Business Model Alchemist

Unfortunately I can’t make it to the Overlap Conference, which is taking place in California these days. It’s a place where the *design world* and the *business world* will melt together to one. Exciting new multidisciplinary and collaborative approaches to business will be discussed in a wonderful environment.

Since I can’t be there I thought I’ll spend some time on discovering some new insights about the overlap between design and business on my own (new to me that is I did this by finally digging out a short paper that has long collected dust in my reading list: “Leveraging Design’s Core Competencies” by Chris Conley in the Design Management Review. In addition, I “turned on” some music streamed over the Internet by Pandora (they call themselves the Music Genome Project). It’s the first time I’m using this custom-designed music service and it’s serving me 2Pac’s “Life Goes On”…

Back to my exploration of business & design: Conley’s paper is really interesting. It uncovers some of the potential that the design approach can bring to business. He identifies 7 core competencies of the designer, which make them fit for infusing new energy into the business world.

• The ability to understand the context or circumstances of a design problem and frame them in an insightful way;
• The ability to work at a level of abstraction appropriate to the situation at hand;
• The ability to model and visualize solutions even with imperfect information;
• An approach to problem solving that involves the simultaneous creation and evaluation of multiple alternatives;
• The ability to add or maintain value as pieces are integrated into a whole;
• The ability to establish purposeful relationships among elements of a solution and between the solution and its context;
• The ability to use form to embody ideas and to communicate their value.

Of course many business executives also dispose of at least some of these competencies. However, they rarely see them as crucial in their daily work. For designers these ARE their core competencies. They see them as essential in their daily work. I found it interesting to read how Conley illustrates with some examples in his paper how designers have brought their competencies and tools to the business world.

I am really looking forward to the day when more designers become key partners in business executive teams. Then they will be able to infuse some of their tools & techniques in addition to the currently dominating (and limited) business analytics. So it’s not about business people becoming designers and it’s not about designers becoming business people… It’s about exploring the overlap of the two worlds in order to tap into unexplored and powerful potential.

Have you ever heard of prediction markets? It’s all about applying market mechanisms to predict the likelihood of certain events taking place (e.g. Arnold Schwarzenegger becoming US president). The market prices of an event is interpreted as a prediction of the probability of the event to happen. It could be quite interesting to apply prediction markets to forecast which one of all the mushrooming Web2.0 services and business models might succeed (by getting bought or by doing an IPO at a real stock market). Eventually the unsuccessful ones will run out of cash and disappear anyways, but prediction markets might speed things up.

Prediction markets have a long history starting with the University of Iowa’s “Iowa Electronic Market“. Since 1988, this market has predicted the results of American presidential elections more accurately than traditional polls 75 percent of the time. Today prediction markets are also finding their way into industry. An obvious field of application is pharmaceutical research. Pharma giants spend billions of dollars in research on hundreds of projects of which only very few succeed. It is a very important for them to allocate resources to promosing projects while killing off likely losers early. For example, Eli Lilly has used prediction markets to identify promising molecules. Other well known users of prediction markets are Google who have internally identified “google talk” through this mechanism or Siemens who has applied this mechanism to UMTS telephony.

The reason why I am currently interested in this topic is because my colleagues, Cedric Gaspoz and Professor Yves Pigneur, are aiming at applying prediction markets to scientific research. Ultimately they want to test if prediction markets could help better allocate research funds to potentially successful projects. They have already built a nice market platform, which they are now testing with a number of trials. One trial is a market to predict which city will host the Olympic Winter Games 2014. The market is open to everybody at www.2014candidates.org. Trading is quite fun and I can only recommend you join and try it out!

(picture: The Hollywood Stock Exchange which applies prediction markets to the film industry)

My good colleague from the Netherlands, Professor Jaap Gordijn, has just set up a new website for his modeling software and approach called e3-value. The tool allows you to graphically model business networks (or business ecosystems) and automatically generate revenue/profit calculations for each actor involved. From the website:

The e3value methodology helps you to explore your innovative e-business idea – starting from understanding which enterprises and actors are actually involved, to an assessment of profitability for each enterprise.

I think these types of tools are really a step forward in the paradigm shift towards software-assisted business creativity, business modeling and business innovation. In an earlier post on Computer Aided Design (CAD) in business thinking I argued that software based tools could bring a similar boost to business thinking as CAD has brought to the fields of architecture and engineering. Just like in the technical fields such software would not replace the human creativity and ability to understand, but assist humans and allow them to do certain tasks more efficiently and enable them to do new things.

For example, Jaap Gordijn’s e3-value tool allows you to do the follwing things:

• Draw, model and represent business value networks graphically;
• Easily share these drawings among decision makers to foster discussion;
• Rapidly re-draw specific elements of the value network based on the discussions;
• Make several different business prototypes, i.e. model different possible value networks;
• Automatically generate the revenue & profitability for each business prototype and test different assumptions;

I have used the e3-value tool at several different occasions. For me it has worked quite well. However, there is still no detailed handbook going with it, which can make some modeling tasks a bit more cumbersome. Particularly, when you aim at generating revenue/profitability sheets I would have appreciated a tiny little bit of hand-holding… But there is no question: this tool represents a great leap forward from good concepts on value networks, such as in Weill & Vitale’s book “Place to Space” and Tapscott, Ticoll & Lowy’s “Digital Capital“. With a software based tool like e3-value we can really start doing things like prototyping, iterative designing and (profitability) testing in ways that were not really possible with MS Word, MS Visio and MS Excel…

The next step will be to integrate the e3-value tool with an approach that allows to model the business model of an individual company, taking into account things like distribution channels and value propositions. Jaap and I talked about it… but a lack of time and funds never really let us walk down that path…

I was quite amazed to read about Skype’s new coup. Until recently Skype was merely (but successfully) offering free or cheap Voice-over-IP (VoIP) calls over the Internet. Now Michael Arlington from Techcrunch reports that Skype has introduced a new real-time language translation services for Skype voice calls. The service supports 150 languages and it costs $2.99 per minute. Skype is able to offer this to the market through a partnership with Voxeo and Language Line Services.

From a business model design and innovation perspective this is very interesting because it addresses several business model elements at the same.

• it’s an extension of the existing basic value proposition of free/cheap VoIP calls;
• it aims at the lucrative market segment of Small and Medium Sized Enterprises (SMEs);
• it opens up a new revenue stream;
• it represents a strategic differentiator from the other (mushrooming) VoIP services.

I already knew that Skype was trying to enter the enterprise sector from the interviews I did last year for a study about the company. At the time they were particularly aiming at the Small and Medium Sized Enterprise (SME) sector. With this new product announcement they are now coming up with a real extension to their value proposition (free/low cost VoIP telephony) to offer something of substance to differentiate themselves from their competitors.

In terms of business design it means that they are extending their basic value proposition that addresses anybody in the world in order to address a specific and lucrative market segment: SMEs that need translation services (though the service is available to anybody). So on the one hand it is a competitive differentiator and on the other hand it opens up a new revenue stream for Skype (and its partners).

If you think the SME market isn’t attractive then think again. SMEs make up the bulk of most (if not all) economies, though they are less visible as individual companies than multinational giants such as Citi Group, IBM, GE etc. Skype can address the entire global SME market in a strike because they do not have to maintain any physical presence or assets in the different countries. They can offer the entire service and customer relationship 24/7 over the Internet…

For those that are still doubting of Skype’s potential to further disrupt the global communications market: keep posted or hire me to explain you

Nicholas Carr has an interesting blogpost on the battle between Microsoft’s currently dominating Operating Systems (OS) vs. Google’s upcoming Web-based OS. I look at it as the clash between the currently dominating software business model vs. the potential future of software business models (for more info on what a business model is go here). In the former you buy and install a product (i.e. the software) on your computer, whereas in the latter you access a service on the Internet (and the software as such is not visible to the customer anymore).

This is a tremendous transition in terms of business model change. It means the software industry is moving from a product-based value proposition towards a service-based value proposition. And since there is no more software as such there is no more versioning either. The customer won’t have to buy software upgrades anymore, bu will benefit from a continuously updated software on the supplier side of which he only sees the service. It also represents a substantial transformation regarding the capabilities and resources a company needs to implement the business model. Carr clearly describes this difference with the Microsoft OS vs. Google Web OS example:

A Web OS is very different from a traditional computer operating system like Windows. The latter is an intellectual construct, a set of instructions written by people. You have to spend a lot on salaries and other labor costs to build a traditional OS, but the capital expenses are negligible. A Web OS, on the other hand, takes physical as well as intellectual form. If you want to control the OS, as Google and Microsoft do, then you not only have to write the instructions but you have to buy, assemble, and maintain all the equipment – processors, storage drives, and so on – that the instructions control. Because a Web OS runs centrally, you have to own the equipment it runs on, rather than offloading that headache onto your customers.

This shows how substantially different the incumbent vs. the insurgent software business model is. The former mainly invests in software development resulting in salary costs, while the latter invests heavily in infrastructure and thus bears high capital spending. Carr outlines this for Google:

Google this year will buy at least $1.5 billion worth of capital equipment, double what it spent last year and about five times what it spent two years ago. In announcing its first quarter financial results a couple of weeks ago, the company said, “We expect that the growth rate in capital expenditures in 2006 will be substantially greater than the revenue growth rate for the year.”

Which type of OS will succeed and which software business model will be dominant in the years to come is still uncertain. However, the battle between Microsoft and Google is definetly gives us a hint for where the entire software industry is heading. An indicator that we are moving towards the incumbents model is the fact that Microsoft is also heavily investing in capital spending. Carr writes:

Microsoft, said Ballmer last week, will jack up its capital spending for its web business to $500 million during its next fiscal year, which begins on July 1. That’s up from an estimated $300 million this year and just $100 million last year. It will also spend a whopping $1.1 billion on R&D for its web business next year, as it rushes to catch Google.

If I look at my own behavior I can clearly observe that I am using less and less installed software and more and more services available on the web. Some because they are free and some because they are just more convenient and immediately accessible. The value proposition of online services is often more attractive to me…

Today I was at a meeting for a case writing project in Management & Information Systems (CasIS) for the Swiss Virtual Campus. It was interesting since it brought together a couple of great people working at different Swiss Universities (there were only two Swiss of which I was one

At one point of the meeting some fundamental questions about case teaching/writing came up. It made me realize that case teaching in the management and IS disciplines are still mainly focused on the decision making and the decision argumentation process. However, while building decision making skills might still be important I think today’s uncertain competitive environment requires the teaching of design skills on top of that. Design skills allow us to come up with additional solutions to a particular business situation or problem setting when the existing choices don’t seem adequat for gaining a competitive edge.

But since Richard J. Boland & Fred Collopy explain this complementarity between decision skills and design skills in teaching much better than I do, I won’t hesitate to quote from their book “Managing as Designing” once again:

Working with him [Frank Gehry] has led us to see how both management practice and education have allowed a limited and narrow vocabulary of decision making to drive an expansive and embracing vocabulary of design out of circulation. In our focus on teaching students advanced analytical techniques for choosing among alternatives, our attention to strengthening their design skills for shaping new alternatives has withered. What is needed in management practice and education today is the development of a design attitude, which goes beyond default solutions in creating new possibilities for the future.

then the authors beautifully outline why a design attitude is needed:

A decision attitude toward problem solving is used extensively in management education. It portrays the manager as facing a set of alternative courses of action from which a choice must be made. The decision attitude assumes it is easy to come up with alternatives to consider, but difficult to choose among them. The design attitude toward problem solving, in contrast, assumes that it is difficult to design a good alternative, but once you have developed a truly great one, the decision about which alternative to select becomes trivial. The design attitude appreciates that the cost of not conceiving of a better course of action than those that are already being considered is often much higher than making the “wrong” choice among them.

and finally the authors explain that times are changing and today is the right moment to introduce more design tools to management:

The decision attitude toward problem solving and the many decision-making tools we have developed for supporting it have strengths that make them suitable for certain situations. In a clearly defined and stable situation, when the feasible alternatives are well known, a decision attitude may be the most efficient and effective way to approach problem solving. But when those conditions do not hold, a design attitude is required. The decision attitude and the analytic tools managers have to support it were developed in a simpler time. They are the product of fifty years of concerted effort to strengthen the mathematical and scientific basis of management education. Today’s world is much different from that of the 1950s when the movement to expand analytic techniques in management began to flourish. We are suggesting that now is the time to incorporate a better balance of the two approaches to problem solving in management practice and education.

I think all this should translate into how our future business leaders are tought at our universities. Case studies could actually be quite an interesting approach to foster design skills. Hopefully, we will be able to bring some of this thinking into the CasIS project…

And those of you who didn’t get enough of the extensive quotes from the article above can download the paper “Design Matters for Management” on the Web. It’s the first paper in their book, which is a collection of texts on “Managing as Designing”.

(The picture above was taken by Brad McCormick. It’s a picture of the building designed by Frank Gehry for the Case Western University, which sparked the debate on managing as designing)