Business model innovation: "You have to burn the boats"

Such was the wisdom of Hernan Cortez, and such is the requirement for any company hoping to reinvent itself as business models change under a company's feet, as highlighted in this excellent Steve Hamm piece from BusinessWeek. In other words, if you want to move forward, most will need to cut off any hope of retreating into comfortable, "safe" business models or product strategies that worked in the past.

It's a new world. Get over the old world.

Steve Hamm's article (co-written with William Symonds) walks through Eastman Kodak's struggles to adopt digital photography, despite being the company that invented it in the first place. Why has it been so hard for an innovator like Kodak to adapt to this brave new world? In part, because the spoils of conquest in the new world have not proved as fat as those in the past:

While blazing growth of camera sales has helped blunt the effects of Kodak's fast-fading film revenues, it hasn't replaced the rich profits of the film business. Even the best mass-market cameras yield slim profit margins. So, although Kodak's digital camera business was a roaring sales success, it turned out to be a crushing profit disappointment.

In part, the shift has been difficult because business model innovation is much harder than product innovation:

"Business model innovation is harder than product innovation. It's harder to visualize, and the scope is larger and much more complex. It includes everything the company does. Everything has to be changed," says Jay Desai, chief executive of management consultancy Institute of Global Competitiveness.

This is so because business model innovation is essentially a human problem. People don't like to change, particularly when the old ways have yielded so much success in the past. Kodak has fired 27,000 workers on the road to change, just as the Christian Science Monitor went through a 60% turnover in its IT staff to yield an open source savvy organization capable of innovating, and not just watching colored, blinking lights to make sure they keep blinking.

How do you manage the "people problem?" First, figure out where people stand:

Perez believes that in any organization, one-third of the staff will readily support a change, one-third can be convinced, and one-third will be unwilling to make the shift. He calls it The Rule of the Thirds.

If you're committed to change, you first have to rid yourself of those who will sandbag any efforts to move forward. When Novell first started moving to open source, it was a terribly tough slog, in part because more than one-third (it felt like 98%) were stuck in the NetWare past and could not grok open source. Any successful company will be shackled by its history. That's why it's important to "make painful breaks with the past," as Hamm says it. Or, as Cortez might say, "You have to burn the boats."

This may be accomplished through firing/hiring programs, by incubating new products/business models separate from established businesses, or in a range of other ways noted in the article. But one thing is clear: in business model innovation, the road forward starts by obliterating the road behind. You simply can't move forward by spending all your time fetishing the past. Just ask Lot's wife. :-)

This is why I have hope for companies like Sun. No company has responded more aggressively to the open source challenge. Sun has been open sourcing its software and hardware on the expectation that the shift will bear fruit. Time will tell, but by burning its boats, all it needs to worry about is the future. As it turns out, this is a great prescription for success.