Business Model Design: Disruption Case Study

I’ve been working with Alexanders Osterwalder’s approach to business model generation via the business model canvas (BMC) for a few years now. The canvas is straight forward to use, which is the beauty of it: you “get it” right away. But it does take some practice to identify and capture the various elements. It’s more of a craft than a science.

To sharpen my skills I decided to deconstruct the Xiameter business model and compare its parent, Dow Corning–just for fun. (You have the right to now say, “Get a life, Kalbach”). My starting point was an article outlining the structure of Xiameter: “Dow Corning’s Big Pricing Gamble“ by Loren Gary. I combed the text for the 9 elements of the BMC, jotted them down on paper, and then entered them into the canvas.

The image below (Figure 1) shows my analysis using the iPad app for the BMC. The GREEN notes represent Dow Corning’s core business. The ORANGE notes show the Xiameter model. Interestingly, Xiameter seems to have had an effect back on the core business model, according to the article. These aspects are shown in BLUE notes.

Figure 1: Comparison of Dow Corning’s core business to Xiameter using the Business Model Canvas (Click to enlarge)

The new Xiameter channel is a textbook example of disruptive innovation. Clayton Christensen illustrates the basic dynamics of distruption in a now well-know diagram:

Figure 2: Clayton Christensens illustration of disruption

Dow Corning recognized that it was overshooting its market. Overshooting is one of the first signs of a market ready for disruption. Scott Anthony et al write about overshooting in The Innovator’s Guide to Growth:

At the heart of the disruptive innovation model is the concept of overshooting, that is, providing too much performance for a given group of customers. Remember, the model holds that companies innovate faster than people’s lives can change to take advantage of the advances those companies provide. As companies innovate, products or services that were previously not good enough become perfectly adequate; ultimately, they become too good for a given group of customers. (p. 65)

(See my full review of The Innovator’s Guide to Growth in a previous post).

As the Xiameter case study article shows, Dow Corning seems to have recognized overshooting:

In the early 1990s, however, Dow Corning noticed an emerging trend toward commoditization in some of its markets. This meant that as specific products matured, the priorities of clientele within them shifted from wanting help with innovation to wanting to keep costs low. …

This change in what some customers valued—and the consequent decline in profit margins within those market segments—led Dow Corning to conclude that the basis of competition had shifted in parts of the industry. Facing the possibility that such a shift might spread, the company realized it required a more needs-based approach to customer segmentation. Its existing business model, which emphasized selling technical assistance and product testing on top of its core products, ignored price-conscious customers. To meet their needs—and to keep them from migrating to other, less-expensive providers—Dow Corning would have to devise a radically lower cost structure that would allow it to profit solely from selling products.

Overshooting is a key sign of a market ready for disruption. But don’t confuse breakthrough innovation with disruption. A breakthrough is the next, biggest, better product or service in an existing market. It’s the fifth blade on a razor or the Airbus 380. Or, see Kohler’s numi toilets–another example of a breakthrough product design, with a heated seat, feet warming, music and a remote control. But by definition these aren’t disruptive.

Disruptive innovations are more convenient, cheaper and easier to use, generally targeting previously underserved market segments. Think: Flip video camera, eBay or Zopa (a peer-to-peer lending service), as well as Skype and Ryan Air as disruptions. Xiameter is also a disruptive innovation.

The amazing part of Xiameter, however, is that Dow Corning distrupted itself. The fear of self cannibalization is extremely difficult to overcome in most companies, particular those as large and traditional as Dow. And that fear is precisely what causes the innovator’s dilemma. Dow overcame this fear and didn’t let entrants take that piece of their pie, as the chart above (Figure 2) show what usually happens.

My big take-away from this exercise is in the power of visualizing and diagramming all of these elements. Go read the article article that I reversed engineered (Here’s the link again–opens in new window); then come back here and compare what you read to the diagram.

Which explains the big picture better? Don’t get me wrong: the author of the article writes well, and it’s a clear story he tells. But you don’t get nearly the same sense of interlocking dependencies and overall logic you get from the text as you do from the canvas.

More importantly, the BMC let’s you design your business. You can quickly “sketch” multiple directions or variations. If they don’t work out, crumple it up and go back to the drawing board. That’s the power of it: iterative prototyping. With the BMC, you can apply design thinking to the innovation of a business model. It’s a far better better way than trying to detail a model out in text-based report or description.

Visualizing abstract business concepts really helps solve problems. I’ve been beating that drum for the last year or so, ever since I gave a presentation on “Alignment Diagrams” at the Euro IA conference last year. (See also the article Paul Kahn and I co-authored on alignment diagrams: “Locating Value with Alignment Diagrams“). Alignment diagrams are a class of document that includes such things as customer journey maps, service blueprints and mental model diagrams.

In a previous post, I suggest that the BMC is a type of alignment diagram. The elements on the right side represent customer-facing aspects. Alexander Osterwalder calls this the “front stage.” The fields on the left represent business-related aspects, or the “back stage.” In the middle is the “value proposition.” It’s this type of alignment between the back stage and front stage that’s often missing in business logic. While no silver bullet, the BMC and alignment diagrams can help bring clarity.

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NOTE: I’m giving two workshops this year on alignment diagrams:
1. Alignment Diagrams, Euro IA, 22 Sept 2011, Prague (1/2 day workshop)
2. Alignment Diagrams, part of UX Fest, 3 Nov, London (Full-day workshop)

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***DISCLAIMER: I have no association with or interest in either Xiameter or Dow Corning, nor do I have first-hand knowledge of their business models and thier success. The above analysis is based solely on the text in the article cited. 

Follow-up Post – European Commission: Design as a driver of user-centred innovation II

In April 2009 I posted about a European Commision looking at Design (with a capital D) as a driver of innovation. Charlotte Arwidi from this commission has now made public the results of a public survey on the report itself. See the full results of the survey here.

In a nutshell :

“91 percent of responding organisations consider that design is very important for the future competitiveness of the EU economy; 91 percent consider that initiatives in support of design should be taken at EU level.

96 percent think that initiatives in support of design should be an integral part of innovation policy in general, 74 percent think that design should be part of EU innovation policy.”

I’m not sure if the sampling of the survey is good, however. Seems there might have been a high degree of self-selection. So, yes–of course a very high percentage of people coming with a Design background will think that Design is an important part of EU innovation policy.

Still, there are some good take-aways from this latest survey. In particular, when asked about barriers to Design the questionnaire reveals:

“Respondents were asked about the most serious barriers to the better use of design in Europe. Multiple answers were possible. The most important barrier is considered the “lack of awareness and understanding of the potential of design among policy makers” (78 percent of organisations; 76 percent of private persons). The second most important barrier is considered the “lack of knowledge and tools to evaluate the rate of return on design investment” (64 percent of organisations; 62 percent of private persons). The third most important barrier is considered the “lack of awareness and understanding of the potential of design among potential design customers, i.e. private and public organisations”

The least frequently selected barriers are the “lack of designers/design companies with the right skills and/or capacity”, and the “lack of high quality design education in Europe”, indicating that there is not a lack of skilled designers in Europe. This conclusion is however partly contradicted by some respondents who suggest that Europe lacks designers with professional skills such as management, marketing and communication. This is described as a problem for designers in their communication with potential clients. Several respondents added that business managers, in particular in SMEs, do not understand design and that, due to this lack of understanding on both sides, designers and their potential customers “do not speak the same language”.”

Seems there are enough us out there with the appropriate skills, but Designers’ talents aren’t necessarily being used effectively. Hopefully, the commission can make a difference and bring awareness to the potential Design can offer innovation.

All of this, BTW, represents what I believe to be a paradigm shift in innovation. Organizations are shifting (or adding) focus from innovation through technology and operational efficiency to innovation via design and user experience. Let’s just hope Designers can capitalize on the opportunity and get their deserved place at the innovation table.

London Business School Study on Innovation in Experiential Services

Chris Voss and Leonieke Zomerdijk of the London Business School released a long-ish paper back in June 2007 about the role of customer experience in designing innovative services. See the full report online: Innovation in Experiential Services: An Empirical View (pdf).

They looked case-based field studies from nearly 100 companies (mostly in the UK and US) since 2003. From the executive summary:

“The research found that experiential services are often designed from the perspective of the customer journey rather than as a single product or transaction; the service is seen as a journey that spans a longer period of time and consists of multiple components and multiple touchpoints. The journey perspective implies that a customer experience is built over an extended period of time, starting before and ending after the actual sales experience or transaction. During a customer journey, numerous touchpoints occur between the customer and the organisation or the brand. These touchpoints need to be carefully designed and managed. The research shows that innovation takes place at each of these touchpoints as well as of the overall journey itself.”

Of course, the journey view of customer service puts the customer at the center of attention and not the technology (as with many traditional innovation perspectives). And the journey perspective is broader in scope since it essentially can look at any touchpoint between the customer and service.

How do you get the right journey perspective? Like many of the successful innovators in the study, you should go out an observe people:

“With regard to the process of innovation in experiential services, the research revealed that many innovations were driven by detailed insights into customers. Both design and consultancy firms and experiential service providers invested a large amount of time and effort in conducting research leading to insights in customers’ behaviour, needs and preferences. Common techniques were traditional market research, empathic research to understand customers at an emotional level, trend watching and learning from companies in different industries. This indicates that experiential innovations are typically customer rather than technology driven.”

Check out the full study. It’s not short, but written fairly straightforward in accessible language.