Radical Innovation, Part I: Unleashing Creativity

Knowledge@Wharton

You can’t legislate creativity or innovation. “But you sure as heck can take whatever creativity exists in an organization and kill it very quickly,” says Kimberly A. Wagner, a partner and a managing director at the Boston Consulting Group. In this Knowledge@Wharton video, Wagner explains how managing breakthrough innovation in large organizations is very different from two people doing a start-up in a garage. At big companies, “senior managers oftentimes say, ‘We don’t have the creative ideas.’ But if you talk three or four layers into the organization, at the rock face, what you hear is, ‘We have a lot of creative ideas. We just can’t … get permission.’”

The Latest Innovation: Redesigning the Business Model

~ Knowledge@Wharton, Nov 18

Innovation has become a buzzword in business today, as new-product sales advantages so often flow from new designs or features. Think mobile phones, tablets, or even autos. But apart from product or service leaps, can innovation in the way a company conducts business give it a leg up? Research from Wharton management professor Raffi Amit and co-author Christoph Zott, a professor at IESE Business School in Barcelona, Spain, suggests that it can. In this Knowledge@Wharton interview, Amit covers the highlights of a research paper titled, “Business Model Innovation: Creating Value in Times of Change.” The authors note: “Business model innovation … relies on recombining the existing resources of a firm and its partners, and it does not require significant investments in R&D.”

An edited transcript of the conversation appears below.

The importance of business-model design:

Raffi Amit: My colleague, Chris Zott, and I started a research program that addresses the broad question of how firms do business, which is the business model. A business model is a system of activities that are interdependent and that create value for the stakeholders of the firm. For example, in the old days, Apple designed the hardware, either produced or assembled some of the hardware, and then sold it. The value equation was to the sale of hardware.

Enter the iPod, which was a profound change in Apple’s business model, because the company realized it can create value for stakeholders not just by selling a gadget which is nicely designed, but also through the use of the gadget. So, Apple, in introducing the iPod, profoundly changed its business model by having a relationship with the music industry, the owners of the intellectual property to the various songs, and convincing those studios to sell by the song, not by the CD. Then through an electronic store, iTunes, [Apple] enabled people to download selected music. Each time a song was downloaded, Apple got a share of the proceeds, and therefore … it created value for the customer, for Apple’s shareholders and obviously for its employees.

“Innovation is not limited to the innovation of product [but also includes] innovation of the very way a company engages in business.”

The business model is a description of how the firm does business, and it is a system of activity. When Apple introduced the iPod, new activities were added, and the value that was created by this modified business model was enhanced because there were new stakeholders. Note that the stakeholders span both firm and industry boundaries. Who would think a computer company would be in the music business? And suddenly Apple was literally in the music business.

Over the years, Chris Zott, who is now at IESE Business School in Barcelona, Spain, and I have addressed a number of issues that relate to the business model. For example, what are the elements of a business model? What are activities that decide the content? What is the structure? How are those activities combined to create the system and, as importantly, the governance of the business model?

Who carries out each activity? We ask the questions, “How does the business model create value? What are the fundamental value drivers in the business model?” That’s where we created the so-called NICE business model, which stands for: Novelty, Lock-in, Complementaries. These are the fundamental value drivers. We asked managers to ask themselves, “Is our business model NICE?”

There’s another aspect, and that’s the process by which companies go through the business model’s design. Much of the work that’s been done so far focused on the content of what a business model is, or how the business model creates value and so on. But very little work has been done on how organizations design the business model. How do they modify it? And this applies to early-stage organizations — new startups — and to established organizations.

Once you think about what do managers do — obviously they have to lead their organizations and develop the strategies — how are they going to compete? The business model answers a different question. How are we going to do business? So, that’s the essence of our research program.

Key conclusions:

Our research on the process of designing a business model established that, by building on the methodology that was adopted for the purpose of product design by IDEO — which is a leading design company in the Bay Area on the West Coast — and in applying it to the design of the business model, we developed a five-phase process that’s embedded in the understanding of the antecedent for the design of the business model.

Some of the work we’ve done has established that when a company designs its business model, it doesn’t do it in a vacuum. It has to do it by considering a number of antecedents. For example, what’s the goal of the business model? [The answer is] one antecedent. What are some of the templates that other companies have been using? And to some extent thoughtfully and mindfully adopting some of those templates is another antecedent.

[We also looked at] understanding who are the stakeholders of the organization that would benefit from that business model. [Further, we looked at] constraints — whether these are financial, human capital, regulatory or any other type of constraints that would affect what the firm can and cannot do for any one of the reasons I just mentioned.

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Once these antecedents are acknowledged and communicated, then there’s a process that we suggest in the research paper that involves five steps. First, to observe … a little bit of an ethnographic study — how people use your product or your service. What do they like and not like? When and how do they use it? Who uses it? Who makes the buying decision, and how is that decision made? So, a lot of observation is involved.

Then there’s a phase of synthesis — taking all of the information you observed and pulling it together. Then there’s a point of generating some product-type business model. [You can] say, “This is one idea of how we do business. Here’s another idea of how we do business, and let’s compare them.” [The fourth step is to] refine the model as you think about it more vigorously and more definitively. The last phase is implementation.

That cycle — observation, synthesis, generation, refinement and implementation — should be an ongoing process. It’s not the starting point. It’s a dynamic process in which the firm never sits still and says, “This is how we do business, and we work in silos.” Our main observation here is the need for people in the organization to think in a holistic way — not to think in silos — to take a broader view of the organization, not just of the activities in which they are involved. And that, we believe based on the research we’ve done, will create value for all stakeholders.

“Design doesn’t just apply to product design. It applies very much to the design of how firms do business.”

In fact this process paper is an attempt to journalize our past research that focused on emerging companies. This was our attempt to move from focusing and empirically examining young emerging-growth companies to focusing on … large, global, diversified companies.

What current business events are relevant in light of this research?

What are the implications of not adopting a process of continuously updating and revising your business model? I’d like to give two examples.

Look at a company like Blackberry, which dominated the smart phone industry in government, business and among consumers. Blackberry almost became a verb in American society. Even the President of the United States used a Blackberry. But Blackberry stuck to a particular way of doing business and ignored the changes that were happening in telecommunications, in the ability of wireless networks to transmit videos and other graphical information. Executives did not adapt the company’s business model. Today, Blackberry is in decline, and according to some, on the verge of bankruptcy.

Another example of a company that has not adapted its business model is Nokia. At one point it was by far the largest marketer of handsets for wireless communication. Nokia has since disposed of its handset business, and it declined to a very small percentage of the global number of handsets that have sold. It’s been taken over by the likes of Samsung, Apple, HTC and others.

A concrete example of a company that totally transformed itself by transforming its business model is IBM. Historically, IBM was a product-centered company. It sold computers, disk drives, tape drives, a number of boxes. Today, the vast majority of IBM revenue comes from services where the products are not a means to an end, but are a means to deliver the services.

That’s a profound transformation of how IBM does business. Today, the most profitable part of the company is not the boxes, but the services. The largest fraction of IBM’s revenue comes from services. So, IBM is a good example of a global, multi-national, large and diversified firm that has undertaken a profound updating or revision of its historical business model and, as such, enabled it to stay on top.

How does this research stand apart from other studies?

We believe we are the first to focus exclusively on the process of business model innovation. There has been a realization that business model innovation matters. But before we did this study, no one had really vigorously looked at the process of how you innovate a business model. And that’s where we believe our main contribution lies.

Two main takeaways for business:

First, the need to apply design thinking to the design of the business model. Traditionally, design thinking has been applied to the design of products. What we’ve established through this research project is that the process by which firms design the business model can, in and of itself, create enormous value Twitter .

The second takeaway is that firms need to develop a capability to continuously ask themselves how to tweak their business models, how to refine and revise them. This is an organizational capability that needs to become part of a firm’s DNA. The business model needs to change as the environment in which the firm competes changes. There [needs to be] a realization that each and every member of the organization needs to look at: “Are we still doing business in a way that maximizes the value creation potential?”

“The process by which firms design the business model can, in and of itself, create enormous value.”

The answer, therefore, is that designing the business model is no longer just a job that the CEO has to do. Each and every member has to ask: “In the activities that I’m involved in, is there another way to do this activity? How do the activities that I’m involved in relate to other activities that are going on in our firm that create value for our stakeholders?” And when I talk about stakeholders, there are obviously the customers of the firm, the partners, owners, employees and managers — to pick a few stakeholders. All of them need to be considered in thinking through the design of the business model.

So, these are the two main takeaways. Design doesn’t just apply to product design. It applies very much to the design of how firms do business. And secondly, this has to be a continuous activity that becomes part of a firm’s DNA.

Surprises that came out of the research:

On one hand, the impact of the business model’s design on the firm’s performance has been substantial, greater than what I would have anticipated. But what surprised me most is how rare it is in the organizations that we surveyed and talked to where the process of designing the business model is part of the firm’s DNA.

Very few organizations routinely think, “How can we tweak our business model? How can we find a better, more efficient, greater value-creating business model?” That surprised me, and I think that managers and organizations more generally would benefit by thinking deeper about the design and thinking about it not as a one-time or once in two years thinking, “Is there a better way?” — but as an ongoing, dynamic capability that the firm has.

And it’s up to the leadership of the company to instill that kind of design thinking into the DNA of the firm. And the fact that this is rare was a surprise to me.

Misperceptions dispelled:

The perception is that innovation is about product innovation. And what our study attempts to show is that innovation is not limited to the innovation of product [but also includes] innovation of the very way a company engages in business, how it interacts with its stakeholders, how the various activities are connected to each other. Who carries out each of the activities?

Because in business models in today’s environment — where there have been enormous advances in information and communication technologies — companies are involved in activities that are carried out by other companies. And that’s very much part of the business model of how a modern corporation operates today.

I can give you a lot of examples of how the business model of Amazon relies on UPS delivering the products that people buy from it. And Amazon doesn’t produce or stock most of the products it sells. They’re just drop-shipped from another company. So, the business model of Amazon involves companies and activities that are happening outside of the boundaries of Amazon — outside of the industries it’s in.

There are companies where the entire innovation is how they do business. Take Priceline, which has revolutionized travel. Rather than you going to the website of any airline and looking at the menu of what it has to offer, it’s just the opposite. You say, “I want to travel from A to B, and I’m willing to pay X dollars to travel, and, you airline, make me an offer.”

It’s kind of a reverse auction in some sense. But in many ways, it’s a way to create value — for the airline to dispose of seats it hasn’t sold, because if it flies an empty seat, it makes no money. So, everybody wins. This is a value-creating business model, and there’s no product there. With eBay, there are no products, right? The business model is where the value creation is.

What’s next?

We’re engaged in a fairly massive effort of collecting data to address a related question, and that is focusing on large companies and how the business models evolved side by side with the organizations — the people, the incentives. That’s because a business model focuses on what activities the firm is engaged in, in order to create value, and how that system of activities creates value, how it’s connected, who does it. But there are other elements of the organizations that need to be looked at. And that’s how we see ourselves in the next phase of this research program which, as I said, we started over 15 years ago.

The Truth About Breakthrough Ideas

Here’s an interesting piece: Ken Favaro writes about something that Steven Johnson calls ‘the adjacent possible’ in his book “Where good ideas come from”. I don’t quite understand the point though that ideas come from individuals not companies or organisations. Of course everything starts with people but the key ingredient is not the brilliant isolated individual, instead it is the brilliantly networked individual who can grow his idea by synthesizing diverse inputs. The role of the organization is to facilitate this process. And yes agreed, classic brainstorming is definitely not the answer here, there are many much better planning tools, platforms and services.

s+b Blogs

Posted: December 15, 2014

Ken Favaro

Ken Favaro is a senior partner with Strategy& based in New York. He leads the firm’s work in enterprise strategy and finance.

Ford, Apple, Netflix, Starbucks, and Google struck gold with these breakthrough strategies, and changed the game in their respective industries:

• Offer a standard, mass-produced automobile

• Turn a personal computer into a “digital hub” for consumers

• Rent movies through a monthly, direct mail subscription service

• Create a “third place” between office and home to enjoy high-quality coffee drinks

• Organize the world’s information and make it universally accessible and useful

Although each strategy is distinctive, they share a few common characteristics that tell us how breakthrough strategies really come to be.

First, they start with flashes of insight prompted by working on big problems. For example, Henry Ford had the idea to move the cars, not workers, down an assembly line, while struggling with how to make the automobile more affordable. Netflix founder Reed Hastings asked himself, “Why can’t you sell movies like Amazon sells books?” while fuming over the fees he had incurred from his late return of Apollo 13 to Blockbuster.

But where do such novel ideas actually come from? Is it from the muses, as the ancient Greeks would have thought? Is it from genius? Is it from the creative side of one’s brain, as Roger Sperry, winner of the 1981 Nobel Prize for his left brain/right brain research, might have said? Or is it from a brainstorming session in a tricked-out conference room with creativity-enhancing furniture, colors, and lighting?

In fact, research tells us that innovative strategies are sparked by “precedents” from unexpected places that seem to offer at least a partial solution to the challenge you have in mind. For example, before they founded Google, Larry Page and Sergey Brin were working on how to make the Web more useful for e-commerce. But Page was also working on the Stanford Digital Libraries Project, and realized that you could rank Web pages the way scholars are ranked by their annual number of citations. Howard Schultz was noodling on how to raise people’s demand for high-quality coffee when he was inspired by observing Italians from all walks of life enjoying espresso at their local watering holes. Ford’s idea for the moving assembly line originated in meatpacking plants, where butchers disassembled carcasses moving past them along an overhead trolley.

Then things get really fascinating, because breakthrough strategies always involve “creative combination.” For example, to help make the Macintosh a digital hub for consumers, Jobs created the iPod by combining visual cues from Braun’s T3 pocket radio; a 1.8-inch 5GB hard drive from Toshiba; the navigation features of the Bang & Olufsen BeoCom 6000 wireless telephone; capacitance technology invented in 1910 for the scroll wheel; the programming code from SoundJam MP (a popular MP3 player app), and his Pixar experience, where he learned about negotiating with the music industry for the right to sell songs individually. Ford added to his idea for a moving assembly line by adopting profit sharing for frontline workers—which John Stuart Mills had written about in his popular book published in 1848, Principles of Political Economy. Ford’s famous dictum, that you can have any color you want as long as it’s black, was the result of discovering that black paint dried faster than any other color—thus allowing the assembly line to move faster. And his network of dealer franchises emulated Singer Manufacturing’s move to cover the country with third-party resellers because it could not afford a national sales force to hawk its innovative sewing machines. Similarly, Page and Brin brought together data mining, page ranking, and search-linked ad selling technologies in creating Google, and Hastings combined Amazon’s book-selling approach with the gym membership fee model to build Netflix.

Finally, people—not companies—create breakthrough strategies. Breakthroughs go against the grain of accepted wisdom, and markets and organizations are powerful immune systems that throw up multiple barriers to turning new ideas into commercial reality. It takes a person who believes enough in the strategy to be willing to fight an organization or the broader market for however long it takes to make it happen. Remember that Howard Schultz was not the original founder of Starbucks. He was just an employee of the company, then a roasting and packing business, when he was sent to Italy to scout out the equipment used there for roasting and grinding coffee. Upon his return, he shared his idea—to create an Italian-style espresso bar that would drive demand for Starbucks’s high-quality coffee—with the founders, who promptly turned him down. So he quit to start his own business. Then, when the founders decided to sell, Schultz bought the company, and the rest is history.

So what does all this tell us about breakthrough strategies? They rarely come from the typical strategic planning effort. Nor do they typically result from the common practice of generating and evaluating strategic options. And they certainly aren’t inspired in a traditional board offsite, executive retreat, or brainstorming session. Instead, they start with individuals working on big, specific challenges who find novel ideas in unexpected places, creatively combine them into innovative strategies, and personally take those strategies to fruition—against all odds.

Three ways companies can make co-creation pay off

Involving outsiders in the creative process of developing products and services is harder than it sounds. Here’s how leading companies do it.

December 2014 | byJacques Bughin (McKinsey & Company)

Ever since companies began using the web to solicit ideas from outsiders for enhancing services and developing products, the promise of co-creation has overshadowed its measurable impact. Studies have shown that the impact of co-creation—the act of bringing external parties, usually customers or suppliers, into a company’s creative process—on new product innovation is neither statistically significant nor economically relevant, nudging the likelihood of success up by a scrawny 4 percent.¹While attempts to create products or services jointly may produce desirable side effects—in the form of reduced market-research costs or increased customer loyalty—the ultimate goal of bringing outstanding products to the market remains elusive.

While co-creation with customers has produced widely publicized successes at some brand-name companies, the challenges that practitioners must overcome to build and sustain a productive model of online collaboration have been minimized, if not ignored. That oversight should be corrected. Co-creation skills are an important capability for companies, requiring agile processes, quick test-and-learn cycles, and a deep understanding of customers. In fact, in contrast to the average practice, the masters of co-creation not only unlock value rapidly by delivering high-quality products and service innovation but also sustain that impact over time—all with little additional R&D overhead.

Last year, we studied more than 300 companies in three European countries and found that the best at co-creation excelled in three areas:

1. Target your co-creators

Our research found that while 90 percent of executives were eager to get consumers involved in co-creation, only 12 percent of Internet users had actually done so. In fact, only a quarter of consumers were even aware of the concept, while an additional 5 percent knew about co-creation but not how it actually worked. To overcome this issue, the best companies parse customer data to actively target co-creators and actively explain how to use their co-creation platform. They segment their audience and tailor marketing promotions to what appeals to users: for example, games, money, education, or pure peer recognition.

Since 2001, for example, P&G has successfully been bringing outsiders into its R&D process. As well as targeting them by motivation, the company has also targeted retirees with specific skill sets, including P&G’s own alumnae, as well as retired technical specialists at airline companies.² P&G’s co-creation platform, Connect + Develop, has spawned dozens of products, boosted product development, and effectively doubled the number of employees engaged in R&D—without adding to payroll costs.

Implicit in this effort is getting to critical mass: without enough people, the chances of co-creation success drop. When Starbucks launched its My Starbucks Idea co-creation platform for customers, it understood from the start that it was critical to lure big numbers of participants—between 1,000 and 7,000 is an ideal number for one product.

An important element of successful recruiting is finding people who actually like your brand. Finding people on social media who not only “like” your brand but are also active promoters is a good place to start. In addition, the value benefit can increase. Our research shows that a brand’s market share is more than twice as correlated with those who are inclined to co-create with a brand than with those who only make positive comments on social media.

2. Find the motivation

Getting a critical mass of users to do more than drop by and glimpse an online co-creation platform can be daunting. Having clear navigation and communications is critical so that potential co-creators know what kind of help you’re looking for. Co-creation-savvy companies list their needs and organize them by category, mimicking online co-creation platforms such as O’Desk or Mechanical Turk.

Understanding and tapping into what motivates co-creators is critical for getting them to submit good ideas. Not surprisingly, one motivation is compensation. Heineken launched its co-creation platform in 2012, asking game lovers, beer drinkers, and environmentally conscious consumers for ideas that would make its packaging more sustainable.³ The winner, a German citizen, suggested a device (the Heineken-o-Mat) intended to turn recycling into a game and walked away with a $10,000 prize.

Yet interestingly, many people aren’t motivated to co-create purely by compensation. Our research on ten co-creation projects found that the largest percentage of participants (28 percent) was driven by curiosity and a desire to learn, followed closely by entertainment and social play (26 percent), and an interest in building skills (26 percent). Some 20 percent were driven by recognition and rewards.

Starbucks, for example, fostered an atmosphere that welcomed the opinions and reviews of customers, and provided a platform for them to connect with each other. By talking to each other and to the company, customers shared views on store design, in-store music, and corporate social responsibility initiatives. The most active of the 250,000 participants in the first two years⁴ received recognition on the site; some also got the ultimate reward of their idea being among the 300 that the company has implemented.

It’s important to bear in mind the segments of co-creators—such as gamers and social butterflies—and then design applications with them in mind. For example, creating a fun contest will draw game lovers. Building in a social component, such as a leader board for winning games, is also likely to entice people who want social recognition. But what really generates mass participation is when companies attract audiences to co-creation with multiple appeals. A contest to draw game lovers is also likely to entice people who want social recognition (by winning games), for example.

3. Focus on a sustainable payoff

For co-creation to pay off handsomely over time, companies must focus it on activities that deliver a sustainable competitive advantage.

That may be about being a price leader, a product innovator, or superior service provider. P&G has used co-creation to remain an innovator in household cleaning products. Ideas from its product-co-creation program have helped it turn its Febreze air-freshener brand into a fragrant frontrunner, with $1 billion in annual sales. Threadless, a company that manages and sells crowd-sourced tee shirt designs, built a sustainable model by producing high-quality shirts in limited quantities to create the sense of a premium brand.

Other companies have rightly rooted co-creation on creating a cost advantage. Take Chinese motorcycle maker Loncin. In the late 1990s, the firm needed to become more price competitive with Honda, Yamaha, and Suzuki in the Vietnamese market. Loncin brought suppliers rather than customers into its co-creation initiative and asked for ways to reduce the cost of manufacturing. The resulting ideas helped Loncin cut costs by more than 70 percent and gain 60 percent of the Vietnamese motorcycle market within four years. With strong capabilities in co-creation, Loncin since has branched out into engines and cars.

Similarly, Missha, a 14-year-old cosmetics retailer based in South Korea, turned to co-creation in the early 2000s to create a lower-priced yet attractive alternative in a market dominated by high-priced brands. Missha appealed to its suppliers to help reduce costs without stripping away valued capabilities. The feedback helped Missha more than double its market share in South Korea.

Co-creation is here to stay. For companies that figure out how to do it well, the rewards can be far greater than a more effective and efficient R&D organization. More important, it is a core capability for unleashing the vast ingenuity of outsiders on an organization’s biggest challenges.

About the author

Jacques Bughin is a director in McKinsey’s Brussels