Point: Experiment with new business models in a “connected adjacency” before committing to them.

Story:  Saul Kaplan, founder of the Business Innovation Factory (BIF), just wrote a new book, The Business Model Innovation Factory.  Kaplan shares 15 business model innovation principles, weaving in his personal experience (from Eli Lilly to Accenture to BIF) as well as experiences from numerous presenters at BIF’s Collaborative Innovation Summits. My favorite chapter in the book was “R&D for New Business Models.”

In the chapter, Kaplan describes how to deal the challenges of testing a new business model.  Organizations can’t easily jump from an entrenched business model to a new one.  There’s too much support for the old model and too many unknowns about the new one.  The solution is to test the new business model in what Kaplan calls “connected adjacencies.” A connected adjacency is like a real-world sandbox or living lab. For example, Kaplan details how Accenture changed its business model from being a systems integrator to being a business integrator.  Accenture (Andersen Consulting at the time) started to rapidly build a strategic capability alongside its existing systems integration business. As Kaplan writes,

“It was a connected adjacency that was given the autonomy and resources necessary to scale a rapidly-growing strategy practice from scratch – right next to the huge systems integration practice.  We were an entrepreneurial business unit within the context of the behemoth. The emergent strategy practice would never have worked if it had to live by the rules of the core business model at the time.  If not protected, it would have been swallowed alive by line partners from within the core business model. The new business model needed to be shielded, at least temporarily, within the relative safety of a connected adjacency.”

Part of the success of experimenting in a connected adjacency is letting employees self-select to participate.  In Accenture’s case, the company went so far as to hire partners directly from outside the company – something the company had never done before in its “promote from within” philosophy of the past.  The connection between the existing business and the innovation sandbox is vital, however, because it lets ideas and experiences be transferred between the two spheres.

In another example, Kaplan describes Babson College’s creation of Babson Global, an entity separate from Babson’s core business model that serves as an R&D platform for creating, prototyping and testing new approaches for teaching entrepreneurship and creating entrepreneurial ecosystems in communities worldwide.  The entity is separate from the college but adjacent to it – faculty and staff from the college self-select to participate.

Action:

• Nurture the new business model in a “connected adjacency” — a sandbox, living lab, or side unit of the main business.
• Protect the developing new business model effort from the old model’s metrics and pressures.
• Allow staff to self-select or volunteer for the new model, or hire outsiders so that you have open-minded enthusiasts for the new model rather than adherents to the old.

Point:  Technology and innovation enable greater customer engagement through open-ended customizations, apps, add-on, and social features.

Story: At BIF7, John Hagel, author of The Power of Pull, highlighted what he saw as a distinction between story vs. narrative. A story is complete, self-contained, and has a beginning, middle, and end. Stories have audiences: people who passively consume the story.  In contrast, Hagel defined a “narrative” as an open-ended, unfolding sequence that continues into the future.  Narratives frame the world and the people in it.  Under this definition, narratives create participants: active co-creators in the evolving timeline of current and future events.  Whether you agree or disagree with Hagel’s particular choice of words, the key is in the interesting distinction between a closed-ended tale and an open-ended dialogue — and what that distinction means for product innovation..

Although Hagel didn’t say so directly, the concept of story v. narrative can be applied to product innovation: some products are like stories and some are like narratives. Some products are meant to simply be bought and consumed, like the beginning-middle-end of a story.  It’s a “once upon a time, someone used the product and they lived happily ever after” story.

In contrast, other products are like narratives, in which purchasing the product is just the start of a long series of interactions with that product, with related products, and even with other people. Such products let people customize, individualize, and enhance the product. Customers can tap into an ecosystem of add-ons, apps, tracking, feedback, and engagement. Customers can interact with other customers or with the company’s services for on-going enhancements.  In short, the customer joins the narrative and extends it, too..

The most obvious example of the narrative-style product is the Apple iPhone, with its “there’s an app for that” opportunities for customization and engagement. Similarly, Nike converted a consumer good — shoes — into narrative-driven product with strong participant engagement through Nike+.  A sensor in the shoe and wireless connection to an iPhone, iPod, or special watch lets users of its shoes track their exercise. People can then share their runs with others, participate in virtual races, and learn about great running routes from others..

Technology enables more and more of these kinds of narrative products. Companies can now leverage low cost or existing electronics (e.g., smartphones), low-cost software, and low-cost web/cloud services to create an ongoing customizable social experience.  Companies can also use existing social platforms (like FourSquare, Twitter, Facebook, etc.) to create a narrative environment for their product or service.

Action:

• Is your product like a closed-ended tale or can you make it like an open-ended dialogue with your customers?
• Create a brand to encompasses the customer (vs. simply defining the product or the company)
• Create optional tracking or feedback that lets customers record their piece of the narrative.
• Create optional add-ons or apps that support customization or ongoing enhancements.
• Create an ecosystem of partners and encourage open innovation around a narrative product platform.
• Create social engagement that lets customers not just use the product but also interact with the people behind the product and the other users of the product.

Point: Rule-breaking products may require business model innovations.

Story: At BIF7, Alex Osterwalder told his story of breaking the rules when creating his book, Business Model Generation, now an international bestseller. Creating this book meant taking a lot of risks.

The current business model for business books is broken, Osterwalder said. There are too many books and too few readers. Every year, another 11,000 new business books pile on top the 250,000-space of competing titles. The average book sells only 250 copies per year. Worse, book sales are declining: a 12% drop from 2007 to 2009. If Osterwalder wanted to create a book on business models that people would love to buy,  he would need to innovate the business model for business book production and sales.

From the start, Osterwalder asked people what they hated about current business books. People said existing books were too fat with turgid prose but at the same time too light on substance. Second, people found the books impractical because they lacked useful “Monday morning” actions items. Finally, the books were too text-heavy, missing the richer, reinforcing learning experience of a text-and-graphics combination.

To address these problems, Osterwalder envisioned something more like a coffee-table book akin to architecture books, being simultaneously informative and beautiful.

Osterwalder also faced a business problem: no book publisher wanted to break the rules of traditional business books to publish his book. At the time, Osterwalder was an unknown author from Switzerland wanting to create a book with high production values, expensive color printing, and a very un-business-book approach. The only solution was self-publishing.

But, self-publishing wouldn’t be easy because Osterwalder had neither the cash, book production resources (editors, designers, etc.), marketing department, nor  distribution assets of a publishing house.

To solve the problem, Osterwalder recruited peers to co-create the book. Ultimately, 470 people contributed to the book in a wide variety of ways. People joined Osterwalder for early access to the ideas, to be part of something bigger, and for the stimulating collaborative process of working on the topic. Not only did this community of contributors help make the book, but they were also its best sales force.

To raise money, Osterwalder offered advanced sales under a “pay me now to reserve a copy” philosophy. Demand for the book proved higher than expected, so he raised the price from $24 to $36 to $54 to $81. And, just before publication, he offered a last-minute premium deal: for $250, the buyer would be listed in the book as a contributor who helped make it happen. For distribution, Osterwalder ultimately chose Fulfillment by Amazon.

The book quickly became a bestseller in business and in the top 100 of all books selling on Amazon. Osterwalder’s success in self-publishing attracted the attention of Wiley and other traditional publishers, who would never have taken a risk on Osterwalder’s book. “Once you’re successful, everyone wants in,” Osterwalder said. After tough negotiations, he signed with Wiley. To date, over 200,000 copies have sold and the book has been translated into 22 languages.

Action

• Listen to customers and partners to uncover why competitors fail.
• Look for lateral inspiration; that is, look for out-of-category products that evidence desirable characteristics.
• Pre-build customers through a co-creation community in advance of the product release.
• Play with the pricing and offering to maximize revenues and volume.
• Find service partners and community members to handle or support the critical secondary tasks of the business.