And that’s not good enough. You’ve got to know the improvement trajectories; you’ve got to know if those trajectories will still hold true when you’ll launch your offering; and, if they’re out of gas, you’ve got to figure out the new improvement areas and their trajectories.

You’ve got to differentiate over the in-the-future competition who will constantly improve over the next two years, not the in-the-moment competition you see today.

For technology, first look at the competitions’ websites. For their latest product or service, figure out what they’re proud of, what they brag about, what line of goodness it offers.  For example, is it faster, smaller, lighter, more powerful or less expensive?  Then, look at the product it replaced and what it offered. If the old was faster than the one it replaced and the newest one was faster still, their next one will try to be faster.  But if the old one was faster than the one it replaced and the newest one is proud of something else, it’s likely they’ll try to give the next one more of that same something else.

And the rate of improvement gives another clue.  If the improvement is decreasing over time (old product to new product), it’s likely the next one will improve on a new line of goodness.  If it’s still accelerating, expect more of what they did last time.  Use the slope to estimate the magnitude of improvement two years from now.  That’s what you’ve got to be better than.

And with business models, make a Wardley Map.  On the map, place the elements of the business ecosystem (I hate that word) and connect the elements that interact with each other.  And now the tricky part.  Move to the right the mature elements (e.g., electrical power grid), move to the middle the immature elements (things that are clunky and you have to make yourself) and move to the middle the parts you can buy from others (products).  There’s a north-south element to the maps, but that’s for another time.

The business model is defined by which elements the company does itself, which it buys from others and which new ones they create in their labs.  So, make a model for each competitor.  You’ll be able to see their business model visually.

Now, which elements to work on?  Buy the ones you can buy (middle), improve the immature ones on the far left so they move toward the central region (product) and disrupt the lazy utilities (on the right) with some crazy technology development and create something new on the far left (get something running in the lab).

Choosing what to work on starts with Observation of what’s going on now. Then, that information is Oriented with analysis, synthesis and diverse perspective.  Then, using the best frameworks you know, a Decision is made.  And then, and only then, can you Act.

And there you have it.  The makings of an OODA loop-based methodology for choosing what to do.

 

For a great podcast on John Boyd, the father of the OODA loop, try this one.

And for the deepest dive on OODA (don’t start with this one) see Osinga – Science, Strategy and War.

Validate the Business Model Before Building It.

One of the best ways to learn is to make a prototype.  Prototypes come in many shapes and sizes, but their defining element is the learning objective behind them.  When you start with what you want to learn, the prototype is sure to satisfy the learning objective.  But start with the prototype, and no one is quite sure what you’ll learn.  When prototypes come before the learning objective, prototypes are inefficient and ineffective.

Before staffing a big project, prototypes can be used to determine viability of the project.  And done right, viability prototypes can make for fast and effective learning.  Usually, the team wants to build a functional prototype of the product or service, but that’s money poorly spent until the business model is validated.   There’s nothing worse than building expensive prototypes and staffing a project, only to find the business model doesn’t hold water and no one buys the new thing you’re selling.

There’s no reason a business model can’t be validated with a simple prototype. (Think one-page sales tool.)  And there’s no reason it can’t be done at the earliest stages.  More strongly, the detailed work should be held hostage until the business model is validated.  And when it’s validated, you can feel good about the pot of gold at the end of the rainbow.  And if it’s invalidated, you saved a lot of time, money and embarrassment.

The best way to validate the business model is with a set of one-page documents that define for the customer what you will sell them, how you’ll sell it, how you’ll service it, how you’ll train them and how you’ll support them over the life of your offering.  And, don’t forget to tell them how much it will cost.

The worst way to validate the business model is buy building it.  All the learning happens after all the money has been spent.

For the business model prototypes there’s only one learning objective: We want to learn if the customer will buy what we’re selling.  For the business model to be viable, the offering has to hang together within the context of installation, service, support, training and price.  And the one-page prototype must call out specifics of each element.  If you use generalities like “we provide good service” or “our training plans are the best”, you’re faking it.

Don’t let yourself off the hook.  Use prototypes to determine the viability of the business model before spending the money to build it.

Image credit – Heather Katsoulis

Mike Shipulski Mike Shipulski
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