INNOBLOG

Look around your office. How many of your colleagues are sitting at a desk with a telephone? Why on earth are they still doing that?

The last stage in the development of a business model, our CEO Mark Johnson writes in his recent book Seizing the White Space, is the evolution of a company’s business rules, success metrics, and behavioral norms, which, he says, “connect the elements of a business model and keep the system in proper balance.” In many industries, a company’s rules (“employees must wear the company polo w/ black slacks during working hours”) and metrics (“employees shall be compensated at 20% commission for all sales beyond $x-amount”) are fairly easy to identify and articulate.

Norms, on the other hand, are far more implicit, and often executives and employees do not recognize the impact they have on the business. Explicitly examining the norms that a company currently takes for granted can unlock the full potential of business model innovation.

Understanding where norms come from helps to clarify what they are. For every key process in a business model, there are a number of sub-processes. For example, the key process “hiring and training” can be subdivided into “resume screening,” “interviewing,” “extending an offer,” etc. At some sub-level, defining a process becomes pedantic and useless. At this level, the process can be approached in many different ways, though over time patterns of behavior emerge as ingrained actions that simply become “the way things are done.”

Anyone who has been “the new guy” at a company can attest to the rate at which norms are spread by word of mouth. Examining them is important because while all employees work through processes in some way, often this is not the optimal way. Suboptimal norms (relative to the purpose of the business model) often arise as behaviors that compensate for immediate constraints in either resources or knowledge.

A good example of this is the general layout of office workers (think of the TV-series The Office): Until the late 1990s, a common white-collar norm was to work at a desk using the office landline phone and a desktop computer, all day, every day. The lack of mobile phones and portable laptops made any other arrangement difficult, even though being stationed in a single location was often not ideal for either productivity or job satisfaction. Slowly, more liberating working norms have emerged at many companies, as resources like online communication, wireless handheld devices, and Bluetooth headsets allow for greater flexibility and more efficient freedom of movement. And yet, look around your office. How many landlines do you see on people’s desks? Is the message they send to employees in line with the purpose of your business?

Norms like these, which are rooted not just in a company’s business model but more broadly in the culture of the wider industry or society, are especially hard to identify and manage. But for the insightful manager, the good news is that many constraints to optimizing norms (resources and knowledge, to say nothing of rules and metrics) are highly fungible. Jaguar’s recent IT switch from Microsoft Outlook to Google Apps is a case in point. Not only has this shift saved the company millions of dollars, but it holds the potential to engender a new and powerful set of employee norms, as over 14,500 staff worldwide begin to work with Google Docs, Gmail, and other cloud-based live-document programs.

Wired editor Chris Anderson, ever the eloquent early adopter, probably describes that potential most vividly here in his book Free:

I’m typing these words on a $250 “netbook” computer, which is the fastest growing new category of laptop. The operating system happens to be a version of free Linux, although it doesn’t matter since I don’t run any programs but the free Firefox Web browser. I’m not using Microsoft Word, but rather free Google Docs, which has the advantage of making my drafts available to me wherever I am, and I don’t have to worry about backing them up since Google takes care of that for me. Everything else I do on this computer is free, from my email to my Twitter feeds. Even the wireless access is free, thanks to the coffee shop I’m sitting in.

Not all business models will call for Anderson’s working norms (using unsecured wireless networks may not be a good idea for financial services folks, for instance), but an important (and actionable!) part of optimizing norms for your business model is to consistently remove resource constraints, as well as educate your people on the best use of available resources.
 

Dartmouth College graduates are generally big supporters of our most famous alumni — Theodor Geisel (Class of 1925) known better as Dr. Seuss. On Sunday evening, my son pleasantly surprised me by picking one of my favorite Dr. Seuss stories, The Sneetches, from the shelf for his bed time reading. Reading the story helped me visualize why a company I recently visited was approaching innovation the wrong way.

For those of you who don't remember the story, the sneetches (yellow characters that vaguely resemble ostriches) start the book as a divided crowd. One group of sneetches has stars on their stomachs. They consider themselves superior to the sneetches without "stars upon thars." Then Sylvester McMonkey McBean arrives with a machine that can put a star on a sneetch's chest. Much to the star-bellied sneetches dismay, the non-starred sneetches go through the procedure. Then, of course, the star isn't special anymore, so McBean unveils a star removal machine. Hilarity ensues.

By the end of the book, the sneetches have all lost their money but can no longer remember who had a star and who didn't. The story carries obvious lessons about the dangers of conformity, and upon basing social status on silly, superficial things.

But what the heck does this have to do with innovation?

First, when you are setting up innovation groups, you have to avoid simply putting "stars upon thars." Sometimes members of these groups begin preening, thinking they are the chosen ones within the organization. As Vijay Govindarajan and Chris Trimble point out their new book The Other Side of Innovation, the resentment that typically follows is dangerous because innovation success almost always requires support from the base business (who of course provides the money to make innovation happen).

Read the rest at Scott's Havard Business Review blog.

This blog post was featured in the Harvard Business Review.

Back in 2006 and 2007 my colleague Scott Anthony argued that Nintendo’s Wii would be a disruptive innovation that could catch Sony and Microsoft off-guard. And it did: Wii sales figures soared in the following years. In 2008 and 2009, for instance, Nintendo sold more consoles in North America than Microsoft and Sony did with their respective consoles combined.

The core of the argument was that Nintendo’s strategy of “competing against non-consumption” would allow it to fly under the radar of Microsoft and Sony, which were engaging in an arms race to provide ever better-looking games to their most-demanding consumers at premium prices. And that is exactly what happened.

But now that Nintendo’s innovation appears to have passed the peak of its life cycle and the media is turning its attention to the next generation of consoles, one might wonder about what comes next.

Interestingly, Nintendo’s recipe for short- to mid-term success might play out in a way that also helps its competitors in the long run.

Nintendo made the use of consoles and interaction with video games simple and intuitive. That enabled millions of individuals worldwide to overcome a key barrier to consumption, thus dramatically broadening the market. But the Wii’s high-profile success made Nintendo’s strategy impossible to ignore, and Microsoft and Sony responded by replicating some of its key elements, such as the intuitive motion-sensing game controller (Microsoft Kinect, Sony PlayStation Move).

Legions of Nintendo consumers, having overcome the skill-based barrier to consumption, are now conceivably in the market for products with even more intuitive controls, improved graphics, better online experience, and so on. Leaving brand effects aside, the next generation of consoles from all three companies might thus be much better substitutes for one another than the current generation is. So while Nintendo has made a fortune with its disruptive innovation, it also essentially did significant market development work that all players could profit from in the future.

What can Nintendo do to navigate this market development trap? Principal options include moving up the sustaining curve to fight more fiercely against Sony and Microsoft or continuing to compete against non-consumption.

For a successful march up-market Nintendo would need to improve the performance of its next-generation offering along the performance dimensions it introduced – intuitive control and equally intuitive gameplay. That might not be enough to combat Microsoft and Sony. Microsoft, for instance, has established a partnership with Netflix to boost the attractiveness of its current offering that it will likely carry on to its next-generation console, since it already helps keeping Xbox 360 sales numbers up. Without systemic changes to the traditional business model of the industry by the disruptor, there is considerable room for its high-end competitors to attack.

Continuing to compete against non-consumption, on the other hand, could be a very attractive strategy for Nintendo. The company already has brought simple gaming to new contexts in developed world with its DS handset (which is following its own improvement trajectory, adding on 3-D functionality and other advantages).

Addressing non-consumers with simpler solutions creates competitive advantage that can be sustainable for a considerable period. The Wii had caught its competitors by surprise: It took three full years in the fast-paced world of consumer electronics for Microsoft and Sony to adapt their game controllers to make their games more intuitive, something which had at first glance seemed straightforward.

What’s more, targeting non-consumers typically expands the market base. By continuing to “democratize” the video gaming market, Nintendo might be able to repeatedly create new growth markets. Wii Fit was already a good follow-up move to attract young women (historically video-gaming non-consumers). Where could Nintendo look next? How about the billions of people worldwide who cannot afford a Wii, its games, or TV sets, or do not have access to a continuous electric power supply? Framed in the right way, that is, by continuing to make distinct cost/performance tradeoffs and rethinking interactivity – both capabilities that Nintendo has already shown it can master – there could be lots of great growth opportunities here.

Three insights Nintendo’s story might offer:

• Simplicity can be a really powerful means of disruption when targeting non-consumers. It is typically unattractive for market incumbents to lower the performance of their offering along traditional dimensions to compete for non-consumers right away because this would not meet the demands of existing consumers. So it can take a while for the incumbents to realize and incorporate the newly introduced performance dimensions in a way that does not alienate their core consumer base. In the meantime, the disruptive innovation can outsell its competition.

• It’s crucial to keep thinking about what comes next. The best disruptors are also the best sustainers. Imagine what would have happened if Apple, for instance, had stopped with its first-generation iPod! Companies that disrupt sustaining players by overcoming skill-based barriers to consumption need to recognize that the converted consumers will be amenable to sustaining offerings by competitors in the future – the market development trap. If a disruptor is not able to induce incumbents to exit the market, it will need to explore its ability to either engage head-on in a sustaining competition or disrupt the market anew since its impressive returns will attract competition. It’s crucial to keep thinking about what the source of sustainable competitive advantage is that will allow the disruptor to fend off the inevitable competitive counterattack.

• The market development trap is not so much a threat as it is an opportunity. Competing against non-consumption can become a self-renewing cycle that a company can commit itself to over the long term. To get – and stay – ahead of the competition, the trick is master the tin challenges of continually improving and expanding the disruptive “base” while also tackling new circumstances of non-consumption.

Nobody said that being a disruptor would be easy. Nintendo shows how a disruptive strategy can pay off handsomely, but also illustrates that in highly competitive markets competitive advantage is a transient notion.

This blog post was featured in the Harvard Business Review.

It was 5 pm on August 9. I had just settled down for the three hour journey from Singapore to Manila. The seat next to me was empty, so after surreptitiously checking email one last time before takeoff, I switched my iPhone to airplane mode, and left it face down on the seat.

After I got through customs, it hit me. I hadn't picked my phone back up (I use my U.S.-based BlackBerry when out of Singapore to avoid the ridiculous roaming bills you get with iPhones). Singapore Airlines of course handled the situation beautifully — letting me go back on the plane to look for my phone. But it was gone.

The 18 hours in Singapore without my iPhone made me realize how much I like it. But it's not because of how the iPhone makes or receives calls. It's all the little use occasions, like checking my MLB app on the bus ride (I usually catch the second inning of East Coast baseball games), reading a book on my Kindle app on the subway ride, or finding out how to get to my meeting once I got off the subway in an unfamiliar location.

It would be an exaggeration to say I was lost without the phone, but I could palpably feel its absence. Contrast that to my Flip video camera. I think Flip (now owned by Cisco) makes good, useful products. But when I forgot my camera on a recent trip, I shrugged my shoulders, turned on my phone, and used it to take a more-than-good-enough video.

I've talked before about how you can't really know for sure whether you are working on a good idea until someone actually pays something to purchase your idea. For some ideas, payment isn't enough. You need someone to use your idea, fall in love with your idea, become reliant on your idea, and tell their friends about your idea.

So how do you know that your idea could pass that love/reliance test?

Read the rest at Scott's Havard Business Review blog.

I read with interest a recent Wired Magazine article about Hunch.com – an online decision-support tool that’s similar to Ask.com and Yahoo Answers but with the ability to customize recommendations based on users’ taste profiles and their answers to a set of probing questions related to the topic of interest. The company claims that an average user voluntarily answers 152 questions, allowing Hunch.com to develop intelligent hunches.

Intrigued, I logged on to Hunch.com to see what’s so special about this Web site that propels Internet users to divulge such a huge amount of personal information. Thirty minutes later, against my better judgment, I’d answered 131 seemingly random “Teach Hunch About You” questions, which was a surprisingly therapeutic process. Yes, I can change a lightbulb, and no, I don’t know how to tie a bow tie.

In theory, these questions will enable Hunch.com to understand my personality, tastes, and preferences. That way, when I ask Hunch.com a question later on, it could combine my profile data with my responses to topic-specific quizzes created and edited by other users in order to narrow down to the answers.

Having tried a few questions, what I realize is that for subjective topics like “Where should I move?” and “Should I get married?” Hunch.com’s advice is probably more precise than a Magic 8 Ball or a bad therapist. However, when it comes to product research, like when I asked what car I should buy, Hunch.com’s recommendations were hit-and-miss.

Hunch.com’s predictive power is still a long way from perfection. However, its approach of instantly customizing recommendations by asking customers about their needs and wants is refreshingly different from how e-commerce sites work today.

The common shortfall of such sites is that they only allow users to search for products based on functional attributes. For example, on Amazon.com, laptop computers can be filtered by brand, processor type, display size, hard disk size, and price. It presumes that consumers already have some basic ideas of what solution they need for the job they need to get done.

This is very different from how salespeople make recommendations in retail stores. Imagine yourself walking into an electronics store to buy a laptop. The first thing a good salesperson would ask probably won’t be about CPU or display size. He or she would probe you on your jobs and circumstances: Will you carry it around frequently? Will you use it for video gaming? The salesperson could then deduce from this information which laptop best matches your jobs.

It’s about time that e-commerce sites incorporate this jobs-to-be-done approach in making recommendations to their customers. Using online decision support tools that gather information on customer jobs and circumstances -- similar to what Hunch.com has developed -- e-commerce sites could help consumers quickly identify the right products and ultimately drive sales. Knowing more about customers’ jobs-to-be-done would allow companies to cross-sell more effectively, giving them the information they need to go beyond a single-product sale to propose a total solution that could help customers achieve their goals. The insight data collected from the decision support tool could also be tied back to purchase and abandoned-cart data, which may shed light on customers’ unmet jobs and innovation opportunities.

To implement an online recommendation tool like Hunch.com’s, e-commerce companies will need to understand customers’ potential jobs and their decision logic (that is, how they make trade-offs between alternatives under different circumstances), and then continually update the program as new products are launched. This is no easy task, but considering the high click-through rate (20%) that Hunch.com has managed to achieve with its online recommendation approach, the investment may well pay for itself.