How to Design a Business Model

I recently met a fantastic artist.  Scott Stearman is a sculptor who specializes in bronze work, such as life-size statues and memorials.  The process he goes through to create the end product truly is amazing.  Long story short, Scott actually starts his process with a very small clay model.  This model is then magnified and processed to create a mold for the bronze, which is then finished.  The part of this process that I found most intriguing is that the large finished product is being made from a very small model.  This means that any errors that are made on the model are magnified multiple times when it is enlarged to create the bronze mold.  Having a half inch error on a model can result in a four inch error when the model is magnified to become eight times larger.  

I have found that the same is true with a business model.  If a business does not fully refine their strategy on the small scale, it becomes magnified as the business grows.  This is not always a bad thing, but how much more effective could a business be by being intentional?  If a business model is not intentionally designed, the business will ultimately default on a business model that may, or may not be the most effective model for the business.

Regardless of the size of a business, any business owner can be intentional about the design of their business model by refining four strategies.

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Pioneering Innovation

As I discussed in our blog post The Three Types of Innovation, there are three main types of innovation: 1) pioneering innovation, 2) best practice innovation, and 3) technological innovation.  In this post, we will discuss pioneering innovation.

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Pioneering innovation is often the example of innovation most associated with the term innovation.  Pioneering innovation occurs when a brand new product, service, or way of doing something is introduced into the market.  This method, however, is the rarest form of innovation as most products or services have already been introduced into the market in one form or another.  While not every industry may have utilized each innovation, it is very rare that a new product, service, or way of doing something is completely original.

When I think of pioneering innovation, I think of invention.  An invention is something that is brand new and refers to the very first occurrence.  For example, Thomas Edison is widely known as the inventor of the light bulb.  The truth is, however, that Edison did not invent the first electric light bulb.  Inventors such as Allessandro Volta had early forms of electric light dating back to as early as 1800 while Edison had his first successful test on October 22, 1879.  Edison did, however, developed the first commercially practical incandescent light.

One example of a modern form of pioneering innovation is the Segway. The Segway is a two wheeled personal transportation device where a person stands upright to ride.  It is activate by shifting your weight forward or backwards and by using a handlebar to steer. The idea behind the segway was to transform the personal transportation industry by providing a devise that places riders at an increased elevation in a crowd and provides a stability so that the rider does not need to dismount when the device comes to a stop.  Due to these features, the Segway has become popular for tourism and law enforcement agencies, especially in large crowded events.

The reason I classify the Segway as a form of pioneering innovation is because this really was the first personal transportation devise of its kind.  Previously, bikes, scooters, and motorcycles all had to be moving in order to stay on them.  The standing form of the Segway has allowed riders to fully stop without needing to step off or dismount from the device.  While it was originally speculated that the Segway would fully transform the industry, it has found a niche market in areas such as law enforcement and tourism.

Another product that is a form of pioneering innovation is the GPS.  Before the GPS, there really wasn't anything comparable, at least on the consumer market.  Most of us remember the first Christmas season when GPS's were the rave.  EVERYONE was purchasing them, and it was a new product anyone who drives a car could use.  The fascinating thing about the GPS is how quickly it came and how quickly it is going - due to technology like our smartphones.  Innovating the GPS is a post for another day, but the GPS truly was a form of pioneering innovation.

I have often heard authors or businesses claim that something essentially falls into the category of pioneering innovation, while the form of innovation was not completely new in one form or another.  In our next post, we will explore innovations that come from utilizing industry benchmarks or other-industry best practices.

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10 Areas of Organizational Fitness

Organizational health has long been a component of business strategy, but is something that I believe is vastly underutilized by most businesses.  To clarify, I am not referring to the physical health of  employees where many organizations have been implementing physical fitness programs in attempts to reduce health insurance costs.  Rather, I am referring to the overall health and function (or disfunction) of a business.  

Patrick Lencioni discusses this topic in his book The Advantage: Why Organizational Health Trumps Everything Else in Business. In his book, Lencioni states that organizational health is comprised of five main components - leadership, teamwork, culture, strategy, and meetings.  

He explains that the cost of poor health in these areas leads to a dysfunction throughout the business.  Lencioni utilizes a psychology approach in building a cohesive team and ultimately a healthy culture through tools like trust building exercises and the study of personality profiles.

I believe that organizational fitness (a term I prefer to use) goes far beyond the five components listed by Lencioni.  Organizational fitness can be broken into ten different components:

1) Vision is the foresight and planning of an organization
2) Hearing is how an organization listens to its environment and stakeholders
3) Speech is what others hear
4) Height is the stature of a company, and could also be measured by growth or size
5) Weight is an organization's burdens and baggage
6) Nutrition is the investments the company is making
7) Agility is the resilience of the company
8) Cosmetics are what others see: the image of an organization
9) The Nervous System is the communication and internal processes
10) Immunizations are the risk mitigators implemented by a company

Over the next few months, I will be breaking apart each of these components of business fitness.  Look for our other posts on Organizational Fitness.

Redbox - Innovation Has-Been?

Since I was first introduced to Redbox in 2006, I have found them to be one of the most intriguing companies in recent years and are one of the great examples of innovation.  While they have had amazing success, the question I now have is: is Redbox an Innovation has-been? 

If you aren't familiar with the company (which I am not sure how you could have missed the red kiosks located at thousands of grocery stores and pharmacies in the US), Red Box is a kiosk DVD rental service.  The idea is that rentals cost just over a dollar a day and can be returned to any kiosk in the country.

First, I find it fascinating that McDonald's Corporation, a company we associate with as a food service business, was the original funding company.  It is easy to understand the innovation behind launching Redbox, however, if we think of McDonald's as being in the Real Estate business rather than being in the food service business. 

One of the core elements of Red Box is the strategic placing of their kiosks, many of which are located at the golden arches and this thinking by McDonald's was quite brilliant.  McDonald's knew the resource they had in their locations and used this as a distribution channel for many kiosks early on.  Imagine a family vacation road trip.  You stop at a McDonald's for breakfast and rent a couple of movies at a Redbox for the kids to watch on your minivan DVD player.  That night (and five states later) you swing by another Redbox and return the rentals which only cost you a few dollars to rent.

Secondly, I find it strange that a company has grown so large in an arguably dying industry.  While it is true that the DVD rental kiosk was an innovation that helped to destroy the brick-and-motor model of Blockbuster, DVDs are a technology that is arguably on its way out due to online download and streaming options.

The question now becomes, what happens to Redbox when DVDs become obsolete?  Their brand (i.e. "box") is designed around the kiosk, so it will be interesting to see how Redbox deals with the moving trend to streaming videos over the internet.  Will Redbox Instant (their attempt at a streaming service) fail to effectively compete with Netflix for the online market or will they find a way to innovate once again?