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Research shows that while close attention is helpful with tasks that are novel or complex, it can actually be destructive when the task is familiar and well-practiced. In one study (published in the Journal of Experimental Psychology), in which experts and novices at golf were asked to visualize themselves putting and then actually doing it, novices sunk more putts when allowed more time than when they were pressured to putt quickly. No surprise there. But what was surprising was that experts showed the exact opposite tendencies; they performed much worse when they were told to take more time than when they were told to putt faster. The researchers concluded that well-honed skills are better practiced through strength of habit than through deliberate reflection.

Habit is a powerful force in business, as Innosight Chairman Mark Johnson points out in Seizing the White Space. Although every successful company is successful, he explains, because it works according to an effective business model, people seldom stop to think about the model they’re working in. Commonly, employees act out of habits that are “often implicit, arising not as direct imperatives of the model but in response to the business, rules, behavioral norms, and related success metrics that have developed to allow the model to be executed effectively, repeatedly, and efficiently.” And as in golf, when consistency of execution is the goal, strength of habit can be a competitive advantage.

But unlike golf, consistency of execution isn’t always what’s called for. While operating with more speed can be effective for well-practiced tasks in core business operations, Johnson explains how those same impulses are poisonous to new business -- where the executive is essentially a novice in a new domain.

It’s natural to want to do what you’re good at and to keep doing it over and over again to get better and better. While that might work for the pro golfer, today’s ever-changing business landscape demands that managers be ready to adapt to utterly new circumstances. So the next time you do something out of habit, take a moment to see if you’re still playing the same game.
 

For years companies have been playing Tom Sawyer with us. We consumers have been doing their work and thanking them for the opportunity. ATMs pass the job of the teller to us, and we are thrilled because they are open at 10:00pm when our job to be done is “pay the babysitter.” Airlines encourage us to print our own tickets at home using our own ink and paper, and we jump at the chance in order to “save time” standing in long lines at the terminal. I have even seen kiosks cropping up at quick-serve restaurants where you enter and pay for your meal using the same system sitting up at the counter. 

But to pay for this privilege, that’s where this model breaks, right? We’re not that gullible, are we? The success of Build-a-Bear Workshops would say we are, and now GM is betting people will pay for the chance to assemble the engine for their new top-of-the-line Corvette Z06 or ZR1. Crazy? Not at all.

Admittedly, on paper a value proposition that states you are going to increase the cost of a new car by 5% to 8% with no additional features or performance improvements and require the customer to spend a week doing the labor you have already included in the sticker price shouldn’t be viable. And were we considering just the functional needs of the buyer, you would be right. But GM knows that the Corvette (and most exotic cars) represents an emotional purchase for most customers, as obviously there is no practical reason anyone needs 635 horsepower and a 0-60 time of 3.4 seconds.

This isn’t new information, and for years such cars have relied on these emotional cues to justify their price tags, but I think GM has hit upon a new angle with this innovative participatory business model. For people with a sincere passion for automotive performance (not those simply showing off their wealth), part of the joy comes from knowing all about the capabilities of the car and being able to share these insider details with an admiring public as you lean casually against your imposing go-fast machine. For decades, motor heads got this job done on their own by getting their hands dirty under the hood turning reputable rides into hot rods. However, as engines became more complex and electronically controlled, performance enhancements started to resemble systems-integration projects with a generation of “tweakers” simply bolting on turbos and nitrous tanks to small, high-revving import engines.

This trend left some old-school horsepower hogs cold. Many are older and now have the money to buy the performance parts they always craved but lack the time and skill to install them. GM saw an opportunity to delight these frustrated gear heads and introduced a $5,800 “option” that allows them to personally participate in the creation of their 7.0 liter monster. For those so inclined, they can now derive a real sense of personal accomplishment and pride of ownership that transcends a set of keys and a contract to purchase. This is truly “their” Corvette.

Only time will tell if GM’s Tom Sawyer move is a hit, but the cost to experiment is low -- a slight risk to production timelines for these few, hand-built units -- and the potential return is significant – a 5% to 8% price premium with no added cost and heightened customer loyalty.
 

How many cooks does it take to keep a kitchen running smoothly? More than the number most restaurants currently have on staff on any given day, I’d argue. I’ve worked in a grand total of one restaurant in my life, helping the talented chef Tony Maws to open the Craigie Street Bistrot in Cambridge, MA, and then managing it for a couple of years. Through the staff there I also learned about the business models used by other restaurants at which they had worked, leading me to believe that there is a compelling reason to create more sustainable kitchen staffing models to improve overall restaurant performance.

Two main business models seem to exist for kitchen operations in mid- to high-end dinner restaurants. The first applies mainly to one-off, small restaurants, which run low-volume, high-margin operations, where kitchen workers work very long hours on low salaries for the opportunity to learn the art from a masterful chef. The second model is typical of upscale chains or hotel restaurants (“corporate kitchens”), which run more efficiently at lower margins and greater scale.

Both models have their drawbacks, particularly where the cooks are concerned. Significant flaws in the first model include high potential for burnout and turnover. The budget and quality of food may suffer from time to time when cooks quit without notice. To cover the shortage, remaining cooks then have to work even more hours while the restaurant has to spend money on costly recruiting efforts aimed at a relatively small pool of talent. Then, once hired, new cooks have to get up to speed, during which time the restaurant may have to limit seating to account for slower work in the kitchen.

But cooks who go the corporate-kitchen route have dissatisfactions of their own. They may be seen as selling out, sacrificing the “art” for better pay, sustainable hours, and benefits. What’s more, for those who seek to open their own restaurants in the future or otherwise compete in the chef spotlight, the corporate kitchen is something of a dead end, and these kitchens lose out on much of the top talent as a result.

I think these drawbacks could be addressed creatively and profitably if restaurants thought more expansively about business models—if they thought of cooks not as costs but as key resources in an integrated business model. Using that frame, a small restaurant might see how it could actually increase profitability if it hired more staff and built in some slack time rather than making a smaller staff work harder. Adopting a hybrid model where small, non-corporate kitchens hire a few more cooks who all work somewhat more reasonable hours at somewhat higher pay, an enterprising high-end restaurant could offset the higher costs through lower turnover, leading to less waste of time and resources, to say nothing of the potential for greater customer loyalty that the more reliable operation might engender and the possibility of poaching talent from competitors with less-attractive working conditions. Money spent on cooks, in the business model context, becomes an investment in a potentially virtuous cycle and a competitive advantage.

What do you think? Where do you see room for innovation in the restaurant industry?

Last week I attended World Innovation Forum in New York, a conference that usually presents top speakers who talk about issues on the forefront of innovation. This conference was no exception to that rule. The conference had no particular theme yet almost every speaker homed in on a topic that's critical these days, not to mention near and dear to us at Innosight: business model innovation.

Starting with the first speaker, Michael Porter (pictured here), conference presenters — including Michael Howe, the creator of MinuteClinic, Jeff Kindler of Pfizer, and Joel Makower of GreenBiz.com — particularly spoke of business model innovation. Porter's recommendations on how we can fix healthcare in this country focused on the need to identify value for patients and innovate outmoded delivery systems and profit models — both critical parts of the four-box model for business model innovation. Howe spoke of the ways in which MinuteClinic actually did those things and the ways in which the value proposition around healthcare has changed for consumers, who now expect to be participants in their healthcare rather than receivers of healthcare.

Jeff Kindler of Pfizer spoke of how Pfizer is organized around small teams each with its own innovation "officer," and of the need for pharmaceutical companies to innovate new models for care, including personalized medicine and even counseling, an area in which you wouldn't imagine a pharmaceutical company could innovate. More importantly, Kindler spoke of the need for agility and the need for open innovation due to the increased velocity of change. "You need to move faster than the competitors you don't know about," he said. "You need to think this way every single day."

Joel Makower of GreenBiz.com talked of the ways in which a company has to integrate "going green" with its business model: "The question is now how does going green create value for a company?" He also talked of ways in which a company can innovate its business model to become more green: rethink management of materials, logistics, and chemicals. And, we would say at Innosight, above all you must reimagine the customer value proposition.

As if to wrap up the business model innovation message, consulting firm Capgemini presented the results of a CEO survey whose main finding was that since the previous year's survey, business model innovation as a priority has leapt ahead of all others, including operational innovation and cost reduction. That dovetailed nicely also with a point that Michael Porter made earlier the same day: "Every company should now ask itself, 'What is my fundamental purpose?' After two years of cost-cutting, you'd better sit down with your team and make sure you HAVE a strategy that's not just cost-cutting!" 

If you're interested in knowing more about what went on at the World Innovation Forum, blog posts by all the Bloggers' Hub writers are here. A transcript of all of the tweets that were posted at the #wif10 hashtag during the conference is here. Searching the #wif10 hashtag on twitter.com will get you the most-up-to-date wrap-up blog posts and tweets. 

Dan Keldsen of Information Architected posted his interview with Mark Johnson about his book Seizing the White Space on May 14. That post capped the two-week-long virtual tour for the book. You can hear the interview at this link. Thanks to all the bloggers who participated! Here are links to all the other stops on the virtual book tour for Seizing the White Space:

• James Todhunter, Innovating to Win
• Andrea Meyer, Working Knowledge
• Jeffrey Phillips, Innovate on Purpose
• Jim McGee, FastForward and McGee's Musings (same review at both)
• Braden Kelley, Blogging Innovation

Like many of my friends, I fancy myself an amateur interior designer. But, aside from spontaneously rearranging the furniture and accessories in my home and decorating my sister’s first apartment (including pulling together design boards for our “design consultation”), nothing formal has come of our efforts.

Not so for friends Andrea, Casey, and Ashley who, in 2009, pooled their collective design experiences and opened luxury interior design firm Avenue Interior Design. I’ll be honest, I don’t know much about Avenue but I’m willing to bet that, like most companies that operate at the premium price tier of their industries, their business was a bit slow due to the Great Recession. But, unlike most premium companies, these intrepid designers did something different. They did something disruptive. They created I Heart Design.

I Heart Design is an online interior design website that offers consumers the expertise of trained designers and the benefit of custom designs for a fraction of the cost and time.  Here’s how it works: 

1. Pick your design style from nine options (everything from Wall Street to Rue Claudel to Surfside Ave)
2. Answer questions about the room you want to make over and upload its measurements and some photos along with any specific instructions (for example, “My husband loves this photo of the soaring eagle. I hate it but it needs to be in the room. Can we hide it somehow?”)
3. (NOTE: this is the disruptive genius part) Review your estimate which is based on the square footage of the room
4. Relax
5. In three weeks, you receive a box with two floor plans, recommended paint colors and window treatments, decorating tools (tape measure, tape, etc), and the password to your private interior design store
6. Visit your design store to buy as much or as little of the furniture and accessories from your design

That’s it! No time-consuming appointments. No wasted effort trying to tell the difference (let alone choose) between eggshell white and cumulus cloud white. No judgmental stares when you flip out about the price tag on the purple shag sofa that the designer insists you simply must have.  No paying the equivalent of a month’s rent to decorate a room the size of a closet.   Just a few minutes answering an online questionnaire and taking some photos and measurements gets you two personalized designs and your own virtual store, all for a price that is (literally) proportionate to your room size.

I Heart Design is a perfect example of how “good enough” can be great and how an existing company can use their understanding of consumers’ jobs-to-be-done and a new business model to attract nonconsumers and build an entirely new revenue stream.

I heart disruptive innovation and that’s one of the reasons I heart I Heart Design.

We're excited to announce that this week and on May 14, Innosight Chairman Mark W. Johnson's book Seizing the White Space is featured on a virtual book tour: five different innovation and management-themed blogs will be posting reviews of the book and/or interviews with Mark. The full list of participating bloggers includes this stellar lineup:

• Monday, May 3:  Andrea Meyer, Working Knowledge 
• Tuesday, May 4:  Braden Kelley, Blogging Innovation 
• Wednesday, May 5:  Jeffrey Phillips, Innovate on Purpose 
• Thursday, May 6:  Jim McGee, FastForward Blog 
• Friday, May 7:  James Todhunter, Innovating to Win 
• Friday, May 14:  Dan Keldsen, Information Architected

Andrea Meyer of Working Knowledge has already posted her review here. We'll provide links to the rest of the reviews as they are posted this week. 

Harvard Business Review The Conversation

By Mark W. Johnson

When people want to transfer money safely and directly to one another in the Europe, they go through their banks. But in the United States, they're more likely to use PayPal.

This is good news for eBay, which phased out a competing payment system and bought PayPal in 2002 for $1.5 billion. eBay's revenues were up 16% in the last quarter of 2009, in good measure due to PayPal, which PC Magazine reports processed $20 billion worth of transactions for 81 million customers in that quarter alone. But it's bad news for U.S. banks, which it might be argued, should have been reaping the benefits eBay is now enjoying.

In fact, that's exactly what Anil Arora argues, and as CEO of Yodlee (the company that makes the software running the lion's share of the online-banking operations in the United States), he's in a pretty good position to know.

PayPal shouldn't exist, he maintained in a recent interview with Reuters columnist Felix Salmon. "After all," as Salmon explains, "it's not needed in other developed countries, where people can happily transfer money into anybody else's bank account without either party paying a massive fee. But in America, the short-sighted desire to keep those transfer fees allowed the banks to concede the field to the dot-com upstart."

Why did the banks allow this to happen? According to Arora, it's "because they weren't asking consumer-oriented questions."

I couldn't agree more. In theory, start-ups like PayPal that take aim at your customers should be at a huge disadvantage. You should know a great deal more about your customers than any start-up could and be in the best position to spot new opportunities to serve them. But in practice, start-ups are able to pick off your customers because, rather than ask, as you do, "What would make people want to buy my products?" they ask, "What can I produce profitably that customers want?" Very often, the answer is, "Something that requires a different business model than your company is currently using." This is where the start-ups have the edge — with no legacy business model to defend, they're free to focus entirely on serving customers' needs with a business model uniquely suited to doing so.

In this regard, the federal legislation curbing banks' abilities to charge hidden fees is a blessing in disguise. Rather than cling to their current fee-based business model, banks may have little choice but to do what I argue all companies should be doing as they seek to replace demand that may never return to pre-recession levels — look for transformational growth opportunities by developing new business models to fulfill jobs customers really want done.

Opportunities to serve your existing customers using a different business model is one of the two main ways companies can achieve transformational growth, the other being innovations that open up whole new markets. The former I call "white space within;" the latter, "white space beyond." I label them "white space" opportunities not because they're opportunities no one else is considering or opportunities that reside in places no one has gone before, but precisely because they require your company to go somewhere it can't go with its current business model. That makes them very hard for your firm to spot or realize, but not so hard for a start-up — or, conceivably, for a competitor already running under a more compatible model.

Looked at this way, it is easier to see how particularly dangerous it is for your company to ignore other firms' novel, low-margin offerings in your own market. These forays into your "white space within" are not just difficult opportunities for your company to fullfill, they are other companies' low-margin disruptive innovations. If someone thinks up a clever way to serve customers in your white space beyond — that is, in a market you currently aren't in — it's too bad if you could have done it first, but it's not necessarily tragic. If someone thinks up a way to siphon off your customers through low-margin opportunities in your white space within — opportunities you find so difficult to address that you chose to ignore them — that can be fatal.

Just ask the big U.S. steel companies, which, as Clay Christensen famously recounts in The Innovator's Solution, were at first untroubled when steel minimills took away their least profitable customers using a new steel-making technique that produced a somewhat lower-grade steel at far lower cost. By the time they understood the threat, the minimills had steadily improved their new business model and their products, and eventually chewed up the big steel companies' entire customer base from the bottom up.

It's probably too late for the banks to go head-to-head with PayPal by setting up their own alternative systems. But it's not too late, Arora suggests, for the banks to take another look at new kinds of profitable possibilities.

Turns out Arora thinks banks have a lot of scope for offering services customers could want. Yodlee is sitting on a database of some 23 million users managing $3 trillion, which it's opening up to outside developers in much the same way Apple has opened up its iPhone and iPad to app developers. Arora envisions apps that might warn consumers when they're about to incur one of those well-hidden bank fees or compare different banks' offerings in much the same way that Progressive insurance does with car insurance — and even a payment widget that might compete directly with PayPal.

Banks can look at this merely as a threat to the fee-based banking model — and a big leg up for no-fee banks like Ally — or as an opportunity to join with Yodlee and recast their business models to profit in some more consumer-friendly way. If some enterprising financial institution spent as much energy focusing on business model innovation as it has on propping up its fee-based strategy, it might see in its vastly changing competitive landscape not just threats but a rare chance to get back the business it's ceded to a nimble start-up.

Read on The Harvard Business Review

Where Will Your Next Profits Come From?

How does your company make its money? I'll wager it's not in the way that you think. Not entirely, at any rate.

I typed the term "profit formula" into Google the other day, and the first entry I got was entitled "Calculating Gross Profit Margin."

That's not really surprising, since most companies measure profits in terms of margins, whether gross or net. What could be more rational? After all, at its most basic level, a company's profit formula has two parts — revenue and costs. Sell something for more than it cost you to make it and you turn a profit. How much higher revenue is than cost for each transaction is the margin. So it seems logical that focusing on margins is a good way to keep track of your profits.

And it is. But it's also a good way to close your organization off to the possibility of making future profits.

To understand why, let me lay out what I believe is a more useful way to think of profits — a formulation I've broken out into four parts to make it easier to view profit generation strategically. In this framework, the factors you need to consider when determining how your company will turn a profit for a given offering are:

• Revenue model (price x quantity)
• Cost structure (direct costs, overhead, economies of scale and scope)
• Margin model (how much each transaction must net to reach the desired profit level)
• Resource velocity (how quickly resources are turned into offerings — leadtimes, throughput, inventory turns, asset utilization).

Companies that habitually use margins to judge how well their current model is working often make the mistake of using them to judge how feasible a new opportunity would be, too. That leads them to reject out of hand any new business that might involve lower margins.

But as you can see from this framework, your current company's margin requirements are a function of many other factors: the price you've set, the quantities you sell, your fixed costs, your economies of scale or scope, the speed with which you can get paid. Change any of these factors and the margins required to turn a profit change as well.

Granted, changing fixed costs, overhead, or the way in which customers pay you is hard for incumbents. But the very fact that it's hard to think about profit generation in other terms is what creates opportunities — if not for you, then for focused start-ups unencumbered with your fixed costs or your need to sell at a certain price to maintain margin.

Dell Computer, for example, became extraordinarily profitable not just because it found a lower-cost way to make personal computers than its competitors, but because it found a way to get its customers to pay for the computers before Dell had to make them — thus assuring that it made only the computers that would be sold. With that advantage, Dell could be profitable at far lower margins than Compaq or IBM could ever accept.

Read the rest at Harvard Business Review The Conversation.

What’s Holding Your Company Back: The Dangers of Dogged Loyalty

What to do when you find it tough to get people to change course.

Why is it so hard for companies to do something truly new? After all, companies innovate all the time. They innovate products. They innovate marketing efforts. They innovate processes to increase efficiency. Through these efforts, companies innovate and improve their existing business model in incremental ways, streamlining and increasing its efficiency, tweaking the profit formula, bringing new key resources to the table, and changing and refining individual processes. But rarely do incumbent companies make the leap to reinvent their existing business models or create new ones in response to the opportunity or threat presented by a new customer value proposition.

Why not? Why can’t top executives get their employees to change course? I’ve never been comfortable with the “People don’t like change” explanation; even less convincing to me is the “My people are stubborn” or “My employees want to do what they want, not what the company wants.” If that were so, I suspect most well-run companies would have let those people go by now.

A far more interesting question to ask then is, “What’s stopping my most talented and loyal employees from doing what I want?” As an answer, let me suggest a thought experiment (taken from my recent book Seizing the White Space: Business Model Innovation for Growth and Renewal).

Imagine a fictional corporation, DogCorp, the world’s leading manufacturer of high-quality dogs. DogCorp makes the best, most efficient, most innovative dogs on the market. Its consistent success has made it the company of choice for talented designers and managers throughout the industry, who thrive in its strong canine culture.

But one day, a fairly free-thinking manager realizes that a significant number of customers hanker after a different kind of pet—a more independent and curious animal. Excited by this new growth opportunity, she puts together a team that designs something new—a cat—to satisfy this unmet need. Then she brings it to her superiors.

And the DogCorp managers go rabid. Their first impulse is to nip this cat-thing in the bud. It’s “non-dog,” and that is often reason enough for them to refuse to allocate sufficient people, time, or resources. That’s what Digital Equipment Corp. CEO Ken Olsen did when confronted with the PC. He wasn’t interested in selling low-margin computers piecemeal, having famously said he wanted to own the entire computing structure of his customers’ enterprises. In the 1970s, DEC actually had a PC under development in its laboratory, eventually sinking $2 billion into the effort, but by the time the poor cat received the serious resource commitment it needed, it was too late.

Fundamentally new customer value propositions, ideas that require different profit formulas, or projects that call for different key resources and key processes can all look like non-dogs. If managers could recognize them as cats, they might find potential uses for them or see untapped markets or underserved consumer needs they satisfy. But instead, all thinking stops at the conclusion “non-dog.”

Read the rest at Chief Executive Online.

Harvard Business Review The Conversation

By Mark W. Johnson

"We see local as the big white space."

That's America Online (AOL) CEO Tim Armstrong recently explaining to a group of investors how AOL's "digitizing towns" initiative (to offer one-stop website-management services to municipalities all across the U.S.) would position the company to compete against the likes of Google, Yelp, and CitySearch as the company looks for a clear path away from the disappearing dial-up subscription market.

In this context, white space basically means "a place where a company might have room to maneuver in a crowded playing field."

As a metaphor, white space is at once ubiquitous and frustratingly ambiguous. There may be as many definitions circulating as there are business thinkers. Some people define it as a place where there's no competition. Others as an entirely new market. Still others use it, as Tim Armstrong has, to refer to gaps in existing markets or product lines.

For all its ambiguity, though, white space is undoubtedly a metaphor about opportunity; different thinkers define it differently because they take varying approaches to capturing opportunity. In that spirit, let me offer up another way to look at white space — a very specific meaning I think would be particularly useful to Tim Armstrong and to any other top executive engaged in strategy formulation.

Rather than think of white space as external — as some indistinct but desirable land outside your company's walls — I suggest that it's more productive to view it as an internal signpost — as a way to map your company's ability to address new opportunities or threats. So by white space, I mean "market opportunities your company may wish — or need — to pursue that it cannot address unless it develops a new business model."

These might be opportunities to bring your own innovations to market — Apple's iPod is a great example and so were the mouse and laser printer (albeit ones their inventor, Xerox, failed to develop). Alternatively, they might be imperatives to address a competitive threat or a radically altered market landscape — like the one AOL faces as it watches its dial-up subscription market melt away or the one I suspect many, many companies will face this spring as they contemplate a world devoid of credit-induced demand.

Defining white space in this way is important to strategy formation for three reasons.

First, many companies have drawn too broad a conclusion from failed efforts to enter their white space — not that those opportunities couldn't be captured without changing their business model, but that those opportunities could never be captured at all. As a result, they've retreated to their core operations and adjacencies — and unnecessarily limited their options to only those strategic moves that they can execute with their current models. Too many companies act like Xerox in this situation and not like Apple.

Second, if viewed in this way it becomes clear that one company's white space may be another company's core competence. This may well be so for AOL as it tries to switch from a profit formula based on subscriptions to one funded through advertising, something very far from its core but very familiar to its born-on-the-Web competitors (though perhaps the fact that Armstrong is a former Google executive will carry the day).

But ultimately what this definition allows you to do is map a new opportunity or impending threat against your company's current ability to meet it, rather than assuming that the odds of success depend mainly on how near or far it is from other competitors. If white space really were just a place where no competitors lurked, companies would have little trouble bringing their most innovative ideas to market, since they'd be, practically by definition, the ones least subject to competition. But we all know how often that turns out to be true.

Read on The Harvard Business Review

Quick: Describe your company's business model.

Having trouble? That wouldn't surprise me. In reality, there isn't really any consensus about what the term "business model" even means. Suggestions range from the all-encompassing, everything-in-your-value-chain approach to the reductionist "A business model is nothing else than a representation of how an organization makes (or intends to make) money."

That latter definition is from Peter Drucker. And while I applaud his attempt to reach for the essence of the idea, I think he went too far. A business model has to specify more than just how a company intends to make money. It also needs to include some information about why a customer would ever want to give the company any money.

As something of a middle ground, I've proposed (in both an HBR article and in more depth in my book Seizing the White Space) a framework meant to be specific enough to overcome the reductionist problem but selective enough to overcome the unwieldiness of the kitchen-sink camp. I've broken it out into four boxes that answer the following questions:

1. Why would someone want to buy something from you?
2. How will you make money selling it?
3. What, exactly, are the important things you need to do to pull off the plan?

(I know that's three questions, but the answer to that last question comes in two parts, so the model requires four boxes.)

Read the rest at the Havard Business The Conversation blog.

In the past few days there’s been a lot of buzz surrounding the announcement of Google’s new touch-screen handset, Nexus One. The handheld device, which Google is calling a “superphone,” has a beautiful 3.7-inch display, an ultra-thin body, a long-lasting battery, and of course Google’s heralded Android operating system. Google has obviously produced a nifty device, and it’s given rise to expected debates and chatter  over how the Nexus One matches up against and poses a threat to Apple’s iPhone.

But there is much more to this story than just a slightly improved sustaining technology.  What’s most noteworthy about the Nexus One is not necessarily the phone itself, but rather the disruptive potential of Google’s new business model. The real story here is that the phone will be sold exclusively through a new Google-hosted Web site. Highlighting this point, Google announced the Nexus One not as “a new phone by Google” but rather as “the first phone we'll be selling through this new Web store.” Riding high on the wave of superphone euphoria, Google is more subtly but strategically positioning itself to go direct to consumers through online retailing. With nearly five million unique visitors viewing a link to the phone (and thus the Web store) on Google’s homepage each day, plenty of people will get a chance to experience the new Web store firsthand.

But is the risk really worth it? Last time I checked, it seems that Google has a pretty healthy business. And isn’t selling ads really the core of its business anyway? In this sense what sets Google apart is how demonstrably willing it is to innovate its own business model in times of healthy success. Google is displaying courage and dexterity similar to IBM and especially Amazon, which has gone from book retailer to consumer goods retailer to brokerage services provider to Web services provider to original equipment manufacturer.

Google’s brave move illustrates a point Mark Johnson makes in his new book Seizing the White Space — “To thrive in today‘s marketplace, to be built to last, every business now must be built to transform.” Aware of the likelihood that, as Harvard Business School Professor David B. Yoffie has noted, the new paradigm-to-be is mobile computing and mobility, Google has seen this change coming for years and is fearlessly preparing for it.

So is the risk really worth it? After all, not even Google has a flawless record of success in new business ventures (when was the last time you used Google’s Orkut or Knol?). But in an era of shorter business cycles and increasing competition, risk is inevitable, and being built to transform has become the new imperative. The surest path, then, is to not be bound by doing merely what you’re good at or what you’ve always done, but to vigilantly identify new ways to address customer jobs more simply, conveniently, and affordably, regardless of how this may or may not fit with your current business model.

A recent Economic Times story detailed IBM's new "spoken Web" technology, which will allow users to browse the Internet and access information by speaking in their local language without having to type or otherwise use the computer keyboard. An IBM India lab is currently developing the technology and performing real-world tests with rural dairy farmers in India. The idea is that if IBM can remove barriers to accessing its enterprise resource planning technology, Big Blue may be able to unlock a large market selling ERP software to companies that source dairy and other foodstuffs from rural Indian farmers.

This sounds like a technology problem. After all, using technology to create the opportunity to sell to nonconsumers — that is, people who have been totally shut out of a market — is a classic way to build substantial new growth. But in reality, this is a business challenge.

To crack this nut, the technology needs to be delivered to market with the appropriate business model — and there's no guarantee that the right business model is the one IBM is currently using. The business problem confronting IBM, then, is whether it needs a different model to realize this opportunity. If so, IBM must figure out a way to seize what I call its "white space beyond" — that is, its opportunity to open up an entirely new market with an entirely new business model.

IBM has done this before many times, having successfully moved, for example, from the leasing model it used to sell its fabulously costly mainframes in the 1960s to a purchase model for its lower-end mainframes and minicomputers in the 1970s, and — far more radically — to a retail model for its personal computers in the 1980s.

IBM took a lot of flack for being something of a technology laggard in the PC market, preferring to be a fast follower; it didn't get nearly enough credit for being on the cutting edge of business model innovation.

Here was a company that owned more than half the computer market setting up a renegade operation in Florida full of young employees in polo shirts (far from its headquarters in cold, formal, famously white-collar Armonk, New York), building what Ken Olsen, CEO of then-number-two computer maker Digital Equipment Corporation, thought of as little — and unprofitable — toy computers.

But IBM understood that this new technology could be profitable if the company developed an innovative business model to go along with it — one that offset the radically smaller profit margins with much greater volume, generated through a lower cost, retail sales channel. For both DEC and IBM, the PC represented a tremendous growth opportunity, but only IBM understood that the real challenge was business model innovation, not technological innovation. And where is DEC now?

As we come out of the Great Recession facing the possibility of permanently lower demand in the credit-deflated West and look for growth to the millions of nonconsumers in India, China, and the rest of the developing world, I would argue that every multinational finds itself in the same position as IBM was in 1980. That is, every company needs to ask itself: Can I reap those opportunities with my current business model?

I'll go out on a limb here and predict that for most western multinationals, the answer will be no. Developing economies will not support the margins that most of their current business models require. These opportunities will be squarely in their white space beyond.

The question is, Will they be just "beyond" these companies' markets — or will they also be beyond their imaginations?

Read the rest at the Havard Business Conversation Starters blog.

There’s a popular adage that “imitation is the sincerest of flattery.” Well, it amazes me how often I hear “it’s like Netflix for…” as a new company is being touted as innovative because it has borrowed (what it thinks is) the Netflix model. Generally speaking, it’s a great idea to consider borrowing a successful business model from one industry to apply to another, but there needs to be thoughtful consideration as to what the core of that business model is, so that it is not misapplied.

The Netflix model is a great example of business model innovation, which disrupted the entire movie rental market by providing customers with convenient, inexpensive entertainment. The model has resulted in numerous imitators, renting children’s toys, audio books, dresses, magazines, and beyond.

One of the big risks that many “it’s like Netflix for…” companies take is that they have borrowed some of the processes (e.g. creating rental queues online and home delivery of products) without thinking of the business model as a whole. The success of the business model depends on the integration of the customer value proposition (CVP), profit formula, and key resources and processes (see the Four-Box Business Model Framework). At the heart of the Netflix model is the customer value proposition: convenience and cost savings. Careful consideration should be given to what the benefit to the customer really is, in terms of what important and unsatisfied jobs are being addressed. For instance, if not convenience or cost-saving, is the value in time-saving or variety?

A big red flag that a model is being misapplied is if there is a weak customer value proposition, because the tradeoffs for the target customer are too high. Think for a moment about something that you own that you would hate to rent, or about something that you would want to select in store, not select over the Internet. Chances are the things that first come to mind are likely not a good fit for the Netflix model. When it comes to borrowing business models, it simply is not enough to think that because it worked in one industry it will work in another.

Could these interpretations of the Netflix model work for some of these companies? Sure. It’s too early to say whether these businesses will individually or collectively succeed, but here are a few questions that entrepreneurs looking to borrow a business model should think about:

1. Is whatever you are borrowing going to help fulfill your target customer’s important and unsatisfied jobs-to-be-done?
2. Will this model be unique to your industry? If not, are you at risk for becoming just another “me-too”?
3. What are you really competing against? Will your would-be-customers be willing to accept the tradeoffs your model presents?

If done properly, drawing from business model analogies in different industries can be a way to spur business model innovation. Consider which aspects of a business model you are borrowing and whether those fit with your vision and the customers for whom you are trying to create value.

A friend in the industry sent along word of an interesting business model innovation from electric car pioneer Tesla. The company is now offering to send roving mechanics, or “service rangers,” to its customers on house calls as needed for diagnosis, maintenance, and repair work at the rate of a buck per mile traveled. This "geek squad" for cars makes the experience of owning a (still extremely pricey) Tesla more convenient and more secure, and it keeps Tesla from having to build out a nationwide network of service centers. 

Tesla’s cars are pretty wired – a central computer monitors all systems and produces diagnostic reports – which should make on-the-spot service easier. Furthermore, electric cars are much simpler machines than their gas-powered brethren; the powertrain is much cleaner and more streamlined. There is no need for oil, spark plugs, hoses, pistons, etc, so there is less that can go wrong and less need for a full-on garage for many repairs. Finally, unlike the established automotive companies, Tesla is not encumbered by a pre-existing dealer / servicer network and therefore has the ability to innovate its maintenance model in interesting ways like this one.

Taking a step back, this is another in a series of intriguing moves by Tesla to go beyond simply providing a very cool but very expensive electric car to focusing on the customer’s entire experience of use. In addition to this servicing concept, the company has also started providing charging stations to its customers. We have long touted the comprehensive system of electric mobility that Better Place is constructing (most recently in the Harvard Business Review, here) as a key step towards enabling the electric vehicle revolution, and we have issued warnings about Tesla’s strategy of targeting the high end of the market out of the gate. But if Tesla can continue moving towards a Better Place-lite comprehensive value proposition, and if it can successfully launch lower-priced models as it promises, Tesla may find itself making an awful lot of house calls in the years ahead.

Google made big news last week when it announced that it will offer free navigation service for mobile phones as part of its new software, Android 2.0. The service will initially only be available on Motorola’s new Droid phone (on sale beginning Nov. 6), but will eventually be expanded to more phones in the near future.

Unsurprisingly, the day the announcement was made, shares plummeted for GPS giants Garmin and TomTom, with Garmin’s shares dropping by 16 percent and TomTom’s closing around 21 percent lower. This amounts to a combined loss of $1.7 billion for the companies, with Garmin losing a fifth, and TomTom a third of its market value. To be sure, stock prices for both companies have been nothing to gush over throughout the economic crisis, but before Google’s announcement there had been some positive momentum with TomTom’s GPS app created for the iPhone and Garmin’s GPS/smartphone (Nuvifone).

It is too early to know how Garmin and TomTom will recover from and respond to this announcement, but at present their future does not appear to be filled with sunshine and smiles. True, Motorola’s Droid is not necessarily the perfect solution for every customer, and some will still be more comfortable with a dedicated GPS device—it tends to display maps faster, has a bigger screen, doesn’t need to be in cellular range to function, doesn’t come with the annoying two-year commitment of a cell phone plan, and allows the driver to talk on his or her cell phone while simultaneously following a GPS course.

But for many consumers, Google’s offering will be more than good enough. While GPS units cost an average of about $177, customers who commit to a two-year contract can purchase a Motorola Droid for $199. For a $20 difference, customers get a sleek, supercharged smartphone whose navigation features—thank you Google—may even trump those of a standard GPS device. With response to simple voice commands, visual display of Google’s street photographs, point by point directions, and possibly even free traffic data, its navigation features alone make the Droid an attractive product.

So how did TomTom and Garmin fall behind? How did the mighty fall so fast? The answer may have less to do with technology than it does with business models. While the tech industry is obviously moving at a rapid rate, the pace of destruction and transformation of business models in the navigation business is blinding. Instead of making sustaining improvements to their existing products (i.e. Garmin now makes 82 different GPS units) perhaps the GPS giants should have been, and should now be, thinking about how they could transform their respective business models to reach new or existing customers in fundamentally different ways. It may not be too late.

Over on the Harvard Business Review Editors' Blog, Gardiner Morris takes a look at the money that President Obama and US Energy Secretary Stephen Chu have been promising to spend on energy research projects and innovations in the energy sector. Morris argues that while this money is necessary, it's not sufficient to get the clean-tech economy up and moving. He cites the recent HBR article by Innosight's Mark Johnson and Josh Suskewicz, "How to Jump-Start the Clean-Tech Economy" as he discusses the need for the systems that will make this sector take off -- the "infrastructure, business models, and regulatory regimes that clean technologies will need. 

In their article, Johnson and Suskewicz write:

Edison didn't just invent a light bulb. He created a coherent commercial system to support it. He designed a technical platform that included generators, meters, and transmission lines; he piloted the project in an ideal test market (lower Manhattan, teeming with enthusiastic early adopters); and he used his clout to get the regulatory support he needed, fighting off the lamplighters' union, among other things. In short, he imagined the business ecosystem his light bulb would need and set about methodically creating it. 

The HBR article itself is still (as of this posting) free at the link above. We invite you to read it and join the conversation: what do you think it will take to get the clean-tech economy jump-started?

One of the most enjoyable sessions I saw at the World Business Forum was an interview with filmmaker George Lucas. Quite striking was the degree to which both serendipity and fate were intertwined in his education and early career. Also striking was seeing film clips of one after another scene showing a way in which Lucas has innovated.

And beyond the obvious – that he’s an extraordinarily creative filmmaker – Lucas has innovated the very business of filmmaking in a variety of ways:

• Lucas was among the first to insist on getting merchandising and sequel rights. He then created the kind of move-related merchandising we know today, and created the sequel-as-franchise idea with Star Wars
• Rather than limit himself to contractual obligation as a way of keeping control, Lucas simply formed his own studio
• Lucas saw digital moviemaking coming and started Industrial Light and Magic to experiment with digital filmmaking techniques that pioneered an industry.
• Lucas innovated the very sound of movies when he created THX Sound, paving the way for a day when enhanced sound became part of every entertainment experience from car stereo to mp3 player earbuds to video games with surround sound and a DVD player in your living room.

While Lucas has made his mark pushing the technological envelope, he described himself as not particularly technologically oriented. He writes in longhand and when developing filmmaking technologies often seems to cast himself almost in a “lead user” role, directing others as they do the technological work of creating the user interface. He focuses on the goal and lets others actually do the work.

Lucas seems to be unusually adept at spotting the overall direction indicated by trends, and is unusually fearless and clear-thinking as he goes about inventing ways to capitalize on new trends and technological innovations without regarding to protecting what he already has. This is a trait shown by almost no incumbent whose businesses and products are under attack from potential disruptors.

For example, although Lucas said he “never imagined people would go through Star Wars frame by frame, and tweet their friends about its cinematic tricks,” he embraced DVD technology when it came out. He has embraced every type of medium, and said during his World Business Forum interview that not only has he made films for all kinds of screens, he’s now focused on learning to make films for mobile phones.

Yet he also seemed quite humble, acknowledging others’ innovations and at one point saying that he had thought that due to its complexity the Lord of the Rings saga couldn’t be made into movies, and that he thought Peter Jackson had done a great job at that.

Running as a theme throughout Lucas’ story was that you should keep trying, keep experimenting, move on when the experiments don’t work, and build on them when they do. He quoted one of his most famous characters, Yoda, saying “be careful what you hate – you may become it,” which is one way of saying don’t focus on negativity and failures. Another Lucas aphorism appropriate for innovators: “Nothing is a lost cause, unless you give up.”

A recent article in the Wall Street Journal caught my eye, as it described a shift away from hourly billing by law firms that seems an apt analogy for needed changes to healthcare pricing.

While past Innoblog posts have looked at innovations targeted at those overshot by the current legal services model, law firms’ high-end customers are also demanding fundamental changes. With the recession in effect and law firms scrambling for work, large companies that consume millions in legal services each year are telling law firms they must agree to fixed-fee contracts rather than charging by the hour. Pfizer, for example, says it plans to cut its domestic law firm expenditures by 15-20% through flat-fee contracts. The pharma giant will pay lump sums to firms to handle specific areas of work, such as litigation or tax issues, telling law firms that they will no longer make their historical profit margins. This change in profit margin necessitates business model innovation for law firms, as it does for healthcare providers under pressure to lower rates.

In both the legal services and healthcare industries, consumers are not currently paying based on what matters to them – results.  In legal services, results mean completing an entire project, case or workstream.  In healthcare, results mean improved health. Currently, however, providers in both fields are incented to do more work, whether or not the customer really needs it.

Law firms have experimented with flat fees for repetitive, predictable assignments (e.g., patent applications) but stress that hourly billing will likely always be used for more complex, high-risk/-return projects.  Similarly, healthcare providers such as MinuteClinic have moved to charging relatively-low, flat fees for a finite range of standardized treatments for clearly-diagnosed ailments. More complex conditions requiring greater skill for diagnosis and care continue to be treated at higher-cost hospitals/clinics for fees and services that are not known at the beginning of care. In both fields, providers can and should scrutinize which procedures are routine enough and sufficiently standardized to be offered profitably at a lower, set price.

Using lower-skilled providers

For these more routine tasks, law firms and medical providers can hold down costs by employing lower-skilled staff. In order to offer flat rates, Orrick, Herrington & Sutcliffe LLP, for example, hires fewer grads from elite law schools and also employs college grads to perform more routine tasks.

Increasing efficiency

By realizing efficiencies, Orrick has increased by 300 percent its revenues from non-hourly billing in the last year while remaining profitable. How? First, the firm is incented to accomplish the same amount of work in shorter time. Second, tools provide information on efficiency to allow educated adjustments in time allocation. For example, a software system alerts lawyers when they hit certain percentages of a flat-fee budget and biweekly reports indicate how a lawyer is spending his/her time.

The biggest shift required of law firms and healthcare providers, however, is a change in the value proposition they offer to customers. As Pfizer’s general counsel commented, while the company could have simply demanded a discount from law firms’ hourly rates, it instead hopes to create a system in which the firms work more collaboratively with Pfizer and Pfizer’s other law firms.

• The Disruption of Scientific Publishing, by Bruce Sterling | Wired's Beyond The Beyond blog

  Description of a new "flourishing ecosystem of startups that are experimenting with new ways of communicating research, some radically different to conventional journals" and the "gradual rise of science blogs as a serious medium for research."

• The New Media Crisis of 1949, by Terry Teachout | WSJ.com

  A look back at 1949, at the start of the television era, in which TV disrupted other forms of media and entertainment. Author notes that CBS and NBC, which had been big radio players, also came out on top in TV by the 1950s: "The old media of today have a similar chance to prosper tomorrow if they can survive the heavy financial losses that they're incurring while they develop workable new-media business models."

• Start-Ups Are Poised For Latest Space Race, by Andy Pasztor | WSJ.com

  With its budget eroding and virtually certain not to keep pace with stated space exploration goals, NASA is increasingly turning to outsource portions of its programs that have never before been outsourced. Smaller firms and "scrappy entrepreneurs" are expected to win contracts.

• How to Build a Culture of Innovation, by Jessie Scanlon | BusinessWeek

  Description of the top-down innovation culture at Tata, including the Tata Group Innovation Forum (TGIF), a 12-member panel of senior Tata Group executives and some CEOs of the independently run companies.

   

By Kai Itameri-Kinter

People often try to determine if a technology is disruptive in and of itself, and the short answer is usually: it depends.  On a lot of things. But one of the biggest determinants of disruptive success is the business model with which a product, or technology, is applied.  Some of the most exciting breakthroughs occur when new technologies and new business models come together, like Gillette's Mach 5 "razor and blades" model or the open application platform of iPhones.  That is why I got excited recently when reading a Fast Company article which discussed a technology that looks like it has serious disruptive qualities and the ability to unlock an entirely new business model.  What is this silver bullet? 3-D printing.

3-D printing, sometimes referred to as rapid prototyping or fabbing, boils down to the use of computer controlled machines to "print" 3-D objects.  The technology has mostly been used for various polymers, and printers usually only manipulate one type of material, but better printers are emerging that can mold metal and other feedstocks, as well as combine various materials into a single product.  The price has typically been too high and the quality too low for any significant applications outside of labs and techies' basements, but both of those are changing. The result is a technology with just good enough quality, low enough price, and the requisite stripped-down features to be a real disruptive gem.

However, what makes 3-D printing really exciting is the discussion around the potential of these printers to disrupt many manufactured goods industries.  The general gist is that instead of manufacturing at a central plant and shipping to customers globally, manufacturers would develop digital plans for a product and then manufacture locally at a smaller scale, or license to local sub-contractors, and avoid long-distance shipping altogether.  So instead of getting your desk lamp designed by a Swedish firm, made in China, and shipped to you, you could buy a lamp designed by a Chinese firm, made in your own city and shipped across town. 

Of course, there are plenty of remaining issues concerning quality control, the price of labor, and availability of feedstocks across an industry's various markets.  However, decentralization of manufacturing seems increasingly likely as you look into the future, and for one major reason:  It is generally agreed that carbon will become more costly, and some pessimistic scenarios are predicting that the foreign manufacturing model cannot be sustained due to inevitable increases in fuel prices, forcing a return to local production.  Therefore, a company that can find a foothold in 3-D printing and produce a just good enough product can simultaneously build environmental credibility by burning less fuel in shipping now while moving ahead of the curve to prepare for a huge market shift down the road. 

The potential for 3-D printing to become a real disruptive business in and of itself, as well as being the jumping off point for loads of other industries to develop new disruptive business models makes me want to say that, this time, if you asked me, the short answer is: yes.

RFID, SAP data center, dedicated Verizon network, Windows CE with touch screen interface…for flavored water? The cola wars have come a long way from blind taste tests in the local shopping center!

With the limited release this summer of the new Coca-Cola Freestyle machines (pictured at left), Coke is essentially introducing a new business model into the fountain drink industry, one with serious disruptive potential. The system is about the size of a small Coke machine you would see on the street but features a large touch screen interface and single dispensing position. The consumer simply navigates through 100 varieties of beverages and then the machine uses micro-doses of flavor from canisters stored inside to precisely mix up the selection. Profiled in this recent InformationWeek article, the Freestyle is a consumer and customer service tool, a network node, an inventory and supply chain manager, quality control, and business intelligence agent all in one. The integration of these various functions and their associated data streams offers Coke the rare opportunity to improve their performance on the sustaining curve while simultaneously introducing a disruptive play into the market (for more on these curves, see The Disruptive Innovation Primer).

On the sustaining front, Coke is offering its consumers a wider array of drink choices at the point of consumption. They hope this greater array of choices will delight many consumers who leave the fountain disappointed that their preferred beverage was not offered. They also hope the increased number of options will capture a significant portion of the non-consuming market who have traditionally selected water or no beverage at all as the options traditionally available at the fountain were not to their liking. Both of these are significant competitive advantages that will move Coke further up the sustaining curve. However, increasing the number of flavors alone will not yield transformative growth.

The real disruptive potential here lies in the data, not the drinks. By mixing flavors on site in the machine and capturing purchase behavior real time, Coke is better able to test new offerings and immediately respond to market insights around existing and emerging consumption patterns at a hyper-local level. Each point of purchase becomes a kiosk through which Coke can interact with its consumers and test their reactions to new formulas and new messaging. It is no longer dependent on limited and lagging sell through data from its restaurant customers, rather, it can decide which beverages to present to the consumers based on time of day and recent consumption patterns. Much like Zara has done in the apparel industry, Coke is virtually eliminating the time lag between trend identification and capitalization.

Coke also made sure to address the “jobs” of their channel partners, namely the restaurants selling the beverages. By opening up the data to these outlets, Coke is expecting them to play an active and informed role in increasing beverage revenues while the RFID-controlled, networked inventory and supply chain control system promises to address long-standing frustrations.

As the benefits of this smart system are realized, we expect to see other restaurant chains shifting from competing fountain suppliers to Coke. 

• Learning, and Profiting, from Online Friendships , by Stephen Baker - BusinessWeek

  Exploration of the innovation taking place as companies work to figure out how to make money from the wealth of data they're beginning to have about our online friendships.

• A Real ROI from Twitter? The Start of Social Medical Networks, by Tom Steinert-Threlkeld - Between the Lines blog, ZDNet.com

  Tweeting to your doctor about the status of your health could revolutionize the treatment of chronic diseases.

• Gin, Television, and Social Surplus, by Clay Shirky - Here Comes Everybody

  Participation in social networks represents the shift of "cognitive surplus" from billions of hours of TV watching to a more participatory culture.

• Getting Money from Readers Who Won't Pay for Online News, by Steve Outing - Editor & Publisher

  It's too late for newspaper publishers who are not already charging for content to start doing it, says Outing as he puts forth a business-model concept of multiple revenue streams and describes what some of those might be.

• TRIZ-enabled Mergers and Acquisitions, by Jim Belfiore - InnovationTools.com

  TRIZ, a well-established method used for product and process design evolution, has elements that can be successfully used as an early-stage M&A planning and research tool to help predict and identify potential evolutions of products, technologies and markets.

The proliferation of "good enough" alternatives has been a main driver of the current disruption of the media business. Good-enough is, of course, quite relative — citizen journalists offer a product that's good enough on some dimensions, but for some audiences often is vastly superior to professional journalism on dimensions such as immediacy and depth of local knowledge.

"Do-it-yourself" media got another shot in the arm last week when HP announced its MagCloud service, which would allow anyone to create a glossy magazine: "Charging 20 cents a page, paid only when a customer orders a copy, H.P. dreams of turning MagCloud into vanity publishing's equivalent of YouTube. The company, a leading maker of computers and printers, envisions people using their PCs to develop quick magazines commemorating their daughter's volleyball season or chronicling the intricacies of the Arizona cactus business."

John Boddie, formerly of Innosight Ventures, sent me an email commenting on this development:

"Print on demand has been around for a while and there may have been other companies that have tried to offer many of these features. One of the difficult things about disruption is watching the churning mass of contenders for a given disruptive play and figuring out which will finally arrive at the right combination of jobs-to-be-done and respect the right set of restrictions so that consumers on the other end can finally adopt. In this case, the choice of PDF for submission (rather than mucking around with a custom magazine generator) is key. Almost everyone now has some means of converting most document formats to PowerPoint. Almost everyone now has some means of converting most document formats to PDF. Eventually they might want to allow uploads from other content creation/distribution engines such as Slideshare and Blogger, but this is a great start."

The New York Times story also offers a couple of other clues as to the innovative potential of this idea, one in the very lead: "For anyone who has dreamed of creating his own glossy color magazine dedicated to a hobby like photography or travel, the high cost and hassle of printing has loomed as a big barrier." People who are intent on communicating around an interest about which they are passionate offers an attractive niche market to get the service off the ground and growing. Once that happens, there could be the up-market move that would potentially displace some existing print magazines.

Also, at the end of the story, HP offers a clue that they're going about this right: "For H.P., MagCloud is also a way to provide customized service at low risk. And if the niche does not thrive, the company will simply move on. “We are trying to experiment with these new types of business models,” said Andrew Bolwell, head of the MagCloud effort. This kind of emergent-strategy approach of setting up a business unit to experiment with a new model is what we would recommend any existing company like HP. In order to grow, they will have to find new markets. Setting up this kind of low-risk test is exactly the way to go about it.

Any time a barrier prevents consumers from satisfying an important job, the market is ripe for disruption. Consider the significant barriers keeping physicians from adopting electronic medical record (EMR) systems, or expanding on those systems they do have. In a study published in the New England Journal of Medicine, 88 percent of physicians without electronic medical record (EMR) systems and 80 percent of physicians who already have EMR systems cite “cost of capital” as a barrier to adoption or expansion.

Who can blame them? Widely published estimates cite the costs of electronic medical record (EMR) systems as ranging from $15,000 - $50,000. However, this does not take into account the costs of hardware, implementation, training, and ongoing support, which can easily take the full costs of an EMR system to $250,000 - $300,000 for the first year.

So who will enable the disruption for which this market is ripe? Enter WalMart. Long known as a purveyor of cheap toothpaste, toilet paper, and televisions, WalMart announced this week that it has partnered with Dell and EClinicalWorks to offer physicians a package of hardware, software, installation, maintenance, and training for the everyday low price of $25,000 for the first physician and $10,000 for each additional physician in the first year.  While WalMart’s announcement is significant (especially to incumbents in the healthcare IT space), it is also significant, and important, to note that they are entering healthcare IT in a classically disruptive manner: 

1. Understand the important and unsatisfied jobs of key stakeholders: Physicians today are not just caregivers, they are businesspeople forced to deal with the bureaucracy of managed care and the headaches of managing an office. Any solution that enables them to spend more time with clients and less time on paperwork without a significant impact on the bottom line will be quickly embraced.
2. Create an innovative business model: With its understanding of physicians’ important and unsatisfied jobs, it was likely easy for WalMart to create a solution with an appealing value proposition. However, they likely realized that additional resources would be needed (or at least helpful) to execute the strategy. Enter Dell and EClinicalWorks. Each brings its unique experience and reputation to the solution creating something greater than the sum of its parts: 
   • WalMart claims that its role is one of an integrator. While this is true, largely because of their purchasing scale, it does offer three other key resources: widely recognized expertise in logistics and coordination, an existing physician customer base of approximately 200,000 physicians, and an existing distribution network through its 600 Sam’s Club stores. 
   • Dell supplies the hardware – either a desktop or tablet PC – and the installation services. While WalMart could likely have partnered with another hardware vendor, Dell’s experience in supply chain management and reputation for good customer service likely gave it an edge over cheaper but less well-known hardware companies.
   • EClinicalWorks supplies the Internet-based electronic medical record and practice management software, training, and maintenance. Already used by 25,000 physicians, EClinicalWork brings credibility in the healthcare IT space.
3. Use an emergent strategy: This is neither the beginning nor likely the end of WalMart’s foray into healthcare. In 2007, it partnered with the University of Arkansas and Blue Cross Blue Shield to conduct research on how to improve healthcare IT in the US.  In February 2008, it opened co-branded clinics with a common EMR platform operated by EClinicalWorks (surprised? You shouldn’t be), and in September it promised to provide all employees with access to electronic health records. It’s reasonable to assume that each of these activities were small steps to resolve assumptions related to IF and HOW WalMart should enter the EMR space. 

Supported by the Obama administration’s $19 billion investment in healthcare IT via the Recovery Act, WalMart’s foray into EMR is likely to be yet another successful step in its journey into the healthcare space. In the short term, WalMart is likely to benefit from sales of the system and the ability to influence patients and physicians to fill their prescriptions at WalMart’s pharmacies or to buy medical supplies and durable medical equipment at Sam’s Club. In the long term, its savvy use of the principles of disruptive innovation positions it well to successfully disrupt incumbents.

Last week First Solar, one of the world’s leading solar power companies, announced that it was buying start-up OptiSolar’s portfolio of impending projects for $400 million. OptiSolar had appeared out of nowhere last year to ink massive contracts with utilities, including a record $550 million deal with PG&E, and seemed poised to become a major player in the industry. I and others wrote admiringly about their differentiated, fully integrated business model – whereas most solar power companies simply make solar modules that they sell to contractors and developers, OptiSolar planned to control their full value chain – they would actually build and operate power plants using their panels.  

I received a thoughtful email from developer Stuart Henshall regarding this post on the potential for Twitter to come up with a business model. Stuart makes a great point:

Twitter is a pipe and we send signals down it. That means it’s not that different to the internet, just text-based. … The tweets that are valuable are the ones that escalate to conversations. An @ reply is also many times more valuable to the community than a DM. Both are an escalation. Both imply some form of relationship or exchange. Key word that! Exchange.

Stuart goes on to point out the many ways in which Twitter could benefit from selling services that allow users to escalate their conversations beyond basic tweets. Yet Twitter offers none of these "escalation" services – all of this development is taking place by outside developers like Stuart. The problem? Twitter has not offered these developers a way to make money from providing services that allow Twitter users to escalate conversations into exchanges, nor does Twitter offer any mechanism for developers pay for access to Twitter users. The end result is that developers can't make money from escalating exchanges and Twitter’s not making money they could make from providing the “pipeline” for the exchange.

Stuart again:

So Twitter if you want to make money you have to allow commerce to flow through your veins. You have to let me turn each Tweet into something more valuable. You have to keep it really simple and find a money model that doesn’t gouge my efforts.

Consider the Innosight construct for business model innovation. Key is the Customer Value Proposition – the way a company creates value for customers, or, in other words, helps customers get an important job done. “The best customer value proposition is an offering that gets that job – and only that job – done perfectly.”

It would seem that Twitter has an opportunity here to create value for the developers, who would then create value for the Twitter users. Yet according to Stuart, Twitter does not adequately engage its developer community and hasn’t optimized a value proposition for them, which would in turn help them solidify a value proposition for the user base. It is only when these customer value propositions are created and priced appropriately that the optimum value would be created for all stakeholders in this system – Twitter, the developers, and the Twitter users.

The new version of Amazon’s Kindle e-book reader has been attracting quite a lot of press (including within this blog), and generally the coverage so far seems to be positive: its screen is easier to read and displays more shades of gray, it’s thinner, its keyboard is easier to use, and it doesn’t look quite as much like a medical device. One improvement, however, has been strongly criticized and may threaten an existing business model.

This new feature is the Kindle’s ability to “read” text out loud; text-to-speech technology has been improving rapidly in recent years, and supposedly the Kindle’s computer-generated voice – named “Tom” – is reasonably pleasant to listen to, at least for a little while. Surprisingly, this has stirred up some controversy.

In this New York Times op-ed, Roy Blount, the President of the Authors Guild, argues that the Kindle’s new ability is essentially stealing value from authors and publishers because it offers each title as “an e-book and an audio book rolled into one” but doesn’t pay anyone for audio rights and may threaten the market for audio books. Although one writer responds that the Kindle’s speech synthesis just isn’t good enough to compete with audio books, it seems inevitable that the technology will reach that point in the not-too-distant future.

This is a terrific example of an entrenched business model threatened by (and fighting against) a new technology that undermines it. From Baldwin Locomotive to VCRs to Better Place, this kind of tension is ubiquitous, and overcoming it can require businesses to transform their business models to adapt – because, litigation aside, new technologies are tough to stop. Baldwin Locomotive may not have seen diesel coming early enough, but the entertainment industry adapted to VCRs after failing to stop them in court by using them as a new channel to sell their content. Through sites like Hulu, it’s now adapting to the Internet as well. Whether Better Place’s nascent business model will be undermined by better batteries remains to be seen, as my colleague Luke Langford explains.

So how will book publishers adapt? The audio book industry may well be in for some tough times, but the Kindle could enable some fascinating (and potentially lucrative) new business models that weren’t possible within the paper-and-ink paradigm. This blog post suggests just a few good ideas, from dynamic pricing to social networking to self-publishing. Making money through the Kindle might look different from making money through Barnes & Noble, but the faster the authors and publishers of the world recognize that business model innovation will be necessary and doesn’t have to be zero- or negative-sum, the brighter the industry’s future will be.

Update: Amazon appears to be taking this argument seriously, at least for now.  On February 27th, Amazon announced it would be allowing publishers to decide whether to allow text-to-speech to be made available for their content.

In the January 14 issue of Strategy & Innovation, we offer up our annual Year in Preview story (free reg. reqd.) by Scott D. Anthony. This year we've added a new feature to this feature — we asked Innosight partners to write short industry specific predictions of the industries in which they have expertise.

Some overall themes:

• The darkening economic climate is good news for innovation — after all, abundance is at the root of many corporate struggles with innovation.
• It has never been easier to develop and scale an idea. Innovators can draw on high-quality, low-cost tools to develop, test, and begin to commercialize ideas without tens of millions of dollars of investment.
• Innovation has never been more important. Success in what we are calling the Great Disruption requires mastering perpetual transformation.
• Companies that are partially disrupted (such as print media) and those that are innovation novices will have a tougher go of it, as the current economic climate isn't favorable for their challenges.
• On-the-brink disruptive attackers and companies that have progressed in their efforts to make innovation systematic will be more likely to find their efforts paying off.
• Companies that demonstrate an ability to love the low end will find that strategy effective if they are able to master business model innovation and gain a deep understanding of how the low-end consumer measures value and develop unique offerings tailored to key value drivers.

Those industries for which uncertainty in the markets and uncertainty regarding potential governmental policy and regulations changes will struggle this year until the economy settles down and the policies of the new U.S. presidential administration begin to take shape. Finance and healthcare are two such industries.

Here are some of our partners' industry-specific predictions:

• Media: A strong likelihood of continued bankruptcies among media companies.
• Defense: A push toward decentralization and away from aircraft- and ship-specific platforms.
• Manufacturing: A shift toward innovation and away from strict reliance upon Six Sigma and cost-cutting.
• Automotive: No automakers will fold, but we will see consolidation of vehicle models in the saturated marketplace as a better linkage develops between customer requirements and available models.
• Retail: Growth among retailers targeting the low-end as well as those that can add high-level services that high-end consumers will pay for.
• Consumer products: CPG companies that do well will be those that strive to push the boundaries of their innovations, looking beyond just new products to new categories, new business models, and new channels.
• Finance: Reduced scope and size among financial global financial services firms, and an opportunity for low-cost tools and data providers.
• Healthcare: Widespread implementation of Electronic Medical Records, as proposed in the forthcoming economic stimulus package, could radically shift the balance of power between physicians, healthcare provider organizations, and insurers. 

It’s not often that a TV ad stops me in my tracks and causes me to rewind the DVR so I can see it again. But that’s exactly what happened this Sunday when I saw the ad introducing Hyundai Assurance — a new program that promises that if you buy a new Huyndai and, in the next year lose your income, you can simply return the vehicle.

Wow. A car with a return policy.

Impossible? No. Innovative? Yes.

Given the current economic climate, consumers are (understandably) scaling back spending on essential and luxury items alike. We are delaying major purchases and trying to squeeze every bit of usefulness out of the products we currently own.

In response to this, and given the long development and production lead times in the auto industry, car makers are relying on business model, rather than product, changes. Most are focusing on changing the Profit Formula (for more information on the Business Model Innovation framework, go here) by offering significant rebates and discounts. Hyundai is the first (and so far only) car company to change its value proposition.

The value proposition is composed of the target consumer, that consumer’s job(s) to be done, and the offering that satisfies the job(s). Hyundai realized that people haven’t stopped buying cars because their jobs to be done – “get to and from work,” “be financially secure,” “feel prepared for any situation,” “provide for my family” – have changed. Rather the “hiring criteria” (or, in our JOBS methodology, the “objectives”) used to select an offering has changed. For example, consider a consumer with the job to be done of “be financially secure.” Before the crisis, she might have used hiring criteria like “…in 20 years” or “…by maximizing investment returns.” However, in the face of economic uncertainty and increasing unemployment, she may look for offerings that meet criteria like “…in the next 12 to 24 months” and “… by minimizing financial obligations.” Hyundai Assurance directly addresses these objectives while the profit formula changes (rebates, discounts) that other car makers are offering target a different set – “…at purchase” (because down payments are reduced or eliminate), or “…during ownership” (because monthly payments are reduced) and, as a result, fall short of satisfying her job to be done.

Ten years ago, in response to skepticism about the quality of its cars, Hyundai introduced America’s first 10 year/ 100,000 mile warranty. People thought they were crazy. But it worked. Hyundai’s sales grew and the other car companies follow suit. People probably think Hyundai Assurance is crazy but, because it’s grounded in and understanding of consumer jobs and hiring criteria, I think it will work. After all, not many things make me stop in my tracks and say, “Wow.” 

A lot has been written about the “job swap” program taking place between consumer packaged goods leader Procter & Gamble and technology leader Google where  “about two dozen staffers from the two companies have spent weeks dipping into each other's staff training programs and sitting in on meetings where business plans get hammered out.” The key benefit that has been highlighted is how it is helping the two companies develop innovative ways of working together, as P&G learns about consumer habits online and Google works to attract a higher share of the world’s largest advertiser.

If we ladder up we can see that this employee exchange program is also helping these two companies “look at the world in a very different way and do things differently”. If we frame the problem, or job-to-be-done this way, competing solutions would be sending senior executives to cross-industry conferences, reading business books and case studies of other companies, networking with business partners and friends, hiring employees away from firms you’d like to learn from, or working with consultants who have an extensive knowledge base from working with clients in a range of industries. Each of these solutions has merits, but also has disadvantages, namely:

• Conferences give executives an opportunity to hear what’s top-of-mind to their peers, but are typically only attended by senior executives. Also, the conversations may lack authenticity and the messages may be watered down to a point that it would not be useful to the person executing the work.
• Business books and case studies offer insightful perspectives from outsiders, but the stories are interpretations that may be distorted or summarized to the point of being useless and may not answer your specific question
• Networking with old business partners, colleagues and friends is a great resource but it is limited to the people in your network

This “job swap” program appears to do a better job of really shifting mind-sets and inspiring people at the team level, who are really executing the work, to do things differently. At the team level, you wonder what does it mean to systemize the process? Think outside of the box? Look beyond the obvious? This program gives the employees an opportunity to really experience what it is like to work in another company. The program certainly has limitations; for example, companies in competing industries wouldn’t be motivated to do this, it’s unclear how you decide who gets to participate, and it requires some clear objectives so valuable work time is not wasted.

Obviously, there will always be a place for business books, conferences, networking, and consultants, but this job-swapping is a new solution that helps company solve an important problem. Following disruptive patterns, we bet traditional conference managers, consultants, and business publishers probably aren’t too worried right now but companies like business social networking site LinkedIn, which are still looking for a business model, are best positioned disrupt this market and develop a simple, convenient, accessible and affordable “job swap” program. We wonder how many other companies will team up to do this and if a more formal network and a business model will emerge to facilitate it.

The latest issue of Strategy & Innovation just went out to subscribers. (To subscribe, sign up here — it’s free.)

The issue leads off with an excerpt from the much-anticipated January 2009 book The Innovator’s Prescription by Clayton M. Christensen, Jason Hwang, M.D., and Jerome H. Grossman, M.D., which looks at our health care system through the lenses of disruptive innovation. Our excerpt, Disrupting the Hospital Business Model, argues that hospitals are burdened with multiple business models and jobs-to-be-done. Hospitals can heal — if they focus on one business model and stop trying to be all things to all patients. Specifically, according to the authors, “Hospitals providing much of today’s health care cannot and therefore ought not to be relied upon to transform the cost and accessibility of health care. Instead, hospitals need to be disrupted. We need them to cede market share to disruptive business models, patient by patient, disease by disease starting at the simplest end of the spectrum of disorders that they now serve.”

This issue’s Innovators’ Insight, by Scott D. Anthony and Tim Huse, asks How Do Disruptors Perform in Recessionary Times? Conventional wisdom would be that up-and-coming disruptive companies that have had some early success but haven’t broken through to the mainstream would certainly become casualties of today’s tough economic climate. Not so — Scott and Tim went back to look at how up-and-coming disruptors did in the face of the last three economic downturns in the U.S. In 1979 and found that 11 such companies, including Intel, Home Depot, Nucor, and Southwest, fit our criteria. Their compound annual growth over the recession between 1979 and 1982 was 22 percent. Between 1989 and 1991, the sample of 11 up-and-coming disruptors, which included Best Buy, Cisco, and Charles Schwab, grew revenues by 33 percent.

This issue wraps up with Voices of Disruption, featuring an interview with Ron Gonen, Co-Founder and CEO of RecycleBank, an interesting start-up that rewards households for recycling. Former Innosight Senior Associate Lillian Zhao did the interview, after exploring RecycleBank in this blog post.

I feel guilty that I don’t recycle as much as I would like. The truth is, I’m lazy about sorting, and I don’t have room in my kitchen to have separate bins for cans, paper, glass, etc. And, I always wonder, does the stuff in the bins really get recycled? I know that at my office, rumor has it, only the cans and bottles really get recycled because the staff is paid for recycling cans. However, the paper in the paper bins gets thrown in with the regular trash because the staff isn’t incentivized to recycle that.  I know I’m being lazy, but really, why does recycling need to feel like work? Why can’t we get incentivized for recycling all things recyclable?

I think I just found the company that solves all those jobs: RecycleBank. It is one of the coolest green companies I’ve come across. RecycleBank introduces financial incentives and convenience (no sorting needed, curbside drop off) to the recycling process, offering new dimensions of performance that motivates everyone to recycle more.

RecycleBank has a winning customer value proposition to every participant in the value chain: 

• RecycleBank provides financial incentives to households to recycle, which reduces the total tonnage of landfill-bound material
• Municipal officials save disposal fees
• Recycling companies make more money from processing
• Retailers gain positive association with an environmentally beneficial activity
• Partnering waste haulers can differentiate themselves in the competitive hauler market

How does this process work?

Households put unsorted recyclable materials into recycle bins for curbside pickup. The recyclables are weighed on the back of disposal trucks when they are picked up by the sanitation crew. Information is scanned and recorded through a computer chip embedded in the garbage bins and then is channeled from an on-board computer in the garbage trucks into a databank. Households collect points, which can used at more than 400 national retailers such as Starbucks, HomeDepot, neighborhood grocery stores, etc.

RecycleBank has formed partnership with diverse players in order to make its innovation process work. It has partnered with over 35 cities and municipalities, over 400 business sponsors, with technology providers, and with waste haulers.

How does RecycleBank make money?

RecycleBank has developed three diverse revenue streams. This first is from municipalities (or private haulers, depending on the agreement), who pay a fee per household involved. The second is from recycling plants, with the amount determined by how much it increases the amount of materials that are processed (see NYT's article).  The third, and potentially the biggest, is advertising revenues from online website used by households to manage their “RecycleBank point” accounts. (Fortune, Sept 20, 2007)

What is RecycleBank’s disruptive impact…so far?

In the 3.5 years since RecycleBank was founded, it expanded its services to more than 35 municipalities the Northeast and is planning a national US rollout and an expansion to the UK. In its first 3 years of operation, RecycleBank has diverted more than 36 million tons of recyclables from landfills (see Press Release and Green VC article) 

In need of legal advice, a man went into a lawyer's office. He knew how expensive lawyers could be, so he inquired, "Can you tell me how much you charge?"

"Of course," the lawyer replied, "I charge $500 to answer three questions."

"Don't you think that's an awful lot of money to answer three questions?"

"Yes it is," answered the lawyer, "What's your third question?"

To an average family or small business owner, legal advice feels expensive because you pay (a lot) and you pay by the advice. What you get is assurance that your interests are protected against generally unlikely events or liabilities. The majority of families, who rarely consult with lawyers and have not been on the losing end of a legal issue, are not accustomed to spending $200 per hour for advice. To those families, the benefits of legal advice don’t seem to outweigh the costs. Could the popularity of greedy lawyer jokes be the indicator of a disruptive innovation opportunity?

Yes! Even those of us who do not have frequent needs or resources to regularly seek legal advice still relate to the emotional satisfaction of having a lawyer in our corner to make us feel more protected. The question is, why can’t legal advice be more affordable, to satisfy this need for assurance amongst those who don’t have deep pockets?

Prepaid Legal (PPD) recognized this opportunity back in 1972, when its original founder began to offer legal expense reimbursement to motorists through a membership club after he suffered a collision and significant legal fees not covered by his car insurance. Prepaid Legal Services developed into a membership-driven organization that provides a range of specific legal services to any member for a flat monthly fee. 

Here’s how it works: You pay Prepaid Legal a monthly fee ($16 per month in Massachusetts for a standard family plan). This membership provides you access to a lawyer at a local law firm who is a part of Prepaid Legal’s partner network. For that membership fee, you get access to an attorney for phone consultation at any time. If the lawyer believes it would be prudent to pursue a legal matter in more depth, you have access to a menu of services that are limited to a set number of specific activities per year, such as document review or drafting legal letters. 

Prepaid Legal has proven it has a successful business model, with over 1,481,531 active memberships reported at the end of first-quarter 2008. What makes them an interesting example in the disruptive playbook?

Targeting constrained customers: By focusing on the question of “How can we make legal advice accessible to non-consumers?” Prepaid Legal discovered an innovative way to design the pricing and distribution model for legal services, making it accessible for those who were previously priced out of the market. Sixteen dollars a month for on-going basic legal service is much more feasible to these customers than paying $500 to hire a lawyer one time to review a document.

Offering “just good enough” service: Customers get an inferior product by traditional standards, sacrificing unlimited service for a cheaper price point. If you need a lawyer to review documents to purchase a home, a membership affords you up to two reviews of legal documents that are no more than 10 pages. If additional services are needed, you are entitled to a 25% discount on your lawyer’s regular fees.  For the majority of infrequent advice seekers, this level of benefit is a good deal. Their legal matters tend to be straight forward and the reassurance of having a lawyer on call by phone provides a significant emotional and practical benefit.   

Changing the business model: What makes the offering possible is the scale that Prepaid Legal can provide to the distribution channel (its partner law firms). This is done through multiple business model innovations that deliver the same old legal services from the same old law firms, but to new consumers: 

• Prepaid Legal changed the financial model to aggregate receivables before legal services are rendered. Their partner law firms benefit from a predictable revenue stream
• Prepaid has created a marketing network of associates who are usually members and who receive commissions for referrals. This pyramid type of marketing approach has garnered criticism for its ability to drive sustainable growth. But it keeps marketing and sales expenses low and allows the company to remain profitable with its low cost positioning.
• Finally, the company created a new value proposition in the marketplace that positions legal services much more like insurance. This was done by limiting the features and benefits of the service to the most scalable and frequent kind of legal advice, and by targeting that advice to traditional non-consumers.

Statements like “the Dell, Wal-Mart, or Southwest of new industry x” always get us excited because they indicate that an entrant has shifted the focus of innovation efforts from the product to the business model.

Not that there’s anything wrong with technology-based product innovation – it is, of course, essential. But it is also a gamble; pursuing product-driven innovation alone means that you’ll be entrenched in a fierce competitive battle because it is relatively easy to frame a challenge in technological terms. Changing the basis of competition by innovating the business model – as Dell did with PCs, Wal-Mart with retail, and Southwest with air travel – has historically increased the odds for breakthrough success.

That’s why it caught our attention when Fortune’s Green Wombat blog labeled Berkeley-based solar start-up Sungevity the “Dell of solar energy.” Solar power has been red hot, aflame with technological advances and billions of dollars in investment. Getting business model innovation right in this context promises enormous success.

Has Sungevity gotten it right? For starters, their tagline, “faster, easier, affordable solar,” is as close to Disruptive Innovation 101 as you can get. As loyal readers of this blog know, disruption is fueled by companies delivering on speed and convenience, ease of use and de-specialization, cost and accessibility. Doing so removes barriers to consumption, enabling large swaths of consumers who were otherwise locked out of a market to participate – non-consumers, in disruptive innovation terms. And there are certainly a lot of nonconsumers of solar power…just think of all the unused rooftop real estate out there.

Sungevity is looking to put solar panels on those barren roofs. The company is a solar installer; they take the panels produced by giants like SunPower, Evergreen Solar, and BP Solar, affix them to rooftops, and connect them to the grid. This final step in the value chain has, predictably, been beset by inefficiency and variability up until now, because it depends on all too human factors like the availability of good installers who know what they’re doing.

The flock of solar installers that have emerged in recent years are seeking to centralize and simplify this complex and potentially frustrating process. Economies of scale give any company a natural advantage over the independent contractors they compete with, but Sungevity’s clever web-based interface is what really sets the company apart.  The company asks visitors to their site to enter their home address, and then uses software and satellite imagery to come up with customized quotes that outline what a solar power system would cost and what it would produce. This estimate makes the system planning process quick and easy by obviating initial site visits from a contractor.

Crucially, moving the quotation process to the web figures to lower the bar for potential customers who are not yet intent on installing systems. Instead of taking time out of the day to accommodate a sales visit, people can simply plug in a few numbers online. There’s no commitment, no investment, no contractors marching around on your roof who’ll be disappointed when you tell them that you’re not yet ready to commit to laying down $10,000 for the panels.

In addition to mapping out a custom-designed system for your rooftop, the nifty Sungevity site also projects install costs and lifetime energy and cost savings. The site produces images of your house decked out with solar panels and then allows you to enter a credit card number to make the purchase on the spot. In the words of CNET’s Greentech blog, the customer-friendly web interface “reduc[es] a complex sale into a quick online exchange.”  As easy as customizing and purchasing a PC, right?

Innovative service-oriented business models like Sungevity’s that are just now emerging will spur the development of the solar power industry, enabling it to maintain its blistering pace of growth while reaching more and more of mainstream America. When you factor in other clever business model innovations such as solar financing and the cost reductions and efficiency improvements that will emerge from the technological arms race underway in the industry, the picture starts to look very sunny indeed.