Thoughts on Reading Business Model Generation and a Note on René Descartes

I recently re-read Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. The book is available on Amazon.com, and you can currently download the first chapter of the book here. The goal of the book is to provide a useful framework and set of techniques for developing new business models. Reading it this past weekend also led me to reflect on the relationship between innovation and systematic approaches to business. As I have reflected on before, large corporations are often torn between two extremes: on the one hand the best way to control risk, to manage a large corporation, and to form incremental improvements is through systematization. On the other hand, such systems tend to reaffirm the status quo, and thereby stifle genuine innovation.

Business Model Generation is an attempt to develop a system that can lead to more innovative business models, and thus bridge these two extremes. The system the book presents is outlined in the first chapter, and it involves separating a corporation or business into 9 key components: a value proposition, key activities, key resources, customer relationships, distribution channels, customer segments, key partners, cost structure, and revenue streams. The different components are arranged on a "canvas" in which the value proposition is front and center, and it is possible to chart flows between components. The "canvas" helps one visualize different business models.

But the real value of the book is that it begins to augment this framework with actual examples of innovative business models and explains the trade-offs of each, and when it outlines design techniques that can be used to create new ones. The examples come from a wide range of industries. One reads about the contrasting approaches of the Maerki Baumann and Pictet banking institutions, how Telco unbundled the components of its infrastructure in order to better align its capabilities, how Lulu changed the publishing model, how Lego experiments with user-generated content, and how Nintendo Wii re-imagined the video game model. Apple and Google both have their requisite due. Metro's publishing model is explored. Red Hat is used to introduce the fremium model and Skype and Amazon are discussed. P&G's R&D gets significant attention, as does the classic Gillette bait and hook. All of these business models are related to the canvas developed in the first chapter, and it produces a type of alignment that allows one to see each innovative model as a general type. The presentation of each  business model is entertaining and insightful.

After this rich list of examples, the book turns its attention to more in-depth discussion of some aspects of the design approach to business including brainstorming techniques, how to gain customer insights, the importance of storytelling, and ways of analyzing markets for strategy. All of these topics are covered in more depth in other books, and serious innovation designers may find them old-hat. However, as with the canvas developed earlier in the book, having all these techniques in one place, with quick efficient overviews can give even an experienced innovation designer a nice bird's eye view of the business model landscape.

When all of this is put together the team responsible for Business Model Generation has created an ideal way to get a quick overview of cutting-edge approaches to business design. I have actually used the book on several occasions now. It has helped me and a group of colleagues understand our own business much better than other techniques we have used. But the understanding is peculiar: I have found that although Business Model Generation is a useful read, the practical utility of the "canvas" presented in the beginning can be somewhat limited. The divisions that the 9 components of business force on a particular case can often be too restricting and feel unnatural. This effect oddly reminds me of David Trood's famous National Geographic photos in which David uses hundreds of photos to produce unified images. In both cases the resulting products end up giving you a general picture from which you can glean some insight, but one is struck by how much is lost in the resulting image. As in life we often learn more from differences than similarities.

The limitations of the framework reminded me of a philosophical work I studied in graduate school. René Descartes once set himself the task of providing a unified system for developing new ideas. He called it his Rules for the Direction of the Mind. At the time Descartes was already an accomplished mathematician and had solved several problems that had baffled mathematicians for centuries. He did this by developing new innovative techniques for solving problems, including imagining the line of a curve to be traced by a complicated mechanical machine. The results of such thought experiments were not immediately accepted by the mathematical community, but in a suitably translated version they became the basis for much of modern mathematics. (The best account of Descartes' mathematics is Henk Bos' Redefining Geometrical Exactness: Descartes' Transformation of the Early Modern Concept of Construction.) Having been extremely successful in mathematics, I assume Descartes thought it would be easy to develop a formal approach to creativity that could be applied in all instances. However, he soon abandoned his work, and left the book incomplete. Many theories have been offered for this, but I think it is very likely that he realized at a certain point that truly innovative solutions could not be codified or mechanized in such a formal manner. One has great difficulty formalizing the process of innovation.

Llull developed a random idea generation machine.

I bring up the case of Descartes, because I think a similar phenomenon occurs any time one discusses innovation. A creative process generally ceases to be innovative the moment it is codified and mechanized. Even a system designed to produce random results, such as that of Ramon Llull,  is rarely as effective as someone thinking creatively outside of the rules, whether it is through analogy, brainstorming, or applying an example from a very different domain. The best that one can do to capture this kind of innovative thinking is to review examples and develop rough techniques for thinking about problems.

To Business Model Generation's credit it is pleasantly situated between the extremes of random creative thinking and a mechanized and codified process that stifles innovation. It provides enough detail to stimulate thought, but does not attempt to develop it to the level of being a formalized and unresponsive framework. This means that the reader has a loose and flexible tool that she or he can use to think about their own businesses, and perhaps stumble on an insight that will lead to new, truly creative developments. But, it is important to understand that having a framework is only the beginning of the road to innovation.

P.S. I should add that one of the most fascinating aspects of the book is the innovative way in which it was written. You can find more on the book website here.

7 Ways to Turn Failures into Successes

If someone is really trying to be innovative, almost by definition that person will fail from time to time. This is because innovations that have never been tried before are often risky undertakings, and failure is far more likely than success. James Dyson went through 5,127 prototypes before he came up with his famous vacuum cleaner. Thomas Edison famously said, "I have not failed, I've just found 10,000 ways that won't work." To persevere is certainly a virtue, and many examples show that such persistence can ultimately pay off. But this kind of persistence is a virtue in an individual, not necessarily in an organization or company. A company that constantly follows failing strategies will be out of business rather quickly.

Because of this, businesses are very concerned with failure, and the punishment can often be severe: loss of jobs, financial penalties and so on. Although sometimes it is necessary to take such severe measures, there is a trade-off in terms of loss of communication, and such decisions can also limit the possibility for individual or organizational improvement. There are more constructive ways to respond to failure. Here are seven ways for a company to respond.

• Use mistakes to pinpoint areas of improvement. In a recent interview Milton Glaser made the observation that failures are sometimes better than successes: successes merely reaffirm your previously held views and reinforce the status quo; only failure provides genuine opportunities for improvement. But to actually produce this improvement takes more than simply admonishing an employee with a cliche like, "Don't do it again." Successful people and businesses know how to focus in on the specific factors that led to a failure. A pianist who simply continues to play a piece from the beginning, is unlikely to perform the piece as well as someone who spends extra time mastering the difficult passages. Similarly, a company that doesn't provide appropriate focus on the specific cause of a failure will not improve as quickly as one that does. Hence, you should offer people who have failed new ways to meet the challenge in the future. For instance, if a client presentation doesn't go well, offer to excuse the employee from other tasks in order that she or he can obtain sufficient training to do better next time. For a company, this is a prudent investment in the future.
• Use mistakes to understand the limits of current possibilities. Another way to learn from mistakes is to use them as opportunities for understanding the limits of a domain. I have a mathematician friend who spent more than a year with colleagues throughout the world working on a proof that ultimately didn't work. However, the funding for the project required a specific output, and so he did what scientists often do, and turned the study into a disproof of the original methodology. Far from being a cop-out, such a move represents a genuine advance in knowledge. This lesson can be applied to companies too. For instance, if there is a client product that cannot effectively compete against the competition based on feature or price, then that might be the signal that the company should leave that market, and head in a different direction that better suits its strengths. This is a loss, but because it allows you to redirect your resources, the project also represents a positive gain for future strategies.
• Steal from your mistakes. Google is a company that has managed to respond well to failures. For instance, consider the recent failure of Google's Wave service, a service Google pulled the plug on in August 2010. The service developed a fresh new approach to online messaging, but for various reasons it never caught on. However, despite the fact the service had to be closed, many features of that service are now entering the market as enhancements to other services that Google offers, and vestiges of Google Wave can be seen in Google Docs. This is one of the ways you can respond to failure in a creative way. If the overall system doesn't work, then analyze it down into its components and see if there are ways to construct new services from the pieces. This requires investing time in understanding a failure, and in seeing how to reintegrate the results into the overall strategy of a firm.
• Keep a record of mistakes. This is closely connected to the previous observation. It may be the case that there are no obvious ways to steal from a mistake at the moment, or that the reasons for the failure are currently too opaque. However, it may turn out that six months or a year down the road a new opportunity will arise in which the learnings can be applied to significant advantage. In order to take advantage of these situations, many details of the previous failure may need to be recorded and reviewed. If blame is attached to specific individuals they may be less forthcoming about the real reasons for the failure. Hence, a database of previously attempted initiatives incorporating a certain degree of anonymity should be maintained. I'm actually surprised so many companies do not have specific people in charge of understanding failures and finding new creative applications for the results. Given that the development costs of these failed initiatives are already paid for, such failures can often provide the proverbial "low hanging fruit."
• Turn the failure into a challenge. If it is particularly important to overcome a failure, throw down the gauntlet and constructively challenge people to do better. There is an amusing story recounted on Michael Schrage's HBR blog post of how Charles M. Schwab used a challenge to motivate workers. After learning that the day shift at a poor-performing mill produced only 6 heats, he proceeded to write a large "6." on the floor. When the night shift came on, they saw the number and knew that they could do better, and worked extra hard to put a "7" on the floor. The process accelerated when the day crew arrived, and by the time the competition completed the mill was producing more than any other mill in the plant. Competition is an effective tool for improvement whether it be in business, evolution of species, or in breaking the four minute mile. For this process to work well in a business it is important that the emphasis be on the success rather than the failure: in a race in which only one person wins, there is little point in berating everyone who didn't.
• Outsource a part of a challenge. If a product or service is generally working, but there is one component that is consistently failing, you may want to consider outsourcing that component of the product to a company that has the knowledge or resources to make it work. Although these may not be prime examples of "failures" Netflix was able to retool their algorithms for movie suggestions by outsourcing it through a competition. P&G famously decided to increase efficiency and reduce cost by aiming to outsource up to 50% of its R&D work to third-party providers. When companies outsource capabilities to other firms they can focus their resources on those aspects of projects in which they can obtain the highest value.
• Let an employee keep at it. There are a variety of ways of responding to failure, but one of the ones we value most in our society, whether it is in inventing or playing video games, is the value to keep at something. As the options above indicate, it is sometimes important to recognize when something will not work, but this doesn't mean that one should always give up. For instance, if there is an employee who is particularly passionate about a cause, why not let him or her spent a few hours each week pursuing it long after the company goes in a different direction? The most you are losing are a couple of hours, but the added gain in letting the passionate employee own the task, and of keeping the project within the company's fold may be significant if it does work out.

If you are striving to be innovative, it is important that you have a plan for dealing with inevitable failures. By concentrating creatively on what can be gained from a given case, one can turn current failures into future successes.

Do you have any interesting examples of failures that you turned into successes? Do you have ideas for other ways to make use of failures? Feel free to comment below.

Thoughts on Reading Sticky Wisdom

For Creativity and Innovation Week (April 15th-21st) I've decided to write something about a book that has recently had an impact on how I think about creativity. This is ?WhatIf!'s Sticky Wisdom: How to Start a Creative Revolution at Work. The book is relatively short, and can be finished in about a day. It has a number of interesting examples of creativity, and offers a framework for thinking about creativity and innovation.

The part of the book that I found most useful is the distinction between analytical and creative thinking and the importance of signaling when one is changing from the one to the other. I just defended a dissertation in analytical philosophy, so I am probably the poster-child for analytical thinking: whether it's ancient mathematical proofs, Gödel's incompleteness theorem, or applying skepticism to any proposition ("Do I exist?"—"Not entirely clear."), I've done it. "Analysis" means breaking down a proposition into its component parts, and comes from the Greek word for loosening or untying a difficult problem. Analysis is not necessarily the opposite of creativity: it can take considerable freshness of thinking to be able to see the assumptions upon which an approach or statement is based. But there are contexts in which it can definitely be in tension with creativity.

This is often the case in a business context. Businesses are incredibly analysis-based. This is in part because of the complex types of problems that corporations face. A successful launch of a product in a new country depends on getting hundreds of details right, whether it's understanding the customers, determining how to distribute the product, identifying costs, coming up with effective branding, and so on. If any one of these things goes wrong the launch could be a disaster. This is perhaps the reason why analysis is so central to MBA education, and why corporations and consulting firms can be obsessed with it in the interviewing process. But the analysis focus goes even deeper than this: most corporations are obsessed with risk management. There are people whose only jobs are to avoid risk, committees and boards are designed to distribute risk, jobs are reduced to such tiny pigeonholes that no one can cause too much damage, and at the top there is a CEO who's job it is to never say anything that will risk the company's reputation. Hence, when a new idea is proposed, the default setting for most people is, "What could go wrong with this? What are the risks if we do this?" Yet, although these are necessary questions to ask in some contexts, they can be inimical to truly creative and disruptive ideas that no one has thought of yet. This is because—by their very definition—such disruptive ideas are risky.

Hence, in Sticky Wisdom the authors argue that it is important to set aside space for another mindset. They call this "greenhousing," and it can be roughly described as a context in which risky ideas are not only allowed to grow, but are in fact encouraged to do so. This is particularly important in the early stages of an idea, before it has had a chance to be worked out in any detail. As Sticky Wisdom emphasizes, at these stages a simple, "Yes, but . . ." or "We've tried that before," could be enough to kill a potentially exciting and innovative idea. What one really needs is a context in which even an initially ridiculous idea can be explored. As I have said in an earlier post, I sometimes have started a brainstorming session with the question, "What's the most ridiculous way to solve this problem?," and have been surprised at how much insight can be gained in approaching a problem in this way. But given the focus on analytical thought in a corporation or in academia, you have to often make a point to signal when you are looking for growth-support rather than criticism.

The advantages of having an organization occasionally adopt this mindset are manifold: new opportunities can be identified, and genuinely innovative approaches to problems can be found. One might even argue that it is not accidental that many of the most influential technologies and innovations arise outside of a corporate setting: whether it be Twitter, Facebook or Google, small entrepreneurial groups can be more willing to take risks because they have less to lose if the idea doesn't work out, and are often more willing to be creative. When large corporations are not at least sometimes willing to take similar risks, they create risks of their own, including the risk of missing the next trend in innovation. And the funny thing is that large companies don't necessarily have to miss that boat: if a corporation provides contexts in which employees are encouraged to think creatively, they too can have the insight to come up with similarly innovative solutions. But this takes more than a mission statement about the importance of innovation, but a genuinely new way of looking at the world. Sticky Wisdom offers insights on how to look at the world in this way.

I hope in honor of Creativity and Innovation Week and Leonardo de Vinci's birthday companies, schools and organizations set aside some time to think about creativity. Having the staff reading Sticky Wisdom can be a good start.

The Farnsworth House and Innovation

Mies van der Rohe's Farnsworth House (1945-1951) is widely regarded as one of the most influential designs in 20th century architecture. The house itself is not only an icon of the International Style, but it also has inspired many equally iconic houses throughout the world: Philip Johnson's Glass House (1949), Steve Hermann's Glass Pavilion, the Division Knoll Residence, the Lumenhaus, and many others. (It would be an interesting project for someone to compile a site chronicling these many houses.)

I had the opportunity of visiting the house with a Canadian couple and one of the Trust tour guides towards the end of this past summer, and seeing the house was a genuinely moving experience. The house was far better designed than even I had imagined. I always recognized the importance of the large-scale design, but being able to walk through the rooms of the house made me aware that this high level of design is also reflected in smaller-scale aspects of the house. The depth of this design contributed to the fact that very little in the house seem out-dated, despite the fact that it is almost 70 years old.

The beauty of the design made me reflect on what is now being called the "design innovation" approach in business and elsewhere. It occurs to me that anyone who wants to adopt this approach, would do well to learn from the creations of brilliant designers, whether they be architects, product designers, or artists. Designers of all stripes can learn a lot from the Farnsworth House. What follows is a catalog of a few of the things I learned about innovation from visiting the house last September.

1. Innovations involve keeping an audience in mind. It may seem peculiar to pick a house that had such a tumultuous design and construction history as an example of keeping the audience in mind. Edith Farnsworth famously criticized Mies' design and added screened porches and various other "improvements." Yet, it seems clear that Mies did have an audience in mind. Instead of being designed for Ms. Farnsworth, the house was designed for a particular model of how a modern life should be lived. The fact that so many houses have been based on Mies' design is a testimony to the fact that his intended audience does exist. Further, Mies apparently articulated this to Ms. Farnsworth: when she complained that there was not enough closet space for her clothing, Mies countered that she didn't need to bring so much clothing to a weekend retreat. Everything coheres around an idea of a weekend retreat open to nature. For instance, because one might want to entertain guests on the weekends, there is a large patio that allows traffic to flow in and out, there are windows situated to allow cross-ventilation in the summertime, and there are even two bathrooms so that Ms. Farnsworth could keep her personal items separate when entertaining. Clearly, there were disconnects between the vision of these two people, but Mies did have an audience in mind. It just didn't end up being necessarily Ms. Farnsworth.

A Floor-Mounted Electrical Outlet

2. Innovations arise through constraints. Mies van der Rohe wanted to create a house that expressed his particular design aesthetic. One could imagine Mies drawing a sketch of the house in a few seconds. Perhaps a few minutes more would be all that was required to figure out the basic structural features that needed to be in place to create such a house. But, to this extent it is merely an idea, not an innovation. Innovation comes from working through the many challenges that need to be overcome to bring the final object into reality. The challenges he faced placed constraints on Mies' project that inevitably pushed him even further. For instance, Mies' desire to minimize the vertical structures of the building by using floor to ceiling glass and minimal steel supports resulted in no wall surfaces for electrical outlets. Hence, Mies had to put the electrical sockets in the floor, and he installed rather elegant openings for this purpose. It is the process of working out these details that differentiates a mere idea from an actual object in the real world.

3. Artistic innovations endure. Not all the design elements were the natural consequence of physical constraints. At times, Mies' artistic ambitions clearly pushed him further. For instance, the kitchen counter is made of a single piece of stainless steel that at one point becomes the top surface of the range. Mies could have easily made this counter out of multiple components. It would have been far simpler to construct, especially considering no one had attempted a single kitchen counter of this length in stainless steel before. However, the resulting continuous structure has a simplicity and beauty about it that no other kitchens of the time could match. It also presumably inspired a whole tradition of restaurant work surfaces. When one considers this innovation one is reminded of other product innovations like Apple's single stainless steel body in the MacBook and iPad lines of computing products. In fact, I would argue that one of the reasons for Apple's recent success is that its designers approached the task of creating products from a largely artistic perspective. This is apparent in the fact that Apple continues to produce videos highlighting the beauty of their single-piece construction.

The counter and range are made from a single
piece of stainless steel.

4. Innovations involve trade-offs. Although this post is mostly about Mies' design, visiting the house also made me aware of innovations that have happened since the house was built. When Mies designed the Farnsworth house he took extra care with materials, and had the large sheets of glass custom made for the residence. Since then, the standards of glass have changed, and when one of the large windows shattered in the 1996 flood, it had to be replaced with tempered glass to remain up to building code. Although the owner did a great job replacing the glass, and it is difficult to see any difference between the new and the old glass when viewed head-on, things change when you view the glass at an extreme angle. From an angle the new glass does not have the clarity or beauty of the old glass, as the tempering process changes the transparency of the glass ever so slightly. However, when compared with the alternative of a very dangerous glass surface, it is simply a trade-off that needs to be made. Trade-offs are not always apparent when one initially brainstorms ideas, but they become important when one moves to implementation.

5. Innovations can be serendipitous. Glass can get dirty. A house made of glass, situated in a tree-lined grove would seem to require significant care and maintenance. For instance, my apartment building has to clean windows on nearly a monthly basis.  However, I have been assured by a woman at the Farnsworth House office that the windows rarely need to be washed. The fact is that the water running down the flat surfaces during rain storms is sufficient to keep them clean throughout the year, except for a few occasional washings. Mies was a master architect, so this feature may have been designed in from the beginning, but the effectiveness is even more surprising when one sees the remarkable transparency of the glass: it would seem to be very difficult to maintain such remarkable transparency. This illustrates one principle of innovation: you may not be able to guess all the strengths and weaknesses of your creation ahead of time, or even how your product will ultimately be used. Coat hangers are excellent for fishing items out of drains. Standard cell-phones in India take on some of the qualities of smart phones thanks through the ingenuity of vendors in a train station. (As Genevieve Bell explained at SXSW 2010.) Science is full of examples of mistakes that end up being more profitable than the original experiments could ever have been. One cannot always predict how one's products will be used, and a truly innovative designer should always be open to these new possibilities.

6. Innovations involve leaving things out. Mies famously said, "Less is more," and it became one of the mantras of the International School. Even if you are striving for another aesthetic, there are important lesson that you can learn from this approach that many people, organizations, and corporations miss. It is true that the Farnsworth house pushes simplicity to the limit. The house seems to demand a particular style of living that even Mies does not seem to have embraced in his own life (see the 7 part video by the BBC). However, this is also what makes the house beautiful and interesting. In a similar fashion the Apple iPhone has only one button on its surface, Twitter's usefulness stems from the brevity of its postings, and even "knock-offs" products can be seen as remarkable innovations in simplicity: they omit features that some purchasers would find superfluous. (See this ?What If! video for more.) Less often can be more.

As with all great designs the beauty is not only in the initial idea, but it is also apparent in how that idea is developed and implemented. As a society we seem drawn to the idea of instantaneous ideas, and so we like the idea that Newton found the idea for gravity from being hit on the head, or credit people with objective intelligence regardless of what is done with that intelligence. But reality is a challenging and exciting place, and we should reserve our highest honor for the people who manage to bring their realities into being. There is a lot that one can learn from Mies van der Rohe's Farnsworth House.

Photos by John Hannon published with the permission of the National Trust. All rights reserved. Do not publish without written permission. If you would like to visit the Farnsworth House yourself, visit the Trust website at http://www.farnsworthhouse.org/.

Thoughts on Reading Rework

This past week I read Jason Fried and David Hansson's Rework on my iPhone. In retrospect, I think this is a book better purchased in book form: it's the kind of book you want to leave on your desk to start conversations. The useful and entertaining book argues that many of the standard practices in business are misguided, and provides examples to underscore this point.

To give you a flavor for the book, you might watch Jason's ted.com talk. There the emphasis falls on the problems with meetings and managers. Now, I think it is obvious that there is a role for both of these within a corporation, but Jason's point seems to me correct: they are overused, and often serve as crutches for poor management skills. For one thing, meetings take a lot of time out of the productivity of an organization. The time should be multiplied by the number of people participating. A meeting between 10 people for one hour takes 10 hours of productivity out of the organization. Understood this way, one should ask whether the goal of the meeting is worth this significant expenditure before scheduling it. In many cases a meeting could be avoided by having short exchanges in the hall, or reducing the number of people attending. This not only saves the company money, but may actually enhance employee morale. Employees have long complained about how meetings are a waste of time, and from my experience I would agree these complaints are often warranted. The low rate of information exchange alone underscores this fact.

As for managers, Jason has similar arguments. The main argument in this case comes from the way managers can interrupt the flow of thought. One simple check-in on an employee who is engaged in a project that requires concentration is often enough to put that process back 10 minutes. If enough of these interruptions happen throughout a day, then work can almost come to a stand-still. Of course, as is the case with meetings, there are places and times for these types of interruptions. I have had employees work for me from time to time who actually needed to have interruptions to stay on task, but I would say out of 100s of people I've worked with only a handful fell into this category. Most employees are motivated to do their work, and they just need to have the resources and opportunity to succeed.

How would a post-meeting/manager company function? It would rely more on passive modes of communication throughout the day. The advantage of passive communication is that it doesn't necessarily interrupt the workflow: people can respond to an e-mail at the time of their choosing. Employees should also be given enough ownership of their tasks that they can feel genuine entrepreneurial excitement. Managers' roles are to inspire employees and provide enough structure that the goal and requirements of a task are clear. If you add to this mix an enthusiastic workspace filled with employees who can be trusted to do good work, and such a well-run company would surely succeed.

Meetings and managers are often described as necessary evils. But why should anything evil be necessary? Far better to minimize interruptions so that when you do get together meetings and managers become necessary goods.