Thoughts on Reading Business Model Generation and a Note on René Descartes

I recently re-read Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. The book is available on Amazon.com, and you can currently download the first chapter of the book here. The goal of the book is to provide a useful framework and set of techniques for developing new business models. Reading it this past weekend also led me to reflect on the relationship between innovation and systematic approaches to business. As I have reflected on before, large corporations are often torn between two extremes: on the one hand the best way to control risk, to manage a large corporation, and to form incremental improvements is through systematization. On the other hand, such systems tend to reaffirm the status quo, and thereby stifle genuine innovation.

Business Model Generation is an attempt to develop a system that can lead to more innovative business models, and thus bridge these two extremes. The system the book presents is outlined in the first chapter, and it involves separating a corporation or business into 9 key components: a value proposition, key activities, key resources, customer relationships, distribution channels, customer segments, key partners, cost structure, and revenue streams. The different components are arranged on a "canvas" in which the value proposition is front and center, and it is possible to chart flows between components. The "canvas" helps one visualize different business models.

But the real value of the book is that it begins to augment this framework with actual examples of innovative business models and explains the trade-offs of each, and when it outlines design techniques that can be used to create new ones. The examples come from a wide range of industries. One reads about the contrasting approaches of the Maerki Baumann and Pictet banking institutions, how Telco unbundled the components of its infrastructure in order to better align its capabilities, how Lulu changed the publishing model, how Lego experiments with user-generated content, and how Nintendo Wii re-imagined the video game model. Apple and Google both have their requisite due. Metro's publishing model is explored. Red Hat is used to introduce the fremium model and Skype and Amazon are discussed. P&G's R&D gets significant attention, as does the classic Gillette bait and hook. All of these business models are related to the canvas developed in the first chapter, and it produces a type of alignment that allows one to see each innovative model as a general type. The presentation of each  business model is entertaining and insightful.

After this rich list of examples, the book turns its attention to more in-depth discussion of some aspects of the design approach to business including brainstorming techniques, how to gain customer insights, the importance of storytelling, and ways of analyzing markets for strategy. All of these topics are covered in more depth in other books, and serious innovation designers may find them old-hat. However, as with the canvas developed earlier in the book, having all these techniques in one place, with quick efficient overviews can give even an experienced innovation designer a nice bird's eye view of the business model landscape.

When all of this is put together the team responsible for Business Model Generation has created an ideal way to get a quick overview of cutting-edge approaches to business design. I have actually used the book on several occasions now. It has helped me and a group of colleagues understand our own business much better than other techniques we have used. But the understanding is peculiar: I have found that although Business Model Generation is a useful read, the practical utility of the "canvas" presented in the beginning can be somewhat limited. The divisions that the 9 components of business force on a particular case can often be too restricting and feel unnatural. This effect oddly reminds me of David Trood's famous National Geographic photos in which David uses hundreds of photos to produce unified images. In both cases the resulting products end up giving you a general picture from which you can glean some insight, but one is struck by how much is lost in the resulting image. As in life we often learn more from differences than similarities.

The limitations of the framework reminded me of a philosophical work I studied in graduate school. René Descartes once set himself the task of providing a unified system for developing new ideas. He called it his Rules for the Direction of the Mind. At the time Descartes was already an accomplished mathematician and had solved several problems that had baffled mathematicians for centuries. He did this by developing new innovative techniques for solving problems, including imagining the line of a curve to be traced by a complicated mechanical machine. The results of such thought experiments were not immediately accepted by the mathematical community, but in a suitably translated version they became the basis for much of modern mathematics. (The best account of Descartes' mathematics is Henk Bos' Redefining Geometrical Exactness: Descartes' Transformation of the Early Modern Concept of Construction.) Having been extremely successful in mathematics, I assume Descartes thought it would be easy to develop a formal approach to creativity that could be applied in all instances. However, he soon abandoned his work, and left the book incomplete. Many theories have been offered for this, but I think it is very likely that he realized at a certain point that truly innovative solutions could not be codified or mechanized in such a formal manner. One has great difficulty formalizing the process of innovation.

Llull developed a random idea generation machine.

I bring up the case of Descartes, because I think a similar phenomenon occurs any time one discusses innovation. A creative process generally ceases to be innovative the moment it is codified and mechanized. Even a system designed to produce random results, such as that of Ramon Llull,  is rarely as effective as someone thinking creatively outside of the rules, whether it is through analogy, brainstorming, or applying an example from a very different domain. The best that one can do to capture this kind of innovative thinking is to review examples and develop rough techniques for thinking about problems.

To Business Model Generation's credit it is pleasantly situated between the extremes of random creative thinking and a mechanized and codified process that stifles innovation. It provides enough detail to stimulate thought, but does not attempt to develop it to the level of being a formalized and unresponsive framework. This means that the reader has a loose and flexible tool that she or he can use to think about their own businesses, and perhaps stumble on an insight that will lead to new, truly creative developments. But, it is important to understand that having a framework is only the beginning of the road to innovation.

P.S. I should add that one of the most fascinating aspects of the book is the innovative way in which it was written. You can find more on the book website here.

7 Ways to Turn Failures into Successes

If someone is really trying to be innovative, almost by definition that person will fail from time to time. This is because innovations that have never been tried before are often risky undertakings, and failure is far more likely than success. James Dyson went through 5,127 prototypes before he came up with his famous vacuum cleaner. Thomas Edison famously said, "I have not failed, I've just found 10,000 ways that won't work." To persevere is certainly a virtue, and many examples show that such persistence can ultimately pay off. But this kind of persistence is a virtue in an individual, not necessarily in an organization or company. A company that constantly follows failing strategies will be out of business rather quickly.

Because of this, businesses are very concerned with failure, and the punishment can often be severe: loss of jobs, financial penalties and so on. Although sometimes it is necessary to take such severe measures, there is a trade-off in terms of loss of communication, and such decisions can also limit the possibility for individual or organizational improvement. There are more constructive ways to respond to failure. Here are seven ways for a company to respond.

• Use mistakes to pinpoint areas of improvement. In a recent interview Milton Glaser made the observation that failures are sometimes better than successes: successes merely reaffirm your previously held views and reinforce the status quo; only failure provides genuine opportunities for improvement. But to actually produce this improvement takes more than simply admonishing an employee with a cliche like, "Don't do it again." Successful people and businesses know how to focus in on the specific factors that led to a failure. A pianist who simply continues to play a piece from the beginning, is unlikely to perform the piece as well as someone who spends extra time mastering the difficult passages. Similarly, a company that doesn't provide appropriate focus on the specific cause of a failure will not improve as quickly as one that does. Hence, you should offer people who have failed new ways to meet the challenge in the future. For instance, if a client presentation doesn't go well, offer to excuse the employee from other tasks in order that she or he can obtain sufficient training to do better next time. For a company, this is a prudent investment in the future.
• Use mistakes to understand the limits of current possibilities. Another way to learn from mistakes is to use them as opportunities for understanding the limits of a domain. I have a mathematician friend who spent more than a year with colleagues throughout the world working on a proof that ultimately didn't work. However, the funding for the project required a specific output, and so he did what scientists often do, and turned the study into a disproof of the original methodology. Far from being a cop-out, such a move represents a genuine advance in knowledge. This lesson can be applied to companies too. For instance, if there is a client product that cannot effectively compete against the competition based on feature or price, then that might be the signal that the company should leave that market, and head in a different direction that better suits its strengths. This is a loss, but because it allows you to redirect your resources, the project also represents a positive gain for future strategies.
• Steal from your mistakes. Google is a company that has managed to respond well to failures. For instance, consider the recent failure of Google's Wave service, a service Google pulled the plug on in August 2010. The service developed a fresh new approach to online messaging, but for various reasons it never caught on. However, despite the fact the service had to be closed, many features of that service are now entering the market as enhancements to other services that Google offers, and vestiges of Google Wave can be seen in Google Docs. This is one of the ways you can respond to failure in a creative way. If the overall system doesn't work, then analyze it down into its components and see if there are ways to construct new services from the pieces. This requires investing time in understanding a failure, and in seeing how to reintegrate the results into the overall strategy of a firm.
• Keep a record of mistakes. This is closely connected to the previous observation. It may be the case that there are no obvious ways to steal from a mistake at the moment, or that the reasons for the failure are currently too opaque. However, it may turn out that six months or a year down the road a new opportunity will arise in which the learnings can be applied to significant advantage. In order to take advantage of these situations, many details of the previous failure may need to be recorded and reviewed. If blame is attached to specific individuals they may be less forthcoming about the real reasons for the failure. Hence, a database of previously attempted initiatives incorporating a certain degree of anonymity should be maintained. I'm actually surprised so many companies do not have specific people in charge of understanding failures and finding new creative applications for the results. Given that the development costs of these failed initiatives are already paid for, such failures can often provide the proverbial "low hanging fruit."
• Turn the failure into a challenge. If it is particularly important to overcome a failure, throw down the gauntlet and constructively challenge people to do better. There is an amusing story recounted on Michael Schrage's HBR blog post of how Charles M. Schwab used a challenge to motivate workers. After learning that the day shift at a poor-performing mill produced only 6 heats, he proceeded to write a large "6." on the floor. When the night shift came on, they saw the number and knew that they could do better, and worked extra hard to put a "7" on the floor. The process accelerated when the day crew arrived, and by the time the competition completed the mill was producing more than any other mill in the plant. Competition is an effective tool for improvement whether it be in business, evolution of species, or in breaking the four minute mile. For this process to work well in a business it is important that the emphasis be on the success rather than the failure: in a race in which only one person wins, there is little point in berating everyone who didn't.
• Outsource a part of a challenge. If a product or service is generally working, but there is one component that is consistently failing, you may want to consider outsourcing that component of the product to a company that has the knowledge or resources to make it work. Although these may not be prime examples of "failures" Netflix was able to retool their algorithms for movie suggestions by outsourcing it through a competition. P&G famously decided to increase efficiency and reduce cost by aiming to outsource up to 50% of its R&D work to third-party providers. When companies outsource capabilities to other firms they can focus their resources on those aspects of projects in which they can obtain the highest value.
• Let an employee keep at it. There are a variety of ways of responding to failure, but one of the ones we value most in our society, whether it is in inventing or playing video games, is the value to keep at something. As the options above indicate, it is sometimes important to recognize when something will not work, but this doesn't mean that one should always give up. For instance, if there is an employee who is particularly passionate about a cause, why not let him or her spent a few hours each week pursuing it long after the company goes in a different direction? The most you are losing are a couple of hours, but the added gain in letting the passionate employee own the task, and of keeping the project within the company's fold may be significant if it does work out.

If you are striving to be innovative, it is important that you have a plan for dealing with inevitable failures. By concentrating creatively on what can be gained from a given case, one can turn current failures into future successes.

Do you have any interesting examples of failures that you turned into successes? Do you have ideas for other ways to make use of failures? Feel free to comment below.

Thoughts on Reading Rework

This past week I read Jason Fried and David Hansson's Rework on my iPhone. In retrospect, I think this is a book better purchased in book form: it's the kind of book you want to leave on your desk to start conversations. The useful and entertaining book argues that many of the standard practices in business are misguided, and provides examples to underscore this point.

To give you a flavor for the book, you might watch Jason's ted.com talk. There the emphasis falls on the problems with meetings and managers. Now, I think it is obvious that there is a role for both of these within a corporation, but Jason's point seems to me correct: they are overused, and often serve as crutches for poor management skills. For one thing, meetings take a lot of time out of the productivity of an organization. The time should be multiplied by the number of people participating. A meeting between 10 people for one hour takes 10 hours of productivity out of the organization. Understood this way, one should ask whether the goal of the meeting is worth this significant expenditure before scheduling it. In many cases a meeting could be avoided by having short exchanges in the hall, or reducing the number of people attending. This not only saves the company money, but may actually enhance employee morale. Employees have long complained about how meetings are a waste of time, and from my experience I would agree these complaints are often warranted. The low rate of information exchange alone underscores this fact.

As for managers, Jason has similar arguments. The main argument in this case comes from the way managers can interrupt the flow of thought. One simple check-in on an employee who is engaged in a project that requires concentration is often enough to put that process back 10 minutes. If enough of these interruptions happen throughout a day, then work can almost come to a stand-still. Of course, as is the case with meetings, there are places and times for these types of interruptions. I have had employees work for me from time to time who actually needed to have interruptions to stay on task, but I would say out of 100s of people I've worked with only a handful fell into this category. Most employees are motivated to do their work, and they just need to have the resources and opportunity to succeed.

How would a post-meeting/manager company function? It would rely more on passive modes of communication throughout the day. The advantage of passive communication is that it doesn't necessarily interrupt the workflow: people can respond to an e-mail at the time of their choosing. Employees should also be given enough ownership of their tasks that they can feel genuine entrepreneurial excitement. Managers' roles are to inspire employees and provide enough structure that the goal and requirements of a task are clear. If you add to this mix an enthusiastic workspace filled with employees who can be trusted to do good work, and such a well-run company would surely succeed.

Meetings and managers are often described as necessary evils. But why should anything evil be necessary? Far better to minimize interruptions so that when you do get together meetings and managers become necessary goods.

9 Steps To A More Successful Brainstorming Meeting

In the course of my time teaching and managing people, I have become very interested in how to make conversations more conducive to creativity and innovation. Although there are no general ways to guarantee that a conversation or meeting will lead to new and creative results, I have identified at least nine steps that can turn an ordinary brainstorming meeting into an innovative and interesting one.

1. Develop a Non-Standard Context. All too often managers and other employees are accustomed to interacting in very specific and structured ways: some people are used to talking, others to listening, and everyone wants to be recognized for their particular areas of expertise. To truly encourage creativity it is often very useful to introduce a context in which people have very few expectations, such as having a session in an unusual space like a hallway or kitchen, or encouraging people to play devil's advocate to their own ideas. One of my favorite ways to encourage creativity is to open up a meeting by presenting a problem and then asking, "What's the craziest way anyone could solve this problem?"  
2. Ensure Everyone is Beginning on the Same Page. Knowledge is power, and power can be used to quash discussion. It is important that everyone start from the most even playing field possible. If there are facts that a decision must be based on, it is useful to distribute those to all the participants ahead of time. Further, if a range of solutions is clearly "wrong," that should be known ahead of time too. One can always choose to ignore some of these considerations within the meeting or discussion, but no one should feel that she or he is walking into a "mine field" in which some of their answers will be criticized for being wrong for reasons they could not possibly know ahead of time. 
3. Remove Boundaries. In normal conversations, especially in a workplace, there are many conventions about how we interact with other people. People in authority generally demand some respect from those beneath them, new people in an organization who are unaccustomed to the conventions and expectations can often sound timid or out-of-touch, and experienced employees can be trapped by preconceptions about what their jobs are and what they are entitled to say. The first step in getting a group to truly foster creativity is to remove many of these boundaries. People in authority should let others take the lead; new employees should be encouraged to talk if only because their ideas have a better chance at being genuinely new, and more experienced employees should be challenged to think outside of their particular job functions or roles. 
4. Provide Structure. Even if one removes ordinary boundaries in a discussion, it can be very useful to impose novel or extraordinary structures in a discussion. No one can produce productive solutions to specific problems in a vacuum, and forcing people to look at problems in new ways can lead to new approaches and fresh ideas. For instance, ask people to think about the problem as someone else in the room would, or to look to a parallel problem in a very different environment, or ask participants to change sides in the middle of an argument. Creative rules often create creative solutions. 
5. Accommodate a Wide Variety of Styles of Thought. Some people need silence and preparation to develop genuine creative solutions, while other people need to hear lots of ideas and enjoy jumping into the discussion suddenly and unexpectedly. Some people demand logical precision in their thought, while other people like to think in metaphors. One of the main challenges in fostering creativity in a meeting is developing a way of interacting that allows each person to participate effectively. Often just recognizing the differences in the room can be a cathartic exercise. 
6. Actively Listen. In my experience, this is the single most important rule in encouraging creativity in a discussion. No one learns anything new in a meeting if they do not spend time listening to other people, and yet very few people are careful listeners. Listening involves not only passively hearing what other people are saying, but more importantly, it involves finding ways to interpret those utterances constructively. For instance, when I ask people to come up with the craziest possible solution to a particular problem, I am often surprised at how even the craziest ideas have a great deal of structure to them, and can be quickly developed into a constructive solution, provided that one pay attention to those details. 
7. Let Participants Own Their Ideas. The paradigms of creative individuals are artists at work in their studios, producing original books or paintings that express their particular viewpoints on the world. The connection between personal expression and creativity is strong. Hence, it is important to make people feel in control of their own ideas at a meeting, or when they seek to further develop or implement them. When a person feels responsible for his or her own idea's success, that person is more likely to be emotionally engaged with that idea, and there will be an added incentive to bring the idea to completion. 
8. Empower People to Develop their Ideas. Coming up with new ideas is just the first step when innovation is the goal. Providing the infrastructure for evaluating ideas, for developing them, and monitoring their progress is critical. People often fail to recognize just how much work and time it takes to bring an idea to fruition, but that is where the real work lies. Anyone can come up with a great idea; it takes true genius to bring it to fruition. 
9. End with Clearly Defined Next Steps. This is basic good business practice, but it is particularly important when a creative discussion ends that there be clearly defined next steps. This is because the particular context that produced these ideas may be difficult to replicate, and when people take up non-standard roles in a discussion, it may take serious thought to redistribute the components of those ideas to the right people in the organization who have the expertise and abilities to bring them to completion. Everyone should leave the room knowing what steps are being taken, that the right people are taking them, and understand the criterion for the success or failure of those steps. 

These are just some general ideas on how to structure a brainstorming discussion that is conducive to the creative and innovative development of new ideas. It is worth keeping in mind that this is only one of the contexts in which new ideas develop. In particular, in some stages of the development process a great deal of structure is needed, requiring managers to do what they should do best: distribute complicated tasks among the right people in the organization and at the right times to get them done. At other times, it may be more useful to have a passive way of gathering information, such as a designated bulletin board or wall. Nevertheless, if you find your company or organization is suffering from a lack of new ideas, occasionally implementing some of these steps in a meeting may help.

Do Non-Profits Have a Unique Metaphysical Structure? (Repost from September 13, 2008)

There are some obvious contrasts between for-profit and non-profit corporations. The basic philosophy of a for-profit company is clear: reduce operating costs, increase revenues, and thereby increase profits. In order to achieve these goals, most companies have three classes of individuals: the executives who set policy, the employees who do the work, and the management that ensures that the employees do their work and that the company succeeds in implementing the executives' policies. A well-run company with its unified purposes, efficient methods of implementation, and its clear system of responsibility has been one of the marvels of our age, and it explains the dominance of the corporate model throughout the world economy. Further, by focusing on profits, for-profit corporations are called upon to produce successful products and services, and this success or failure can be easy to track.

Although it is legally the case that a non-profit can have a very similar corporate structure to a for-profit company, with boards of directors, executives, managers, and employees, the philosophical structure is fundamentally different. By explicitly denying the pursuit of profit, corporations are denying the fundamental raison d'être of for-profit companies. As a consequence, many non-profits have goals that are less easy to define or track. For instance, a non-profit might be founded to increase awareness of an issue, but seldom are there viable ways of tracking how well it achieves this goal, or of comparing its current approach to other alternative approaches. A non-profit might be set up to pursue a religious, cultural, or charitable goal, but it may value the activity of pursuing that goal more highly than any specific product that is brought about.

And this may point to a fundamental metaphysical difference between corporations and non-profits: one tends to value an activity more than any specific product, and the other values the product more than the activity.

In both cases, however, the best run companies and non-profits can converge (See Economist July 15, 2010, "Profiting from Non-Profits"): both should be able to employ efficient means to achieving their goals, while at the same time valuing the activity highly enough that the activity itself can be a worthy goal. A corporation that provides good benefits to its employees, and that is sincere in its effort to produce a sense of responsibility and community among its employees, managers, and executives begins to converge on a non-profit model and to raise the status of activity within the organization. And a non-profit organization that is run efficiently, that offers its employees competitive wages, and has clearly defined goals and metrics, can be a lot like a for-profit corporation.

But the differences go further than this. Although this is not inevitable, anyone who has spent time working at a non-profit and a for-profit corporation may have realized that the culture can be quite different. Since for-profit companies are basically in existence for the purpose of making money, this infuses the culture of the individuals who make up that corporation, and you tend to get competition, a strong desire to advance, and basically, people are there to make money. The desire for financial gain among the individuals then transfers back to the company, and increases the drive towards profit. The reciprocal way that large-scale goals infuse small-scale actions and conversely small-scale actions lead to large-scale goals is an interesting philosophical feature of many group activities, and has been noted since antiquity. (Cf. Plato's Republic.)

Non-profits have a similar reciprocal system, but it is based on doing good. Since doing good tends to be a collaborative activity, or at least a non-hierarchical activity (i.e. each agent in the organization is capable of fulfilling the goal to a certain extent), it has the consequence that there is less competition within a non-profit, and it is less amenable to a traditional corporate hierarchy of authority and control. Now, of course, this isn't inevitable, but it does mean that there may be less emphasis on the rules and regulations that are at the heart of the success of a large for-profit corporation. People are less likely to be criticized for being late, less likely to have software on their computers that prevents surfing on the Internet or other similar security and efficiency measures, and people are probably less likely to be reprimanded or even fired for failing to produce good enough ROI. But since it can be argued that happiness is found in activity, it may very well be the case that non-profits tend to produce happier employees, especially if there is an emphasis on activity.

Does a non-profit company lose something when it aspires to be as efficient and effective as a corporation? I think it may well be the case that a non-profit would lose something under these circumstances. What do you think?