Risk, Great Ideas, and Your Business Model

By: Langdon Morris

Where do great ideas come from? Obviously they come from many sources, which means that your systematic innovation process has to support and sustain multiple efforts at ideation in parallel. In the following article we will explore some promising ways that you may be able to find ideas that will take your own business forward.

Researching your own business model

One of the most important purposes of the business model map is to help you understand your own business model, which focuses your thinking on how your firm is organized to make money, and the value proposition you’ve created which results in customers paying you for the products and services you sell.

To dig into your model more deeply, begin by making a list of 5 to 10 reasons that your customers are your customers. For example, do customers come because of your business’s location? Or is it the distinctive quality of your products? Or perhaps their designs? Or maybe you have a strong or particularly efficient distribution system? Are your prices lower? Is your branding better?

Of course you have impressions and insights about this, perhaps a great deal of insights. But an even better source of the important information probably isn’t your own ideas, it’s what they think, what the customers themselves believe, so we’re going to go through some techniques you can use to gain insight about your customers directly from them through a focused process of researching.

And in addition to talking with customers, it may also be quite useful to consider non-customers, the ones who don’t buy from you, but could. The question, of course, is Why don’t they? Does your offer lack something they want? Does your brand lack appeal for them? Why are competing offers more attractive?

It’s also useful to find out the views of your partners, as well suppliers and even community members, for their perspectives on your business may offer useful insights that could lead you to discover new innovation opportunities.

Customer needs – known and unknown

To find out what customers want today and may want in the future, you need to go out and talk with them. It’s not a phone call, it’s a face to face dialog, preferably in their own workplaces. Ask them straight out what they want and what they like, and what they don’t like, and you’re likely to gain some interesting insights once you get past the everything’s fine” talk. Probe deeply by asking open-ended questions that they have to think about, explore what they’re expecting for their own futures and what their needs will mean for what you can provide to them.

You want them to be fully open, so take it as a gift when they complain about your firms’ work, or criticize your staff…

You want them to be fully open, so take it as a gift when they complain about your firms’ work, or criticize your staff and don’t try to explain or defend even though it may be very tempting to do that.

• When are things difficult? How can you make them simpler?
• When are things awkward? How you make them smoother?
• When are things unsatisfying? How you can make them satisfying?
• What causes worry? How can you alleviate it?
• What causes confusion? How you make things clearer?
• What causes waste? How can you eliminate it?

All of these themes may lead to opportunities for improvement of their experience, and when you improve their experience you create brand loyalty. We call these types of opportunities “unmet needs,” and they’re exactly what you need to find since every unmet need is also an innovation opportunity.

In the words of innovation teacher Clayton Christensen, your task is to understand the job that the user/customer wants to do, and then to figure out how to do it more simply, more efficiently, with less waste, and with more fun. When you discover experiences that are difficult, awkward, unsatisfying, etc. you know that a task or job is being done inefficiently, and hence you’ve also found the opportunity to remove inefficiency and replace it with the opposite, simplicity, ease, or fun, and get paid for doing it.

In addition to your customers, you’re likely to also learn a lot from non-customers. If you can find out why they choose products or services offered by your competitors instead of yours you’ll probably be gaining a lot of insights into your brand and your organization.

In addition to talking, it may also be worthwhile to simply observe how they work, or what they do.

There’s a discipline behind this sort of observation, and one of its insights is that the way people behave is not necessarily exactly how they say they behave; what they do, that is, is often different from what they say they do. In fact, what they do is quite often significantly different from what they tell you, and you may not find this out unless you observe them.

For example, during a research project for a food company we interviewed many families who fit into their target market group, and these consumers were happy to describe for us their very healthy eating habits. A look into their storage closets and pantries revealed a rather different view, though, as all the snacks and sugary treats were there on full view.

So what did we learn? If we had talked to them at the store, or at our offices, we never would have discovered what they really eat; we had to actually go to their homes, talk with them, and observe their own living environments.

A team of researchers at Wells Fargo bank practices the same techniques and learned so much about their clients, and found so many new ways to help them as a result, that they trained hundreds of their sales people in these observation techniques, and they count the additional sales that they’ve achieved in the tens of millions of dollars.

So meet with people not in your office or in some neutral (sterile) focus group meeting room, but in their own homes, offices, factories, distribution sites, and in their cars, airports, hotels, stores,and wherever else they’re engaged in doing whatever it is that you need to learn about.

These are probably not going to be 10 minute conversations or 10 minute observations, but dialogs of an hour or more. Delve behind the attitudes and reasons behind the choices to expose hidden values, beliefs, and expectations. Find out why they make the choices they make. Learn what works for them; learn what doesn’t.

The science behind this is called ethnography, and it’s derived from a branch of anthropology that’s focused on the study of human culture. One hundred years ago when ethnography was developed, the practitioners were Margaret Mead and Claude Levi-Strauss and dozens of others, mostly academics, and their research subjects were human cultural groups, tribes and societies who lived in exotic places. Many of today’s ethnographers are working for companies to help sort out the complexities of human choices and human behavior in the marketplace. Intel has teams of ethnographers who study computer usage around the world; ATT has teams that study how people use phones; and every other type of company has conducted ethnographic studies, in food, paper, metals, appliances,cars, banking, energy, health care, and on and on.

Kimberly Clark used ethnography and discovered a new market that was quickly worth $1 billion in annual sales, as did Alcoa.

And you can do the same thing, by observing closely, withholding judgment, asking open ended questions, and being open to and indeed interested in learning what’s not working, and how it can be fixed.

Discovering what’s “less than ideal”

One of the reasons that it’s not enough to ask people about their own experiences is that in many situations they can’t tell you much of use. This is because many of us are deeply conditioned from a young age to accept things as they are, even when they’re less than ideal or even pretty bad.

Someone has taught us that whatever is not working for us is our problem, not theirs, and we have to endure it, and this pattern is so common that we often fail to notice how bad things really are.

Someone, probably an authority figure (often a self-appointed one) has taught us that whatever is not working for us is our problem, not theirs, and we have to endure it, and this pattern is so common that we often fail to notice how bad things really are.

Until there is a better alternative. And then given a choice, people rush to use it, and readily abandon whatever wasn’t working. This is true whether we’re talking about people rushing out of East Berlin upon the fall of the Berlin Wall and the collapse of the USSR, or if the subject is the mass migration from cell phones to smart phones. At the exact moment that people become aware of a better option,the contrast between the old, worse way and the new, better way becomes abruptly crystal clear, and they switch.

Waiting in line at the post office was accepted as normal until Fedex showed that it was unnecessary. And …

• Drinking “coffee” was normal until Starbucks offered higher quality beverages and a much more pleasant experience.
• Using DOS was fine until there was Macintosh.
• A corded phone was great until there were cordless ones.
• Cell phones were good; smart phones much better.
• Sears was fine until Wal-Mart was better.
• Taxis were ok; Uber is better.

Many innovations transform experiences that are accepted as normal and natural without question, into those that are better, or even much better. So your task as an innovation hunter is to identify how, where, and why your current customers, non-customers, and future customers, aren’t (or won’t be) getting what they would prefer to have, what they really want, or even what they need. And when you figure out how to do that at a price they like, your business moves into the category called “innovative.”

Outside-In

You’re learning to think in a new way, because you’re becoming a problem-seeker. You learn to see as “not acceptable” what many others just accept as “normal,” and your senses become attuned to the gap.

Many people are pretty good at this, but it’s not merely an innate talent because anyone can learn how to do it, including you. What’s needed is intention, practice, and the willingness to find new perspectives.

And this last part, perspective, is a really interesting one.

In general terms we can learn about perspective by making a very useful distinction between “insiders” and “outsiders.” Insiders are the ones who live and work inside a system, inside a paradigm or viewpoint. They know it intimately; it is their skin, their air. These are employees in a company who know how it gets work done because they do it that way every day, and frequent users of a product or service who depend on it. They know the rules, the tricks, they’re insiders. Being an insider by definition shapes ones viewpoint and experience, it provides a context and perspective.

For example, a French person knows intimately the French society, knows the laws, and the big ideas that shape French culture, knows the hidden or unspoken rules, knows how to get around Paris, and can communicate naturally with other French people. An Iranian knows the same about Iran, a Russian about Russia, an American about America, and so on, for each and every one of the thousands of distinct cultural groups around the world.

But then it goes deeper than that. A person from Brittany, in the far northwest of France, knows a different version of French culture from a Provençal of the south, or a person from French Polynesia or French Africa. Each of these is also a culture, possibly a subculture, and each has its own rules, its own standards, mores and styles.

And each has its own assumptions, both overt ones that people discuss, and hidden ones that are deeply important part of everyone’s lives, but which are often not spoken of at all. Outsiders are different. They’re the ones who are familiar with none of those things. They are the ones who ask the stupid questions that all the insiders already know the answers to. They’re the ones who, when they ask why, get the response, “Because that’s how we’ve always done it!” Often this response comes with some sense of indignity, as if it is impolite or inappropriate to not know how we do it.

By the very act of asking, the outsider has branded him or herself precisely as an outsider, as someone “other,” and this is a matter of derision or even condemnation.

In extreme contexts it is wrong to be different. “Our” ideas and texts are sacred; “yours” are profane, and over such issues wars are sometimes fought, and people die.

These viewpoints, the distinctions between “us” and “them” are characteristic of human culture, and this is precisely the domain that we must explore, though perhaps not as theologists, but as practical people looking for a better way to accomplish the tasks of living.

Outsiders are often the ones who usually see more clearly what’s not working.

And in this way we searchers and researchers should take on the perspective of outsiders, for outsiders are often the ones who usually see more clearly what’s not working, or where deeply held assumptions have so conditioned peoples’ minds that they readily accept less than ideal circumstances, products, or services.

In the history of entrepreneurship it has frequently been the outsiders who have seen what’s not been working, and who then created many of the great leaps forward. Many of the most successful, however, have combined deep insider knowledge of a market or an industry with the outsider’s ability to see what’s not working, and to see how solutions introduced laterally from other industries may solve problems that the insiders may not have even recognized at all.

Fred Smith was an outsider-insider who revolutionized package delivery business; he founded Fedex.

Dee Hock was an outsider-insider who transformed personal finance; he led the team that created the Visa credit card, which revolutionized personal finance.

Howard Schultz was an outsider-insider who changed the world’s beverage habits; he made Starbucks into a global brand.

Herb Kelleher was an outsider-insider who transformed air travel; he co-founded Southwest Airlines, the first discount airline, and the one that changed air travel forever.

There are plenty of other examples, and they all tell the story of someone who saw a better way, and knew enough about the inside of an industry to see how it could become much better.

And what about you? You know your company, your sector, your industry, and you know it intimately. And as you develop the capacity to look at it as an outsider you’re likely to find many opportunities to innovate, to grow, to meet new needs in new ways.

Study business model innovators

What is the most important quality that successful business model entrepreneurs have in common? You might say that it’s their persistence or perseverance, tenacity, determination, or perhaps cleverness. These are all important, of course, but in our view there’s another factor that’s not so well recognized, but it may be the most significant ingredient that successful business founders have in common: they combined the attributes of insiders and outsiders.

They understood their business domains from the inside, and knew well the deep intricacies and the qualities and characteristics necessary to be successful. But they were not content to operate a business in the conventional way. Instead, they also brought to it the outsider’s perspective on what could or should be done differently.

Both types of knowledge were essential to their successes, and it was largely their capacity to combine them, to find new and better ways to do well-know jobs, that became the foundation of their super -successful ventures. This, then, is your challenge as well: to see from the inside what is, and from the outside what could be. It is your powers as an observer that are most likely to disclose to you where the opportunities lie.

Hence, in the outsider role you must set aside what you know about the business or the company, and see through new eyes, to discover the insights and possibilities that your insider knowledge and experiences have blinded you to.

The question, then, is what companies in your business have done what these business model innovators have done? Who has shifted the dynamics of business in your own field? And from what, to what, did they provoke the change?

Understanding their accomplishments and especially the thinking behind it can lead to a much deeper appreciation for the structure of your business or industry, and that in turn can sensitize you to new possibilities and opportunities.

This then relates in a very important way to the definition of luck, and to the role of luck in innovation. In fact, luck almost always plays a part in the conception and creation of any innovation, a part that is nicely explained by the famous comment of the great French chemist Louis Pasteur, who commented that “luck favors the prepared mind,” meaning, of course that the lucky accident comes about not so much by change, but as a direct consequence of the preparation which preceded it.

This concept of luck removes the notion of randomness, which is generally part of how most of us imagine luck happens, and instead replaces it with the idea that we may seize upon opportunities that life, fate, or chance put before us if and only if we are able to recognize exactly those very same opportunities when they are presented.

By contrast, by its very inpreparation, the unprepared mind is not capable of seeing what the prepared mind recognizes. This tells that preparation is entirely required for luck to become present, at least as far as innovation is concerned.

The great golfer Gary Player expressed much the same sentiment in his comment that “the more I practice, the luckier I get.”

Knowledge of history is a great friend of the would-be innovator.

So your studies of past innovators and their work, in your field and outside of it, are an essential part of your own quest for innovation, and cannot be overlooked. Knowledge of history is a great friend of the would-be innovator, and most successful innovators are more than casual students of history; many are quite rigorous about it.

Engage your community

Another useful perspective to consider is based on the awareness that no business exists in and unto itself. There are always suppliers and partners and of course customers, both upstream who providing you business with critical inputs, and downstream, taking your outputs for their own purposes.

Taken together, this group constitutes a community, or ecosystem, and your business occupies one niche of it. Do you intend to grow your business? Then one way to do so is to expand your role in that ecosystem, to find new ways to add value to the overall process chain of which your organization is one part. Hence, you have to figure out where there are opportunities, and course a great way to do that is simply to engage with other players, individually and in groups, and through those interactions to find out what’s not working, or what could be working better.

Meetings, formal and informal, conferences, brainstorming sessions and workshops are all tools you can use to expose new needs, uncover old but unrecognized problems, and collaboratively design win-win approaches and solutions.

Improve your supply chain

Most products and services reach the customer at the end of what can be a quite long series of transactions, handoffs, and exchanges that is sometimes called the supply chain. At each junction in the chain there is an exchange not only of products, but also of information. And each participant in the chain has to make decisions about what they’re going to do, and to buy, and what they’re not.

Hence, if your product or service is part of a supply chain, then studying that chain in depth may reveal significant opportunities for improvement. Go and talk to your supply chain partners, and find out how it’s going. What’s not working? What should work better?Where are the bottlenecks, and breakdowns, and gaps? How can the process be more efficient? Are there customer needs that are not being addressed? Are there new competitors coming that we should prepare for?

Apply new technology

The rapid acceleration of new technology presents enormous opportunities to meet the needs of existing and new customers in new ways, but also of course it presents significant potential threats, because it enables new competitors to enter your market in new ways.

And as we surround ourselves with more and more technology, we also create new ways to use technology to connect and to act, and this changes the structure of the market.

For example, the world’s advertising agencies used to have a wonderfully protected position in the ad market because they were the ultra-knowledgeable specialists, but then Google arrived and made it possible for all types of organizations to reach directly to the customers they really wanted, namely the ones who were already looking for them. Within a decade the share of the advertising market that the agencies controlled dropped from x% to y%, and Google became the number one ad agency in the world by a wide margin.

In hindsight it’s easy to blame the ad agencies for their lack of foresight, but in fairness Google’s leaders didn’t see it either. It took some years for Page and Brin and Schmidt to recognize that “ad words” and “auctions” were the money machines that would make the search engine into a world-leading business, and even then it happened only because one of their competitors did it first.

This is but one tiny example among thousands that show not only how technology brings change, but also how hard it is to predict what the impact will be.

Like computers have certainly done, every foundational technology that has ever been introduced caused fundamental change, and the last two hundred years of economic growth and development is essentially a steady parade of new tools that changed how we live. Steam engines, new metals, railroads, autos, electricity, refrigeration, vaccines, highways, elevators, airplanes, telephones,rockets, satellites, computers … each brought momentous change.And yet in most instances, few people who happened to be around at the time that these revolutions were introduced actually had a clear picture of what the outcomes would be. Just as the founders of Google took years to figure out how to make money with the stupendous innovation, many others did as well.

Hence, while the entire economy has been transformed from stage to stage, from agriculture to industry to information and services, at each step it’s been a process of discovery and invention rather than any progression guided by a grand plan. Some of the scientists, entrepreneurs, and technologists involved in all of these advances may have had a sense of what was possible, but only a sense.

But what they all saw, each of them, was a better way to accomplish some immediate objectives, and this set them on the path that led to economic transformation.

Anticipate customer needs

Technology changes the structure of the market by providing new capabilities, and it also introduces new needs and new desires. In fact, in the modern world our needs and desires are entirely confused with one another, and many of us have a hard time distinguishing the one from the other.

We need food, of course, and water and other necessities of life, but the need for technology is more ambiguous. Do we need cell phones and smart phones, or do we just like them a lot? Do we need apps and tunes and videos?

But we do adore them, oh yes we do! Consumer demand for cell phones, and then smart phones has exploded worldwide; during the last half of a single year, 2010, more than 350 million people became cell phone subscribers. It’s a big, impressive number, even more impressive when we break it down in smaller time increments:

60 million per month, 2 million per day, or nearly 1,350 per minute.

In 2010, in other words, cell and smart phone makers, providers and service companies were basically printing money, and as a result many of today’s richest people are those who own or owned cell phone companies, including Carlos Slim of Mexico and Mukesh Ambani of India.

New phones with new capabilities then bred new services, which in turn disrupted every consumer market and many B2B markets. Mobile banking, retail, distribution, publishing, printing, to name just four, are all much different businesses than they were before the smart phone.

With each new generation of technology new things become possible, desires become needs, needs become standards of use, and thus new behaviors emerge.

The questions that our adoration of technology must lead you to ask yourself and your colleagues pertain to what it means. With each new generation of technology new things become possible, desires become needs, needs become standards of use, and thus new behaviors emerge.

Your job as a small business leader and aspiring innovator is to figure out what this means for your own company, and your own industry.

Did taxi drivers see smart phones as a fundamental threat to their business? Probably not. Yet this is exactly what they’ve become, and for very good reasons. The transportation services that smart phones enable are just better. But it wasn’t so obvious until someone put the pieces together – felt the need, designed the apps, built the platform, recruited the drivers, and then convinced the customers.

And how did that happen? What was the triggering event? The founders of what became Uber were trying to get a taxi, and there were none to be found. Angry, frustrated, and wet (it was raining), they saw how to connect the pieces of technology into a solution, and they set about to build it. Now Uber is a company worth billions, and taxi companies are fighting back in the courts to stop them, but they’re also developing their own apps and platforms, and it won’t be long before all the taxi companies operate just like Uber does. Or perhaps they won’t survive.

It’s worth taking a deeper look at how Uber has changed the experience of “hired transportation,” because it reveals a lot about how technology can change the market. While this is not always so, in general it’s reasonable to say that a lot of taxis aren’t very clean, that a lot of taxi drivers are rude, and that standing on a corner for five or ten minutes, or half an hour, and waving at cars going by, hoping that one of them is an empty taxi that will stop for you, creates all in all a not very pleasant experience.

So let’s say you want to improve that experience – what would you do?

Well, what if you could request a taxi via your phone? And what if the phone had a map that showed you where all the taxis are, and especially the one that’s coming to pick you up? Then you wouldn’t have to stand on the corner, in the cold and the dark, waving at cars whizzing by. You could instead wait inside where it’s safe and warm until the taxi arrives. And you’d know the name of the driver and the type of car. And you’d know immediately the
cost to get to your destination.

In the conventional taxi model you have none of those benefits, but in the Uber model you have all of them. And all of them are based on the principle that providing more information and more choice to customers makes for a better experience. This is what smart phones enable, and why Uber, as a company, has a huge market valuation while the taxi companies are complaining bitterly about the new competition that they are facing.

The smart phone, then, is itself a powerful driver of change, because it makes things possible that were formerly impossible. This is the essence of innovation – doing something that you previously couldn’t – and what’s happening is that smart phones enabled with and connected to a lot of other complementary technologies have changed how people think about a wide range of issues that are central to our lives.

Our phones tell us where we are and a lot about where we want to go – through maps, traffic time estimates, transit maps, transit schedules, flight schedules, train schedules, etc. This is information that didn’t used to be available to us, but now it is.

Our phones are also financial instruments, as we use them to buy things, from food to goods and services of all kinds. We also use them to manage our money, to access information about bank accounts, and to enable money transfers, payments, etc. And many vendors now use them as ways to receive payments, through apps like Square.

Phones are also medical devices, monitoring our heart rates, blood sugar, and in rural India, they’re connected to probes that do what EKG machines do, except EKG machines aren’t portable and they cost thousands of dollars.

Our phone are also entertaining us, with movies, games, TV shows, videos, sports, and music.

What else do you use a phone for? Email keeps you connected, along with Facebook and a slew of other apps that facilitate social connection and communication. Plus, it’s a phone.

It’s also a camera, a calculator, a thermometer, a drone controller, a clock, an alarm clock, a calendar, a to-do list, a notebook, a health care device, and, and, and…

If you add up the cost of all the devices that the smart phone has replaced, it’s quite significant. So the impact throughout the consumer electronics industry has also been pretty large.

And the point for you as an innovator is that this is probably just the beginning. What you want to know is what’s coming next, and for this you will require insight, hard work, research, and your imagination.

To help you, let’s see if we can identify some patterns by looking at what various apps do, and the underlying themes and utilities.

• Matching: Smart phones enable people with “needs” to be matched with others who can meet those needs. This is what Uber does.
• Transacting: Smart phones enable people to buy, sell, trade, track bank balances, and all things related to money, counting, and calculating.
• Locating: Smart phone enable you to identify where you are, discover how to get where you want to go, to find what’s near by, find your friends, find out when the next subway train is arriving, and find out where Latvia, Lithuania, and Estonia are too.
• Entertaining: Smart phones bring you all forms of entertainment; they also enable you to create entertainment through photography and video.
• Informing: Smart phones bring you access to information no matter where you are.

These are just five of their more general functions, but you get the point.

Next, expand on this simple list to explore how they may impact your business in the future. Some questions to consider are …

• What new forms of information will new technology create and deliver to us?
• What new services will the new information and the new technologies enable?
• How will providers and consumers use that information to change their environments, their lifestyles, or their own behaviors?
• What might this do to the structure of the market?

The cone of uncertainty and the power of prediction

These are not easy questions to answer, but they’re important ones to ask, to think deeply about, to discuss with colleagues, and to come to some conclusions about.

Interestingly, it’s not entirely necessary that your conclusions are actually proven correct, in the sense that your predictions and expectations have to be accurate to be useful. What they do need to be is specific, and they need to frame your views, right or wrong.

The reason that it’s more important to make predictions than for those predictions to be correct relates to the nature of change, the challenges of making predictions, and the need to take action now, long before the current trends and patterns become clear. The underlying issue here is that the farther into the future we think, the less likely we are to see accurately, but most of us have a pretty good idea about what we’re expecting for tomorrow. Aside from any big unexpected events that are entirely unpredictable, things like car accidents and terrorist attacks and earthquakes, we pretty much know how we expect the next day to unfold.

When we think a year into the future, however, things get considerably fuzzier. We may have some ideas, but it’s not all that clear. And five or ten years into the future things generally get entirely blurry. Most of us only have the vaguest outlines of what will be happening by then; where we’ll be, what we’ll be doing, and what the world will be like, well, we can only guess.

We describe the progressively less knowable future as a “cone of uncertainty” that begins with today. We know what’s happening now, but the further out in time we go, the wider the possibilities become, and the less predictable it all is. The spread at the open end of the cone to the right connotes the progressively higher levels of uncertainty that we face the further we get from today.

Of course the unpredictability of the future is a big problem for business leaders. The more they know about the future the better are the decisions they’re able to make today, so if, for example, we knew a particular key product or service is going to become obsolete by a particular date then we can focus our innovation investments on meeting that target.

But for the most part we have uncertainty. We don’t know, and so we have to guess, and it’s precisely because of this innovation becomes so tricky, so risky, so unsure.

Should we invest in product A or product B? Is service Y going to be disrupted by new technology, or service Z? The further into the future we’re thinking, the more we’re forced to guess, and when we don’t have much confidence in our guesses, we typically wait and see rather than acting. As a result of this progressive uncertainty, most firms focus their innovation efforts on short term needs and issues about which they have greater clarity. This circumstance leads them to create incremental innovations, small adjustments to existing product and service lines, but to defer or eliminate entirely the investment in big ideas for the future.

An excess of uncertainty causes investment to stop, and the net result of this pattern is that there isn’t enough investment in big ideas even by the big firms that will be most severely threatened by their own inability to change. Most of their current competitors follow the same pattern, watching and waiting.

The firms that do invest in the big, new ideas are often the ones that see how existing or new needs can be met with new technologies, and when they come into the market it is in an entirely disruptive way. These are often entrepreneurial companies and start-ups.

This pattern explains exactly why the taxi companies didn’t come up with the new approach to their business, but Uber and Lyft did. The established companies were busy running their day to day affairs, and they failed entirely to see that (a) people hate rude cab drivers, dirty cabs, and standing on the corner waving at the cars going by, and that (b) smart phone apps can link drivers, passengers, current locations, desired destinations, and the means to pay in a seamless, predictable, and mutually beneficial way. It’s a huge win for everyone.

Except the taxi companies, for which it is a huge threat.

If they had even bothered to draw a cone of uncertainty about their own businesses, chances are pretty good that the taxi companies would have made one that was quite narrow. There just didn’t seem to be much change in their futures. But the actual cone as revealed in hindsight was a quite heavily impacted one.

Focusing only on the short term needs that have clarity almost always drives them to make choices that are self-defeating over the long run, because this pattern renders them exposed and vulnerable to the big changes.

The first point is that this same error is the one made by the majority of business leaders, whether their companies are large ones or small ones. Focusing only on the short term needs that have clarity almost always drives them to make choices that are self-defeating over the long run, because this pattern renders them exposed and vulnerable to the big changes.

The second point relates back to the importance of making predictions, regardless of how accurate they are. A prediction about the future becomes a benchmark, and when you make a set of predictions about change and how it is occurring, and then track what actually happens, you create the capacity to improve your predictions, and if you do this diligently over some months and then years, your predictions will gradually get better and better.

In addition, your predictions will serve as landmarks along the road of progress. If the landmarks arrive more quickly than you had anticipated, then you’ll know that things are going faster.

Conversely, if the landmarks don’t arrive as fast as you expect them to, then you’ll know that things are changing more slowly. Either bit of knowledge will have significant impact on the pace and intensity of your investment in innovation.

To go back to the original point, if you do not make the initial prediction then you will have no basis for tracking the rate, nor for tracking the specific events, and thus you’ll be driving at night, in the fog, without headlights and without instruments, and you know that this scenario is not likely to have a happy outcome.

Uber is a good example of the broader pattern of change because the advent of mobile technologies accessed through smart phones has impacted every consumer-facing company in a decisive way, and most of them were indeed driving in the dark, in the fog, without much if any foresight, and they’ve been hammered as a result.

As an aside, it’s worth noting that many of the companies that do handle change well, particularly those in technology, use what they call a “technology roadmap” to help them anticipate what’s coming, and to design how they expect to respond. These maps look five, ten, or even twenty years into the future, and chart the emergence of new science and new technologies, the obsolescence of old ones, the progressive transitions of products and services from old to new, and the associated marketing and sales efforts that help customers migrate as well. These are also used as tracking benchmarks in addition to planning tools, and help to calibrate the anticipated rate of change with the actual rate.

A technology roadmap is thus a giant prediction (giant, because they’re often poster-sized charts) that in and of itself poses a series of very significant and influential questions. As a small business leader, if you’re not asking yourself on a regular basis what the potential impacts of changing technologies are likely to be for your own firm, then you’re taking enormous risks that you may not recognize that you’re taking.

From the questions come answers, which, again, don’t have to be correct to be useful, because they will cause you to take action, and that action will generate learning.

From the questions come answers, which, again, don’t have to be correct to be useful, because they will cause you to take action, and that action will generate learning. And that learning will generate adaptation, and will sow the seeds what should sooner or later be the right innovations at the right time.

In today’s environment of accelerating change, it’s clear, then, that not innovating is by far the greater risk than innovating and being wrong. Facebook founder and CEO Mark Zuckerberg expressed this pretty well: “The biggest risk is not taking any risk. In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

The concept of the cone helps us to see that we have to prepare for a much broader range of possibilities than most of us generally consider. And it is precisely because most people envision a cone that is in fact much narrower than the possibilities they ought to be preparing for that so many businesses falter, and then are entirely overtaken by changing conditions, and made obsolete by new technologies or better business models. In effect, the competition has figured out how to move the accepted value proposition upward and to the right, and customers naturally migrate in that direction.

Hence the mental model which tells us that change is slow and manageable is a flawed model. We have to change our thinking because the consequences of this deficiency may be critically important to the future of the enterprise.

Who do so many people get fooled? In general, we can point to three causes. The first is that change literally is accelerating; things are simply moving faster today than they did in the past, and while most of us generally recognize that it’s different now than it used to be, many haven’t thought through the consequences in a thorough way. It’s time now to think about this quite deeply, especially if you’re a business leader.

Secondly, most people don’t quite grasp the underlying pattern of how change unfolds, as noted in a comment by Bill Gates, who once wrote that people over-estimate change in over the short term but they under estimate it over the longer term. We expect more from tomorrow than we get, but we get much more ten years in the future that we expected: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”

“Lulled into inaction” is indeed an evocative phrase, as it captures precisely the nuance that’s so important. And of course the point of this book is to help you, as a small business leader, to define the best and most effective ways to take that very action. It’s our antilull campaign!

The third cause is the topic that we explored in detail above, which is the age of digital disruption that we are in the midst of. It’s a dynamic vortex of change where the scale and scope of disruption is unprecedented, and it’s going to get significantly more intense in the next coming years.

What all of this tells us that the necessary and appropriate responses to this situation should include the following:

1. 1. First, please rethink the cone of uncertainty as it pertains to your own business. To get a clearer sense of the rate of change, ask yourself how things have changed over the last five years and then invert that thinking to consider how things may change in the coming five. Make a list of the changes from the past, and anticipate changes that could be coming in the future. The next step is to assume that change in the coming five will be twice to five times greater than what we experienced during the past five. That could well be frightening, which is exactly the point. It will also probably be more a accurate representation of what’s coming. Look at new and emerging technologies that could impact your customers and how they think about the world, or could impact on how you create and deliver the products and services you provide to them. Will technology enable your customers to get better information? Almost certainly it will. How will that information impact on their purchasing decisions?

1. Second, invest in preparing for a wide variety of degrees of uncertainty. On this issue you need to create an innovation portfolio, which we discuss in detail in the next chapter.
2. Third, you need not only to invest, but to invest well. This means that you need to use a disciplined innovation process to reduce uncertainty, target future opportunities better, and increase the success ratio related to your investments. This will be our topic in Chapter 4, focusing on how to do this at maximum speed.

Disruption

Earlier we talked about five revolutions that are driving major change throughout the global economy, the technology revolution, the science revolution, the culture revolution, the demographic revolution, and the climate revolution. Each of these is a potent change maker of change by itself, but because they are so thoroughly interconnected and combined and intertwined, they compose an unprecedented market situation of monumental complexity and happily, immense opportunity.

Now let’s return to that list and think through in more detail about how these revolutions may impact your own business. What we’re particularly interested in are the ways in which these forces may disrupt the market by enabling or even creating new forms of competition, and also by altering the needs and perceptions of customers.

Please take some time now to consider specifically how these trends may disrupt your business.

As a thought exercise, and without judging how likely or unlikely your ideas may be, list three potential disruptions in each of the five categories, which will give you fifteen total disruptors.

Next use the cone of uncertainty map to estimate how soon each one could possibly appear in the market. Are they short, medium, or long term disruptions? It’s obvious that most of these estimates will really be guesses, but that’s OK. The point here is not necessarily to be correct, although it’s fine to be right, of course. But what we’re really interested in is establishing benchmarks, some reference points that you can then use to chart the actual rate of change. Because without some reference points it’s impossible to know how fast change is actually occurring, and thus it’s impossible to estimate how soon you’ll actually need to be ready to introduce the next generations of products and services that will enable your business to remain viable.

And once you’ve thought about the cone and you have a sense of what is coming sooner as opposed to what may be later, you can then begin to think about how your business might respond in each case.

Each of these disruptions also gives you a great opportunity to engage in some what-if thinking. What would you need to do to remain relevant as a company in the face of each of the disruptions that you’ve just identified?

Taking Action

There’s been a lot to think about in this chapter, and we’ve already made a lot of suggestions about what you can or should do to being implementing these ideas.

As noted just above, make a list of possible disruptions pertaining to each of the major driving forces of change. Assess the short, medium, and long term impact, and think about the early warning signs that you might receive to indicate that a possibility is turning into a reality.

The exercise to list changes in the last five years, and your anticipated changes in the next five can also be a powerful way to see more clearly how change is occurring, and to prepare for the big changes that are certainly coming.

By Langdon Morris

Photo: Businessman with binoculars looking for new business from Shutterstock.com