Johnson_med 2 Mark W. Johnson, Chairman of Innosight and author of the great book Seizing the White Space: Business Model Innovation for Growth and Renewal, generously shared an hour from his busy day. We talked, well mostly I listened and that proved most useful, about the power of seizing white space or innovating a new business model, how companies can grab that power, what happens if they choose not to and his reasonable aspiration for writing this book.

Mark, I’ve been looking forward to talking with you about your book since it arrived. Let’s jump in.

My friend Erika Andersen coined the phrase Reasonable Aspiration or Hoped-For-Future in her book Being Strategic. What was your reasonable aspiration or hoped-for future when you began to write Seizing the White Space: Business Model Innovation for Growth and Renewal.

I had hoped that businesses could be more agile to reinvent themselves and get out of their own way. Very often we have heard the statement, stick to your core, don’t venture too far out and as you know with the financial crisis, I think companies have a responsibility to do new things that may not be about their core business. It may leverage some core assets but it is about doing some things that are a whole different way about operating and making money.

You used a word that caught my attention – responsibility. Is that a social responsibility one to their stakeholders or community our country? Can you elaborate on that?

I think it is all of those: responsibility to their shareholders and employees to make sure that they don’t become obsolete. The companies that have stayed around for a long time have reinvented themselves. They are now different corporations from when they started and from even 20 years ago.

I fear with the given change due to technology and global competition that if companies are too myopic, thinking only about the core business, they will be left by the wayside.

There is a responsibility for society as well, for the US economy to focus on those things that will help them through what they do. I

I also think it is a responsibility in general for continued improvement around the globe for consumers. If companies focus on what is the real job that consumers/customers are trying to get done, they will deliver real value. By delivering real value, they will continue to improve the economic condition around the world.

The real responsibility is to ensure growth, renewal and change as opposed to company traditions and original core.

Absolutely. Without that, any company is dead. The question is what is the best way to achieve that and I believe the best way is to deliver real value. Sometimes to do that, you must step out of the old ways.

One of my favorite artists is Bruce Springsteen. He sings each concert to one person in the audience who’s usually about 2/3 of the way back. He can see them or he pictures that person. As an author who in the global audience did you write this book for? Describe the person in your mind as you wrote.

I have written it for people whom I think can lead the charge for visionaries and game changers. It is for those people who can look to the future and see new and better opportunities. They are excited for new growth in new markets or existing markets.

It is meant for C-level audience as well as managers that feel the current way of doing things is not going to get the company where it needs to go, and it is meant for entrepreneurs who need further insight and structure for how they can develop and grow their business.

I also think it is for leaders within non-profits, industry leaders, or government leaders who can use a concept like seizing the white space business model for change. Help them to change how they do things.

What’s been their reaction of readers to your book?

It has been exclusively positive-giving a clear lens to navigate the unknown to do something new. It is a focused short read to make it tangible for the reader. I tried to give the book one foundational framework, letting the stories navigate through the challenges.

You write early in your book that if ever there was a time that a business could just execute year after year and achieve lasting success, it is long gone. There’s a lot of pain in that sentence. Pain from jobs lost, industries gone, and communities devastated. How do seizing the white space in general and your book in particular ease that pain?

I think the book is a book of hope, not fear and this eases the pain. It says to get up and get going. Even though there has been a lot of pain, there are still customers out there that need to get jobs done. We need to add value. If we focus on a customer who has a real job that is not getting done, and we follow a structured approach, then there is room for new inventions and strengths. The book says let’s change the focus and the lens to reinvent ourselves.

One of the common obstacles for any successful company pursuing a white space, a business model innovation, is their attachment to their current business model. There’s so many interests vested in their current structure. There are careers and incentives, prestige and routines and comfort zones.

How do companies manage that process?

How do they encourage, incentivize people to leave those shores for a long time in hopes of finding...the West Indies?

One is that the senior leadership has to have the vision. They must recognize that the core business isn’t going to deliver forever the growth that is needed. There needs to be sponsorship.

For those embarked on looking for new opportunities and leaving the shores, they have to think big and tell a story that this is a game changer. Ambition and drive creates the energy for doing something that is new. At the same time, the company needs to think small. It is not about trying to conquer the world all at once. You have to start with foothold market in order to test that you have addresses the important job for a customer and that you are testing the business model to make sure it truly addresses the customer’s job, delivers value for you and also makes money. Think big while acting small.

The final point is that the company has to get out of its own way. It needs to recognize that the existing business model may get in the way of the new efforts. Individuals really need to carve out time to focus on the business building effort.

If you do these three major things, you set the greatest opportunity for an existing corporation to leave the shores.

Do you have an example of success here?

One is very well known. That is Amazon who first sold books, and then multiple products on its website then it did a business model change by going into web services to help other companies get online. They did another biz model change by selling hardware. They had a new revenue model. They are basically a sequential biz model innovator.

Another example is Dow Corning. They created a separate business called Xiameter. They realized they had customers who need the basics of their products at a cheaper price. Dow saw this and realized they would need a different set of rules. They set it up as a biz portal and have the customers order right online-changing the specific rules of how silicone is purchased. They created net new growth.

The skill sets and talents that built Amazon as a book-retailer and Dow-Corning as high-end technology equipment provider were not the skill sets they needed for these new ventures.

Can the team that built a successful formula 1 racer be the team that builds a successful Baja-500 racer? How did these companies carve out these individuals requiring different skill sets to find that foothold? How do they find the talent and skills to carve that out?

Certainly some new people are needed, but what is more important to build a successful team is that you have to have people focused on one effort or the other. They must continue to do the core effort or they are separated to do the new.

It is about hiring a couple of new people and leveraging the existing team. You don’t want to lose the base of knowledge by hiring a whole new team and not leveraging the power of the core business in creating the new. That is exactly what Dow did in creating this low end business by not having these two companies connected together.

24:52

Failure is a part of this process of seizing the white space. How does a company culture recover from a white space failure?

I think the way the failure can be tolerable is to recognize the difference between a failure and a mistake.

A failure is really about engaging in an experiment that is not going the way you had hoped or planned, but you can extract the learnings to do something a different way.

A mistake is repeating the same thing twice.

Failure gets managed back to the point that you start small in a foothold. You have a transaction with a customer but it is small and it enables one to learn by that direct interaction.

The problem so many times that companies face when they go into white space, is that they do it in a bold and large scale effort. Because it was so bold and took so much effort, the impact of the failure is huge given the level of the investment.

If you start small, you are actually more capable of picking up the pieces and going in the right direction.

What are the 4 variables that determine a successful profit formula?

1. Revenue model
2. Cost structure
3. Margins
4. Resource velocity

This is not meant to be financial 101. I have pointed them out because I think they need to be thought about first and foremost.

A revenue model is how much money can be made in sales.

Cost structure is both direct and overhead costs.

Then I talk about margins and resource velocity meaning the speed by which inventory and assets and utilization happens to cover the cost structure.

The simplest example of these four variables is the retail industry. There was a business model innovation with the discounts stores. Traditional department stores marked up their inventory 40% and then they turned the inventory 3 times over the course of the year which equals 120% return.

Discount retailers changed the game. All they did was decided not to mark up their inventory as much. They turned their inventory faster through their system.

What I find as the biggest hurdle for companies trying to create new business: it is hard to think about new unit margins for their products and services. They are concerned changing the market metric will change their cost structure, but the reality is that they do need a new overhead structure.

The other thing that is difficult is to turn the inventory quickly.

Which one of these four is most often overlooked by businesses?

The fact that the fixed cost structure is often overlooked because it is taken as a given. The term resource velocity is also overlooked because it too is thought of as a fixed cost. The reality is you may have to change the fundamental elements of how you make money as well.

You quoted the former chairman and CEO of LockHeed Martin as saying:When it comes to diversification, the defense industry is unblemished by success. Can’t we apply this quote to a majority of industries in the US, right now?

I think so. In looking at the history of how companies achieve growth, I found there are similar challenges within industries – the challenges of diversification starting in the ‘60s, as being a venture into fool’s gold. They weren’t seeing the value in doing that.

What happened in the 80s and 90s was sticking to your knitting, profit from the core; don’t venture out beyond anything your core biz model.

The problem with their diversification is that companies were doing new things, but not changing the biz model. It would go into new areas with an ability to relax the rules, then diversification could happen.

Companies need to open up and not be afraid of failure.

Your graphic on page 57 shows there are bases 4 shifts in competition. What are those?

The four are:

  • Performance
  • reliability
  • convenience
  • cost.

It is a way of thinking how product performance changes over time:

  • First it is about the basic product features and functions.
  • Products move to be more competing on reliability.
  • It moves towards convenience and customization.
  • Over time, products become commoditized and become about cost.
The simplest example is personal computers. Apple and Compaq came in in the late 70s in terms of performance. Reliability steps in on the brand of Apple and Compaq. Then convenience moves in and Dell forced convenience with their Dell Direct model. Now we see PC move towards being a cost game. What happens to Dell who were based on convenience, is no longer relevant.

What this chart does is to explain that in the early stages of a market and the company is competing on performance and reliability, they will drive the way they out-compete based on product and innovation. When things start to move to making something more convenient or accessible, we often see we can’t do it just changing the product or the packaging. We must change the biz system as well. That is what Dell did in the 80s.

When you go to cost and delivering at the lowest cost, you must create a new model to do that.

41:09

It made laugh darkly. The 4 shifts showed the trendline from heaven on earth and business salvation with margins and market share to commodity hell with no margins and a dying market.

You pointed out those shifts occur sequentially. But can a business reverse them within either their business model or their industry?

Yes. The contrasting case study that I use is Hilti - They reversed the process of commoditization. They make high end power tools. They decided by understand their customer on construction sites, they needed to do something different. They decided to lease their tools. They sold these now to the CEO of the site vs the managers. They had to understand what was happening on the construction sites and set up a service model that was highly valued by these customers.

When do you as an investor say no more white space ventures?

The key componentry towards saying no is: the knowledge to assumption ratio.

Any effort to create a new biz model or system – we know for sure there is a high set of assumptions and a low amount of knowledge. What we are looking for when we invest in companies is to find out how to get those assumptions converted to knowledge.

When the knowledge gets built so we know the course of action won’t be successful then the trick is to shutdown things sooner than later.

You work with start-ups. We need a lot more start-ups in our economy. For the entrepreneurs and start-ups and small businesses listening what are three keys to insuring they can always venture into their own white space?

1. The first and foremost is to start with a real customer who has an important unsatisfied job to get done. Focus on real value.

2. It shouldn’t just be about developing the standard biz plan. The plan is best served on “how will I best learn. What assumptions should I test?” The first biz model that is formed is not quite right. They have to embrace learning.

3. Recognize that it will be about where you start and how fast you stage the effort. Companies that are starting up should not go to scale until they are clear about what they have learned. They are also confident on the knowledge side to overtake the assumption side so they can accelerate to become a large business.

49:11

Singapore as a nation ranks higher than the US in every survey for innovation resources and results. Is it a coincidence then that you consulted with the Singapore government on their innovation policies? What are they doing that we should be doing?

It has been about 5 yrs since that consulting effort, so I am not privy to all of the things they are doing now.

They leveraged our perspective about disruptive innovation and thinking from a business model perspective. They moved on to do their thing.

What I think has helped them, they recognized that they could not achieve their continued growth by having multi-nationals come over. They knew some of their own growth would have to come from their own entrepreneurs. How could they enable them to do things?

I think Singapore has embraced their own appropriate language what innovation means and how to both encourage and sponsor it.

We have to develop our own language that goes beyond product and process and we will be much better off.

Singapore tends to be strong sponsors and drivers of initiatives and that is an important element of success.

Does social media play a role in democratizing products and services? Does it expedite this, hinder, or have no impact. Do you have examples?

If you think about all of the non-consumers worldwide, I think it is a great opportunity for corporations who are trying to go global. The key is to recognize and deliver value, it may not be enough just to tweet the existing model. We do have an opportunity to democratize but we have to be more expansive.

I know you have a busy schedule. What have been the best 3 books you’ve read this year?

Where can we find you on the web?

Thank you, Mark!


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