by Cary Burch

 

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Data from the Goonies is known for one thing, his inventions. He was able to see opportunity where no one else did, put forth solutions no one else though about, primarily as he saw the raw materials differently. If innovation means putting forth new solutions based on what is available, this also means that in order to drive change in how we innovate, we must first begin by reassessing what we innovate.

Changes to the business model change the raw materials available for innovation efforts. This permits a redefining of what content/product/service can be made available at the user level (whether business or consumer) and potentially redefine the business we’re in. Who knows, you may just have a latent asset that becomes your next Bully Buster. Said best by Davila, Epstein, & Shelton in Making Innovation Work, “Business models describe how a company creates, sells, and delivers value to its customer… The three areas where business model change can drive innovation are the value proposition, supply chain, and target customer… These are the fundamental elements of every business strategy and the logical focal points of innovation” (p. 32).

The literature and our collective experience with organizations large and small tell us that change is constant, but change for change’s sake alone? I think not. There is a transitive nature to both our businesses and the ways we retain competitive advantage. One core component of this transitive state is the very business model which steers all else. As mentioned, we can either review the value prop, our supply chain, or our target customer. This gives us a great set of lenses to use to keep a sharp focus on what we must change in order to stay ahead of the dreaded maturity curve and its asymptotic descent into obsolescence. So what’s the point of embracing a transitive view of our business model, and attempting to innovate? Rita Gunther McGrath in The End of Competitive Advantage tells us:

In far too many companies, the life of innovation resembles Thomas Hobbes’s despairing characterization of the human condition: ‘nasty, brutish, and short’. The fundamental problem is that in a world dominated by those pursing exploitation, the innovation process is light amusement at best, a dangerous threat at worst. A broken innovation process guarantees that your organization will struggle to keep its edge as competitors catch up to whatever you were doing before. You should be thinking of how to avoid the cycle of success, decline, downsizing, near death, desperation, bet the company, and revival that characterizes so many corporate histories. (p. 5)

If this sounds a bit like your organization, don’t worry, you are not alone. If this sounds like your last innovation initiative, don’t worry, you are not alone there either. In fact, we are talking about upending the very driver of value both for your organization and the customers or clients it serves. This requires precision, coordination, expertise, and a great dose of equal parts vision and confidence in collectively achieving that vision. So we are going to spend the balance talking about a few questions I find useful to ask – even if rhetorically yet preferably among your leadership team – when permitting your business model to undergo the sort of surgery required in order to stay competitive and exhibit this transitive quality we seek. They include:

What is your reference point? In 1979 Kahneman and Tversky published what remains some of the most relevant research to such areas as behavioral economics, and it contains two nuggets useful for our work here in innovating business models as well. In their article on Prospect Theory published in Econometrica, they discuss both reference dependence and probability weighting. Looking first at reference dependence, their work holds that “people normally perceive outcomes as gains and losses, rather than as final states of wealth or welfare. Gains and losses, of course, are defined relative to some neutral reference point.” This in mind, what is your reference point? Are you looking for future success based on the success of your prior business model? Does success mean beating a certain competitor to market, or achieving a certain margin? Recognizing both the state, and applicability of your given reference point to future plans will help you better understand what to expect from your next model and whether you’re truly being pragmatic and objective about it.

How probable is your intended outcome, truly? Probability weighting as a concept is the second of two gifts bestowed upon our understanding by Kahneman and Tversky in ‘79. Not only does understanding reference dependence help us to better assess bases of comparison in use, yet we must also understand just how probable the outcome we seek truly is. This is where probability weighting comes in. As Kahneman and Tversky explain, “Because people are limited in their ability to comprehend and evaluate extreme probabilities, highly unlikely events are either ignored or overweighed, and the difference between high probability and certainty is either neglected or exaggerated.” We tend to think the rare are less so. We believe the jump from 0:100 to 1:100 odds is more significant (and feels like a greater jump in probability) than say from 30:100 to 31:100 odds. This does not mean we should stop analyzing the probability of a certain outcome, it instead begs the question of how much weight you give to the resulting data and either probabilities lying in the highly likely, or highly unlikely. Does your planning process continue to regard the probably rare as truly rare? Or are you instead considering minimum thresholds as subjectively likely events?

Do you truly value what value you create? Christensen et al. have given us a number of incredibly relative concepts when it comes to business model innovation. These include the idea of non-customers, undershot customers, and overshot customers. Yet perhaps more importantly for the question posed here, is the construct known as RPV Theory. As later retold by the IBM Executive Business Institute, “A company’s strengths and weaknesses are best described by its resources, processes, and values… What a company has or has access to, how a firm does its work, and what a firm wants to do and how workers make prioritized decisions.” I find the latter particularly meaningful, as it gets at the root of how you deliver value to all your stakeholders. Is a new business model simply being proposed because you have the capability to deliver, or is it a means of serving your audience that is equally meaningful to them and your organization?

Who or what are you looking to copy? No really? A great deal of what we put forth as new strategy and innovation is simply an incremental – and sometimes when we’re lucky, breakthrough – change to an existing model or offering. Not only is this a common enough occurrence that the literature covers it in detail. Yet when one peruses the organizational development literature it turns out there is already a concept in place to describe it, ‘normative isomorphism’. It takes three forms, and is the bases of our final three considerations, all adapted from Aldrich and Ruef’s Organizations Evolving. Are you looking to adopt practices presently common in the space you wish to enter? Are you adopting the practices of dominant or high-status organizations, regardless of their relative frequency in the space? Are you intending to adopt practices with outcomes that are perceived as successful when used by others?

Ultimately, adopting a more transitive business model does not have to mean winging it when it comes to deciding on your next big bet. It does instead mean there is a real need to consider certain biases, and certain organizational limitations when determining that utopian alignment between organizational capabilities, tools in-hand, the institution’s values, and the established biases which may cloud our judgment regarding such opportunities. Data might have had the tools he needed to help keep the gang safe and moving forward in looking for treasure, but it was only because he cobbled them together his way, and found meaning in everything he built.

 

131d5dfAbout the Author: With over 20 years of software and technology experience, Cary Burch is currently SVP of Innovation for Thomson Reuters Corporation and has held various C-level executive positions in his career. He is a CEO, author, innovator, investor and has an MBA from Pepperdine University.

References: 

Bully Buster
https://www.youtube.com/watch?v=MLzupaRrzAY

Making Innovation Work
http://www.amazon.com/Making-Innovation-Work-Measure-Updated/dp/0133092585/ref=tmm_hrd_title_0?ie=UTF8&qid=1409717057&sr=1-1

The End of Competitive Advantage
http://www.amazon.com/The-End-Competitive-Advantage-Strategy/dp/1422172813/ref=tmm_hrd_title_0?ie=UTF8&qid=1409718061&sr=1-1

Prospect Theory
http://pages.uoregon.edu/harbaugh/Readings/GBE/Risk/Kahneman%201979%20E,%20Prospect%20Theory.pdf

Organizations Evolving
http://www.amazon.com/Organizations-Evolving-Howard-E-Aldrich/dp/1412910471

RPV Theory
http://www-935.ibm.com/services/sg/igs/pdf/vn-asymmetries.pdf