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The core concept of innovation is doing something in a way that has never been done before. It’s about embracing and even initiating change with the expectation that the result will be advantageous to you.

One of the basic foundations of any market or industry is that it operates on a set of rules. These rules dictate that companies within a market make choices and consequently, sacrifices. The necessity of choice in systems is basis for the entire discipline of economics.

The beauty of innovation, of doing something in a way that has never been done before, is that it can change the rules of a market and thus render the requirement of choice and the pain of sacrifice unnecessary.

History is littered with examples, including the invention of the assembly line. Manufacturers used to be faced with the choice between quality and quantity. If they chose the quality of expertly hand crafted high quality products, then they were forced to accept the high labor cost and inefficient, low output manufacturing process that went with it. If they chose the quantity of efficiently and cheaply produced products, then they were forced to accept the low quality and unreliability of the manufacturing process that went with it. The evolution of the assembly line rendered this choice between quality and quantity unnecessary. By focusing on the specialization and repetitiveness of tasks in the assembly process, assembly lines allowed for relatively cheap labor to efficiently produce reliable, relatively high quality products. This game changing innovation completely restructured the manufacturing industry and allowed the early adopters of the new technique to set themselves apart from their competition and thrive in the new environment they created for themselves.

In today’s financial services industry, banks can no longer afford to continue playing by the established rules of the game. The need for new, innovative approaches supported by enabling technology is paramount. Banks seeking to break away from their competition and create a new, opportunity rich environment for themselves need to seek out innovative technology vendors whose solutions can break the current operational trade-offs that define today’s industry.

If you are an individual or a small team not yet operating as a business, starting first on business model innovation sounds like it’s impossible. The world is full of long-standing companies that seem to be serving virtually every conceivable need.

However, can you serve those needs by employing new business models in a better way? Probably you can. And if you can, then you can be the first to compete based on business model innovation.

Notice that business model innovation usually requires more mental agility than resources, so the playing field is either level or may be slightly tilted in your direction. As you work on business model innovation, pay attention to closing the competitive door behind you with impossible-to-duplicate advantages, though, so that others cannot leapfrog past you if you want to enjoy the ultimate competitive advantage from business model innovation.

Let’s consider an example. Commercial art schools had been operating for decades when Education Management started out in 1969 by purchasing the Art Institute of Pittsburgh.

How could the company be first with an improved business model in other geographic markets where commercial art was already being taught by for-profit schools and by tax exempt public or private colleges and universities?

What Education Management did was to focus the commercial art learning process on the needs of employers. In doing so, the company knew that it would also better serve the needs of students by making it easier for them to get, hold, and make career progress in commercial art jobs. To make this adjustment, Education Management made seven changes in the commercial art school business model:

(1) continually define, update and add to the curriculum around employers’ current and future needs, and actively involve employers in the curricula development process through participation in local curricula advisory committees and in special subject panels

(2) employ faculty who are working professionals for career specific subjects

(3) build the curriculum to concentrate on what students need to learn

(4) create facilities and technology specialized to facilitating learning about the professional career environment

(5) help graduates get jobs

(6) reach out extensively to potential students become aware of these educational and career choices.

(7) acquire and rapidly convert small local art and culinary schools into the Education Management business model though substantial investments, and installing detailed planning and information systems to manage those operations according to the Education Management business model.

With this new business model, Education Management could become the first commercial art school in a geographic area to offer greater diversity of education programs in the art, design, and culinary fields, with a superior faculty, facilities, technology, and job market outreach. Note that the business model could either be used to shift the direction an existing school that was acquired (like the Art Institute of Pittsburgh had been) or to start a new school from the ground up.

Copyright 2008 Donald W. Mitchell, All Rights Reserved

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Most companies claim to put innovation at or near the top of their corporate agendas, but many of them constrain themselves from delivering on this ambition.

They burden themselves with cumbersome processes, which, instead of encouraging and liberating creativity, constrict it in a virtual straitjacket. There is nothing wrong with processes per se; quite the contrary: good ones liberate people to focus their creativity on innovation itself, rather than on dreaming up ways to deliver it.

My gripe is instead with the way many innovation processes seem designed to catch errors and avoid risk. Even the terminology encourages this: words like Stage Gates, Pipelines and Funnels all sound very mechanical and very constricting. As soon as innovation projects hit problems, the stage gates crash down upon them and the decision makers are quick to pull the plug and avoid wasting resources on these problem children.

Decision-makers often kill off promising ideas too soon because their supporters are unable to produce hard evidence for the business case. It is short sighted to expect data to support the return on investment so early in the life of a big disruptive idea.

A better approach is for the decision maker to tackle his or her role with a different mindset. Instead of acting as The Gatekeeper and slamming the gate shut at the first sign of trouble, they would benefit from reframing their role as Gate Opener, playing the part of problem solver and supporter, and working alongside the team to help them find a way to make otherwise promising ideas work. This requires setting aside an analytical and judgmental mindset and adopting a more creative one as a builder of ideas and a cracker of problems. The decision-maker is usually the most experienced person in the room, but all too often that experience is channeled into the very easy task of saying No. A far greater challenge and better use of their talent and experience, is to play the role of coach and supporter, helping the team find a solution or make the idea even better.

Doing this requires courage on the part of the leader. Saying no reinforces the sense of a leader’s power and influence. It also means risk is avoided and that can be career enhancing in many organizations: if you don’t stick your head over the parapet you won’t get shot. Instead, rolling up the sleeves and getting stuck in to helping solve a problem means you might fail. It can also feel a bit too democratic for some! But doing it will win the genuine respect of the team and gives high return disruptive ideas a real chance of winning through.

This doesn’t mean that the gate should never be shut. If the problem can’t be cracked, or the idea has little merit, then consigning it to the graveyard before too many resources are wasted is the right thing. Nor does it mean that every minor idea should be laboured over when all the indicators show it has insufficient merit. Far better to put it out of its misery and get on with the search for bigger and better ideas.

I am thinking more of high risk, big return, innovations that require courage and mean changing the existing rules of the game. These are the ideas that often get killed off at the first sign of difficulty. “It will never work” “It’s unaffordable”. “Manufacturing I would add complexity”. “We don’t have the capacity to handle this”. “It won’t work in our usual distribution channels”. “It’s very different from what we do now”. If the size of the prize is big enough or the unmet need that this fills is real enough, then it is worth pitching in and trying really hard to make it work. This may well involve completely changing the rules of the game: different routes to market, outsourced manufacturing, extensive testing, remodeling, and bringing in additional brains or external resources to help crack the challenge.

Don’t shut the gate on high potential ideas before you have given them a chance to bloom.

If you live in a tropical climate and have good soil, you know that a bamboo shoot that you plant can grow by as much as two inches an hour. That’s the kind of explosive expansion that should drive your business model innovations.

When is good enough when it comes to business model innovation? Business people know that the pursuit of perfection can often be folly. You may only get one percent more benefit from adding twenty percent more improvement.

On the other hand, there are places where as little as a one percent improvement can provide twenty percent more benefits. Creating a business model innovation advantage is just such an area where the pursuit of perfection pays off extremely well.

In my interviews with companies whose track records were outstanding in business model development and improvement, I failed to locate companies that were turning business model development and improvement into constantly repeating processes like those used routinely in most larger companies for new product development and quality improvement.

While there would appear to be relatively little of this business model process development going on, clearly this direction will be part of creating future business advantages over competitors. Establishing this source of future customer and competitive advantage should focus on both establishing and improving a business model innovation process, and enhancing the capabilities of those who work with the process to employ it well. What are some key elements that companies should focus on?

Start by defining the process you have used. In the average growing company, most employees have been with the organization in their current job for only a few years. Today’s reality seems like all that there is, or ever has been.

As a result, people are usually focused on wanting to optimize what they have today. But if the company had simply done that kind of optimization in the past, the company might not have survived. How did we get to where we are today, and what does it teach us about what we need to be doing now?

Most companies have a process that has been used at least once to create the current business model. By making that process explicit, you can begin to see what elements need to be repeated and by whom.

Critical elements of this process mapping include:

(1) How does the process begin?

(2) How are objectives set?

(3) What questions are asked?

(4) How are the questions answered?

(5) What does the output look like?

(6) How is the output used?

(7) How is this thinking turned into operating reality?

Note that for smaller companies, you may be describing the inner dialogues that some of the senior executives have with themselves.

With that process in mind, the next step is to examine how you might improve your business model innovation process.

Copyright 2008 Donald W. Mitchell, All Rights Reserved