Designing your business model architecture
Once a growth initiative idea has been defined, it is important to assess it from a business model perspective. Use small investments to learn and adapt to change for long term growth.
Discovery-Driven Growth covers four steps in evaluating a new growth opportunity: establishing the viability of the proposed business in light of corporate requirements; analyzing the unit of business; analyzing the nearest competitive offer (NCO); and identifying key metrics.
The idea is that very early on, you need to get extremely practical and real about the proposed business as a business (and not just a cool idea).
Identifying the unit of business
The first step in evaluating a corporate growth program is to identify the unit of business–what the customer will be paying for. McGrath says this decision “shapes just about everything else that influences the way your business will unfold” and “has major implications for how you price, where profits come from, what your earnings logic is, and how you configure your operations.” Although for many companies, the unit of business is a physical object, for services like cell phones, one party sells the phone while another sells a subscription or a number of calls. Sometimes, companies give something away for free (e.g., iTunes software) so that they can gain revenues elsewhere (e.g., sales of iPods and music).
Redefining the unit of business
Sometimes, radically new opportunities open up when you can think of ways to change the unit of business, particularly if you can link the way customers pay you to an outcome that is desirable or salient to them.
Prepaid calling cards are a good example of an existing payment model (monthly service contract) turned on its head. It also created a set of complementary services such as those which “top off” prepaid minutes on cards. Another example is Apple offering single-song sales via iTunes rather than forcing consumers to purchase an album of songs.
Business model innovation and disruption is a highly covered topic–McGrath gives the example of Netflix changing the dominant movie rental model by charging for a group of titles (like the fitness club model where you pay the same regardless of usage) rather than videos individually. Another example is UPS changing from package delivery to providing third party logistics.
Because selecting the unit of business has “formidable consequences”, the McGrath advises a flexible and thoughtful approach that considers what might make a customer switch their buying pattern/behavior from your offering to a competitor’s and vice versa. Alternatively, if a competitor is locked into a unit of business that is hard for them to change, you may have the opportunity to take the offensive.
McGrath offers four approaches to finding alternative units of business:
- Match your offering’s value proposition to target segment needs
- Identify gaps in current offerings
- Look for external environment changes that could work to your advantage, especially if those changes will adversely affect your competitors
- Find customers who are either under served today or cannot afford current solutions. Ask: what are barriers to adoption?
Several examples that McGrath provides are businesses which re-defined their offering to be more broad than an initial specific benefit. For example, DuPont took one element of construction water management (plastic wrap) and expanded it to encompass all aspects of water management. DuPont management focused on examining the growth potential of the new unit of business and found it to be supportive of sustained profitability.
Bearing in mind that customers always have some way of getting a job done or a need met, McGrath outlines the Nearest Competitive Offer (NCO) process as a way of determining how your offering is different than the competition. To answer the “can you win?” question, consider some attributes of successful disruptive products and services:
- Differentiated “massively” on a dimension of performance that matters to customers (even if the product is worse in other respects)
- Radically changes the cost-benefit ration for its customers
- Changes the criteria that customers use to judge value
NCO analysis will point you in the direction of competitive advantage and clarify areas where there is no differentiation. By painting a portrait of the current customer context, NCO analysis provides the basis for transforming your product or service in the future.
Consumption Chain Analysis
This approach helps understand how your product or service will impact and fit into the total experience your customer has with you and your company. Consumption chain analysis begins with initial awareness, moves through purchase and usage and ends with disposal. Each step along the way offers insights into what customers value and how your offering impacts their lives. Additionally, it’s a great tool to ensure you have examined every link along the way and have not neglected key points like distribution and fulfillment. Comparing your solution to competitive offers along the entire value chain is a great way to determine gaps and opportunities for new value creation.
Finally, identifying key success metrics will help narrow down the options for changing the unit of business. McGrath suggests: sales growth, margin growth, operating effectiveness, capital effectiveness, and cost of capital. These come in handy for internal alignment and selling your business case.
Discovery-Driven Growth provides a set of steps to discover new growth opportunities. After making initial target market choices, McGrath’s method focuses on getting alignment from your organization and establishing criteria for investment. Once that groundwork is laid, focusing on the unit of business becomes the key decision to be made. Finally, financial projects are made and project/program management takes over.
In the video below, co-authors Rita McGrath and Ian MacMillan discuss their discovery-driven growth model. McGrath says the two reasons companies fail at achieving growth are because they make the presumption that “you can be right in a world of massive uncertainty” and insisting on applying inflexible financial metrics in situations where knowledge is sparse. She says companies should take the entrepreneurial approach–“learning, change and redirection.”
McGrath says the first step is to identify areas where a small amount of resources can be freed up to pursue short-term growth opportunities. Unless this is done on a regular basis, the company is setting itself up for negative consequences in the future.
Contrary to traditional thinking, McGrath says that even core businesses are “sliding into uncertainty” so companies should pause to write down their key assumptions and map them against the changing reality of the marketplace.
Strategy is about learning. It’s not about sustainable competitive advantage or stable industry forces…Stop talking about being right and start talking about discipline…Stop talking about failure being bad and instead think about intelligent failures, low cost failures that are rich in learning
Ian MacMillan says that in uncertain environments, “I know that the plan is wrong”, discovery-driven growth is a “plan to learn” so you want to “learn cheap and learn fast.” Specifically, he says a company should identify its assumptions and devise plans to test them at discrete points in time. This allows the company to only invest as the product team learns.