Half of CEOs rank new business building as a top three priority, and in the current economic environment, incumbents are advantaged over startups with relatively easy access to capital. While they are advantaged financially, they are often disadvantaged by their operating model. As Arthur W. Jones famously said, “All organizations are perfectly designed to get the results they get.” Many organizations reach a point where they realize that what got them to where they are is not what will ensure their future success.  

To win in today’s market, big companies need to move at the speed of growth. That means they need to experiment boldly, then convert successes into new capabilities at scale. They must learn to move faster at every step of their business innovation process: speed to customer insight, speed to strategy, speed to market, speed to impact, and – finally – speed to a new capability that can operate as a new, scaled business. 

What sets today apart is the rapid evolution of generative AI, altering the business terrain “slowly and then all at once,” to echo Hemingway. This swift progression presents equal parts opportunity and threat, yet instilling a sense of urgency around such technologies remains a challenge. The slow erosive impact of past technological advancements, like digital commerce and big data analytics, often desensitizes leadership to the acute needs of the moment. The dilemma persists: Is the best method to pursue widespread innovation across the organization, or should innovation be quarantined in specialized units?  

Many organizations have tried at least one of these methods in the past, and many have vacillated between them. At 3M, they tried to infuse innovation across the organization, but ended up with too many SKUs, without business rationale to justify a slew of new product innovations. More recently, the pendulum has swung the other way and their CEO has announced they need to accelerate new product development again. To insulate innovation from a potential drag from the core culture, American Family Insurance set up Tenney 110, a corporate venture studio stationed outside the core business. After a stint investing in external Insurtech startups, American Family Insurance leaders better understood gaps in the market. Further, they realized an in-house studio would enable them to bring their “unfair” advantages to the table to better serve their stakeholders (e.g., data, talent, capital, technology, access to customers). However, when funding and resources became constrained, and leadership did not provide adequate support from the top, the assets that made an in-house studio advantageous could no longer overpower the corporate inertia. 

In fairness, this is a dilemma that has been felt both by clients and consultants seeking to aid them. Clients have tried many methods, and they haven’t been alone in those endeavors. Over the years at Prophet, we’ve delivered ‘culture of innovation’ engagements for a company’s core business, and we’ve also helped to design centralized innovation functions that have subsequently struggled. 

What do organizations – both clients and consultants – that have tried both methods realize? That innovation is hard work and sometimes it requires a very particular model for success: active, hands-on capability building. Capability building means framing a clear ambition, an operating model and an organization designed to reliably enable the delivery of business innovation, in collaboration with the core business.  

To do this work, we bring our innovation expertise across the Human-Centered Transformation Model. This includes many ready-to-use frameworks that have proven successful in organizations of varying sizes and industries. These frameworks are highly durable, meaning that more effort can be spent on the unique innovation challenges and opportunities within a specific organization rather than reinventing the wheel when it comes to innovation methodology and capabilities. 

DNA

We define the organization’s DNA as the core ambition that should not change, ensuring everyone is aligned on the same target destination and direction of travel. This is an essential, yet often overlooked, foundational element. When an organization has a DNA problem, employees do not understand where they are going or when they will get there.  

A recent study reveals few companies have established a meaningful link between innovation and their overall corporate strategy or strategic intent. For many companies, innovation is perceived to be an expensive, time consuming, non-essential activity. Aligning around a clear and compelling ambition for innovation within or outside the enterprise can remedy this disconnect.  

“If innovation is not rooted in moving the purpose forward, then it exists for its own sake. Anything that exists for its own sake must continually justify its existence. And that lends itself over time to subjective scrutiny because the people around it can’t see how it’s moving our purpose forward.” 

Michael McCathren, Sr. Principal, Enterprise Innovation, Chick-fil-A 

Framework 1: The Ambition Template

The Ambition Template aligns the organization around a specific, measurable, transformative and timebound target destination. We unpack each part of the ambition with x-rays, and those x-rays then lead to KPIs. With this template, everyone understands what outcome is expected from innovation activities, and by when. 

BODY 

Next, we align the organization to the vision by co-designing a fit-for-purpose operating model, governance, processes, systems, and tools. If an organization has a body problem, then it feels too hard to get things done. 

 “A corporate innovation function must have disciplined governance and operating models so executive stakeholders have continuous engagement with how the team is driving applied impact.” 

Mark Jamison, Senior Vice President, Visa Inc. 

Framework 2: Innovation Capability Model 

The innovation capability model ensures the organization is building the capabilities needed for always-on innovation, from inspiration and investment to portfolio management and governance. Each of the 11 capabilities are based on underlying services. For example, the inspiration capability included safaris to learn innovation best practices, a speaker series to connect internal business leaders to external thought leaders, and hackathons to regularly source new ideas across the organization. 

Framework 3: DERPA 

Based on the innovation capability model, we determine the critical disciplines needed to progress new ideas through funding stage gates towards MVP and launch (or being halted as quickly as we can determine that it will not generate enough business value). Those skills include design, engineering, research, product management and analytics.   

Framework 4: Pods 

The operating model includes a studio of multidisciplinary “pods” each in charge of progressing a single idea and staffed with relevant disciplines. In addition, there is a portfolio management function in charge of determining which new ideas move into a pod, as well as inside-out and outside-in inspiration functions in charge of sourcing new opportunity areas for future innovation.  

Framework 5: H2A 

The hypothesis-to-action process, run in two-week sprints, ensures that all ideas are assessed fairly and killed as quickly as possible to re-allocate funding to more promising ideas.  

MIND  

Mind work includes the skills and competencies that the organization needs to operate the body. If you have a mind problem, you don’t have the right people to run the processes and contribute content and subject matter expertise.  

“The talent that you select is the single most important decision that an organization can make. It is a very different talent profile to drive true innovation versus managing a core organization. They need to be able to take risks, be analytical to make data-driven decisions, embrace diverse people and diverse experiences and be comfortable challenging the status quo.” 

Lisa Rometty, CEO, Zerigo Health 

Framework 6: Basadur Innovation Profile 

Mind work often includes using the Basadur Innovation Profile to increase awareness of how individual and collective preferences for different parts of the innovation process can impact the work and continuously delivering just-in-time teaching of new skill problem solving skills. This may include opportunity mapping, design research, business design and rapid prototyping and testing. At the end of each quarter, we codified our learnings and shared new methods for use within and beyond the innovation organization. 

SOUL 

Finally, the Soul motivates individuals inside of the innovation function by forging new rituals to work productively while also ensuring team health. If an organization has a Soul problem, employees don’t believe leadership is committed to transformation because their behaviors do not reinforce the ambition. Important leadership behaviors include separating process from content and championing agile ways of working for business activities, adding increment planning, sprint kickoff meetings and daily standups serving as forums for process discussion, and sprint closeouts and office hours provided adequate time and space to solicit feedback on work products.  

“There’s a certain amount of irreverence and risk tolerance that innovation leaders need to have. You have to be able to be strategic, but still be able to quickly pivot and flex, with a dogged determination to push through barriers. And you know you’re going to have barriers! You need to have team members who see barriers more like a speed bump or sales objection rather than an unchallengeable stop sign – a problem to be solved – and that’s a unique mindset.” 

Boris Pluskowski, Managing Director, Head of CXO Platform, HSBC 

Framework 7: SCARFS 

Innovation brings new ways of working and often sees employees working at pace and at the edge of their capabilities. As such, regularly checking in on team health and how individuals are processing the experience is essential. Our team uses the neuroscience-based model known by the acronym SCARF to evaluate how teams are doing across six key elements of psychological safety, satisfaction and productivity. We have improved it for innovation purposes, adding a second “S” to understand the individual and collective sustainability of our pace. 

While all these practices are essential to collective success, one of the most critical practices is that our team doesn’t design and walk away. We think of key roles within the operating model as “2-in-a-box,” meaning a member of the Prophet team is paired with a client so that learning and application is in real-world work, not merely a theoretical application in a workshop. This approach allows everyone to win and learn.  

“Innovation leaders build trust and credibility in an organization by delivering outcomes and the 2-in-a-box model is an accelerant.  By pairing innovation experts with talented insiders, the learning pace and time to results are exponentially faster with higher quality.” 

Diane Teed, Principal, Innovation, Brown Brothers Harriman & Co. 

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Growth is rarely easy. Based on conversations with senior business leaders across industries, we sense an increasing recognition that it has never been more difficult to generate and sustain growth. To be clear, we are talking about growth driven by customer interest and market demand, rather than the temporary variety driven by acquisition, cost takeout or organizational restructuring. The bottom line is that not even top performers can expect that continuing to do what got them to market-leading positions will deliver the next phase of growth.  

Some of the common barriers – continuous cycles of tech-driven disruption, relentlessly fickle customers, talent mismatches – are well understood. However, less tangible and often overlooked factors – including lack of C-level clarity and confidence, short-term thinking and a history of unactioned strategies and plans – may be even more hostile to growth. Consider how senior leaders may lose faith in growth strategies when market opportunities shift more rapidly than the organization can pivot, refine its go-to-market approach or reallocate resources. Even when the right strategy is in place, limited ability to execute – or execute at the pace which growth now demands – may undercut returns.  

Because markets move faster than ever, we believe sustainable growth results from: 

• Unlocking compelling customer insights to inform growth strategies 
• Creating relevant, impactful growth moves 
• Executing faster and more efficiently

How Rapid Changes in Customer Behaviors Impact Growth

The customer often has the answer. In today’s volatile markets, growth comes either through a proactive insight-led and customer-back approach, which is more sustainable, or by riding the wave of macroeconomic or societal trends. Unilever proactively changed its portfolio strategy after scoping the impact of the weight-loss drug Ozempic on consumer behavior. Modeling the likely changes in eating habits, Unilever chose to spin off most of its ice cream business, retaining only a few key brands (e.g., Ben & Jerry’s, Magnum).  

During the pandemic, companies like Peloton and Calm realized unprecedented growth as consumers re-evaluated their health and wellness priorities. Both companies have failed to make strategic, post-pandemic pivots to stay relevant.  

For firms that don’t want to leave growth to chance or market timing, success starts with deep insights into customer needs, as Prophet research shows.  

Insights From Prophet Research   

Among innovative companies, 84% have a consumer and market insights capability. 

Among all companies, 37% of leaders say senior executives pay too little attention to customer needs. 

In devising growth strategies, firms should factor in the impact of external macro trends on customers and the opportunities to provide new products and services to help customers navigate them. Even more broadly, executives should reflect on how these changes may influence who their customers are today and who they should be tomorrow.  

Charting the right course forward requires thoughtful decisions across key growth drivers that go beyond customer insight. In other words, firms must ensure that their good ideas are converted from slideware to clear action plans supported by necessary capabilities. Among the questions to address:  

• Who is our target customer?  
• What products, services and experiences should we offer?  
• Why should customers care about our products, brand and purpose?  
• How do they perceive the value we offer? 
• Where and when should we engage customers – via which channels, ecosystems, platforms and partnerships?  
• How will we capture value?  
• What is the optimal operating model to deliver? 

The answers to these questions have short- and long-term implications. The resulting commitments will be ones the organization can sustain for years at a time. They will also determine what firms should do next quarter. Ideally, a clear customer vision will inspire the organization for the future while attentive, dynamic management of action plans will help firms keep up with constantly shifting customer needs and preferences. Firms should plan for frequent refinements and calibrations based on continuous learning about customer behavior, market feedback and competitors’ actions. Prophet research shows that organizations that meaningfully assess and recalibrate growth plans at least monthly are twice as likely to be successful, resilient innovators. Too many firms still think of growth investments as a matter of annual planning.  

What Happens When It’s All About the Short Term?

Unfortunately, immediate-term pressures – specifically that increasing revenue this quarter is always the top priority – may restrict investment in new offerings and thus narrow future horizons. According to Prophet research, 34% of business leaders say their firms overemphasize short-term results. A similar proportion, 37%, say their organization has no long-term planning process. “You’re constantly in this space of change,” one told us. “Plans are abandoned almost as soon as they are made. There’s no real plan because things just sort of happen.”  

Such reactive postures are no surprise given the pace of disruption. They necessitate that firms build new capabilities even as they are running their growth plays. Those capabilities are often housed in agile, test-and-learn oriented and cross-functional teams, which have proven to be more proficient in delivering against growth objectives. Fully 80% of respondents in our global survey said design-led innovation teams are important, but only 37% said their organizations have such units in place. Developing these capabilities is not easy, of course, but they provide the foundation for self-funding innovation programs and, thus, sustainable growth.   

Insights From Prophet Research   

• 63%: organizations lacking design-led innovation teams 
• 37%: organizations lacking a long-term planning process 
• 2x: organizations that meaningfully assess and recalibrate their innovation moves at least monthly are twice as likely to be successful, resilient innovators 

Pathways to Uncommon Growth  

Strategies aligned to these pathways will manifest differently in varying contexts and sectors and they are not mutually exclusive; some firms will emphasize one, while others will experiment with portfolio approaches that include all three. Boldness and creativity can be different makers for these approaches; the bolder the growth strategy, the more likely firms will differentiate themselves in competitive markets.  

1. Expanding Beyond the Core

In this approach, businesses narrow in on customer needs to enter a new market or customer segment, offering complementary products or services to meet a broader range of customer needs. This approach requires the least risk tolerance and least amount of change within a business. And it’s likely to produce quick wins. For example, through the height of the pandemic, companies developed products and services to reduce transmission and care for the ill. Today, companies are looking beyond point solutions and specific problems to focus on more holistic views of respiratory health. Large pharmaceuticals with separate products in testing, treatment and prevention of upper respiratory infections have reorganized their product portfolios around complete and cohesive solutions offered through retail channels.

2. Venturing Into Adjacent Territories

This approach is about uncovering value in products, services and experiences that are closely related to existing strategies. It requires a moderate risk tolerance and degree of change as it explores efficiencies based on existing strengths and capabilities. When done right, firms find differences from the core business but still share commonalities and avoid channel conflict.  

One financial services company coordinated loan refinancing through third-party aggregators. Realizing it had a unique capability to simplify fragmented lender requirements for consumers, it saw an opportunity to own more of the customer relationship. Prophet helped the company refine its value proposition, create a product roadmap and launch its first pilot into market, all while building the product, technology and marketing teams needed to sustain the effort. As a result, the company remained vital through a volatile inflation and interest rate environment, deploying its direct-to-customer capabilities to launch new services, reach new markets and grow its relevance. 

3. Pursuing Net New Growth From Innovation and Emerging Customer Demands

This is the boldest approach, the one most associated with breakthrough innovations from true disrupters. It involves playing in novel markets or industries, creating forward-looking solutions that get ahead of emerging preferences and aspirations that have yet to fully manifest in mass consumer behaviors.  

Not surprisingly, this mode of growth requires the highest level of risk tolerance, the greatest creativity and most substantial change as it pushes businesses to step out of their comfort zone to pioneer new offerings that anticipate customer needs. Companies often invest in cutting-edge technologies, enter new industries or markets undergoing disruption or create entirely new business models by bringing together an original set of capabilities. 

Durable goods manufacturers – faced with acute supply chain disruptions, a long-term trend towards higher-cost, near-shore manufacturing and mixed results from interventions by smart home technology companies – might reasonably wonder whether they can successfully stand up a services model to future-proof their businesses. Spurred by Tesla, car manufacturers now consider the automobile as an updateable software platform, requiring the application of digital integration, user experience and technology expertise throughout design and production processes; they then sell subscriptions to unlock services like OnStar and Apple CarPlay. Appliance manufacturers like Samsung continue to grapple with the elusive promise of Internet-connected screens on refrigerators, washing machines and other home appliances. And manufacturers of entry and exit points, like doors and windows, can seriously consider their products’ roles in connected, smart security services. 

Five Key Capabilities for Unleashing Growth

Once firms identify the right path to growth as outlined above, they must determine the best way to advance quickly, efficiently and purposefully. Too often, this step turns into a stumbling block. However, organizations that possess a few key capabilities and cultural attributes can create the capacity and build the organizational muscle memory to launch new products, devise new business models and execute other types of growth strategies repeatably. They’ll also enhance their ability to operate these new businesses efficiently and scalably. The keys to success are:  

1. Using Cross-Functional GTM Teams to Achieve Speed to Market

When growth is everybody’s job, it may become nobody’s job. On the other hand, growth is too important to be left to small innovation labs or single functions (e.g., marketing, sales, product development). Rather, firms should build cross-functional teams charged with launching new products quickly. Even if the team is small, it should pull from finance, HR, technology, design, strategy and other parts of the organization. Why? Because all of those domains make important contributions to the development of new offerings.   

2. Building a Coalition of Stakeholders for Informed Decision-Making

To execute successfully, growth leaders must have a clear understanding of the critical path of decisions, identify the necessary data inputs to inform key decisions and maintain a steady pace against clearly defined milestones and gates. However, informed decision-making typically doesn’t happen fast enough, especially in large and complex organizations. Delays are especially likely when decision rights are unclear, contested politically or when a large number of stakeholders must be involved n. Ideally, growth leaders will develop a comprehensive coalition of stakeholders throughout the organization parallel with the work to ensure that everyone is on board with coming changes and understands their role in execution. Such a coalition can help ensure depth and alignment of key capabilities. 

3. Making GTM Innovation BAU (Business as Usual)

Any organization seeking sustainable, customer-led growth must find ways to make the capabilities necessary for organizational reinvention, portfolio refresh and continuous learning part of business as usual. For instance, cross-functional growth teams should work within a well-defined go-to-market process, reflecting the reality that launching, operating and scaling new products and business are not “special projects” but an essential part of ongoing operations.  

4. Moving at the Speed of Growth

Across both growth strategy formulation and go-to-market execution, speed is the name of the game. Some organizations are equipped to strategize and execute at speed, but many struggle. To make these plays work for your organization, you need to increase your organization’s speed to:  

• Customer insight: understanding what they want, which channels they prefer and where they’re likely to go next
• Strategy: converting customer insight into strategic priorities 
• Market: turning strategic ideas into in-market action  
• Impact: accelerating the delivery of real-world results  
• Capability: creating the foundation to scale and sustain higher levels of performance 

Speed matters because organizations can only grow as fast as their ability to adapt.  

5. Getting up to Speed With AI

Faced with the need to go faster, many companies are turning to AI. One media company used AI to track consumer preferences, which led to the creation of a new business model centered on interactive and original content. AI tools are helping CPGs to develop prototypes more rapidly. A hospitality leader has embedded AI in enhanced search experiences to drive discovery and rentals of vacation homes.  

While these applications make sense, leaders should recognize that AI is not a silver bullet to accelerate capability development. Rather, businesses need to understand the targeted ways AI-powered customers interact differently with AI-enabled employees. From that customer-back vantage point, organizations can look to create opportunities to optimize, enhance and reinvent engagement (Be on the lookout for upcoming Prophet research that reveals how consumers really feel about and use AI.)  

One More Thing: Balancing the Risks and Rewards of Growth 

Strategic discussions often emphasize the external barriers preventing firms from realizing the upside.  The risks of growth – and the organizational appetite or tolerance of such risks – is less frequently examined. We believe this is an oversight. Senior leaders must attend to the necessary cultural aspects of unleashing growth, including management mindsets.  

While everyone automatically says they want growth, they won’t necessarily be comfortable with the risks involved in launching new products, deploying resources, modifying operations and all the other necessary steps to achieve meaningful growth. As such, leaders would do well to explore just how “growth tolerant” their firms really are. That’s especially true of today’s dynamic, “high-VUCA.” When firms face high degrees of volatility, uncertainty, complexity and ambiguity, growth demands greater organizational resilience. In other words, senior leaders that help the organization become more flexible, adaptable and agile are laying the foundation for sustainable growth.  

How Prophet Helps

We take a collaborative and human-centered approach to help leaders unlock compelling customer and market insights; create relevant growth moves; and develop the capabilities to execute faster and more efficiently.  

Acknowledgments: Marc Anderson and Griffin Olmstead

If you look at your phone’s home screen, you will see many digital business models in the form of frequently used apps: Uber, LinkedIn, Teams and Spotify to name a few. Each of these companies has a native digital business model in contrast to non-native digital companies that use digital as a sales channel (e.g., Walmart). In this article, we dive into the five archetypes of digital business models with examples to show the tradeoff decisions and investments required to be successful in each archetype. 

At Prophet, we define a business model as how a company creates, delivers and captures value with five main components: 

Two components of this model can be used to deconstruct the five archetypes of digital business models: (1) the value proposition, what you offer in the form of products and services and (2) the revenue model, how you commercialize those offerings.  

Digital Business Model Decision Tree  

Value Proposition 

The first decision when designing a digital business model is how you will create value. Will you own your own supply or aggregate third-party suppliers? Marketplaces connect suppliers with buyers for products and services. Content providers create or aggregate content that can be read, listened to or watched. Infrastructure providers’ own enablers needed to get things done. 

Revenue Model 

The next decision is how you will monetize your offering. Will it be paid for by end users or by a third party? Marketplaces are primarily monetized through transaction fees charged to both suppliers and buyers. In addition, marketplaces can charge suppliers to advertise or offer their users subscriptions to reduce transaction fees. For content providers, the decision to monetize through advertising versus subscription depends on scale. An advertising model reduces costs on end users, enabling scale and network effects. A subscription model provides more predictable revenue from each user and locks in revenue for longer cycles. For infrastructure providers, an on-demand model can provide a cost-based competitive advantage but requires a huge investment in upfront costs. Infrastructure as a subscription provides more funding for ongoing product development and innovation. 

An Example of Each Digital Business Model: 

1. Commission-based Marketplace (e.g., Uber) 

In this business model, suppliers and advertisers pay to access customers in a marketplace. The main revenue drivers are transaction fees, listing fees and advertising. This business model requires creating a flywheel between multiple parties. Uber’s business model includes a DTC service and separately a B2B and B2D (business to driver/courier/biker) marketplace. In Winning Through Platforms, Prophet Senior Partner, Ted Moser describes the advantage Uber gained through creating a unique “customer coalition edge” among multiple parties: riders and delivery recipients, ride and delivery drivers, app developers, advertisers, restaurants and regulatory bodies. By bringing together such a robust customer coalition, Uber can provide more value to each customer group, while also diversifying their revenue sources and differentiating from competitors. Uber attracts more drivers than Lyft by offering revenue from rides, deliveries and in-car advertising. By attracting more drivers, Uber can also attract more riders to their platform with greater ride availability. That, in turn, has the flywheel effect of bringing on more suppliers – including advertisers, developers and restaurants. As a result of these moves, Uber commands a 20x higher valuation than Lyft today at $128B. 

2. Content via ads (e.g., Google) 

Back in 1999, Google’s founders considered two ways of monetizing: subscription and advertising. The subscription model they considered was $20 a year paid by the end user. For that same user, the advertising market would value them at an average of $52 per year in 1999, so 2.5x more. A Wharton paper found that platforms monetized via advertising versus subscription are more likely to invest in content moderation to expand the user base to large, heterogeneous populations. A central tension in the ad-supported business model is that polarizing content is good at getting attention, but over time, it can lead users to be less satisfied and engage less. In addition, advertisers require a high level of stability to ensure that their ads do not appear next to harmful content.  

3. Content via Subscription (e.g., Netflix) 

Platforms with a subscription model must balance growth alongside increasing the willingness of the user base to pay. There is fierce competition for recurring revenue, so subscription players must continue to increase the value that they provide to end users each month. For Netflix, it became difficult to continue to show growth once almost everyone in the U.S. had access to a Netflix log-in through their family and friends. In November 2022, Netflix launched a new ad-supported tier, and a few months later, Netflix began cracking down on password sharing outside of households to force new customers into the ad-supported tier. Netflix also raised the price of the non-ad-supported tier, which forced customers to choose between paying more each month or allowing Netflix to monetize their viewing with advertisers. These moves caused Netflix to have its strongest quarterly increase in customer gains in three years.  

A note that these first three business models all fit into Ben Thompson’s definition of Aggregators: companies that have a direct relationship with users, zero marginal cost for serving those users, and decreasing acquisition cost as the user base grows. This theory explains how platforms have radically reshaped industries by making control of demand much more important than control of supply. For example, Uber has been much more successful than taxi services by focusing on the end-user relationship rather than trying to control the supply of drivers. In the digital world, attention is a scarce commodity rather than a finite resource, so it is much more important to own the end-user relationship than it is to own the supply.  

4. Subscription Access to Infrastructure (e.g., Microsoft Office).  

In this business model, customers pay per seat to access a service. This provides monthly or annual recurring revenue in the form of licensing fees. It is a capital-intensive model that requires ongoing investment in product maintenance as well as product development to retain and acquire new customers. Microsoft recently debuted Copilot, an AI-enabled enhancement to the suite of Office products to differentiate itself from workplace software competitors such as Google. Another form of competitive differentiation is being the one-stop shop for everything. Microsoft is essentially the operating system of work, with all the necessary applications and services – from communication to email to productivity and presentation tools, in one place and connected to each other. Microsoft does not have to have the best single product for anything, for example, many employees prefer Slack to Teams, but by integrating everything in the cloud, the switching costs are too high to opt out of Microsoft’s ecosystem for a single app.  

5. On-Demand Access to Infrastructure (e.g., Amazon Web Services) 

This business model requires significant upfront fixed costs to have capacity available on demand. One of the most in-demand types of digital infrastructure today is Nvidia’s H100 AI chips, which are used to power ChatGPT and other AI apps. Crusoe Energy, a digital infrastructure provider, raised $200M to buy these chips and is forecasted to make half of that investment back in just one year by charging companies for access. The biggest incumbent in the digital infrastructure model is Amazon Web Services, which Jeff Bezos has likened to the utility companies of the early 1900s. Back then, factories had to build their own power plants to generate electricity, but once the factories could buy electricity from a public utility, they no longer needed to invest in expensive private electric plants. In this analogy, electric plants are physical computing technology. By providing servers and storage in the cloud, companies can reduce their fixed investment in computing and storage and pay for what they use, and when they need to use more, it is easy to scale up the capacity. Today, the cloud platform industry is valued at $180B, with AWS controlling a third of the market. In addition, AWS is responsible for about three-quarters of Amazon’s total operating profits. 

Overview of revenue attractiveness and investment required for each business model: 

These are just a few examples of companies that fit into the five digital business model archetypes. We have partnered with a number of clients to design and launch new business models as well as to innovate existing business models in the face of change. 

Creating a new Digital Business Model: 

• We helped a hardware manufacturer create a new on-demand access to infrastructure business model by embedding smart home technology into their physical products, enabling our client to become an essential infrastructure and service provider for home security players. 
• We worked with a healthcare association to transform its business model from membership fees to a new digital learning platform that prepares healthcare workers for the jobs of the future.  

Evolving a Digital Business Model: 

• We partnered with a content provider to quantify the impact of transitioning from a subscription-only model to an ad-supported model.  
• We worked with a telecommunication provider to pivot from a usage-based model to a monthly subscription. 

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With the pandemic increasingly in the rearview mirror, many healthcare organizations are coming to terms with the big and small changes that have become permanent parts of the healthcare landscape. Ushered in during the pandemic, omnichannel care delivery is now a fixture and will play an influential role for many years to come; that’s a good thing, as patients prefer having options and are often enthusiastic about new channels, technologies and treatments. More caregivers now see the value of omnichannel care, especially telehealth and in-home care, because they work so well for patients.    

In our recent work with clients, we’ve seen how different types of healthcare organizations can capitalize on leading practices for change and transformation as they seek to refine, optimize and expand their omnichannel clinical care models.  

The common denominator with healthcare leaders is human centricity. Organizations that successfully drive change design their care models around what patients want and need. Similarly, organizations that adopt a human-centered approach to transformation are more likely to succeed in winning hearts and minds, instilling new behaviors and changing the culture in sustainable ways.  

1. When transforming the clinical care model, start small and iterate fast. 

There are ample transformation opportunities across healthcare but organizations that take on too much change too fast are bound to struggle. The key is to focus on the achievable while understanding the distinct needs of underserved populations and addressing drivers of high cost. 

Organizing around a condition or a use case, rather than a service line, can be useful both for making progress and setting up for broader change over the long term. Breaking down big changes into manageable steps is the only way to go. For example, to redesign diabetes care, leaders will need first to address issues typically treated by primary care, endocrinologists and cardiologists, as well as supporting clinicians in nutrition and other related aspects of care.  

Our work with one national player confirmed how many patients with kidney failure “crash” into dialysis in an unplanned fashion when longitudinal care models can address the holistic needs of such patients. When Geisinger launched a home care program, it realized impressive results, including reduced ER visits and lower costs, largely due to its careful patient selection, a focus on chronic conditions and proactive outreach by care teams.   

Within value-based care models, better patient communication can increase HCAHPS scores, which directly impacts reimbursement. That’s a relatively small-bore change that can yield potentially big results. 

2. Recognize that every healthcare organization is also a software company. And an AI and data science firm, too.  

Whether or not they want to be, all types of healthcare companies are in the technology business – and we’re not referring exclusively to electronic medical records (EMRs). Software now underpins every step of the care delivery process and is essential to making the “anytime care from anywhere” vision a workable operational reality. And yet, there’s no denying that tech has contributed to significant burnout among healthcare workers, including physicians.  

Healthcare organizations would benefit from several tech innovations, including agile sprints and experience design principles, to continuously enhance features. Had EMRs been designed in this manner, they would more seamlessly fit into the clinical workflow and not contribute to provider burnout as they are today. Healthcare organizations can take a similar approach as they design omnichannel care delivery models and deploy new technology.  

Thinking like a service designer will help orchestrate the linkages between backstage systems and data sources and, ultimately, create a seamless experience for all types of users. Accommodating the needs of users with different levels of technology access and literacy – including both patients and caregivers – is the key to developing high-impact solutions. When designing a patient app for patients receiving home dialysis, we went through multiple rounds of design and user testing to ensure that the experience met patient needs in an intuitive way and delivered the right information at the right time. That’s how to empower – rather than overwhelm – users.  

Organizations must also change the perception, common after initial rollouts of EMR systems, that technology is the enemy. One way to overcome that persistent bias is to co-create solutions with patients, caregivers and providers. That’s what we did with a national player seeking to shift the site of care from clinics and inpatient settings to the home. Service designers worked directly with nurses and nurse practitioners who could speak empathetically to the day-to-day needs and challenges faced by home healthcare teams and provide feedback on initial design sketches. These foundational insights, as well as those from patient groups, guided the design of new tools.  

AI Goes Everywhere

There’s no talking about tech without talking about artificial intelligence (AI). AI seems to be taking over healthcare. Payers are using it to digitize claims, conduct audits and monitor payments. Clinically, AI is helping physicians scan X-rays and get ahead of emerging risks and adverse outcomes. Providers use AI to design care paths, personalize care coordination and model the financial impacts of different treatment plans. AI promises to revolutionize clinical trials in the pharmaceutical sector.  

Embedding AI-enabled technology deeply into care delivery processes can make routine tasks simpler, faster and safer. And it’s the most effective way to use technology as a “force multiplier” in delivering care, which is the primary motivation for many healthcare organizations that acquire technology companies. Technology that enables caregivers to do their jobs more effectively and operate at the top of their licenses is invaluable in a time of provider shortages. Equipping end-users (including physicians) with training, skills and knowledge to use the right tech at the right time is how tech can directly support better outcomes.  

That sort of human-centered approach is necessary to change minds, create advocates and smooth the transition as the organization evolves from being healthcare-centric to thinking and acting like tech, AI and data science companies.  

3. Transformation takes an ecosystem.  

Achieving ambitious change objectives will almost certainly require collaboration with others – including payers, specialty care providers, technology companies or other third parties. So finding the right partners is critical, even when focusing on a manageable, well-defined issue or opportunity.  

The massive complexity of healthcare – both as a business and in terms of delivering care – makes broad organizational buy-in an absolute imperative for effective transformation. Overlooking a key constituency can make the difference between success and failure.  

We define stakeholders as anyone playing a role in care or invested in its outcomes. Thus, the universe of stakeholders includes everyone from institutions (e.g., payers and large employers) to back-stage actors (e.g., hospital management, pharmacies) to front-line care providers (e.g., PCPs, specialists, therapists, care coordinators, social workers) and, of course, patients who must remain at the center. These stakeholders have wildly different incentives, hold different values and operate with different information and authority. 

The broadest ecosystems require teams to think like systems designers in working outward from the patient to the entire stakeholder ecosystem, including front-stage actors (e.g., caregivers, PCPs and specialists) and back-stage actors (e.g., care managers, pharmacists, hospitals, payers, regulators).  

Ecosystem design requires incorporating the needs and perspectives of many different stakeholders.  

All of these players have widely different incentives, hold different values and operate with different information and authority. Misalignment among ecosystem partners can manifest in systemic problems that reach deeper than any single touchpoint. When we design healthcare ecosystems, we apply such principles to understand current systems and envision those that will be necessary tomorrow. Design tools such as ecosystem and value exchange mapping are a critical part of incorporating the entire innovation ecosystem into specific solutions. 

Leveraging Internal Ecosystems

The most successful transformation programs also involve many different internal constituencies. One Fortune 500 healthcare organization seeking to disrupt renal care with increased use of in-home dialysis built a diverse, cross-functional team, including digital strategists, product teams, client nurses, nephrologists and other specialists, in its ideation process. It gathered ongoing input via iterative design and feedback sessions. The testing process of initial solutions involved 40+ external users, including patients, nurses and other caregivers and social workers.  

Organizations enacting large-scale strategic change often convene a leadership council for regular reviews and feedback. Typically, such groups include chief medical officers, clinical business unit leaders, medical specialists and senior operational and administrative leaders.  

4. Embrace regulation and payer mandates as inspiration for innovation.  

The expanding adoption of value-based care shows how regulatory requirements can prompt necessary change for organizations with creative leadership and high degrees of operational agility. By default, many leaders resist new rules and love to complain about old ones, which can lead to regulatory oversight being used as an excuse not to change.  

Federal regulators are certainly looking to foster innovation and prompt greater use of in-home dialysis via reimbursement changes in kidney care and other areas. The acute shortage of clinicians is another area where regulators are likely to be flexible in allowing healthcare organizations to experiment with new care delivery options. Consider how pandemic-era stop-gap measures to allow providers to practice telemedicine across state lines have remained in place. We believe the clinician shortage is an existential threat that must be at the forefront of the design of omnichannel care delivery models. Certainly, it will force provider organizations to automate more low-value tasks as they seek to expand their reach.  

Social determinants of health (SDoH) are also being incorporated into regulatory frameworks as their importance to health becomes clearer. Medicaid changes are more likely in the short term, with Medicare following suit in the long term. Organizations that are proactive in developing solutions – ideally in collaboration with regulators and other partners – will be positioned for future success.  

Working with a national provider organization to address the needs of diabetes patients, we focused on SDoH in determining how to shift the site of care to the home. Patients with mobility issues, those that lived in food deserts, or lacked reliable WiFi for remote diagnostics each required different design decisions. As innovation strategies more frequently intersect with regulatory requirements, we help clients think through the implications and find opportunities to streamline compliance processes as an outgrowth of experience design and technology development.  

5. You can’t change your clinical care model without changing your business model.     

This might be the hardest challenge in healthcare, because of the frequent tension between what’s good for patients and what’s good for the bottom line. In theory, clinical care organizations can find the financial backing to move to a more consumer-centric clinical care model in one of two ways:    

• Improving patient loyalty and outcomes to become a recognized market leader or provider of choice, with the net effect of boosting both patient volumes and financial returns. 
• Maximizing reimbursement for all kinds of clinical care services including those delivered outside the traditional clinic.    

We’ve found the first is a harder recipe for success and following it can lead to internal disbelief at best and barriers at worst. Financial incentives need to align with care incentives. Organizations that invest in transforming their care model should expect to realize financial rewards or at least figure out how to get paid for providing services that benefit patients.  

To make it happen, we have helped strong leaders think outside of existing markets to create new categories of care based on patient needs. To model the potential for a new home health business that a diversified healthcare giant was launching, we created a consensus view of existing service lines that could be brought together to meet patient needs in the home, from infusions, to telehealth, to diagnostics and monitoring. Here again, the key was getting stakeholders to collaborate and communicate in new ways.  

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Future back planning is key to unlocking uncommon growth during times of economic uncertainty. 

In our latest global research report, Building Business Resilience Through Innovation, we found that a leading barrier to increasing innovation efforts is that the organization lacks a long-term planning process. Unfortunately for many companies, this has only worsened in the last few years as reactive thinking characterized by the pandemic era.   

As innovation leaders emerge from this reactive phase and begin to chart out the next few years of growth during a time of great economic uncertainty, it is essential to create a growth strategy that spans these three-time horizons.

Across these horizons, there is an inverse relationship between the investment in resources and the investment in strategic decisions. Running the business of today is resource intensive and requires operating with excellence with much less space for strategic exploration. In contrast, exploring the business’ target destination over the next five to ten years within a wide open divergence environment is time intensive. Due to the scarcity of resources, it often requires time-bound investment to collect data on the most relevant drivers of change, model potential scenarios that could unfold over time, and based on that, determine what new opportunities are worth further validation and investment.  

In Horizon 1, the existing value chain is used to optimize and scale the business, but in Horizon 3, the needed value chain will most likely be adjacent to today’s value chain. The inversion point of building the new value chain is challenging to manage because resources are ramping up as the ability to make strategic decisions is fading. At this point, the skills required to be successful change. It is operationally complex to get something to move through the inversion curve.   

If a business neglects Horizon 3 activities today, it sets itself up to be leapfrogged by the competition because it will not have invested in the assets and capabilities needed to act on emerging opportunities.

Future Back Helps Companies Maximize Growth Opportunities in Horizon 3  

While it is impossible to predict the future, market leaders and makers proactively anticipate preferred and disruptive future scenarios. The first step is understanding the most impactful drivers of change that will shape the future market landscape. Drivers of change come from a range of sources: the classic Porter’s Five Forces of suppliers, buyers, new entrants, substitutes and competitors that determine industry profitability, as well as macro-forces that are broader than industry boundaries, often categorized as social, technological, economic, environmental, and regulatory drivers (STEER).  

From doing future back work across industries, we have found three non-mutually exclusive factors that help us see around corners. Across these factors, emerging technology is critical in reshaping societal norms, enabling new interaction modes, and determining future profitability and competitive advantage sources. 

3 Non-MECE Factors that Shape the Future Market Landscape 

1. The Overton Window describes the range of policies that are accepted by the mainstream at a given time and can be used to identify ideas on the threshold of gaining mainstream acceptance. For example, over the last 50 years, public acceptance of in-vitro fertilization (IVF) has rapidly increased as the availability of IVF technology has also grown. In 2021, fertility support startups raised $345M, up 35% from the previous year. Health systems and payors that anticipated this shift ten years ago were able to differentiate themselves within a rapidly growing market. However, with the overturning of Roe v. Wade, societal progress regarding IVF is now under threat. Industries heavily funded by the government, such as healthcare and clean energy, are also strongly shaped by changing societal norms. 

2. Behavioral shifts often emerge due to technological advancements that make it easier to do more with less or create new modes of interaction between humans and machines. For example, Figma’s significant innovation was being browser-first, with the ability to edit files in real-time in the cloud, allowing teams of developers, designers, and product managers to collaborate in one place efficiently.  
 
Adobe was late to the game of browser-first collaboration and, as a result, paid $20 billion to acquire Figma, which had roughly $400M in revenues at the time. The steep price was considered a solid investment given the future value of Figma’s product spaces. Thinking more broadly, technological advancements across the Internet of Things, artificial intelligence, artificial and virtual reality, and autonomous machines will enormously impact behavior and interaction modes, changing how we learn, work, collaborate and entertain ourselves.  

3. Business model shifts are often required to capitalize on or meet emerging technology demands, regulation, the economic environment, and ESG agendas. For example, Fundrise was the first company to crowdfund real estate investment successfully, and the founders did it by seeking the expertise of regulators from the beginning. Working with a former regulator, Ben Miller figured out how to use Regulation A to raise money from non-accredited investors, which was the first time anyone had ever done. Eventually, the regulation changed to Regulation A+, which allowed the company to raise more equity from non-accredited investors while streamlining the filing process. Still, at that point, Fundrise was already the category leader in a new market.

Four Questions to Determine a Company’s Options within the Future Market Landscape 

Once we understand the most impactful drivers of change, the next step is modeling the most viable opportunities for a specific company to pursue. We begin with four questions:  

1. How is a company encumbered and advantaged?  

This includes understanding a company’s options based on its funding and regulatory moats. Firms funded by unregulated capital have an entirely different set of options than firms funded by regulated capital. A venture capital-funded firm can take on much higher fixed costs to stand up a new capability without a near-term path to profitability. For example, the data cloud company Snowflake raised $2.1B over eleven rounds of funding since 2012 and isn’t expected to reach profitability until 2023.    

On the other hand, an advantage of being a large, publicly traded company is that it is easier to find suppliers and partners to test and validate Horizon 3 growth hypotheses with and bring new offerings to market. Along with understanding the implications of funding sources, it’s essential to know where margins come from today – is it from hardware, software, or services? Who has the most power in the value chain to extract more margin over time? What parts of a company’s existing product line, assets, and capabilities might serve as a moat? Does it have access to a rare resource on the supply side or a lock-in effect on the consumer side? Finally, is there a regulatory moat that will make it difficult to unseat an incumbent?   

2. Who has the preferred position in the market to launch and scale this idea?  

The most critical mindset of future back work is humility. We always assume that another player is better set up to execute an idea. The big four (Alphabet/Google, Amazon, Apple, Meta/ Facebook) dominate their innovation ecosystems due to their scale, network effects, and ability to buy entire markets. Firms operating within these ecosystems are often unlikely to win share-of-wallet among end consumers and are much more likely to succeed by playing a critical infrastructure or support role. We look at the role of aggregators and integrators in the innovation ecosystem to understand how parts of the market are consolidating and where technology is being abstracted away from the end user.   

3. Who is the player that can shut this idea down? 

As Archimedes said, “The shortest distance between two points is a straight line.” In highly regulated industries such as financial services and healthcare, a significant source of Horizon 3 growth is creating new business models based on the changing regulatory landscape. Like the Fundrise example, the founder of Coinbase realized that abiding by U.S. law rather than moving offshore could act as a long-term defendable moat for the company. With the collapse of FTX, that bet has already paid off.   

4. What has prevented this idea from being launched and adopted before? 

Is the idea on the threshold of becoming mainstream? Is there a consumer experience problem or a price-to-value problem? Or does capital not think it’s worth an investment? The inevitable endpoint of markets is to solve consumer problems rather than business and technical problems. Enterprise capital is good at solving Horizon 1 business problems, such as increasing conversion in existing channels, creating efficiencies, and increasing margins.  

On the other hand, venture capital is good at investing in long-plays that create new consumer markets because it has a risk appetite and is willing to be too early. Too early might mean taking on the cost of educating the market about a problem that they should have realized could be solved. For example, Netflix was loved for eliminating late fees (a consumer problem previously considered unavoidable in a physical rental market). Still, the company was perceived as shifting to a digital-first business model too quickly. Success in bridging the gap between its Horizon 3 digital-first business and its Horizon 1 DVD rental business required subsidizing the price of the new service for end consumers.   

The Mindset We Bring to Future Back Work 

The future back process combines design methodology (outside-in and hypothesis-led) with business rigor (commercial opportunity assessment with an asset-forward view of value-chain adjacencies and potential competitive moats).   

The mindset we apply to this work draws from design and consulting. We’ve distilled it into three design principles: 

Humble 

We begin this work by assuming that another player has a better solution as well as a preferred position in the market.  

Anti-fragile 

We create a durable portfolio of growth moves in order to hedge our bets, with the understanding that it is impossible to know exactly how the market will reshape over time. 

Effective collaboration  

You need to keep running the business of today while exploring what your business might be in the future. At the same time, your hypotheses around how the market might shift and what options are most attractive for your company are the entry point into this work. We design future back engagements to extract maximum input in the most time-efficient way by starting with stakeholder hypotheses, bringing in external experts to identify new opportunities and threats quickly, and then designing workshops and executive communications that bring your team along the right way at the right time. 

The Outcomes We Achieve Through Future Back Work 

There are three main outcomes that we have consistently achieved through this work: 

1. Board-level alignment and buy-in on a future vision. For example, supporting the approval of a board-level, multi-hundred-million-dollar M&A strategy in order to create an entirely new product category. 
2. Driving capital allocation for new business building. For example, on a recent project, this work led to a $5 billion acquisition as the centerpiece of a new business unit. 
3. Updating the product roadmap to transition from now and near-term investments to decisions that will drive the next horizon of the business. 

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Business strategy and design thinking are converging into a new approach for solving business challenges known as business design. This makes sense given that design-driven companies continue to outperform their peers and also explains why so many management consultancies are rapidly acquiring design agencies. A decade ago, business design was an emerging role in design agencies. Today, however, it’s an established role in consulting and moving in-house as well.  

How do We Define Business Design?  

Business design brings a design mindset and methodology to solve business challenges and deliver viable business models. At Prophet, business design is a method for developing products, services and ventures for our clients that are differentiated in the market and able to capture value for their businesses.  

Why is Business Design the Modern Approach to Business Building? 

There is some magic that happens when you bring the design process of divergence and convergence to bear on business challenges. It gets business leaders out of the mindset of competing over existing market share and reorients them to think about what new value could be created based on the emerging needs, motivations and behaviors of all humans involved in the value creation equation – customers, users, employees and communities. 

At Prophet, when we embark on a business design project, there are some key things we set out to do:  

• Achieve a deep understanding of business challenges faced 
• Bring a design mindset and use design methods to solve them, including creating new methods 
• Develop iterative plans and models based on real-world scenarios to understand what will be most viable in the market 

The goal of business design is to ensure that neither of these scenarios happens: 

• The business minds determine all the requirements for a new offering and bring designers in to beautify the interface 
• The design team creates the end-to-end user experience of a new offering and brings the business people in to give it a price tag 

The defining characteristic of the business design function is to constantly balance the needs of users with the needs of the business, in the near and long term. A business designer will always ensure that business logic informs any design-build or seek out to better understand the logic that supports their design – whether that be loyalty leading to higher customer lifetime value, efficiency leading to higher transaction volume or something else entirely. On the other hand, a business designer will see through a short-term value capture scheme if it has the potential to hurt the long-term viability of the business. So, it is about balance on two fronts: managing desirability and viability and managing the time horizons. 

Three Examples of Business Design Frameworks 

Here are some business design frameworks that show what it looks like to solve business challenges with design methodology: 

Human-Centered Opportunity Sizing = Total Addressable Problem 

The Total Addressable Market (TAM) approach to opportunity sizing assumes that companies are constrained by the industry in which they operate today and that to outgrow the market, they must take share from incumbents. In contrast, the business design approach to opportunity sizing is based on the Total Addressable Problem (TAP), which a business is trying to solve for users. Rather than starting with an existing industry, such as the hotel industry, it starts with a user need, like the ability to feel at home anywhere in the world. Framing the opportunity based on what you are helping users achieve creates new possibilities and use cases.  

Take Airbnb for instance. Airbnb’s growth far exceeded the budget travel market that it originally entered. Now, Airbnb competes with luxury hotels, short-term rentals and travel services outside of lodging. Uber is another great example. It started from the other end of the spectrum as a high-end car service but through a TAP framework, it far outgrew the taxi industry and instead became a micro-mobility platform with food delivery, bike rentals and healthcare transportation. Lastly, Amazon started in e-commerce, but through a TAP framework, grew to provide convenience in all aspects of household management, including building a smart home ecosystem.  

Human-Centered Commercialization = Incentive Design 

Business design creates outsized value by aligning emerging behavioral and business models and then makes value exchanges that are sustainable and durable in the long run. Before folding in 2013, late fees accounted for 16% of Blockbuster’s revenue. If the way a business captures value is in direct opposition to its users’ best interest, that is not a sustainable business model.  

Netflix’s subscription model, however, aligns user and business interests. The more you watch, the more data Netflix gets on what you like to watch, the better they can recommend additional content. Subscriptions lock in recurring revenue, enabling Netflix to make bigger bets in developing new content. And it is not just about value for customers. Netflix invests heavily in creators with new stories to tell and targets those stories to the right audiences. One of the most important activities in business design is creating growth feedback loops in which new demand drives new supply while increasing value for all stakeholders. 

Human-Centered Planning = Test and Learn 

Business design preferences emergent and iterative models over linear and deterministic planning. You can learn more about the viability of a new business in one meeting with users than in a week of modeling future cash flows based on historic assumptions. A business designer is comfortable with the knowledge that an assumption being off could mean a 10x change in revenue projections. They will not boil the ocean perfecting those assumptions, instead, they will put something into the market and see what happens. Of course, businesses need cash flow today to explore new problems to solve for their users tomorrow. A business designer will think about what can be EBIT-accretive today, while also investing in experiments to rapidly test and learn what new business models might be most relevant in the future. 

Check out our most recent research – Building Business Resilience Through Innovation

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A business model is the backbone of how a company creates, delivers and captures value. When a company innovates on just the customer experience without considering the underlying business model, it not only reduces the value that can be delivered to customers but also fails to realize the full value that can be captured by the business. Over time, that reduces the business’s ability to invest in creating experiences that will power the business of tomorrow. As Ben Thompson wrote in his analysis of Facebook, “succeeding on the Internet didn’t simply mean making a digital product, but also finding a business model that was native as well.”  

Business model innovation is the creation of outsized value – in the form of market share, margin and defensibility, by reconfiguring multiple elements of the business model. Here are three examples of business model innovation that created more value for customers while also increasing the amount of value available to be captured by the business: 

Amazon’s Subscription Model Grows Customer Lifetime Value

Customers can automate the replenishment of household items through Amazon’s Subscribe and Save program. Many parents struggle to equitably distribute the management and execution of tasks in their household, with the greater share often defaulting to women. 

For instance, before buying detergent, someone must remember that it needs to be bought and what type to buy in the first place. This idea leads to friction that forces customers to outsource tasks in order to better distribute the load. The Subscribe and Save program makes it easy to personalize recurring deliveries and gives members the benefit of saving more as they spend more. For the business, it creates a recurring revenue stream while decreasing customer motivation to shop around and price compare each month. And finally, sending multiple items in one box each month lowers the marginal cost of fulfillment. 

Airbnb’s Value Chain Grows the Total Addressable Market

Airbnb modularized the supply of short-term rentals available, making it easy for travelers to compare options, read reviews and book. By integrating the supply of rooms onto its platform and completely owning the customer relationship, it created the conditions necessary for guests and hosts to trust one another, even without Airbnb owning a single room. In digital businesses, the winner is often the company that can reconfigure the value chain to modularize supply and own demand because it makes it difficult for suppliers to squeeze margins and it creates a virtuous cycle of new demand driving new supply. Airbnb is an example of disruptive innovation because it began in the underserved, low-end part of the travel market by offering inexpensive room rentals outside of tourist districts. After building a great reputation based on customer experience and trust, the platform was able to move upstream to mid-tier, business and luxury segments of the market. 

Microsoft’s App Store Pushes the Industry Towards Open Marketplaces

During its acquisition of Activision Blizzard, Microsoft announced a set of open app store principles, just months after Epic Games accused Apple of anti-competitive practices in the iOS app ecosystem. Microsoft’s leadership is seeking to create a “universal store” in direct contrast to Apple because it believes that outside developers must thrive in its ecosystem to deliver the best experience to customers, even if this means forgoing near term profits that could be gained by showing preference to its own apps, requiring its payment systems be used or acting as a gatekeeper between developers and customers.  

An NFX assessment recently found that 70% of value in tech is driven by network effects. By creating an open app store, Microsoft is betting that network effects will grow the overall value of the gaming industry enough to make up for leaving some value on the table in the near term. By focusing on overall value creation rather than just profit maximization, business model innovation prioritizes models that will create the most sustainable value for all stakeholders in the ecosystem.  

And When it Goes Wrong – Clubhouse’s Fatal Flaw

The goal of business model innovation is to configure business model components in a way that maximizes the total amount of value available to be created, delivered and captured. An offering that fails to solve a real customer problem will never gain traction in the market and a desirable value proposition without a mechanism to capture value for the business won’t last long.  

For example, Clubhouse quickly attracted a sizeable user base by solving a unique problem presented by Covid 19 – the newfound difficulty of getting together. The audio-only, originally invite-only social media app allowed newly homebound people to gather for live conversations around common interests. Rather than commercializing components of the value proposition, such as through subscriptions, advertising or commission fees, the founders focused only on user growth.  

“Business model innovation is the creation of outsized value – in the form of market share, margin and defensibility.”

However, the problem was that Clubhouse’s value proposition was easy for tech giants to replicate. Twitter quickly rolled out Spaces, which solves the same user problem without requiring users to join a new platform. Additionally, due to network effects, these features are more valuable on a platform with a larger user base. Twitter also already had a mechanism in place to allow hosts to monetize, making it a more attractive platform for content creators, while also offering the capability of capturing value with commission fees, as well as growing a new offering that will be valuable for advertisers in the future. 

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