How to identify adjacent markets that make sense and make money In them...

What Else Can We Do?

When growth falters and investors get cranky companies start to ask this dangerous question. It is dangerous because, especially in high technology companies, the smart guys think the answer is easy: We'll just tweak the doumaflatchit, add more flux capacitance to the romulous and get Scotty to throw in some more dilithium crystals. Customers will line up like trained pigs again.

This is the field of dreams: Build it and they will come. I would term this, gently, inside-out thinking. Whatever it's called it usually fails and wastes resources and demoralizes everybody in the process[1].

By 2004 the firm where I worked had convincingly demonstrated this principle.  A corporate "Innovation Initiative” had established a $200M revolving investment fund and solicited technology ideas mainly from the engineering community. After four years the scheme had started no successful businesses, but had inflicted significant financial losses on the company and also serious career damage among the participants.

Although the company launched two more similarly doomed efforts over the next decade[2] a guerrilla movement searching for a better way sprang up.  One of the rogues, a brilliant ex-fighter pilot who was determined to escape the old Sisyphean fixation, undertook a global search for companies that had demonstrated proficiency converting innovation to cash and found IBM and Shell Oil and several others. Among them he noticed a curious pattern: their annual reports, newsletters and organization charts contained a common language about growth. He traced this vocabulary back to the work of Mercer Management Consultants, a small operation located deep inside the Marsh & McLennan empire, and to a technique called "Value Driven Business Design."[3] This proved to be the secret sauce he had been seeking. 

Business design applies The 21 Rules powerfully to the problem of creating new businesses. In a nutshell, “VDBD” as Mercer called it takes a market-driven approach to business model innovation to create an integrated, internally consistent design whose elements are mutually reinforcing. And it works: one of our teams used VDBD to launch an intelligence-surveillance-reconnaissance services business that generated $200M in revenue during the first year.

Business design helps you create new businesses just as you might design and develop new products and services, with a disciplined, repeatable process that uses deep market insights to build businesses that are purpose-built to serve them. The steps are simple, intuitive and intensive:

• Define market domains where you believe you might be a allowed to make money
• Prioritize segments and select customers
• Dig into customer value chains to find points where you could make money if you had the right offerings
• Build offerings (hardware, software, prices, business terms, etc.) that you are convinced customers would buy if you offered them
• Identify the capabilities required to produce these offerings
• Examine your company to see which of these capabilities you have and control, have and don’t control adequately, or need to acquire
• Examine the environment for potential partners (and competitors, which are also potential partners)
• Create a plan to assemble the capabilities you already have in the most appropriate way, and to acquire (by internal development, contracting, merger/acquisition) the capabilities you don’t have
• Design an organization that can manage all the capabilities, assemble and deliver solutions and capture business.
• Lay out a plan to take all this to market

A disciplined way to design and develop new businesses just as you design and develop new products and services.

Lessons[4]

There are lessons to be learned from successful attempts at business design and also from failures.  Here are a few:

• Picking adjacent markets that make sense is a critical precursor, without which the application of business design is a waste.  IBM invests significant resources in figuring out which adjacencies make sense.  When we benchmarked them we learned that their strategy team continuously generated fresh information about adjacent markets and reviewed the results with the top half-dozen members of the corporate leadership team for one-half day each month.  In these sessions the IBM chairman and his top thinkers looked for instances where value was either pooling in markets IBM did not serve and should, or was moving away from markets IBM did serve.  Once they selected an adjacent space top managers created a "Strategic Business Opportunity" (“SBO”) team to design a new venture in the space.  Their process had generated about 25 SBOs, many of which remained active, and four or five of which were generating $1B in new annual revenues.

• Funds not dumped into dumb ideas are as good as earnings. There is no substitute for subjecting new venture ideas to ruthless market-based scrutiny. Design teams should be rewarded for terminating bad projects.  Killing dumb ideas is very productive.

• The killer application hit rate is extremely low. High technology companies frequently invite their geeks to rummage around in the technology portfolio to identify “neat” technologies that they are convinced will offer the world the next iPad, and then they invest big money to make this dream come true. The risk of value destruction is high: “…of 750 large companies in the decade before 2008… Apple was the only incumbent in this period to grow by creating new markets repeatedly through disruptive innovation.”[5] And it turns out that there is only one iPad. There are many Newtons. Even Apple crashes a lot before it makes a killer app fly.

• Business design is about shaping the company, not shaping the customer. Product teams are sorely tempted by a selfish mentality that seeks to manipulate customers into buying the products we already build. They are Lionel Bart’s flower girl in “Oliver!”

“Who will buy my sweet red roses?

Two blooms for a penny.”

This is the most sickening common attribute among much that passes as “sales” training. The closest analog in the defense and security business is a military notion called “shaping the battlefield,” which means eliminating the enemy's capability to fight in a coherent manner before committing forces to decisive operations.

Framing the customer as the enemy is inexcusable for marketing people. Business design thinking demands that the analysis must begin with market and customer needs and must concentrate on value propositions that will serve those needs, and then drives the enterprise to reshape itself in order to serve those needs profitably.

• The immune system will kill you. New ventures usually offer inferior marginal returns at first and they may threaten to cannibalize existing business lines, so leaders of these existing businesses naturally attack. But long range business plans are notoriously optimistic and vulnerable to somebody. Disruptive solutions targeting over-served customers inevitably appear and the old enterprise captures neither the planned returns nor the earnings that might have been available from its own now-terminated offspring. Disk drive and steel companies learned the hard way. This is why it is important to locate design teams close enough to the existing businesses to scavenge from their infrastructure, but far enough away to avoid infanticide.

• Beware premature transition. As much as the existing businesses abhor new ventures, as soon as the new ones start generating profits the established businesses reverse field and struggle to suck them in. If this happens, the new venture can be disrupted and lose critical mass, fragment and fail.

Practical Steps

• Identify adjacent markets that “make sense.” Expect the strategy team to generate the adjacent space information top leaders need to identify value migration trends, and populate the team with innovators who are willing to think without constraints. Engage top management regularly to explore fresh data and find new insights. Anchor any outside consultants in this internal process.

• Create a team of business design experts. Train a core group of business designers to internalize, operate and improve the process. Allocate a protected budget for the design work, and as business designs are accepted allocate protected budget for the new ventures. Adjust the incentive system to encourage the incubation of new business ventures, elevate to the top the decision about when and how to transition the new business to a new or existing operating unit and time the transition very carefully.

• Maintain a constant high level of senior management focus on the design, launch, early operation and transition processes. Launching a new venture is hard. New ventures rarely succeed. Investing as heavily in the design a of new business, however, as a firm would invest in the design of a new product, improves the odds.

Business Design is Worth It

Most companies are probably already doing the things they are good at. Doing something new is hard. Fortunately, business design transforms how the firm thinks about new business in a way that is systematic and effective, and not mysterious:

• It helps a company serve its customers, because it is fundamentally rooted in market and customer needs, including unarticulated and even unrecognized ones. 
• It resists bias because is data intensive. It doesn’t care what you think; it cares what you know. 
• It feels natural because it harnesses a technology company’s natural understanding of design, turning the firm's own familiar tools and experts toward modifying, complementing or replacing the existing business model to make new revenues and earnings happen.

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[1] “Failure” is defined here as investing large resources in “neat” technologies and sure-fire ideas, supported by field-of-dreams strategy, while generating few if any financial returns.

[2] The advanced technology group pursued “White Space,” a similar collection of initiatives seeking killer applications that added no new businesses of any significance to the income statement.  Years later “I2E” for, possibly, “Innovation-to-Enterprise,” or maybe “Invention, Innovation, and Entrepreneurship,” adopted the same approach and yielded identical results.

[3] Mercer and it’s Value Driven Business Design practice have since been folded into a larger Marsh & McLennan consultancy called Oliver Wyman (www.oliverwyman.com/‎) and their work continues out of London.

[4] Many of the ideas here derive from Clayton Christiansen’s work published in The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School Press, 1997.
[5] Solving Your Biggest Innovation Challenge by Marla Capozzi and Ari Kellen  |   HBR November 21, 2012