Praise for The Business Model Innovation Factory

“Saul understands the scale of change needed in our times and the ways tobreakthrough innovation. The creative skills that will carry us there will comefrom design-centered approaches instead of traditional business ones.”

—John Maeda, President, Rhode Island School ofDesign and author, The Laws of Simplicity

“This is a timely and compelling book. It shows us a path in pursuit of amore powerful form of innovation that has been largely ignored by execu-tives. We will continue to ignore it at our peril. This book shows us how toturn mounting pressure into expanding opportunities for value creationand value capture.”

—John Hagel, co-author of The Power of Pull andco-chairman of the Center for the Edge

“Over the years Saul has brought together an amazing band of innovators toexplore the nature, content, and direction of their work. Anybody inter-ested in innovation has benefited enormously from his work. Now hepresents us with what is certain to end up a well-thumbed `bible' of inno-vation of all kinds. The world needs this book!”

—Len Schlesinger, President, Babson College

“Every year I look forward to attending Saul Kaplan’s incredible Business In-novation Factory conference to learn more about creativity, innovation, andthe wonderful art of storytelling. Now Saul is bringing together those storiesplus all his real-world experience as a full-fledged entrepreneur, governmentpolicy-maker, and `innovation junkie' to offer us the gift of a remarkablebook. Saul is dead-on in saying that incremental innovation won’t hack it inthe twenty-first century. Every CEO needs a business model innovationfactory.”

—Bruce Nussbaum, former Assistant Managing Editor,Businessweek and Professor of Innovationand Design at Parsons School of Design

“In established corporations, disruption has been like the weather—incessantly discussed, never deployed. Now Saul Kaplan—plainspoken,practical, and pugnacious—documents the principles, the tools, and thestories that prove business model change can be part of an organization’srepertoire. This is the handbook for those who will no longer settle for theincremental.”

—Chris Myer, founder, Monitor Talentand author, Standing on the Sun

“Forget episodic or incremental innovation. The Business Model InnovationFactory by Saul Kaplan shows how your future rests on business model in-novation. Learn the 15 principles that are critical to success.”

—Stephen Denning, author of The Leader’sGuide to Radical Management

h o w t o s t a y

r e l e v a n t w h e n t h e

w o r l d i s c h a n g i n g t h eb u s i n e s s

modeli n n o v a t i o n

f a c t o r y

s a u l k a p l a n

John Wiley & Sons, Inc.

Copyright © 2012 by Saul Kaplan. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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10 9 8 7 6 5 4 3 2 1

To my wife Susan,for encouraging this grateful innovation junkie

Contents

Acknowledgments xi

Introduction xiii

I What You Have Always Done Isn'tWorking Anymore 1

1 Don't Get Netflixed: Your Current Business ModelIsn't Going to Last Much Longer 3

Blockbuster Gets Netflixed 5Even Netflix Is in Danger of Being Netflixed 10

2 Business Models 101: Creating, Delivering, andCapturing Value 17

How Does Your Company Create Value? 19How Does Your Organization Deliver Value? 21How Does Your Organization Capture Value? 29Putting the Entire Business Model Story Together 32

3 Why Organizations Fail at Business Model Innovation 3510 Reasons Companies Fail at Business Model Innovation 40

II Connect, Inspire, Transform: 15 Business ModelInnovation Principles 51

4 Connect: Business Model Innovation Is aTeam Sport 55

Principle 1. Catalyze Something Bigger Than Yourself 55Principle 2. Enable Random Collisions of Unusual Suspects 60Principle 3. Collaborative Innovation Is the Mantra 64Principle 4. Build Purposeful Networks 68Principle 5. Together, We Can Design Our Future 72

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5 Inspire: We Do What We Are Passionate About 77Principle 6. Stories Can Change the World 77Principle 7. Make Systems-Level Thinking Sexy 81Principle 8. Transformation Is Itself a Creative Act 84Principle 9. Passion Rules—Exceed Your Own Expectations 87Principle 10. Be Inspiration Accelerators 90

6 Transform: Incremental Change Isn't Working 95Principle 11. Tweaks Won't Do It 95Principle 12. Experiment All the Time 99Principle 13. Off the Whiteboard and into the Real World 102Principle 14. It's a User-centered World—Design for It 108Principle 15. A Decade Is a Terrible Thing to Waste 110

III Creating a Business ModelInnovation Factory 115

7 R&D for New Business Models 117Innovate through Connected Adjacencies 119

8 Leading and Organizing a Business ModelInnovation Factory 131

Staffing a Business Model Innovation Factory 134Skills and Experience to Staff a Business Model Innovation Factory 137Wanted: Business Model Designers 142Resourcing a Business Model Innovation Factory 143Overcoming the Politics of Business Model Innovation 145

9 Experimenting with Business Models in theReal World 149

Give Me Rhode Island 154A Better Place 157Putting the Customer in the Business Model Driver Seat 163

IV Business Models Aren't Justfor Business 165

10 Nonprofits Have Business Models Too 167

11 R&D for New Social Systems 179Measure Innovation Outputs 181Education Rant 183

viii Contents

12 What's Your Personal Business Model? 191Stay on a Steep Learning Curve 193Embrace Vulnerability 195Blessing and a Curse 197

About the Author 201

Index 203

Contents ix

Acknowledgments

This book would not have been possible if it wasn’t for the encour-agement, insight, irreverence, and contributions of the entire

Business Innovation Factory (BIF) team. As I write this everyone iswaiting for a winning Power Ball ticket holder to step forward andclaim a $336 million prize. I don’t have the ticket. But even if I did Ican honestly say that I would still gladly come to work every day atBIF. Our team of energetic, creative, and hardworking innovationjunkies teach me what innovation really means every day. I amproud to be part of this incredible team and grateful that they humorme on this life-long journey to seek a better way. The lessons andinsights in this book are really due to their efforts and great work.I’m just the messenger. My deepest gratitude to the BIF team:

Christine CostelloTori DrewJeff DruryKara DziobekChristine FlanaganJames HamarKatherine HypoliteSamantha KowalczykEli Stefanski

I am also grateful to the entire BIF community of innovationjunkies from around the world. Over the years I have been inspiredby your optimism and passion to try new approaches. You havetaught this dinosaur many new tricks and exposed me to a

xi

knowledge flow that allows me to learn every day. If the goal is to getbetter faster, you shine a light on the path and provide the not-so-subtle nudge to dare to try. There are far too many of you to mentionby name. There have been over 200 storytellers willing to share theirpersonal transformation stories at our annual Collaborative Innova-tion Summit. Over 2,000 participants have attended the summitbringing inspiration, joy, and hope for a better future, and manythousands more connected through social media platforms that keepthe innovation conversation active, vibrant, and relevant. We have asteep learning curve ahead of us, but you provide me with a powerfulsense of optimism that together we can change the world.

—Saul Kaplan

xii Acknowledgments

Introduction

S ometimes tweaks aren’t enough. Sometimes nothing short ofreinventing yourself, your organization, or your community is

called for. The beginning of the twenty-first century is one of thosetimes. If anything is certain about the new millennium, it’s the paceof change. New technology relentlessly hurdles into our lives. Ideasand practices travel around the world at Internet speed. Social mediaenables individuals to self-organize and reorganize in ways un-imaginable in the twentieth century. We also live in anxious timesmarked by economic uncertainty, but one thing is clear: relevancy ismore fleeting than ever. How to stay relevant in a changing and un-certain world is one of the most important questions of our time.

Thriving in the midst of today’s frenetic pace of change requires anew set of approaches and tools. Incremental change may have beenenough at the end of an industrial era marked by “me-too” productsand services, process reengineering, best practices, benchmarks, andcontinuous improvement. We have built institutions that are far bet-ter at share taking than at market making. We have become reallygood at tweaks. There are tons of books, experts, and tools to helpus make marginal improvements in the way things work today andto fight it out with existing competitors for one more share point.But how do we become market makers? Incremental change may benecessary but it isn’t sufficient for the twenty-first century, whichwill be defined by next practices, disruptive technologies, marketmaking, and transformation.

The Business Model Innovation Factory is a book for all leaderswho recognize that incremental change isn’t enough. It’s a bookabout transformation. It doesn’t matter what type or size of

xiii

organization or community you lead or aspire to lead. It could be afor-profit or nonprofit company, a school, or a government agency.It could be a nation, state, or city, or maybe even an online com-munity. Or maybe you are one of a growing number of free agentsworking across projects and networks. Regardless of organizationtype or leadership role, all leaders need to learn the art and practiceof transformation to stay relevant in a changing world. The mostexciting and best opportunities require entirely new business mod-els or ways to create, deliver, and capture value. The challenge allleaders face is how to reinvent a business model while the entireorganization is working hard pedaling the bicycle of the currentone. The twenty-first century screams for transformation, nottweaks. The Business Model Innovation Factory is a book fortransformers.

I was inspired to write this book after spending thirty-plus years asan innovation junkie with every imaginable black and blue mark thatcomes from being a diehard change agent. I have been a student andinnovation practitioner across the public and private sector, indus-tries, and disciplines. I have observed hundreds of organizations andthousands of innovators attempt to do transformational things andsettle for doing incremental things. The patterns are clear and theneed for business model innovation seems obvious. I wrote thisbook to share my experience and ideas on how you can create a busi-ness model innovation factory to stay relevant in a changing world.The book is organized in four parts:

Part I: What You Have Always Done Isn’t Working AnymorePart II: Connect, Inspire, Transform: 15 Business Model Innova-

tion PrinciplesPart III: Creating a Business Model Innovation FactoryPart IV: Business Models Aren’t Just for Business

The book’s first part establishes the basic building blocks of abusiness model and makes the case that business model innovationis the new strategic imperative. The goal for all leaders is to avoid

xiv Introduction

being “netflixed.” If netflixed isn’t a verb it should be! Blockbustersaw DVD technology and Netflix coming. The United States PostalService saw e-mail coming. University presidents see online contentand social media platforms changing the way students learn. Yetwhen faced with the obvious and growing threat of a disruptive com-petitor, organizations remain stuck in their current business models.It’s amazing how few organizations can clearly articulate their busi-ness model. Can yours? If you ask any 10 people in your organiza-tion to describe your current business model, will the answers evenbe close? Most leaders know there are alternative and potentially bet-ter ways to create, deliver, and capture value but struggle with howto change their business models.

In the face of a serious disruptive threat most leaders do what theyare comfortable with and know how to do—they strengthen andbecome even more entrenched in their current business models.They add new products and services to the current model,deploy technology to strengthen current capabilities, extend the cur-rent business model into new markets, and they try to create favor-able laws and go to court to block new business models. Thesestrategies may create value in the short-term but none of these effortsto strengthen existing business models are effective for long in theface of a disruptive competitor that is changing the way value is cre-ated, delivered, and captured through an entirely new businessmodel. Disruption is now the norm instead of the exception.

Leaders could get away with blindly focusing on a single businessmodel in the twentieth century, when business models rarelychanged. Most industrial-era leaders never had to change their busi-ness model. One model worked throughout their entire careers.They could focus on improving their market position and competi-tiveness by making incremental improvements to the existing model.Disruptive threats were rare and could be safely ignored. Not soin the twenty-first century, when the half-life or longevity of abusiness model is decreasing. Business models just don’t last as longas they used to. New players are rapidly emerging, enabled bydisruptive technology, refusing to play by industrial-era rules.

Introduction xv

Business model innovators aren’t constrained by existing businessmodels. Business model innovation is becoming the new strategicimperative for all organization leaders. But how do you transform abusiness model while still living in the current one?

The book’s second part provides innovators with a set of action-able principles to guide business model innovation efforts. It pro-vides 15 actionable principles based on the observations of thisinnovation junkie throughout a 30-year career—practicing innova-tion while meandering across industry, consulting, government, andnonprofit leadership roles, and the over eight years of work with anincredible team at the Business Innovation Factory (BIF), a nonprofitI founded and lead as its Chief Catalyst, focusing on enabling real-world labs for business model and systems-level transformation. Ihave had the privilege of connecting, convening, exploring, and cre-ating with some of the most inspiring innovators on the planet, andthe principles of business model innovation detailed in this bookcome from this wonderful innovation journey.

Fifteen business model innovation principles are organized intothree main themes: Connect, Inspire, Transform. Business model in-novation is a team sport. It’s bigger than any one of us. It’s a collabo-rative act and connections are key. It requires all of us to buildstronger collaboration muscle. The best value-creating opportunitiesare in the gray areas between us. We must become more comfortablein the gray area and get much better connecting across silos, disci-plines, and sectors. The most exciting new business models are net-works connecting capabilities across boundaries.

Successful business model innovators are inspiration accelerators.People excel at and commit to what they are passionate about. Trans-formation can only happen when people are committed to the hardwork of change. People must be inspired and emotionally vested incocreating a new future. Without inspiration business model innova-tion doesn’t happen. The path to inspiration is through storytelling,one of the most important tools for any business model innovator.It’s the best way to create emotional connections to new businessmodel concepts and innovations.

xvi Introduction

Sharing stories is how to create a network of passionate supportersthat can help make new business model ideas a reality. Weremember stories. We relate to stories and they compel us toaction. A business model is the story of how value is created, deliv-ered, and captured.

Transformation is hard. We have to make it easier by creating theconditions for ongoing experimentation. It’s easy to sketch a newbusiness model on the whiteboard. It’s much harder to take the con-cept off of the whiteboard and put it in to the real world. We spendfar too much time thinking and planning and nowhere near enoughtime experimenting in the real world to see what works. We need totry more stuff. We can’t possibly know if a new business model ideawill work sitting in a conference room. We have to create the condi-tions in the real world where we can do R&D for new business mod-els. If we want to stay relevant in the twenty-first century we have toexperiment all the time. Leading organizations will have several busi-ness model experiments going on at all times.

New business model ideas come not by looking through the lensof the current business model, but by learning how to look throughthe lens of the customer. Transformational business models mustbe designed around ways to improve the customer experience, notaround ways to improve the performance of the current businessmodel. Business model innovation starts by bringing the voice andexperience of the end-user into the center of an iterative designprocess.

When woven together, these 15 business model innovationprinciples provide guidelines to enable entirely new ways to create,deliver, and capture value. They enable transformation.

The book’s third part provides an implementation road map tocreate a business model innovation factory. It answers the keyoperational questions: How do you conduct R&D for new businessmodels? How can your organization establish a business model inno-vation factory? Business model innovation is the new strategic im-perative and yet most leaders say they don’t have the organizationalcapability to design, prototype, and test new business models.

Introduction xvii

Innovation is a better way to deliver value. Innovation is differentthan invention. It’s only an innovation when it has actually deliveredvalue or solved a problem in the real world. Invention is great but it’sjust an input to innovation. Innovation is about delivering value andrequires a business model. Business model innovation is about newways to create, deliver, and capture value. Many new business mod-els don’t require any invention at all. Often new business models justcombine and recombine existing technologies and capabilities in dif-ferent ways to change how value is delivered.

The real trick is creating a business model innovation factorywhere technologies and capabilities can be remixed in new combina-tions to deliver value. The imperative is to do R&D for new businessmodels. Not just concepts on a whiteboard or in a consulting deck,but R&D in the real world to explore the viability of a new businessmodel in real market conditions. Not just tweaks of the current busi-ness model, but entirely new ways to create, deliver, and capturevalue. Organizations need a business model innovation factory toexplore new business models unconstrained by the current one.

A successful business model innovation factory has the autonomyand resources to explore even those business models that might dis-rupt the current one. At the same time it’s connected to the corebusiness in order to access existing capabilities to enable and acceler-ate business model experimentation. Easier said than done! Thepractice of R&D to develop new products and technologies is wellestablished. Most organizations know how to develop new productsthat can be commercialized by the current business model in order tocreate new top line revenue growth. The new imperative is to estab-lish the capability to do R&D for new business models, even thosethat might disrupt the current one.

Important implementation questions addressed in this sectionof the book include: How do you organize, staff, and resource a busi-ness model innovation factory? How do you test new businessmodels in the real world? How do you manage the inevitable organi-zational conflict between a business model innovation factoryand the core business? How do you scale a promising business

xviii Introduction

model and deal with the threat of cannibalization to your currentbusiness model?

The book’s fourth part demonstrates that business model innova-tion isn’t just for business. One of the biggest surprises from the timeI spent working in the public sector is how strenuously social sectororganizations resist the notion that they have a business model. Non-profits, government agencies, social enterprises, schools, and non-governmental organizations (NGOs) consistently proclaim that theyaren’t businesses, and therefore business rules don’t apply. Well, I’msorry to break the news, but if an organization has a viable way tocreate, deliver, and capture value, it has a business model. It doesn’tmatter whether an organization is in the public or private sector. Itdoesn’t matter if it’s a nonprofit or a for-profit enterprise. All organi-zations have a business model.

Nonprofit corporations may not be providing a financial return toinvestors or owners, but they still capture value to finance activitieswith contributions, grants, and service revenue. Social enterprisesmay be mission-driven, focused on delivering social impact versus afinancial return on investment, but they still need a sustainablemodel to scale. Government agencies are financed by taxes, fees, andservice revenue, but are still accountable to deliver citizen value atscale. The idea that business models are just for business is justwrong. Any organization that wants to be relevant, to deliver valueat scale, and to sustain itself must clearly articulate and evolve itsbusiness model. And if an organization doesn’t have a sustainablebusiness model, its days are numbered.

Perhaps the most important reason for developing common busi-ness model innovation language across public, private, nonprofit,and for-profit sectors is that transforming our important socialsystems including education, health care, and energy will requirenetworked business models that cut across sectors. We need new hy-brid models that don’t fit cleanly into today’s convenient sectorbuckets. We already see for-profit social enterprises, nonprofitswith for-profit divisions, and for-profit companies with socialmissions. Traditional sector lines are blurring. We’re going to see

Introduction xix

every imaginable permutation and will have to get comfortable withmore experimentation and ambiguity. Economic prosperity and so-lutions for our big social system challenges require business modelinnovation across sectors. All organization leaders must learn how todo R&D for new business models. Nonprofit, social enterprise,school, and government leaders aren’t exempt. Business modelsaren’t just for business.

It’s a great time to be a business model innovator. This is the inno-vator’s day. The good news is that during turbulent economic timeseveryone looks to innovators for new solutions. The bad news is thatwe have turned innovation into a buzzword. Everyone isan innovator and everything is an innovation. And of course whenthat happens no one and nothing is. We have to get below thebuzzwords. The Business Model Innovation Factory is for all leaderswho want to stay relevant in a changing world. It makes the case forbusiness model innovation as the new strategic imperative, showshow organizations can reinvent themselves by doing ongoing R&Dfor new business models, and provides an implementation road mapfor all business model innovators who want to go from tweaks totransformation.

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t h eb u s i n e s s

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