Onesecrettomaintaininga thriving business is recognizingwhenitneedsa fundamental change.

Reinventing Your Business Model

by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann

Included with this full-text HarvardBusinessReviewarticle:

1 Article Summary

The Idea in Brief—thecoreidea

The Idea in Practice—puttingtheideatowork

2 Reinventing Your Business Model

11 Further Reading

A list of related materials, with annotations to guide further exploration of the article’s ideas and applications

Reprint R0812C

Reinventing Your Business Model

TheIdeainBriefThe Idea in Practice

When Apple introduced the iPod, it did something far smarter than wrap a good technology in a snazzy design. It wrapped a good technology in a great business model. Combining hardware, software, and service, the model provided game- changing convenience for consumers and record-breaking profits for Apple.

Great business models can reshape in- dustries and drive spectacular growth. Yet many companies find business-model innovation difficult. Managers don’t under- stand their existing model well enough to know when it needs changing—or how.

To determine whether your firm should alter its business model, Johnson, Chris- tensen, and Kagermann advise these steps:

Articulate what makes your existing model successful. For example, what cus- tomer problem does it solve? How does

UNDERSTAND YOUR CURRENT BUSINESSMODEL

A successful model has these components:

Customer value proposition. The model helps customers perform a specific “job” that alternative offerings don’t address.

Example:

MinuteClinics enable people to visit a doctor’s office without appointments by making nurse practitioners available to treat minor health issues.

Profit formula. The model generates value for your company through factors such as revenue model, cost structure, margins, and inventory turnover.

Example:

The Tata Group’s inexpensive car, the Nano, is profitable because the company has reduced many cost structure elements,

accepted lower-than-standard gross mar- gins, and sold the Nano in large volumes to its target market: first-time car buyers in emerging markets.

Key resources and processes. Your com- pany has the people, technology, products, facilities, equipment, and brand required to deliver the value proposition to your targeted customers. And it has processes (training, manufacturing, service) to lever- age those resources.

Example:

For Tata Motors to fulfill the requirements of the Nano’s profit formula, it had to recon- ceive how a car is designed, manufactured, and distributed. It redefined its supplier strategy, choosing to outsource a remark- able 85% of the Nano’s components and to use nearly 60% fewer vendors than normal to reduce transaction costs.

it make money for your firm?

Watch for signals that your model needs changing, such as tough new competitors on the horizon.
Decide whether reinventing your model is worth the effort. The answer’s yes only if the new model changes the industry or market.

IDENTIFYWHENANEWMODELMAYBENEEDED

An opportunityto . . .	Example
Address needs of large groups who ﬁnd existing solutions too expensive or complicated.	The Nano’s goal is to open car ownership to low-income consumers in emerging markets.
Capitalize on new technology, or leverage existing tech- nologies in new markets.	A company develops a commercial application for a technology originally developed for military use.
Bring a job-to-be-done focus where it doesn’t exist.	FedEx focused on performing customers’ unmet “job”: Receive packages faster and more reliably than any other service could.
A needto . . .	Example
Fend oﬀ low-end disruptors.	Mini-mills threatened the integrated steel mills a generation ago by making steel at signiﬁcantly lower prices.
Respond to shifts in competition.	Power-tool maker Hilti switched from selling to renting its tools in part because “good enough” low-end entrants had begun chipping away at the market for selling high-quality tools.

These circumstances often require business model change:

Onesecrettomaintainingathrivingbusinessisrecognizingwhenit needs a fundamental change.

Reinventing Your Business Model

by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann

COPYRIGHT © 2008 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable enter- tainment, creating a new market, and trans- forming the company. In just three years, the iPod/iTunes combination became a nearly

$10 billion product, accounting for almost 50% of Apple’s revenue. Apple’s market capitaliza- tion catapulted from around $1 billion in early 2003 to over $150 billion by late 2007.

This success story is well known; what’s less well known is that Apple was not the ﬁrst to bring digital music players to market. A com- pany called Diamond Multimedia introduced the Rio in 1998. Another ﬁrm, Best Data, introduced the Cabo 64 in 2000. Both prod- ucts worked well and were portable and stylish. So why did the iPod, rather than the Rio or Cabo, succeed?

Apple did something far smarter than take a good technology and wrap it in a snazzy design. It took a good technology and wrapped it in a great business model. Apple’s true innovation was to make downloading digital music easy and convenient. To do

that, the company built a groundbreaking business model that combined hardware, soft- ware, and service. This approach worked like Gillette’s famous blades-and-razor model in reverse: Apple essentially gave away the “blades” (low-margin iTunes music) to lock in purchase of the “razor” (the high-margin iPod). That model deﬁned value in a new way and provided game-changing convenience to the consumer.

Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Retail discounters such as Wal- Mart and Target, which entered the market with pioneering business models, now account for 75% of the total valuation of the retail sec- tor. Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.

Stories of business model innovation from well-established companies like Apple,

MarkW.Johnson(mjohnson@

innosight.com) is the chairman of Innosight, an innovation and strategy- consulting firm he cofounded in 2000 with Clayton M. Christensen(cchristensen@hbs.edu), the Robert and Jane Cizik Professor of Business Administration at Harvard Business School. They are both based in Boston. Henning Kagermann (henning

.kagermann@sap.com) is the co-CEO of SAP AG, in Walldorf, Germany.

Johnson is the author of Seizing theWhiteSpace:BusinessModelInnovationforTransformativeGrowthandRenewal, forthcoming from Harvard Business Press in 2009.

however, are rare. An analysis of major in- novations within existing corporations in the past decade shows that precious few have been business-model related. And a recent American Management Association study determined that no more than 10% of inno- vation investment at global companies is focused on developing new business models.

Yet everyone’s talking about it. A 2005 survey by the Economist Intelligence Unit reported that over 50% of executives believe business model innovation will become even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs echoed these results. Nearly all of the CEOs polled reported the need to adapt their business models; more than two- thirds said that extensive changes were re- quired. And in these tough economic times, some CEOs are already looking to business model innovation to address permanent shifts in their market landscapes.

Senior managers at incumbent companies thus confront a frustrating question: Why is it so difﬁcult to pull off the new growth that business model innovation can bring? Our research suggests two problems. The ﬁrst is a lack of deﬁnition: Very little formal study has been done into the dynamics and processes of business model development. Second, few companies understand their existing business model well enough—the premise behind its development, its natural interdependencies, and its strengths and limitations. So they don’t know when they can leverage their core business and when success requires a new business model.

After tackling these problems with dozens of companies, we have found that new business models often look unattractive to internal and external stakeholders—at the outset. To see past the borders of what is and into the land of the new, companies need a road map.

Ours consists of three simple steps. The ﬁrst is to realize that success starts by not thinking about business models at all. It starts with thinking about the opportunity to satisfy a real customer who needs a job done. The second step is to construct a blueprint laying out how your company will fulﬁll that need at a proﬁt. In our model, that plan has four elements. The third is to compare that model to your existing model to see how much you’d have to change it to capture the opportunity.

Once you do, you will know if you can use your existing model and organization or need to separate out a new unit to execute a new model. Every successful company is already fulﬁlling a real customer need with an effec- tive business model, whether that model is explicitly understood or not. Let’s take a look at what that entails.

Business Model: A Deﬁnition

A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value. The most important to get right, by far, is the ﬁrst. Customer value proposition (CVP). A suc- cessful company is one that has found a way to create value for customers—that is, a way to help customers get an important job done. By “job” we mean a fundamental problem in a given situation that needs a solution. Once we understand the job and all its dimensions, including the full process for how to get it done, we can design the offering. The more important the job is to the customer, the lower the level of customer satisfaction with current options for getting the job done, and the better your solution is than existing alter- natives at getting the job done (and, of course, the lower the price), the greater the CVP. Opportunities for creating a CVP are at their most potent, we have found, when alternative products and services have not been designed with the real job in mind and you can design an offering that gets that job—and only that job—done perfectly. We’ll come back to

that point later.

Proﬁtformula.The proﬁt formula is the blueprint that deﬁnes how the company creates value for itself while providing value to the customer. It consists of the following:

Revenue model:price x volume
Coststructure:direct costs, indirect costs, economies of scale. Cost structure will be predominantly driven by the cost of the key resources required by the business model.
Margin model: given the expected volume and cost structure, the contribution needed from each transaction to achieve desired proﬁts.
Resource velocity: how fast we need to turn over inventory, ﬁxed assets, and other assets—and, overall, how well we need to utilize resources—to support our expected volume and achieve our anticipated proﬁts.

People often think the terms “proﬁt formu- las” and “business models” are interchange- able. But how you make a proﬁt is only one piece of the model. We’ve found it most use- ful to start by setting the price required to deliver the CVP and then work backwards from there to determine what the variable costs and gross margins must be. This then de- termines what the scale and resource velocity needs to be to achieve the desired proﬁts.

Keyresources.The key resources are assets such as the people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the targeted customer. The focus here is on the key elements that create value for the customer and the company, and the way those elements interact. (Every company also has generic resources that do not create competi- tive differentiation.)

Keyprocesses.Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, bud- geting, planning, sales, and service. Key processes also include a company’s rules, metrics, and norms.

These four elements form the building blocks of any business. The customer value proposition and the proﬁt formula deﬁne value for the customer and the company, respectively; key resources and key processes describe how that value will be delivered to both the customer and the company.

As simple as this framework may seem, its power lies in the complex interdependencies of its parts. Major changes to any of these four elements affect the others and the whole. Successful businesses devise a more or less stable system in which these elements bond to one another in consistent and com- plementary ways.

How Great Models Are Built

To illustrate the elements of our business model framework, we will look at what’s be- hind two companies’ game-changing business model innovations.

Creating a customer value proposition. It’s not possible to invent or reinvent a busi- ness model without ﬁrst identifying a clear customer value proposition. Often, it starts

as a quite simple realization. Imagine, for a moment, that you are standing on a Mumbai road on a rainy day. You notice the large number of motor scooters snaking precari- ously in and out around the cars. As you look more closely, you see that most bear whole families—both parents and several children. Your ﬁrst thought might be “That’s crazy!” or “That’s the way it is in developing countries— people get by as best they can.”

When Ratan Tata of Tata Group looked out over this scene, he saw a critical job to be done: providing a safer alternative for scooter families. He understood that the cheapest car available in India cost easily ﬁve times what a scooter did and that many of these families could not afford one. Offering an affordable, safer, all-weather alternative for scooter fami- lies was a powerful value proposition, one with the potential to reach tens of millions of people who were not yet part of the car-buying market. Ratan Tata also recognized that Tata Motors’ business model could not be used to develop such a product at the needed price point.

At the other end of the market spectrum, Hilti, a Liechtenstein-based manufacturer of high-end power tools for the construction in- dustry, reconsidered the real job to be done for many of its current customers. A contrac- tor makes money by ﬁnishing projects; if the required tools aren’t available and function- ing properly, the job doesn’t get done. Con- tractors don’t make money by owning tools; they make it by using them as efﬁciently as possible. Hilti could help contractors get the job done by selling tool useinstead of the tools themselves—managing its customers’ tool inventory by providing the best tool at the right time and quickly furnishing tool repairs, replacements, and upgrades, all for a monthly fee. To deliver on that value proposi- tion, the company needed to create a ﬂeet- management program for tools and in the process shift its focus from manufacturing and distribution to service. That meant Hilti had to construct a new proﬁt formula and develop new resources and new processes.

The most important attribute of a customer value proposition is its precision: how per- fectly it nails the customer job to be done— and nothing else. But such precision is often the most difﬁcult thing to achieve. Companies trying to create the new often neglect to focus

TheElementsofaSuccessfulBusinessModel

Every successful company already operates according to an effective business model. By systematically identifying all of its constituent parts, executives can understand how the model fulﬁlls a potent value proposition in a proﬁtable way using certain key resources and key processes. With that understanding, they can then judge how well the same model could be used to fulﬁll a radically different CVP—and what they’d need to do to construct a new one, if need be, to capitalize on that opportunity.

CustomerValueProposition(CVP)

Targetcustomer
PROFITFORMULA
- Revenue modelHow much money can be made: price x volume. Volume can be thought of in terms of market size, purchase frequency, ancillary sales, etc.
- Cost structureHow costs are allocated: includes cost of key assets, direct costs, indirect costs, economies of scale.
- Margin modelHow much each transaction should net to achieve desired profit levels.
- Resource velocityHow quickly resources need to be used to sup- port target volume. Includes lead times, throughput, inventory turns, asset utilization, and so on.
Job to be done to solve an important problem or fulfill an important need for the target customer
Offering, which satisfies the problem or fulfills the need. This is defined not only by what is sold but also by how it’s sold.

KEY PROCESSES, as well as rules, metrics, and norms, that make the profitable delivery of the customer value proposition repeat- able and scalable. Might include:

Processes: design, product development, sourcing, manu- facturing, marketing, hiring and training, IT
Rules and metrics: margin re- quirements for investment, credit terms, lead times, supplier terms
Norms: opportunity size needed for investment, approach to customers and channels

KEYRESOURCES

needed to deliver the customer value proposition profitably. Might include:

People
Technology,products
Equipment
Information
Channels
Partnerships, alliances
Brand

on one job; they dilute their efforts by at- tempting to do lots of things. In doing lots of things, they do nothing really well.

One way to generate a precise customer value proposition is to think about the four most common barriers keeping people from getting particular jobs done: insufﬁcient wealth, access, skill, or time. Software maker Intuit devised QuickBooks to fulﬁll small- business owners’ need to avoid running out of cash. By fulﬁlling that job with greatly simpli- ﬁed accounting software, Intuit broke the skills barrier that kept untrained small-business owners from using more-complicated account- ing packages. MinuteClinic, the drugstore- based basic health care provider, broke the timebarrierthat kept people from visiting a doctor’s ofﬁce with minor health issues by making nurse practitioners available without appointments.

Designingaproﬁtformula.Ratan Tata knew the only way to get families off their scooters and into cars would be to break the wealth barrier by drastically decreasing the price of the car. “What if I can change the game and make a car for one lakh?” Tata wondered, envisioning a price point of around US$2,500, less than half the price of the

Sales of industrial and professional power tools and accessories	Customervalueproposition	Leasing a comprehensive fleet of tools to increase con- tractors’ on-site productivity
Low margins, high inventory turnover	Profitformula	Higher margins; asset heavy; monthly payments for tool maintenance, repair, and replacement
Distribution channel, low-cost manufacturing plants in devel- oping countries, R&D	Keyresources andprocesses	Strong direct-sales approach, contract management, IT sys- tems for inventory manage- ment and repair, warehousing

cheapest car available. This, of course, had dramatic ramiﬁcations for the proﬁt formula: It required both a signiﬁcant drop in gross margins and a radical reduction in many elements of the cost structure. He knew, however, he could still make money if he could increase sales volume dramatically, and he knew that his target base of consumers was potentially huge.

For Hilti, moving to a contract management program required shifting assets from custom- ers’ balance sheets to its own and generating revenue through a lease/subscription model. For a monthly fee, customers could have a full complement of tools at their ﬁngertips, with repair and maintenance included. This would require a fundamental shift in all major com- ponents of the proﬁt formula: the revenue stream (pricing, the staging of payments, and how to think about volume), the cost structure (including added sales development and con- tract management costs), and the supporting margins and transaction velocity.

Identifyingkeyresourcesandprocesses. Having articulated the value proposition for both the customer and the business, compa- nies must then consider the key resources and processes needed to deliver that value. For a professional services ﬁrm, for example, the key resources are generally its people, and the key processes are naturally people related (training and development, for instance). For a packaged goods company, strong brands and well-selected channel retailers might be the key resources, and associated brand-building and channel-management processes among the critical processes.

Oftentimes, it’s not the individual resources and processes that make the difference but their relationship to one another. Companies will almost always need to integrate their key resources and processes in a unique way to get a job done perfectly for a set of custom- ers. When they do, they almost always create enduring competitive advantage. Focusing ﬁrst on the value proposition and the proﬁt formula makes clear how those resources and processes need to interrelate. For example, most general hospitals offer a value proposi- tion that might be described as, “We’ll do anything for anybody.” Being all things to all people requires these hospitals to have a vast collection of resources (specialists, equipment, and so on) that can’t be knit

together in any proprietary way. The result is not just a lack of differentiation but dis- satisfaction.

By contrast, a hospital that focuses on a speciﬁc value proposition can integrate its resources and processes in a unique way that delights customers. National Jewish Health in Denver, for example, is organized around a focused value proposition we’d characterize as, “If you have a disease of the pulmonary system, bring it here. We’ll deﬁne its root cause and prescribe an effective therapy.” Narrowing its focus has allowed National Jewish to develop processes that integrate the ways in which its specialists and specialized equipment work together.

For Tata Motors to fulﬁll the requirements of its customer value proposition and proﬁt formula for the Nano, it had to reconceive how a car is designed, manufactured, and distributed. Tata built a small team of fairly young engineers who would not, like the company’s more-experienced designers, be inﬂuenced and constrained in their thinking by the automaker’s existing proﬁt formulas. This team dramatically minimized the num- ber of parts in the vehicle, resulting in a sig- niﬁcant cost saving. Tata also reconceived its supplier strategy, choosing to outsource a re- markable 85% of the Nano’s components and use nearly 60% fewer vendors than normal to reduce transaction costs and achieve better economies of scale.

At the other end of the manufacturing line, Tata is envisioning an entirely new way of assembling and distributing its cars. The ultimate plan is to ship the modular com- ponents of the vehicles to a combined net- work of company-owned and independent entrepreneur-owned assembly plants, which will build them to order. The Nano will be designed, built, distributed, and serviced in a radically new way—one that could not be accomplished without a new business model. And while the jury is still out, Ratan Tata may solve a trafﬁc safety problem in the process.

For Hilti, the greatest challenge lay in train- ing its sales representatives to do a thoroughly new task. Fleet management is not a half- hour sale; it takes days, weeks, even months of meetings to persuade customers to buy a pro- gram instead of a product. Suddenly, ﬁeld reps accustomed to dealing with crew leaders and on-site purchasing managers in mobile trailers

found themselves staring down CEOs and CFOs across conference tables.

Additionally, leasing required new re- sources—new people, more robust IT sys- tems, and other new technologies—to design and develop the appropriate packages and then come to an agreement on monthly payments. Hilti needed a process for main- taining large arsenals of tools more inexpen- sively and effectively than its customers had. This required warehousing, an inven- tory management system, and a supply of replacement tools. On the customer manage- ment side, Hilti developed a website that enabled construction managers to view all the tools in their ﬂeet and their usage rates. With that information readily available, the manag- ers could easily handle the cost accounting associated with those assets.

Rules, norms, and metrics are often the last element to emerge in a developing business model. They may not be fully envisioned until the new product or service has been road tested. Nor should they be. Business models need to have the ﬂexibility to change in their early years.

When a New Business Model Is Needed

Established companies should not undertake business-model innovation lightly. They can often create new products that disrupt competitors without fundamentally changing their own business model. Procter & Gamble, for example, developed a number of what it calls “disruptive market innovations” with such products as the Swiffer disposable mop and duster and Febreze, a new kind of air freshener. Both innovations built on P&G’s existing business model and its established dominance in household consumables.

There are clearly times, however, when cre- ating new growth requires venturing not only into unknown market territory but also into unknown business model territory. When? The short answer is “When signiﬁcant changes are needed to all four elements of your existing model.” But it’s not always that simple. Man- agement judgment is clearly required. That said, we have observed ﬁve strategic circum- stances that often require business model change:

The opportunity to address through dis- ruptive innovation the needs of large groups

of potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated for them. This includes the opportunity to democratize products in emerging markets (or reach the bottom of the pyramid), as Tata’s Nano does.

The opportunity to capitalize on a brand- new technology by wrapping a new business model around it (Apple and MP3 players) or the opportunity to leverage a tested tech- nology by bringing it to a whole new market (say, by offering military technologies in the commercial space or vice versa).
The opportunity to bring a job-to-be- done focus where one does not yet exist. That’s common in industries where compa- nies focus on products or customer segments, which leads them to reﬁne existing products more and more, increasing commoditization over time. A jobs focus allows companies to redeﬁne industry proﬁtability. For example, when FedEx entered the package delivery market, it did not try to compete through lower prices or better marketing. Instead, it concentrated on fulﬁlling an entirely unmet customer need to receive packages far, far faster, and more reliably, than any service then could. To do so, it had to integrate its key processes and resources in a vastly more efﬁcient way. The business model that re- sulted from this job-to-be-done emphasis

Customized solutions, negotiated contracts	Customervalue proposition	No frills, bulk prices, sold through the internet
High-margin, high- overhead retail prices pay for value-added services	Profit formula	Spot-market pricing, low overhead to accommo- date lower margins, high throughput
R&D, sales, and service orientation	Keyresources andprocesses	IT system, lowest-cost processes, maximum automation

gave FedEx a signiﬁcant competitive advan- tage that took UPS many years to copy.

The need to fend off low-end disrupters. If the Nano is successful, it will threaten other automobile makers, much as minimills threatened the integrated steel mills a gener- ation ago by making steel at signiﬁcantly lower cost.
The need to respond to a shifting basis of competition. Inevitably, what deﬁnes an acceptable solution in a market will change over time, leading core market segments to commoditize. Hilti needed to change its busi- ness model in part because of lower global manufacturing costs; “good enough” low-end entrants had begun chipping away at the market for high-quality power tools.

Of course, companies should not pursue business model reinvention unless they are conﬁdent that the opportunity is large enough to warrant the effort. And, there’s really no point in instituting a new business model unless it’s not only new to the company but in some way new or game-changing to the industry or market. To do otherwise would be a waste of time and money.

These questions will help you evaluate whether the challenge of business model innovation will yield acceptable results. An- swering “yes” to all four greatly increases the odds of successful execution:

Can you nail the job with a focused, compelling customer value proposition?
Can you devise a model in which all the elements—the customer value proposition, the proﬁt formula, the key resources, and the key processes—work together to get the job done in the most efﬁcient way possible?
Can you create a new business develop- ment process unfettered by the often negative inﬂuences of your core business?
Will the new business model disrupt competitors?

Creating a new model for a new business does not mean the current model is threat- ened or should be changed. A new model often reinforces and complements the core business, as Dow Corning discovered.

How Dow Corning Got Out of Its Own Way

When business model innovation is clearly called for, success lies not only in getting the model right but also in making sure the

incumbent business doesn’t in some way pre- vent the new model from creating value or thriving. That was a problem for Dow Corning when it built a new business unit—with a new proﬁt formula—from scratch.

For many years, Dow Corning had sold thousands of silicone-based products and provided sophisticated technical services to an array of industries. After years of proﬁtable growth, however, a number of product areas were stagnating. A strategic review uncovered a critical insight: Its low-end product segment was commoditizing. Many customers ex- perienced in silicone application no longer needed technical services; they needed basic products at low prices. This shift created an opportunity for growth, but to exploit that opportunity Dow Corning had to ﬁgure out a way to serve these customers with a lower- priced product. The problem was that both the business model and the culture were built on high-priced, innovative product and service packages. In 2002, in pursuit of what was essentially a commodity business for low-end customers, Dow Corning CEO Gary Anderson asked executive Don Sheets to form a team to start a new business.

The team began by formulating a customer value proposition that it believed would ful- ﬁll the job to be done for these price-driven customers. It determined that the price point had to drop 15% (which for a commoditizing material was a huge reduction). As the

team analyzed what that new customer value

proposition would require, it realized reach-

weeks (exceptions would cost extra); and credit terms would be ﬁxed. There would be charges if a purchaser required customer service. The writing was on the wall: The new venture would be low-touch, self-service, and standardized. To succeed, Dow Corning would have to break the rules that had previously guided its success.

Sheets next had to determine whether this new venture, with its new rules, could succeed within the conﬁnes of Dow Corning’s core enterprise. He set up an experimental war game to test how existing staff and systems would react to the requirements of the new customer value proposition. He got crushed as entrenched habits and existing processes thwarted any attempt to change the game. It became clear that the corporate antibodies would kill the initiative before it got off the ground. The way forward was clear: The new venture had to be free from existing rules and free to decide what rules would be ap- propriate in order for the new commodity line of business to thrive. To nurture the opportunity—and also protect the existing model—a new business unit with a new brand identity was needed. Xiameter was born.

Identifyingnewcompetencies.Following the articulation of the new customer value proposition and new proﬁt formula, the Xiameter team focused on the new competen- cies it would need, its key resources and pro- cesses. Information technology, just a small part of Dow Corning’s core competencies

at that time, emerged as an essential part of

When the Old ModelWillWork

You don’t always need a new busi- ness model to capitalize on a game- changing opportunity. Sometimes, as P&G did with its Swiffer, a com- pany ﬁnds that its current model is revolutionary in a new market.

When will the old model do? When you can fulﬁll the new customer value proposition:

With your current proﬁt formula
Using most, if not all, of your cur- rent key resources and processes
Using the same core metrics, rules, and norms you now use to run your business

ing that point was going to take a lot more than merely eliminating services. Dramatic price reduction would call for a different proﬁt formula with a fundamentally lower cost structure, which depended heavily on developing a new IT system. To sell more products faster, the company would need to use the internet to automate processes and reduce overhead as much as possible.

Breakingtherules.As a mature and suc- cessful company, Dow Corning was full of highly trained employees used to delivering its high-touch, customized value proposition. To automate, the new business would have to be far more standardized, which meant insti- tuting different and, overall, much stricter rules. For example, order sizes would be limited to a few, larger-volume options; order lead times would fall between two and four

the now web-enabled business. Xiameter also needed employees who could make smart decisions very quickly and who would thrive in a fast-changing environment, ﬁlled initially with lots of ambiguity. Clearly, new abilities would have to be brought into the business.

Although Xiameter would be established and run as a separate business unit, Don Sheets and the Xiameter team did not want to give up the incumbency advantage that deep knowledge of the industry and of their own products gave them. The challenge was to tap into the expertise without importing the old-rules mind-set. Sheets conducted a focused HR search within Dow Corning for risk takers. During the interview process, when he came across candidates with the right skills, he asked them to take the job on the spot, before they left the room. This

WhatRules,Norms,andMetricsAreStandinginYourWay?

In any business, a fundamental understanding of the core model often fades into the mists of institutional memory, but it lives on in rules, norms, and metrics put in place to protect the status quo (for example, “Gross margins must be at 40%”). They are the ﬁrst line of defense against any new model’s taking root in an existing enterprise.

Financial

Gross margins
Opportunity size
Unit pricing
Unit margin
Time to breakeven
Net present value calculations
Fixed cost investment
Credit items

Operational

End-product quality
Supplier quality
Owned versus outsourced manufacturing
Customer service
Channels
Lead times
Throughput

Other

Pricing
Performance demands
Product-development life cycles
Basis for individuals’ rewards and incentives
Brand parameters

approach allowed him to cherry-pick those who could make snap decisions and take big risks.

Thesecretsauce:patience.Successful new businesses typically revise their business models four times or so on the road to proﬁt- ability. While a well-considered business- model-innovation process can often shorten this cycle, successful incumbents must tolerate initial failure and grasp the need for course correction. In effect, companies have to focus on learning and adjusting as much as on ex- ecuting. We recommend companies with new business models be patient for growth (to allow the market opportunity to unfold) but impatient for proﬁt (as an early validation that the model works). A proﬁtable business is the best early indication of a viable model.

Accordingly, to allow for the trial and error that naturally accompanies the creation of the new while also constructing a develop- ment cycle that would produce results and demonstrate feasibility with minimal re- source outlay, Dow Corning kept the scale of Xiameter’s operation small but developed an aggressive timetable for launch and set the goal of becoming proﬁtable by the end of year one.

Xiameter paid back Dow Corning’s invest- ment in just three months and went on to become a major, transformative success. Be- forehand, Dow Corning had had no online sales component; now 30% of sales originate online, nearly three times the industry aver-

age. Most of these customers are new to the company. Far from cannibalizing existing cus- tomers, Xiameter has actually supported the main business, allowing Dow Corning’s sales- people to more easily enforce premium pric- ing for their core offerings while providing a viable alternative for the price-conscious.

• • •

Established companies’ attempts at transfor- mative growth typically spring from product or technology innovations. Their efforts are often characterized by prolonged develop- ment cycles and ﬁtful attempts to ﬁnd a market. As the Apple iPod story that opened this article suggests, truly transformative businesses are never exclusively about the discovery and commercialization of a great technology. Their success comes from envel- oping the new technology in an appropriate, powerful business model.

Bob Higgins, the founder and general part- ner of Highland Capital Partners, has seen his share of venture success and failure in his 20 years in the industry. He sums up the importance and power of business model innovation this way: “I think historically where we [venture capitalists] fail is when we back technology. Where we succeed is when we back new business models.”

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Reinventing Your Business Model

Ted Levitt used to tell his Harvard Business School students, “People don’t want a quarter- inch drill—they want a quarter-inch hole.” But 35 years later, marketers are still thinking in terms of products and ever-finer demo- graphic segments. The structure of a market, as seen from customers’ point of view, is very simple. When people need to get a job done, they hire a product or service to do it for them. The marketer’s task is to understand what jobs periodically arise in customers’ lives for which they might hire products the company could make. New growth markets are created when an innovative company designs a product and then positions its brand on a job for which no optimal product yet exists. In fact, companies that historically have segmented and measured markets by product categories generally find that when they instead segment by job, their market is much larger (and their current share much smaller) than they had thought. This is great news for smart companies hungry for growth.

Meeting the Challenge of Disruptive Change

by Clayton M. Christensen and Michael Overdorf

HarvardBusinessReview

March 2000 Product no. R00202

Why can’t large companies capitalize on the opportunities brought about by major, dis- ruptive changes in their markets? It’s because organizations, independent of the people in them, have capabilities. And those capabilities also define disabilities. As a company grows, what it can and cannot do becomes more

sharply defined in certain predictable ways. The authors have analyzed those patterns to create a framework managers can use to assess the abilities and disabilities of their or- ganization as a whole. They also suggest ways large companies can capitalize on op-

portunities that normally would not fit in with their processes or values.

The Customer-Centered Innovation Map

by Lance A. Bettencourt and Anthony W. Ulwick

HarvardBusinessReview

May 2008

Product no. R0805H

We all know that people “hire” products and services to get a job done. Surgeons hire scal- pels to dissect soft tissue. Janitors hire soap dispensers and paper towels to remove grime from their hands. To find ways to innovate, it’s critical to deconstruct the job the customer is trying to get done from beginning to end, to gain a complete view of all the points at which a customer might desire more help from a product or service. A methodology called job mapping helps companies analyze the biggest drawbacks of the products and services customers currently use and discover opportunities for innovation. It begins with breaking down the task the customer wants to accomplish into the eight universal steps of a job: 1) defining the objectives, 2) locating the necessary inputs, 3) preparing the physical environment, 4) confirming that everything is ready, 5) executing the task, 6) monitoring its progress, 7) making modifications as neces- sary, and 8) concluding the job. Within each step lies multiple opportunities for making the job simpler, easier, or faster. By locating those opportunities, companies can discover new ways to differentiate their offerings.

Innovation | Education | Technology