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The ‘White Space’ Answer to Business Model Innovation

Innosight cofounder Mark Johnson says that management teams need to reinvent their business models — including their profit formulas — by designing operations around the job to be done.
COLLABORATORS Ilan Mochari
The 'White Space' Answer to Business Model Innovation
photo by davosmith

Here’s something most companies are bad at: moving beyond their core — beyond what they’re good at, beyond what they’re comfortable with, beyond what they know.

“White space” is what Mark W. Johnson calls this unchartered territory. White space is the potential that demands different business models to exploit.

In his 2010 book Seizing the White Space: Business Model Innovation for Growth and Renewal (Harvard Business Press), Johnson argues that businesses’ habit of failing to capitalize on growth opportunities that didn’t seem to fit and businesses’ tendency to erect borders around what he terms their “core operating spaces” mean that what companies have to do is commit to reconfiguring. Commit to figuring out wholly new ways to act on opportunities that 1) serve new customers or existing customers in fundamentally different ways, and 2) be ready to address the fact they may be a poor fit for the company’s core business.

Business model innovation isn’t a new idea, but it’s a hard one to implement. Johnson, a cofounder and senior partner at the innovation and strategy consulting firm Innosight, notes in his book that a 2008 IBM survey found that nearly all of the 1,100 corporate CEOs polled reported the need to adapt their business models. At the same time, no more than 10 percent of innovation investments at global companies are currently focused on business model innovation. Why the disconnect?

“Companies can’t pull it off because, as familiar as the term is, very few people really understand what a business model is (and what it isn’t) or what model their organization is actually operating under, much less how they would go about creating a new one and why or when they should,” Johnson writes.

In an interview with The Build Network’s managing director for new venture development George Gendron, Johnson talks about how companies need to look for the unmet jobs not getting fulfilled, see the business from the outside in, and think about developing a portfolio of business models.

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Let’s start with an example. Towards the end of your book is the summary about Amazon. If you said to me, “Name a company I don’t ever want to read another word about,” it would be Amazon. And yet its history in terms of business model innovation made me think, what an astonishing story.

It is. The amazing thing about Amazon is this idea of the user experience. What Jeff Bezos, Amazon’s founder and CEO, said was, “I’ve got to get good at what my customers want, regardless of whether I’m able to do it or not.” He didn’t let things get in the way of being able to make that happen. The company was able to focus on figuring out what is it exactly that its customer is trying to get done and how to put together the pieces of the puzzle that would allow the company to serve that customer.

Amazon starts in the retail arena, selling books online, selling consumer goods online, setting up a commission-based brokerage system for used books, opening its storefront to third-party retailers. And then, suddenly, they’re in IT services, creating online services for other sites and client-side applications for web developers. And then they’re building an e-reader, the Kindle. Those last ones are jarring, right?

They are. And remember, Bezos and Amazon were pummeled. I have the picture of Jeff on the cover of Business Week when they came up with Amazon web services in 2006, and the cover line is “Amazon’s Risky Bet. ”

What Bezos and Amazon figured out was how to design around the job to be done, not their capabilities. Everybody focuses on their capabilities, how they can use their capabilities, and of course that’s important. But it has to be broader. What’s the job? What’s that user experience? Wrap the business model around that job, especially if you want to seize opportunities beyond your core business

Bezos put it this way: he said, “If you want to continuously revitalize the service that you offer your customers, you cannot stop at what you’re good at. You have to ask what your customers need and want. And then no matter how hard it is, you’d better get good at those things.”

The Amazon story is that it’s built to transform. It had one profit formula at the beginning when it was just an online bookstore, then it went into this whole eBay-like brokerage thing of selling used books, then its web services, which was a huge, huge departure.

This serial process of business model innovation that Amazon has done, by the way, hasn’t really been repeated.

You also have looked at the way that Apple has been creative in business model innovation.

Of course, in Apple’s case, the MP3 player was so powerful because you could customize your music. That was in place, and there were a whole bunch of MP3 player companies, and people said, “Hey, this is really cool.”

Apple just blew it out of the water when it combined the hardware with the software with the service with iTunes to not only customize but make it extremely user friendly. It was easy to buy and download music onto your iPod. They made the experience seamless, they made it idiot-simple.

Apple is clearly not beholden to their existing structures. They’re figuring a way to not let the existing structure get in the way. They focus on the consumer and his or her experience and making it amazing, convenient, and simple. All the heavy lifting is behind the scenes, combining product with service with technology with software. The customer didn’t care about how hard it was behind the scenes.

Let’s step back. Why do you think this concept of business model innovation got so hot in the first place?

I think it started with the whole dot.com wave, when the Internet began to allow for a different way to make money and a different way to operate as part of serving a customer. I talk about a four box business model framework, meaning the blueprint for how a company delivers value, at a profit, to a set of customers. It’s got four parts: the customer value proposition; the profit formula; the key resources needed to deliver that value proposition at a profit; and the key processes needed.

The Internet really turned things upside down. It created such a wave and a multitude of different businesses, and things were getting financed without any real way of making money

I think that caused a reflection, where people started to say, “We need to think about ‘What is the business model?’” Also, with the speed of information technology, the life cycles of businesses are, I think, shrinking more dramatically than ever. That leads again, intuitively, for people to say, “We’ve got to get to the actual fundamentals,” which is why is the business a business in the first place. What are the underpinnings of that? Let’s get beyond just the measurement and the norms and the culture of how things run to more fundamental questions, which goes back to the business model.

A true business model is an interdependent cross discipline set of pieces that are intertwined in a very unique way, developed over years. It’s not just about the financials. It’s tied to the operating model and how people organize people and processes.

We launched Inc. in 1979, and when we did our first Inc. 500 we were often dealing with CEOs who had started their businesses in the mid ‘70s. And we were seeing what I would describe as the last generations of cowboy capitalists. Real old style entrepreneurs. Many of them would say “business models are forever,” meaning that they had looked for a niche in the marketplace, found one, and they went off to operate that business with the expectation that they’d die behind the desk with the same model that they had started 20, 30, 40 years earlier.

Established companies run a huge risk in becoming rigid. They think, well, our established profit formula and our established operating model — which we have honed and used all these years with the overriding rules and norms and metrics — will obviously work for serving a new customer in a new way. They think this because those things are so embedded in how the organization turns a profit and how it operates.

Financial people have a formula, and if new products don’t meet these growth margins, they’re not interested. It’s counter to the nature of business to say we’re going to entertain changes to the profit formula.

Instead, people have to be prepared to be open and diagnostic about how the ways that they turn a profit might change. I’m thinking about incumbents, mid-tier and large companies. They have to be willing to say, “Hey, we’re going to serve a new customer a new way. Is it possible that the way we turn a profit has to be different.” Or, “We may need to change our overhead structure to go after this new value proposition.” Or, “We may have to change the velocity with which we drive through products. We may need to become a high volume type of company as opposed to a high margin, low volume type.”

Companies can no longer continue to say, “We’re going to be a branded product company.” As soon as they say to themselves, “We can’t just think about breakthrough products,” then they open up the scope of innovation to say, “We have to think about the whole business model.”

How do companies do this? What’s your prescription?

We talk all the time about how, if you’re trying to grow, it’s one thing if you’re sustaining your core business and you’ve been with the customer a long time and you’re doing incremental innovations to improve the product. You can get away with being “inside out,” as they like to say — with your focus from the inside, looking out. But if you’re really trying to create new growth, whether you’re a new entrepreneur or you’re an established company moving into new places, you’ve got to be so “outside in.” You really have to understand what the critically important unmet job is that’s not getting fulfilled. Because at the end of the day, what the customer does is hire the product to get a job done.

When you think about all of the material that you covered in the book, material that you put into practice every day, what’s the one aspect that you wish you knew more about?

I have two. The first is that I’m still trying to figure out the right way to think about how much separation there needs to be between operating the core and coming up with a new growth opportunity and a business model. What’s the right interface between that new incubation growth group that is going to white space and the people executing the core competency?

That is a great question.

There’s so much literature on it now, but I don’t think we’ve cracked it. New incubation groups are totally separate, they’re isolationist, but they can get crushed. It’s like this dance, and I haven’t seen it really nailed to a level that people can understand it and say, “This is how we’re going to do it.”

The second thing is a kind of the corollary to that, and it’s this question: Can a business unit operate two business models at the same time? I’ve always said no. I don’t think it can. But I don’t have all the data to know that that’s a hundred percent right.

I think you know intuitively that most people would agree with you, right?

Yeah. I think most would. But I was just at a client who said, “Oh yeah, we’ve got a bunch of different business models.” I’m not sure if it’s truly a different business model or a nuance off of the existing model.

The way you talk about “design around the job to done, not your capabilities,” sounds so right and appropriate. On the other hand, there are generations of leaders who grew up with the notion of core competence. It’s just been drilled into them, it’s part of their DNA. You’re talking about a huge change in thinking and framing.

It is a big change, but I think it has to be framed the right way. It’s an “and” statement. Of course you want to leverage your capabilities and say, “How do we have things that are consistent with our capabilities to continue to move the train in a forward direction, to move it along.” Nobody disagrees with the core competence of the corporation to drive those things. Nobody, I think should disagree with that — it’s better to try to do things that are nearer in, if there are opportunities, as opposed to further out.

But on the periphery, you can have small innovations. You can have entrepreneurs that are looking at unusual opportunities that come at the intersection of different industries and disciplines that are too good to pass up. Or at least they’re too good to not at least investigate, to find out how it would fit with what your customers might want.

A company could be 90 percent, 95 percent focused on its core competence. But why not take five percent? If you’re talking about a big company, with $100 million of discretionary investment ability, that’s $5 million dollars. I think it’s more a sophisticated portfolio theory for companies.

Large companies as a collection of business models.

Yes. A more sophisticated way to bet for the future.

THE PLUS

Chapter 1 [pdf] of Johnson’s book is available at the Seizing the White Space website. Also at the website: case studies of companies that have successfully experimented with new business models, including Apple, Dow Corning, Hindustan Unilever, Ikea, and Tata Motors. One of the most trenchant treatments of business models came from writer and consultant Peter Drucker, who often talked about what he insisted on calling “theories of business.” See Drucker’s “The Theory of the Business,” from the Sept/October 1994 edition of the Harvard Business Review. Drucker’s succinct assessment from his 2003 book On the Profession of Management (Harvard Business Press): “Eventually every theory of the business becomes obsolete and then invalid.” A 10-minute video excerpt of Johnson ‘s talk at the 2011 CFO Rising Conference gives an overview of his thesis through the Apple example.

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