People, like companies, have problems they cannot solve alone. Frequently, the sufferer feels the pain and recognizes the onset of symptoms, but cannot find practical solutions. The sad part is that there are likely to be proven solutions for their specific condition – the sufferer just does not know how to find them. This describes the struggle a company faces with business model weaknesses. Diagnosing such problems is difficult (symptoms are frequently misread) and a reliable cure is hard to find. The reason is there are few business model experts who can do this work, and neither the theory nor the practice of a discipline we call “business model architecture” is widely understood. This (online) reddit post about a sign in USC’s Electrical Engineering Department says it all:
“Theory is when you know everything but nothing works. Practice is when everything works but no one knows why. In our lab theory and practice are combined. Nothing works and no one knows why”.¹
From 1989 to 1995, I worked with a team involved in researching how companies in different industries use variations of the same process innovations in new product development, customer acquisition, production, distribution, and other major processes. In other words, we were hunters – looking for solutions proven by others to improve our own processes
These gems were easy to find – the popular business press covered them, and we visited top companies to speak with executives who were happy to discuss the smart things they had done. Our team developed a series of analytical “lenses” to clarify the value and portability of these gems that helped us curate them. We started building a catalog of valuable, highly adaptable, portable innovations.
With practice, we became much better at using our “lenses” to illuminate these gems and make them easy to see in the cluttered landscape of the ordinary and everyday things companies did. The “lenses” were part of a broad, versatile, proprietary toolkit. The toolkit, which included some revolutionary approaches for the time, and the business results the Management Board confirmed we delivered, led our team to named one of the top fifteen internal consulting units in the world, in 1995, in an unprecedented independent worldwide study of 700 companies conducted by the American Productivity and Quality Association and Arthur Andersen.
To pull things into focus, from 1989 when we started, to 1995, the team I led at Johnson and Johnson was looking for process improvements. To put things into context, in the late 80’s and early 90’s, senior managers in large corporations were starting to understand how to use business strategy as a way to win in the market. For these managers, Michael Porter’s “Competitive Advantage” (1985) was a key resource.
However, for the next decade, the big idea was not strategy, but process improvement and cost effectiveness. Activity Based Costing, Reengineering, Six Sigma and LEAN were the hot skills to have. Other ambitious managers were reading “The Machine That Changed The World” (Womack, Roos, Jones, 1991), which revealed remarkable “new” techniques from Japan about Toyota factory processes that were inspired by the work of Juran and Deming. There were intriguing angles to the story – the West could have had this advantage first, but these prophets had been rejected in their own land only to find grateful followers far from home. Toyota process results had key new words like Kanban that Western managers embraced conceptually, struggled to implement practically, and pronounced badly.
But how would US managers learn Toyota techniques? How would they understand how other companies reengineered key processes? Benchmarking again became a skill companies desired (the first time I remember benchmarking becoming popular was in the wake of Tom Peter’s 1982 bestseller, “In Search of Excellence”). Perhaps it was inevitable that benchmarking was adopted as the skill ambitious managers had to have. By the late 1980s, benchmarking had even been adopted by accountants, and cost management was revolutionized by a new approach called “activity based costing”.
At analogy, we continue to be interested in process improvements because of our history, but today we have graduated to become Business Model Architects. To explain what this means, imagine if houses, hospitals, and high-rises were built without architects – the quality of the design, the functional productivity of the space and the pleasure of living, working and socializing in the structures would be severely compromised. Some structures would not even stand up for long. Above all, we would miss the joy of experiencing a great building. A good architect designs a building to deliver superior “usability” that enhances function, as well as aesthetic beauty that creates pleasure.
Being a business model architect includes being a collector and curator of valuable business model innovations.
We want to encourage you take up the profession of Business Model Architecture. Learning it now will give you a sharp personal advantage because it hardly anyone is an expert today. It is a career of the future. Top Business Schools will teach it. News-making CEOs of the future will be great business model architects – they will know which business model innovations give their business an advantage and will not be people who “learn” the hard way (i.e. by trial and error to build a great business). After all, imagine if surgeons, pediatricians, pilots, firefighters and any other professional who have an impact on the life and death of people learned their profession by trial and error! Business Model Architects will have an impact on the life and death of companies. It is obvious that good business models drive business success. We directly attribute the high death rate of new businesses and new products to a lack of business model architects.
Being a business model architect includes being a collector and curator of valuable business model innovations. What is the difference between process innovations and business model innovations? Process improvements can be valuable – they improve the cost, quality or speed of specific processes. This sometimes does, but often does not, have a big impact on the performance of the overall business. Good business model innovations on the other hand, directly improve overall competitiveness, and result in accelerated revenue and profit growth.
What is a “collector”? A good collector must have anything from a deep interest to an obsession about the things that drive their passion. Rather than turn to a dictionary for a definition, I will use a personal example. For the last 50+ years, my mother has been an avid collector of porcelain statues and ornaments. Today, at 81, she continues to collect, and her home is full of thousands of items of every shape and size one can imagine. Over the years, she cultivated a strong network of sources that brought her news about where to find good pieces. The auction houses knew her and she was told about pieces that were coming on sale. She would spend an entire weekend at an auction, waiting for a single piece she wanted, and then get into bidding wars with other collectors. As a child, I recall her waking up early to scour the weekend newspaper ads for house sales that included “ornaments” as she called them, and then leaving early in the morning so she could be the first at the sale to buy her choice items. This experience gave me years of experience of what it takes to really be a “collector”.
Today, as a collector of business model innovations, we feel a sense of excitement when we hear about a new approach, try to understand it, and add it to our collection. Our job at analogy is to assess the commercial value of new business models, and find the best ways to adapt them for use in different companies.
Over the last fifteen years, we have collected a database of hundreds of business model archetypes, and their variations. It is like a Wikipedia of business models, structured around six core elements present in any business model (we call these the Cornerstones of a business model) that maximize the commercial value created, delivered and captured. The six Cornerstones of any business model are the Product, Brand, direct or indirect Influencers of demand, Distribution Channels, Manufacturing, and the Profit Model. Optimizing these six Cornerstones by using VAs dramatically reduces risk of failure and increases commercial value.
We collect three kinds of business model innovations
1. The most rare kind is a business model archetype.
“Archetype” 1. An original model or type after which other similar things are patterned; a prototype: 2. An ideal example of a type; quintessence: an archetype of the successful entrepreneur.²
An Archetype represents an entire class of business models. Examples include the “Razor Razor-Blade” business model, the “Cross Subsidy” business model which was described in “Free”, the book written by Chris Andersen, and the “Two Sided” business model which was described in 2007 book “The Catalyst Code”, written by David E. Evans and Richard Schmalensee, Dean of MIT’s Sloan School.
2. The second kind of business model innovation we are interested in is avariation of an archetype
For example, we have cataloged 20+ variations of the Razor Razor-Blade model, and about 10 variations of cross subsidy based models.
3. The third kind of business model innovation we are interested in is the Value Accelerators (VA)™
The subject of this article. VAs optimizes the potential of a business model to create and capture value. A VA has three characteristics:
So your goal as a business model architecture is straightforward – research and build a playbook of VAs that could have the strongest, and most direct impact on the Key Performance Indicators (KPIs) of your business model. Your KPIs must focus on two aspects of performance, best characterized by Peter F. Drucker’s definition of “Effective” (doing the rights things) and “Efficient” (doing the things right)
Your role as a business model architect is to diagnose the need for, and champion the faster adoption of, high potential VAs in your business. The business model your company uses and the quality of leadership, will dictate the internal appetite to adopt VAs. As you know, some companies will not adopt an innovation even if it has succeeded for competitors. However, the single most important determinant of your company’s willingness to adopt VAs is the competitive DNA of the industry in which you operate. We call this your industry’s competitive “Fingerprint”.
However, the single most important determinant of your company’s willingness to adopt VAs is the competitive DNA of the industry in which you operate.
We have spent a few years defining industry Fingerprints. We have refined our discoveries and observations into a method of “Fingerprinting” different kinds of competitiveness. A competitive fingerprint defines how competitors instinctively think, operate and react to customers, suppliers, each other, and to innovations. It describes the “competitive DNA” of an industry – for example, companies in an industry with a “Commoditized” Fingerprint invest marketing and R&D completely differently than t companies in an industry with a “Digitizing” fingerprint, where major steps in the value chain are moving online – such as the Travel and Leisure industry, or Banking. As of today, we have identified 23 distinctive Fingerprints. Please visit our website for a description of these industry “fingerprints”.
Two terms are important to your new career as a Business Model Architect – Value Accelerator™ (VAs) and Value Eroder™.
We define a Value Accelerator™ (VA) as an idea, asset or strategy that will build powerful strategic assets and growth platforms, or grow short-term revenues and profits. They are a powerful way to repurpose solutions that have been market tested by other companies to directly improve other business models. For example, providing free entertainment and education content while making money on advertising is a YouTube Value Accelerator™, but it’s no different than how ABC, NBC and CBS funded free television starting in the ‘50s. And selling Kindles™ at cost to reap the rewards of follow on book and movie sales is the same razor-razor-blade model first used by King Gillette who had the idea to sell razors and blades separately a hundred and fifty years ago.
VEs are some of the primary reasons why business models fail. They include well-defined, common problems like a bad strategy, or an unreliable process, an old technology that makes your cost too high and your products uncompetitive, or a lack of skilled people. They typically occur in recognizable combinations. We call these symptom patterns or syndromes. People also have specific symptom patterns or syndromes. One common syndrome is a large waistline, rising blood sugar, snoring, disturbed sleep and stress.
Companies in unrelated industries can suffer from identical Value Eroder™ syndromes. When a businessperson describes her business concerns, she does not describe an entire set of symptoms that make up the syndrome and instead describes only her top pain points. As a business model architect, your role, like a doctor, is to listen to the patient’s description of her symptoms, and then fill in the blanks to make a diagnosis.
To illustrate, here are a few common symptom patterns or syndromes:
To simplify things a bit, let us describe a code we use to recognize the business model impact of Value Eroder™ syndromes. The code works because VE syndromes typically manifest themselves as persistent weaknesses in one or more of these three aspects of the business model, and recognizing this makes it easier to find VAs.
Code 1 is a weakness in the Value Proposition (which is driven by weakness in 2 Cornerstones – your Product/service, and Revenue/Pricing/Profit Model).
Code 2 is a weakness in the ability to Generate Demand for your Product/Service (which is driven by weakness in 2 Cornerstones – your Brand/Customer relationships, and your Professional/other Influencer relationships).
Code 3 is a weakness in the ability to reliably Serve the Demand (which is driven by weakness in 2 Cornerstones – your Manufacturing or other Sourcing, and your Distribution Channels).
So, Value Eroders™ – combinations/patterns/syndromes of “business model symptoms” – are fantastic ways to recognize underlying causes of the problems that manifest themselves as persistent pain points like slow growth, shrinking margins, tightening cash flows. As with people, treating symptoms has limited value. Treating syndromes is the key to sustainable gains in long and short-term value.
Figure 1: example of a business model strength analysis first described in our first article. The Distribution Channel is the primary weakness. The key strengths of this business (model) are in a superior Brand, Excellent Manufacturing and a strong Profit Model. The competitiveness of the Product and Influencer relationships is average.
We follow two steps to find Value Eroders™
In Figure 1, which you will recognize from article #1 (insert link to article #1), your diagnosis is that the primary weakness in this business model is the Channel of Distribution. Thus, you will focus our attention on identifying the specific Channel VEs that are causing the weakness. Examples of Channel VEs include having your product in channels where your most attractive customers don’t shop, or being in physical stores where potential customers examine goods but actually buy from an online merchant who gets a free ride, or being in a channel that gives your customers an unpleasant shopping experience, or just not being in enough channels, and so on.
In Figure 1, the business model syndrome is a weak (perhaps even commoditized) product, which directly results in an inability to find strong Influencers of demand (for example a doctor or salesperson won’t preferentially recommend your product if it isn’t differentiated and superior), both of which make it difficult to get good Distribution and placement in the most attractive channels.
Fifteen years of practice has refined our process to find VAs – we find VAs in a very simple way. We have tested other, more complex approaches that did not yield better results for the extra effort. At analogy, we have an advantage in this step – our work from 1997 has resulted in an unprecedented catalog of VAs™ for each of the six business model Cornerstones. This is a collection of thousands of valuable, highly portable/adaptable innovations. We urge you to develop your own “living” catalog of six (one for each Cornerstone) curated collections of innovations that are relevant to your industry’s DNA (competitive fingerprint) that also fit your company management’s character. We call this a “living” catalog because many new ideas emerge all the time and will compete to get in your catalog. It’s like being in a giant tropical forest, surrounded by plants that have cures for cancer and other diseases – you will quickly develop the “lenses” that tell you which leaves and roots and barks are worth investigating.
After finding the Value Eroders™(see above), we search our database for other industries and companies who have strength in these weak areas. Starting out as a new business model architect without such a database, you must ask “which company has a great solution for this?” If ‘channel’ is your weakness, as in the example above, research Wal-Mart or Amazon VAs. If leveraging ‘influencers’ is your weakness, research how companies use VAs to become their influencers’ preferred partners. For example, research Colgate’s VAs with dentists, or Neutrogena’s VAs with dermatologists, or L’Oreal’s VAs with hair stylists.
These companies and their VAs are the analogies that will inspire you to find a solution for your Value Eroders™ (“analogy” – a form of reasoning that if two or more things agree in some respects they will probably agree in others⁴).
As better VAs emerge from your design process, the result will be a set of VA variations that deliver incremental, substantial and transformational value.
Use the analogies as a springboard to brainstorm several variations of VAs – for example, after you find a VA used by a company, ask, “How would I improve this VA?” Each time you think about a way to improve the VA, do not stop – keep pushing harder to brainstorm even-better improvements by asking how you would improve the cost, quality, output, speed, or customer experience. As better VAs emerge from your design process, the result will be a set of VA variations that deliver incremental, substantial and transformational value. Not all these will appeal to your company – to your great frustration, even some of the best will be rejected. The reasons could include a lack of management bandwidth, resources, or simply lack of the will to do what it takes to implement the VA.
Following the steps described so far will result in far too VAs many to implement. Therefore, the next step is to prioritize them to choose the best. We do this by using a multi-factored scorecard. We have been designing different kinds of scorecards for a broad range of strategic and tactical uses since 1992. Scorecards can prioritize even personal life choices. Our VA scorecard has two kinds of scoring criteria. One kind assesses the potential value that the VA can create. The other kind assesses how easy or hard the VA will be to implement.
» An example of the scorecard is available for download here.
Using the scorecard will make the VAs with the best value for your company rise to the top.
You will find that this scorecard has ten scoring criteria. Four criteria measure how much value the VA will generate, and six reveal how easy or hard the VA will be to implement. Each of the criteria is mathematically weighted. The criteria and the weights in the scorecard are examples that worked for one of our clients, so it is a “real” example. This is a good starting point for you, but do rewrite the criteria to suit the specific needs of your business, and the context of your industry. Using the scorecard will make the VAs with the best value for your company rise to the top.
After prioritizing the top VAs, return to the scores you gave your business model. Imagine the top VAs are working well, and assess how much your original scores should improve. Discuss the VAs and scores with staff who work day to day in the Cornerstone you have focused on (in our example, the Channel of Distribution). They understand the challenges of the current business well, and therefore can think critically about how your actual performance would improve.
Next, calculate the resources that will be required to implement the top VAs. Include estimates for investments in people, equipment, and process capacity, and for how much time will be required to get the VA implemented. Have a practical discussion with finance and decisions makers, to compare the resources required to the budgets available. This adds a practical aspect to the process and involves the Finance team in contributing their thinking.
Finally, a word of caution. Many senior managers have negative reactions to scorecards because they have great (too much?) faith in their own judgment. They believe that a scorecard process, which can include scores provided by people who have had limited, or even no experience with major business decisions, is a weak substitute for their superior judgment. This is an incorrect assumption. It is incorrect because a well-designed scorecard process benefits from two critical things a senior manager cannot contribute.
Articles one and two explain a method to diagnose business model weaknesses and resolve them by using VAs. We have been using and evolving this approach from 1997 with several clients. We hope you find this approach useful as you launch your new career as a Business Model Architect!
By Tony Singarayar
About the author
Tony Singarayar is Founding Partner of analogy. He spent 20 years at Johnson & Johnson, where he developed the business model innovation methodology now used by Analogy.
Analogy Partners specializes in Business Model design – we have expertise in designing business model innovations to sharply accelerate revenue and profit growth. For over 15 years, we have refined our proprietary toolkit and substantial database of business model innovations. And we have established a strong record of success – we’ve served US and global clients, ranging from startups to Fortune 50 companies, by helping them enter new markets, revamp legacy brands for the digital age, and accelerate revenue and profit growth. We can help you develop an actionable plan to grow your business.
1. Comments by rocamora – Reddit www.reddit.com/user/rocamora/comments/ accessed 4:20pm IST on Feb 8 2013
2. Source: http://www.thefreedictionary.com/archetype, accessed Feb 23 7am SGT
3. http://en.wikipedia.org/wiki/Syndrome – accessed February 10, 2013 at 10:17am IST
4. http://www.merriam-webster.com/dictionary/analogy sourced Feb 7 2013