Much is written about digital business models. About disruptive approaches. Expensive evaluations and process models are sold and tested extensively. Most of the time this results in faulty compromises and “over-digitized”, ancient processes. It sounds paradoxical, but in order to build new, successful business models based on digitization, digital tools are initially less important. Fundamentally, one must be able to break out of tried-and-true mindsets, to figuratively leave the beaten mental path. Here’s how – short version.
In the beginning there was the problem
I’ve developed the viewpoint of the “human problem” during the course of countless workshops, and maintain that all economic activities are based originally on such human problems. What, then, constitutes such a problem? Quite simply, it is something that disturbs people. In the end, these problems, and their manifold combinations, create needs.
Now, this “disturbance” can be serious or trivial. For instance, it can bother me that I always have to turn off the light in the evening, or it can bother me that I have a life-threatening disease [sic!].
A disturbance can thus be understood to be something that prevents me from leading as good and comfortable life as possible. Therein also lies the abstraction to need, which, in its perception, can have an optional character. I consider leading a pleasant and happy life as a given. I have yet to meet anyone who doesn’t want strive for this.
Now, it can be noted that happiness and “pleasant” have many definitions. However, most people have in common that they do not want to suffer and that they are lazy – in a positive sense.
Products and services are opportunities to alleviate or remove disturbances
This, then, is the starting point of a service or product. It makes my life more comfortable by alleviating the disturbance or – in the best-case scenario – by removing it altogether.
“Products are always based on technology, manual labor and methodology. Not all three components must necessarily come from the provider of the product.”
These solutions to problems can come about through the use of technology or by human labor. Or, as is most often the case, through the combination of both factors. Usually, technology not yet available is balanced by human labor. The third component, methodology of execution, simplifies problem solution.
Sounds a little abstract, I know. An example:
One problem, for instance, is “clean laundry”. I want to have clean, freshly laundered clothing every day and do as little for it as possible. To achieve my goal, I can wash my clothes manually every day, wait till they dry and then neatly put them in my closet. A huge amount of work. Or, I can make the whole process much, much easier by using a washing machine and dryer, thus alleviating my problem.
No, if I become even more organized and wash my laundry only once a week, the problem is alleviated even further. I’ve now combined manual labor, technology and methodology in such a way that the problem “clean laundry” burdens me as little as possible.
Evolution of problem solving
As described in my article about the disruption of industries, problem solving always undergoes a certain evolution. As a rule, new technology that enables a radical alleviation of the problem becomes available.
It’s important to understand that current products and service (and with them the industries as well) only represent a step on the evolutionary ladder of solving problems.
To return to the problem of “clean laundry”: At first, clothes were laundered in a river, then with help of a washboard, then came the washing machine, followed by machines with tumbler function. Concurrently, the proportion of manual labor and the methodology behind it was reduced.
What’s the development of new business models really about?
Business models with the potential to break up entire industries start with these problems and, at least at first, don’t take current solutions into consideration.
Applied to our example, what this means is that it isn’t attempted to manufacture the digital washing machine, but rather that the central problem is analyzed and available technologies and methodologies are then looked for that are better able so solve this core problem.
“The goal therefore isn’t to use “digital means” to gradually evolve that which already exists, but rather to find a fundamentally better way to solve the problem “clean laundry”.
Industries are like beaten paths
Industries develop whenever different companies develop such solutions. It lies at the very heart of a market economy that different vendors attempt to participate in economic events with the same solution approach.
What we also see is that industries are truly trodden paths where the solution of problems is concerned. In other words, a certain solution becomes so established that new, and thus, unconventional approaches are no longer pursued. This is the reason why so many from outside an industry are successful when using new technology. They aren’t “prejudiced” by best practices.
So how do you proceed to develop new business models in practice?
1. Analyze industries
It makes sense to become active in areas in which fundamentally new solutions haven’t been worked on for some time. In other words, in industries where the adaption backlog is particularly high. If you are active in such an industry yourself, you will probably ask whether you aren’t cannibalizing your own business. The question is justified, and the answer is simple: Yes, of course, but it doesn’t matter.
It’s better to destroy your own business yourself – if it needs to be – than if someone else does it!
For, if you do it yourself then at least you have the chance to stay relevant with the new business model. In the other case you will simply sink. So much is philosophized and discussed concerning this topic. I understand the fears, but at the same time I appeal to your common sense: Sooner or later a new vendor will come and do everything differently and better. It’s only a question of time. Thus, you only have one option; renew and disrupt.
I’ve described how to select such industries and the parameters you need to considerin more detail here.
2. Identify the central problem
This second step is critical and I’ll admit it takes a little bit of training. Detach yourself mentally from existing products and offerings and ask yourself what the user wants. Let’s take the automobile industry; the underlying problem of people isn’t driving a car, but rather to travel from one point to another as flexibly, safely and quickly as possible. We can solve this far better with new technology than with cars the way we know them today.
Once again: In the evolution of solving the problem, cars are merely an intermediate step that solves this problem at certain costs (please don’t consider in purely monetary terms). It’s out of the question that we will achieve this mobility in the future using different means.
3. Start with a blank sheet of paper
Once you’ve identified such a central problem start looking for technologies and methodologies that can solve the problem. Mentally, work with a clean sheet of paper, far removed from existing industries and products or legal regulations.
Combine manual labor and technology instead of focusing strongly on fully automated solutions. Over time, you will be able to increasingly replace manual labor with technology.
What is of fundamental importance: The product that you create must be radically better for the customer. This can refer either to the customer experience, the price or the actual benefit. Ideally, all three aspects. The harder it is to compare a new product to existing ones, the better.
The critical question therefore is: If we need to solve the critical problem today, and know nothing of current products or services, how would we solve it?
4. Calculate the costs
Calculate the costs for the solution and place them in the context of alternatives available to the customers. I consider a new model to be good if it solves the same problem better than the alternatives at 30 percent of current costs. This calculation must contain a margin of 300 percent for you. I know these figures are extreme. But keep in mind that you are not developing a me-too mode, but one that is capable of fundamentally transforming the market in a very short time.
5. Test the model
Formulate your offering as qualitatively high as possible. Introduce it into the market and note the reactions of your most important customers. You will quickly find out if it has the desired effect. If you can’t do without, then of course you can make a small survey out of the introduction. In the end, though, this only costs unnecessary time and money. In my experience, 150 pitches are quite sufficient in predicting if something is successful with the customers or not.
And then – well then, all you need to do is do it
And that, well that is the most difficult part. Usually this goes hand in hand with considerable investments. In addition, it usually also means a first-time use of existing technology in a new area. Be prepared that you cannot calculate every possible risk. But take risks, as your predecessors did when they founded the company.