I would like to introduce our next speaker. He is a co-founder and partner of InnovationLabs, a very competent facilitator who helps clients all over the globe, as well as a highly acclaimed author of several books, even some he did not list.
This presentation is intended to be a bit provocative. I am not knowledgeable in your particular field, but I work a lot with business models that may have some relevance to your work. We've seen some overlap in the concepts they and you are working on.
The presentation is divided into a couple of different sections. This modeling is very important because it enables us to understand complex things in a visual way.
The term " models" has not been defined. There are probably as many definitions of it as there are people in the room. The venture capital community has done a lot of work on this. They understood that business models had to be capturable and expressible.
Alan Kay is one of the pioneers of innovation at Xerox Parc and made this quote, "point of view is 80 IQ points." If you have a bad model with incorrect assumptions, you have to subtract 80 points from your IQ.
Imagine if you had to describe Rocky Mountain Park without using this map. It would take volumes in text and yet takes only one picture to give you plenty of details to understand or navigate the area.
We use models all the time. There is an interesting aspect to models. The KGB used to create bad maps to keep people confused. This is a great example of why maps and models need to be reality-tested.
You need to ask if customers really want to buy this stuff? Can we fund it? Another model I find useful is a model of change. You can see that it does not move in a one-to-one ratio, but in an exponential curve. Here are some examples of this exponential shift.
I found some graphs on the internet that shows this change in a variety of systems, such as population, carbon dioxide in the atmosphere, and Moore's Law.
The problem for organizations is that there is a gap between reality and what we're prepared to deal with. There is a management gap as well as a conceptual gap. This we need to accept. You're here, this is reality, so figure it out, deal with it, manage it.
Complexity creates certain problems for management. Understanding complexity could be one of the most useful classes for all MBAs.
This model is attempting to show that in any industry there is a peak and then there is a downhill. Some recognize it as it comes and some only after it's passed. If companies don't recognize it, they just keep doing the same thing over again and expect things to get better. This is a risky situation and most managers are risk-averse.
Here are some names of companies who have been on one side of the S-curve or the other. Even though Southwest is smaller than most of the other airlines, they are one of two U.S. airlines who are actually profitable.
You may have known an Ace Hardware store in your town that is actually a local business. Home Depot has mostly put the local people out of business, but Ace has recently changed their way of doing business in order to compete with them.
Here are some other comparisons: Many years ago, American Express was the card to have, but now even though you might be carrying the card, because of the fee and payment structures, you almost always have a Visa card that you use most. How many times do you use FedEx because you want to know if and when your package gets there?
Now Sears and KMart have teamed up so they can sink together. Even though Walmart is on the top right now, that may not last because they are being caught at certain unethical practices. I'm sure these practices they are engaging in that probably would have not been done by Sam Walton. Which leads to another challenge: Having a innovation entrepreneurial leader who doesn't transfer that spirit to those who will carry on the company.
Let's move to Business Model Warfare.
I worked with Daimler Chrysler and realized that they are truly a communications company.
In the not too distant future, you will have computer chips in your clothing.
Jet Blue is advertising their service on the fact that they have satellite television. They are now a telecommunication provider. You see this happening on many airlines.
To summarize, this is a parable: The difference between success and failure in venture capital investing is the ability to be flexible. If you go back to the list of companies who were successful, you'll see that they changed their business model early on in their lifecycle. They discovered by necessity that something had to change in the adaptation to the conditions of the market.
An entrepreneur will tell you that it's important to go out into the market as soon as possible and get as much information as possible about the market.
Here is the idiot's view of CDFI. Here's I've created a matrix of wealth to products in the transportation industry. You could improve many things in this model, but it's the story that can be helpful.
Let's apply this model to GM. The idea of the company was based on a tiered notion. GM had to adopt a more complex business model. They have more options in cars, got rid of some models and then got into finance as well as the Onstar system, which may be their greatest profit.
As you'll see now they are really a finance business. What does this say about the American auto industry? Ford is the same situation. They are only making money in financing cars. Toyota will surpass them in the next couple of years.
The next system is IBM. They were originally a hardware company. By 2004 things have changed a bit. IBM makes 46% of their revenue on services. Now they've sold it to a Chinese company. Here's a quote from IBM in 2004. There are many other companies who are in the middle.
The whole world is trying to get into your market. Something is really mixed up here. There is a challenge because it's hard to see.
Let's do a little modeling in the Financial Services market. You could argue where I've placed these bubbles and I would welcome feedback. There is a lot of movement and blending going on.
I am going to flip this bell curve on its side. Here i do a little segmentation. There is a group called the working poor, which I show by this segment here.
The book called, Crossing the Chasm, was written by a guy at a high-tech marketing firms. He has taken Roger's idea of the bell curve to high-tech marketing. He segments into 4 categories: early adopters, visionaries, pragmatists, and conservatives. All the high tech companies are looking for the visionaries. They are the ones who have a business need and acquire what they need. Any of you who have CRM systems, know this group.
Part of the insight of the model is the chasm. The early adopters and visionaries will buy new technology and are not price sensitive. On the other side are the people who only buy when the price is right. The motives on either side of the chasm are completely different.
If you want to get across the chasm, you have to flip your marketing. Marketing, metrics, management have to flip. Companies who can't get across this chasm die.
How does this relate to you? I'm proposing there is a chasm you're facing. In CDFI, you have to define your market. People in this room will define it differently. If you want to have a consolidated model, you will have to have a conversation about these terms.
Conceptually going to scale it implies that your target market is larger than your existing market.
There is a cellphone industry in Bangladesh. They're going across the chasm in the other direction. GrameenPhone is a subsidiary of GrameenBank which is a CDFI. It's a marvel of a story that encourages individuals to become entrepreneurs.
Why would the Norwegian telephone company go to Bangladesh? Because of the market.
From Kirsten's and Greg's paper, you can see that there amy be differences between the target and existing markets. There may be differences in capabilities, how to find customers, kinds of choices, types of infrastructure, funders' expectations.
Here are some challenges that I would offer you: The first one is about shared infrastructure. All these institutions exist. How many can you tap into or are you going to have to replicate?
The second one is about whether it's easier for the mainstream to move into your world or you to move into theirs. You may meet in the middle as competitors or partners?
The third challenge is about raising enough capital. It's fundamental to your industry.
On your table you'll find a questionnaire. Fill these out and we'll aggregate them to see if we find anything interesting. (click here to link to the actual filled out questionnaires)
Change is confusing and you're going to have to deal with mixed messages.
New business models are ahead.
What if we're only halfway across the curve? If we're not fully there in the same income but the same characteristics, how does the business model have to change?
CDFI is highly customized. Each of you will have different definitions. You need to ask if the chasm is actually vertical? This will be different for each one.
This is while modeling is helpful. If you don't know where you are, you won't be able to get where you want to go.
Looking at unprofitable business models, did anyone look at it and ask them why they never had any foresight? The toughest thing is for the CDFI trade association to develop innovation, especially if the members are not looking at the train coming down the trACK. What is the feedback for those who did not look ahead?
The most prevalent explanation I've found is group think. Groups of people who are homogenous tend to converge in their world views. All the metrics and rewards in organizations go toward everybody doing the same thing. We're perpetuating this with the MBA curriculum which is very backwards. People just became able to think outside the box.
THis is a very interesting and provocative tool. There is a competing model around who is doing the crossing. The CDFI is to show the private sector that there are other ways to have a profitable model. Is the mission of this industry to cross the chasm or to move the bar so that the other side moves into it? We need to take advantage of the change of public policy.
Looking at the mission is a very important query and conversation.
We specialize primarily in housing. As you talk about changing business models, doesn't it imply that the lower end of your curve, how do you make sure that you're still serving our original intention?
British Rail is a great example. They kept cutting off the tail until they made the entire animal smaller and then realized that the feeder routes which were not profitable were making the main system very profitable. Companies tend to look at their products and services but this is not accurate. It's all a cohesive system that works together.
What do existing companies reinvent themselves?
Most of them don't. If you look at the S&P 500, the average life span in 1930 was 50-70 years. Now it's 20 years. In 2020, it will be down to 15 years. Companies are really bad at reinvention. SOme companies create incentives, such as Amazon. Shell has a lot of business processes built in.
In Shell there is a process called Game Changer. They get $100M of business growth from this. They have a formal global process for gathering ideas and bringing them to market.
Amazon has a Just Do It reward system. This is for ideas that you just bring out without asking permission. Institutionalizing this in the business is radical.
