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consultants
educators
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researchers

The Six Secrets of

Business Model Exploration
A Field Guide for Growth Leaders

April 2008

THIS PAGE INTENTIONALLY LEFT BLANK

+ + +

Purpose of this document

Peer Insight has been practicing business model exploration in

services environments for almost 5 years.
years During that period we have
completed dozens of projects and collaborated with over 1,000 senior
practitioners, in 10 countries, from 50 different firms.
When we combine this hands-on
hands on field experience with our global
research program, it provides a clear picture of how different
innovation methods correlate to project outcomes. This document
represents our best advice to business leaders who are considering
this
hi important
i
avenue for
f growth.
h
Please direct your questions and comments about this document to:
Tim Ogilvie
CEO
Peer Insight
(703) 314-3123
tim@peerinsight.com

Gordon Hui
VP, Consulting
Peer Insight
(703) 778-5543
ghui@peerinsight.com

+ + +

Four Fundamentals and Six Secrets

Introduction
The emergence of the services economy and the modern IT
systems upon which it runs has opened up powerful new
opportunities for corporate growth. At Peer Insight, we see that
there are Four Fundamentals for profitable growth in the
Services Era:
1.
2
2.
3.
4.

Ability to detect unmet customer needs and design

unique customer experiences;
Open innovation to engage the best capabilities in
the ecosystem;
Business model exploration to retain a fair share of
the value the firm creates; and
Judicious use of technology to make these new
offerings scale profitably.

This document explores the third of these fundamental

capabilities, business model exploration. Business models
are often addressed at a conceptual level, to raise awareness
and promote discussion. Alternatively, we often see business
models
d l addressed
dd
d after-the-fact
ft th f t att an analytical
l ti l level,
l l to
t explain
l i
why a certain firms business model works (or doesnt).
In this document, we wish to address the subject of business
models at the design protocols level, proposing a series of
practical methods that really work when it comes to unlocking
what John Seeley Brown calls the architecture of the revenues.

Can such a complex topic be reduced to a set of protocols, a

cookbook, so to speak? Our experience in consulting projects
in a wide range
g of environments p
proves that it can.
The Six Secrets
Any experienced business reader can tell you that the topic of
innovation suffers no shortage of hyperbole. For that reason
l
we were initially
i i i ll reluctant
l
to use the
h term secrets

i
in
alone,
association with this guide.
However, our research program has proved that, while business
model innovation attempts are frequent, the methods used are
crude and highly variable,
variable even among different teams within
the same firm. For the six methods below, we found that only
12 of the 100 projects in our recent study used more than half of
them. Yet, when these so-called secrets were employed, the
results were remarkable. Here are the six methods, in headline
form:
Secret #1
Secret #2
Secret #3
Secret #4
Secret #55
Secret #6

Everyone must speak business model

Use customer priorities as the starting point
Contradict the dominant logic
Find a hungry partner to complete you
The on-ramp
p is p
part of the business model
ROL (return on learning) always precedes ROI

+ + +

Examples of Services Era business models

Services Era business models are manifestations of the Four
Fundamentals (customer experience, open innovation, business
model exploration, and technology). Those fundamentals can
take many different configurations. Below are ten examples of
services models. One pattern you will see in these innovative

Nature of the innovation

1. Mass
a customization
a
. . . . . . . .. . .
2. Marketing of excess capacity . . .
3. Marketplace / social media . . .
4 Info
4.
Info-based
based targeted offers . . . .
5. Narrowcasting ad model . . . . . . .
6. Lock-on through learning . . . . .
7 Outsourcing . . . . . . . . . . . . . . . .
7.
8. De-featured versions . . . . . . . . .
9. Pay-per-use plans . . . . . . . . . . . .
10. Fractional
F ti
l ownership
hi . . . . . . . . .

models is how frequently they tend to shift the boundaries of

which party does which tasks in a marketplace. This boundary
shifting is usually based on new possibilities created by
modern IT systems.

Description (+ examples)
y
to enable mass produced,
p
, yet
y customized services
Use IT systems
Ex: Dell direct build-to-order PCs
Business models, often leveraging ICT, that identify and sell unused capacity
Ex: Priceline.com, NextJet
Create a meeting place for buyers and sellers, enabling their transactions
Ex: eBay, Facebook
Use data mining to develop highly targeted offers based on unique insights
Ex: Progressive Insurance, CapitalOne, Harrahs
Use data mining to provide advertisers with access to precisely-defined customers
Ex: Google
Enhanced targeted marketing based on accumulating data through IT systems
Ex: Amazon collaborative filtering, NetFlix recommendations
Company assumes complexity or specific task(s) on behalf of client
Ex: IBM IT Outsourcing
Offer services that are more basic versions of an existing service, at lower cost
Ex: Southwest Airlines
On-demand or per-pay-use services
Ex: Sun Grid Computing, Progressive Insurance TripSense
P id partial
Provide
ti l ownership
shi off a capital
it l asset
ss t
Ex: NetJets

+ + +

About the authors and contributors

Tim Ogilvie
Tim is the CEO of Peer Insight and has twenty years of
experience in business strategy research and analysis.
During the early 1990s, he founded Price Waterhouse's
global benchmarking practice and conducted over 80
best practice site visits in 13 countries. Prior to forming
Peer Insight he was the CEO of a software firm and a
partner in a global strategy consultancy. Tim holds a
Masters degree in Computer Integrated Manufacturing
Systems from Georgia Tech, and a BA from the University of Virginia. Tim
and his wife,
wife a Brazilian-born
Brazilian born artist,
artist are raising two young boys,
boys but he still
makes time for running and rock climbing.

Gordon Hui
Gordon is the Partner in charge
g of Peer Insights
g
consulting practice and directs engagements on a
variety of emerging innovation topics, including service
innovation, growth platform development and customer
experience design. Gordon has implemented innovation
and growth strategies at a number of Americas most
well-known companies, including Hewlett-Packard,
St d d & Poors,
Standard
P and
d Procter
P t & Gamble.
G bl He
H holds
h ld an
MBA from The Wharton School at the University of Pennsylvania and B.S.
degrees in Finance and International Business from the University of
Maryland at College Park. In his spare time, Gordon is a budding acoustic
guitar player and climbs the occasional mountain in Tanzania.

Field Testing with Clients

Our consulting practice lets us take new discoveries and put them into
practice. We have been privileged to know quite a few courageous
clients eager to apply leading-edge innovation methods to their new
growth opportunities. We should acknowledge the collaborative efforts
of several firms, including AARP, Bank of America, Celestica, GE,
Hewlett-Packard, Procter & Gamble, Starwood Hotels, Siemens, and
UPS, to mention a few.

business model exploration

secret #1 . . .

+ + +

Everyone must speak business model

Despite the importance of emerging economies to most
modern supply chains, the language to learn in the Services
Era is not Hindi or Mandarin. . .its business models!
As manyy leading
g business thinkers are q
quick to p
point out,, the
business model mediates the linkage between the technical
and social domain. Every day, the innovation-oriented
product engineer at Hewlett-Packard not only must
understand the language of ink technologies and product
roadmaps, he must also be conversant in Adrian Slywotzkys
perspectives
about
value
capture and
creation.
i
b
l
d value
l
i
Similarly, the growth-driven brand director at Procter &
Gamble cannot simply focus on brand equity pyramids and
stage-gate models, she must also think about Henry
Chesbroughs theories on open innovation.
Most of the firms that we admire today are not only multinational corporations, they are also multi-business model
corporations.
Apple, Amazon, IBM, GE.
Brave and
relentless explorers of new product and service business
models, these firms have their own shared vocabularyy and
shared set of cultural experiences, both successes and
failures. They avoid the paradigm of just sticking to their
knitting; in fact, they recognize that ripping the knitting
apart is the only way to continually foster game-changing
innovation over time.

+ + +

Secret #1: Everyone must speak business model

The focus of innovation efforts change over time

The transition from product technology to
business models as the primary basis for
innovation is a recurring theme across many
industries.
Consider the automotive sector.

Rate
Speedometer Model T,
(1901)
headlamps
(1908)
4 Stroke
Auto
Engine
Electric
(1890) Transmission
Ignition
(1904)
(1910)

Product
Innovation

Business Model
Innovation

Toyota
Scion (2003)

onStar
(1995)

Assembly Line
(1914)

Lean Production
(1980s)

Japanese cars
go premium
(1986, 1989)

Process
Innovation
No Haggle
Pricing
(1985, 1993)
Hybrids
(1990s)

Adapted from Abernathy and Utterback (1978), Grant (2002), Wikipedia 2008

Most basic features of the modern automobile

internal combustion engine, speedometer,
automatic
transmission,
headlampswere
created between 1890 and 1910. This period of
rampant
p
product innovation coincided with the
p
emergence of many car brands that still exist
today, including Daimler, Cadillac, and Peugeot.
By 1913, the focus of innovation efforts shifted
greatly towards process innovation.
The
application of large scale,
scale assembly line
techniques to auto manufacturing by Ransom Olds
and Henry Ford ushered in a new era of lower cost
production, resulting in more affordable cars for
the masses. The focus on process innovation and
driving
g out costs continued into the 80s,, when
Japanese management methods focused on lean
production and quality were widely adopted.

Time
Over the past 20 years, the focus of innovation
efforts in the automobile industry has
t
transitioned
iti
d from
f
operational
ti
l excellence,
ll
which
hi h is
i
now table stakes, to new business models.

Secret #1: Everyone must speak business model

+ + +

Business models have a self-supporting structure, part external and part internal

Customer
Experience
Creating Value
(External)

Getting Paid
(Internal)

Customer
Needs

Value
Capture

Customer
Offering

Control
Points

Most senior executives recognize that the goal of

any successful business model is to make money
and grow profitably.
However, the idea of
getting paid is only an internal view of business
model. Savvy strategy thinkers recognize that
innovative business models change the
competitive dynamics of a market and must
specifically account for creating value, which is
an external-facing activity.
We balance this external perspective of creating
value with the internal perspective of getting
paid through the Business Model Innovation
Diamond, a sequential approach to fostering new
business model development.

Secret #1: Everyone must speak business model

+ + +

10

First focus on creating valuethe external part of your business model development
The external perspective of business models begins with an
understanding of your target customers and their Customer
Needs. In every business, there are functional needs
related to cost, quality, and delivery, plus emotional needs
driven by perception or customer behavior. Strong business
models avoid the Swiss Army knife approach to customer
needs, choosing instead to focus on a narrow set of
customer-desired outcomes.

Customer
Experience
Creating Value
(External)

Customer
Needs

Value
Capture

Customer
Offering

Control
Points

A precise understanding of customer needs provides the

building
g blocks for the creation of a targeted
g
Customer
Experience. This is at the heart of your business model
innovating effort.
Can you create a more premium
experience to drive a new business model in a commoditized
industry? Howard Schulz of Starbucks says yes. Can you
take out some of the unnecessary components of your
experience
i
t drive
to
di
a low-end
l
d business
b i
model?
d l? Clayton
Cl t
Christensen in his three books about disruptive innovation
says yes, yesand yes!
With a customer experience vision established, the next step
p
with a Customer Offering
g that
is to enable that experience
combines products and services. For some product-centric
firms, building a complete offering that explicitly includes
services can be a substantial paradigm shift.
The
development process is different (its not product
development after all), and corporate performance goals
often dictate selling more widgets. For other firms, the
question is not Should we sell more services? but, Are we
creating the right ones?

+ + +

Secret #1: Everyone must speak business model

11

Then shift to the internal: getting paid for the value you have created
Once the Creating Value piece of the business model is
established, then you can transition to the Getting Paid
part of the Business Model Diamond. This domain has been
thoughtfully considered by a number of people, and we are
indebted to strategists like Adrian Slywotzky and the
survivors of the Dot Com Era (i.e.
(i e not Pets.com)
Pets com) for their
pioneering efforts.

Customer
Experience
Customer
Needs

Getting Paid
(Internal)

Value
Capture

Customer
Offering

Control
Points

Any innovative business model has to create barriers to entry

through strategic Control Points. Simply put, why bother
g a new business model and spending
p
g the moneyy to
creating
induce trial if the customers are going to leave right after your
competitors copy your hard work? There are a number of
ways to lock-in customers. Network effects, loyalty programs,
channel, brand. Equally important are control points that lock
out your competitor, such as standards or partner networks.
Only when all four of the other facets of the Business Model
Diamond have been accounted for, should senior executives
truly deep dive on Value Capture. The ways to capture value
are numerous. Proven models, including mass customization
and razors to blades,
blades are still valid in the Services Era.
Era
However, the emergence of Web 2.0 suggests that click
through and marketplace models deserve consideration as
well.
Just remember, yyoure not g
going
g to capture
p
anyy value if the
value doesnt already exist. Focus on the external part of
designing a business model first.

Secret #1: Everyone must speak business model

+ + +

12

Congruent facets make a stronger diamond. Consider Southwest: low cost, high value
The nations low fare,
high customer
satisfaction airline

Low cost but good

quality and on time

Low cost, short haul

We fly for peanuts
Focus on customer
satisfaction

Customer
Experience

Customer
Needs

Value
Capture

Tiered pricing model based

on purchase timing drives
yield predictability and value
for customers; frequent
flights provide options and
drive high asset utilization

Customer
Offering

Control
Points
Rapid Rewards program
Customer service
Brand
Point to point nodes
Personal reservation
system

In developing an innovative business model, the goal is

not to drive radical thinking across all five facets.
Fostering congruence and mutually reinforcing activity
across the diamond are far more important goals. Just
look at Southwest Airlines.
Like many other airlines, Southwest focuses on basic
customer needs: get me there at a low cost, safely, and
on time. However, the airline anchors these needs
against a customer experience of being the nations
low fare, high customer satisfaction airline.* Southwest
does this by providing an offering that focuses on short
haul, no frills flights. They fly for peanuts, but they
dont sacrifice quality, often ranking 1st in unbiased
government and 3rd party surveys of airlines.
To establish control points,
points Southwest locks in
customers with its generous Rapid Rewards program,
superior customer service, and brand reputation as THE
low fare airline. They lock out the competition with low
cost point-to-point airport channels and self-managed
reservation systems. And they capture value through a
tiered pricing model that results in yield predictability
and high frequency, quick turnover flights to drive
volume.
Low cost, high value. Sounds easy? Ask United and
Delta. Do it soon though.
Delta
though There may not be anybody
answering the phone at those places tomorrow.

* Southwest Airlines 2006 Annual Report

business model exploration

secret #2 . . .

Use customer priorities as the starting point

There has been a lot of buzz about the importance of
customer experiences. Are we now to believe they are the
starting point for business model innovation, too? Actually,
no. The first order of business strategy is customer selection;
choosing which customers you wish to serve.
With that done, aspiring business model innovators must
root themselves deeply in the priorities of those customers,
searching for unmet needs upon which to build experiences.
Business models built upon the same outsourced market
research other firms are using will not drive growth.
growth
Even B2B firms are investing in customer insight. Pitney
Bowes and Intel, to name just two, have full-time
ethnography and social research skills on staff to design and
execute observational research programs in support of
innovation. Both firms go on-site with customers to observe
their workflow and search for weak signals of unmet needs.
Peer Insight teaches our clients to frame their field
observations using the atomic structure of customer
i
s
experiences:
journey

touch point

your direct interaction

with the customer

moment of truth

a moment of high
emotional significance

+ + +

Secret #2: Use customer priorities as the starting point

14

Journey mapping helps us isolate the emotional moments of truth

As innovators, we dont treat the atomic structure of
experiences as theoretical constructs. We build a map of the
customer journey and use it to find innovation opportunities.
The mapping process begins with what we know best: our own
internal business processes (level 0 on the example below)
and the touch points we share with a key customer (level 1).
Then we work upward from those shared touch points to map
the customers work flow (level 2). From there, we generate

Customer ABC
emotional concerns

Customer ABC
business goals

Customer ABC internal

process activities

Shared interactions
between Customer ABC
and your firm

Your firms internal

process activities

hypotheses about the customers key business goals (level 3)

and their emotional needs (level 4).
This highest level of insight holds the key to discovering the
moments of truth. We find these are often upstream in the
process, where an informal, two-way contract is being made
with the customer. Progressive Insurances online quote
comparison utility (known inside Progressive as the ticker)
is a good example. Right away, it establishes Progressive as a
firm with nothing to hide, and which respects your time.

+ + +

Secret #2: Use customer priorities as the starting point

A good journey map will have 40 to 60 nodes and tells us where to look
Once we have mapped the customer journey, we
analyze it for potential moments-of-truth and
blind spots (where we cant see well enough into
the customers workflow or emotional journey).
In the B2B example at right, there were 2
moments of truth (one early, and one late) and 8
blind spots. These became the focus areas for
four weeks of field research performed by the
d
development
l
t team.
t
A quick glance at the pattern of interactions tells
you something about the challenge for this
company. There is little interaction upstream in
the customer
customerss work flow (the green nodes). Then
a big hand-off occurs, and the work is all on the
vendors side (the lower set of pink nodes). Not
surprisingly, the primary moment of truth occurs
when control is handed back to the customer (the
cluster of pink hearts).
Lumpy interaction models such as this one have
the potential to create anxiety for both parties.
The business model solutions envisioned by this
firm include creating greater transparency and
establishing earlier,
earlier smaller moments of truth.
truth

Green clouds indicate

blind spots

Pink hearts represent

the moment-of-truth

15

Secret #2: Use customer priorities as the starting point

Field research lets us test our hypotheses and arrive at deeper insights
There was a time (the 1990s, to be exact) when business models
were the exclusive domain of strategists and financial analysts. In
the Services Era, the social sciences have emerged as a critical
part of the business model innovation team.
Customer interviews and observation is best done in the subjects
natural environment. Peer Insight social researchers and clients
often team up to go into the field and perform ride-along research
to understand the user environment in full context. We have found
the best approach is to have two researchers and a single subject,
subject
as the photo at right depicts (the second researcher took the
photograph of Peer Insights Katie Waterson and a research
subject).
We cannot design a unique experience for each customer, so we
need to organize the field insights into patterns and clusters.
When we find a cluster that (a) captures a common unmet need
and (b) fits the capabilities of the firm, that becomes the focus
area for business model innovation activities. In the picture at
right, Tamzyn Peterson of Peer Insight is organizing field research
into clusters to be used for customer co-creation.
co creation
Sense-making from qualitative research is a unique skill, one that
your firm may find unfamiliar at first. It requires an aptitude for
pattern recognition that we predict you will grow into quickly. (In
fact, humans are far more naturally skilled at pattern recognition
than at making precise calculations.)

+ + +

16

Secret #2: Use customer priorities as the starting point

+ + +

17

Prototype it fast, and customers will show you their priorities with their actions and
expressions
Business models are not built upon our initial conclusions about
customer priorities, but low-resolution prototypes are.
Remember, the best business models base themselves on fresh
i i h into
insights
i
l
latent
customer needs.
d
Deep insight
i i h emerges
slowly, based upon trial and error. The photos at right show
testing of early, low-resolution (2D) prototypes with customers,
in a B2C setting (upper photo) and a B2B setting (lower). Facial
expressions offer important clues and the B2C setup allows
researchers to capture both their choices and their feelings.
feelings
Deep customer insights are the essential starting point for
successful business models.
For example, when Pfizer
developed its smoking cessation program, ActiveStop (later
acquired
q
byy J&J),
) it was based on a subtle but crucial customer
insight:

Smokers do not believe they have a health issue. They

believe they have made a lifestyle choice, and that one
day they will make a different choice.
This view is held by many smokers, despite the fact that the
average smoker makes seven attempts to quit before they are
successful. Based on this new insight, Pfizer designed its
customer experience and business model on the basis of
providing a healthy person with an opportunity to make a new
lifestyle choice. (You could think of it as a gym membership for
your lungs.)

business model exploration

secret #3 . . .

Contradict the dominant logic

Every organization has a story it tells itself, a story that
explains why it doesnt go out of business.
Henry
Chesbrough of UC-Berkeley refers to this as the dominant
logic of the enterprise.
What makes the gravitational pull of this story so strong is
that it doesnt have to be told people just know it. And by
knowing it without challenging its validity, the dominant logic
can be very hard to defy.
Business model innovation requires us to do just that, to defy
the dominant beliefs our firm holds dear, even if only in small
ways.
Peer Insight uses a structured approach to the challenge of
defining and then defying the dominant logic of the
enterprise. Every business model comprises three flows:
Physical flows
Information flows
Financial flows
In the Services Era, these three flows of value are often multidirectional, and collectively they create a customer
experience.
The most successful business model
explorations are adept at mapping these flows and changing
just
enough
to create a compelling
experience.
j
h off them
h
ll

+ + +

Secret #3: Contradict the dominant logic

19

Example: The live music market

Netflix competes successfully with Blockbuster
by contradicting several key elements of the
traditional media rental market. Specifically,
Netflix wins a key moment of truth by having
no late fees,
fees ever.
ever
GE Aircraft Power has become number one in
its market by selling to a different customer
(the airline CFO instead of the COO) and
making
g a completely
p
y new p
promise: well lease
the engines to you and guarantee up-time.
The change from selling engines to providing
thrust with a guarantee more than doubled
GEs market share and delivered industry
leading profits for nearly a decade.
The dominant logic of most markets can be
defined by about a dozen key elements. We
can illustrate the analytical approach we use
by making an example of the live music
right)
market (see figure at right).
We like to convene perhaps 5-6 people familiar
with the industry to help develop the initial
contradiction frame. Next, for each element,
we give them three minutes and ask them to
write 3-5 post-it notes, each with an alternative
approach (continued on next page)

Dominant logic of live music market

Physical
ys cal flows
lo s
Occurs in established indoor venues
Events scheduled in evenings
Live band or DJ on stage
New acts appear every few days
Amplified music
Alcoholic beverages are sold
Information flows
Advertised in the media
Aimed at a specific audience
Limited data available in advance
Limited data captured or reused
Financial flows
Pay a fixed fee to get in
Single-use fee model

Resulting customer experience

Predictable except
p for the band

How could we contradict

these elements? There are
usually several ways for each.
Alternate p
physical
y
flows

Alternate information flows

Alternate financial flows

Resulting customer experience

+ + +

Secret #3: Contradict the dominant logic

20

Example: The live music market, version 1

that contradicts the dominant logic. After
three minutes, each person posts his/her
notes on a board and reads them aloud to the
group.
Within 45 minutes you can easily produce 80100 contradictory elements.
The key to
business model exploration is to change the
crucial few that address the customer priorities
you believe in.
in
The table at right shows how you can change
only three elements of the traditional live
music experience and have a completely new
experience and a new business model in
this case, a rave.
The resulting customer experience is exclusive,
unpredictable, dangerous, and exciting just
what a lot of young music fans are looking for.

Dominant logic
Physical flows
Occurs in established indoor venues
Events scheduled in evenings
Live band or DJ on stage
New acts appear every few days
Amplified music
Alcoholic beverages are sold
Information flows
Advertised in the media
Aimed at a specific audience
Limited data available in advance
Limited data captured or reused
Financial flows
Pay a fixed fee to get in
Single-use fee model

Resulting customer experience

Predictable except for the band

How a RAVE! contradicts

Occurs in a rented space

Novelty from new event/space

Info travels person-to-person

Pay a suggested contribution

Unpredictable on many levels

+ + +

Secret #3: Contradict the dominant logic

21

Example: The live music market, version 2

Another innovation popped up in the live
music scene in Europe several years ago, the
silent disco.
Instead of blasting music
through amplified speakers, party-goers dance
to the music playing in their wireless
headphones.
This permits loud parties to occur in
otherwise quiet neighborhoods and during
quiet times of the day.
day It also permits partyparty
goers to remove their headphones and have a
social conversation, something that would be
next to impossible in most music club
environments.

Dominant logic
Physical flows
Occurs in established indoor venues
Events scheduled in evenings
Live band or DJ on stage
New acts appear every few days
Amplified music
Alcoholic beverages are sold
Information flows
Advertised in the media
Aimed at a specific audience
Limited data available in advance
Limited data captured or reused
Financial flows
Pay a fee to get in
Single-use fee model

Resulting customer experience

Predictable except for the band

How a Silent Disco contradicts

Occur in diverse venues

Occur at many times of day

Wireless headphones

Out-of-the-ordinary, more social

(can talk with headphones off)

Secret #3: Contradict the dominant logic

+ + +

22

Successful contradiction prepares you for the next phase: combinatorial play

We have found this framework to be extremely intuitive.

Client teams can begin using this method successfully
within minutes.
minutes The resulting brainstorm generates
dozens of intriguing ways to contradict the current
model for a market.
The magic, of course, is in picking and choosing the
crucial few contradictoryy elements that will create a
compelling customer experience and a viable business
model.
This next phase of business model exploration,
therefore, resembles combinatorial play.
Your
greatest allies
lli in
i this
hi effort
ff
are (1)
( ) the
h strength
h off your
insight into customer priorities and (2) the agility of
your firm and your downstream partner network to
develop and market a compelling solution for more
than it costs to deliver. The business model exploration
secrets that follow will help you meet this challenge.
challenge

business model exploration

secret #4 . . .

+ + +

23

Find a hungry partner to complete you

The best business models combine the capabilities of two or
more large entities in new ways. Finding a large, hungry
partner in your target ecosystem lowers cost, reduces risk,
and paves the way for a more complete offer that scales.
This
h process is often
f
called
ll d open innovation, and
d it is one off
those popular concepts that is more easily said than done. At
the heart of open innovation is the requirement for an
organization to expose its closely-held intellectual property
to outsiders.
Open innovation, therefore, requires a shared leap of faith.
It works best when (1) you choose the partners and (2) you
make the leap of faith as short as possible by using clever
protocols.
R&D-centric
R
D
i companies
i are embracing
b i open innovation
i
i with
ih
open arms. Procter & Gamble, Clorox, and IBMs successes
are well-documented. And the significant demand for open
innovation has spawned an entire industry of open innovation
intermediaries, including Venture2 and Nine Sigma.
Just keep in mind that technology scanning is not the only
reason to do open innovation. Channel access, early market
feedback, and customer co-creation are valid reasons too. If
nothing else, Eric Von Hippels work on the role of lead users
in democratizing innovation, as well as the success of
Google mashups and Wikipedia, are clear evidence that the
hungriest partner may be your actual customer.

+ + +

Secret #4: Find a hungry partner to complete you

24

Finding hungry partners bridges creating value and getting paid

Services Era business model development path
Customer
selection

1.
2.

Which customers do I want to serve?

How relevant is my brand to those customers? (Which brands are most relevant?)

Value creation

3.
4.
5.
6.
7.

What unmet needs do those customers have (including their end user customers)?
How can I create a compelling customer experience (cX) to meet those needs?
What assembled capabilities are necessary to fulfill the cX?
Who are the other actors in the ecosystem?
What are the possible ways to create value with and for those actors?

8.
9.
10.

Who are the available payers? What payment mechanisms exist?

What business models are possible? What are the likely costs? Profits?
How can we create control points to claim a share of the profits?

Customer
Offering

Control
Points

Value capture
(the architecture of
the revenues)

If you are thinking about open innovation, you have reached a

key inflection point in the Business Model Diamond. Having
already identified the target customer and their unmet needs,
you are seeking to create the ideal customer experience through
a specific set of customer offerings.
offerings The decision is no longer
about what will create value, but how to create value in a way
that allows you to capture it and lock out competitors.
From the perspective of our Services Era business model
development path, you are on questions 6 and 7. A key question
h
here
is: how
h you can share
h
value
l with
h your partners? Even Apple,
l
notorious for creating proprietary standards, has gone back to
kindergarten and learned how to share.

Yes, Apple is everyones poster child for innovation today, but

the real lesson to take away from the iPod story is not make all
of your products white but make of all of your products
partner-friendly. We all know that Apple didnt create digital
music but the record label partnerships that allow for 99 cent
music,
downloads has revolutionized the way music is bought and sold.
Several years later, the company continues to pursue unique
partnerships to innovate the business model. Imagine a world
where your iPod records the pace of your jog through your Nike
shoes,
h
and
d you can instantly
l download
d
l d the
h song thats
h
playing
l
when you visit Starbucks after the workout. Youre in luck; both
of those potential innovations are realities today.

+ + +

Secret #4: Find a hungry partner to complete you

When do you partner and when do you not? Use an eco-system map
The decision to partner or not to partner can feel like an
extremely complex make-versus-buy decision.
We find that
creating an eco-system map allows senior executives to better
visualize the opportunities and trade offs of open innovation.
To begin your map,
map first determine what are the key offerings
that fulfill the ideal customer experience and create value. For
each of these offerings, assess if your capabilities are adequate
to develop, produce, and bring to market that product or service.
p out the offerings, decide if each offering is core,
As yyou map
adjacent, or distant to what you will fundamentally provide to
the target customer.
Think twice about partnering (and
potentially giving away IP) on anything that is core. Starbucks,
for example, is highly willing to partner to create music or sell ice
cream, but the coffee retailer never partners on anything related
t coffee
to
ff or tea
t that
th t is
i actually
t ll sold
ld in
i a Starbucks
St b k store.
t
The figure on the right is an eco-system map for Nike+iPod from
Apples perspective. For the purposes of illustration, the map
has been simplified, but the point is clear. Anything that
g
directlyy to the iPod and iTunes p
platforms is core and
integrates
should be protected by Apple. Any offerings that are related to
the iPod lifestyle are adjacent. Shoes are clearly distant.
For those aspects that cannot be effectively fulfilled by existing
capabilities and that are not core to your business, determine
who
ho may
ma be reasonable partners to complete your
our offering.
offering In
addition, think about the implications of eliminating a partner.
Dell had a good run with its direct model that disintermediated
retailers.

Ecosystem Map for Nike+iPod

iTunes

iPod

iPod
Receiver
Attachment
(R,D,M,C)

Nike+iPod
iTunes
Software

Nike+iPod
Website

Core

Nike+Shoe
Transmitter
(R,D,M,C)

Adjacent

Nike+
Shoe
(R,D,M,S,Di,C)

Distant

Legend: Hungry Partner Needed

R: Apple cannot do R&D for the product or service alone
D: Apple cannot Design the product or service alone
M: Apple cannot Manufacture the product or service alone
S: Apple cannot do Sales and Marketing alone
Di: Apple cannot Distribute the product or service alone
C: Apple cannot provide Customer Service alone
I: Apple cannot provide IT support alone

25

Secret #4: Find a hungry partner to complete you

+ + +

26

Case example: Progressive TripSense

When it comes to introducing successful
Services Era business models, one of the most
impressive firms is Progressive Insurance. The
story of how TripSense came to market
illustrates the step
step-wise
wise nature of business
model exploration. We will also use it to
illustrate a robust approach to identifying
potential partners in the ecosystem.

The key question became one of enabling real-time proof of driving habits.
Progressive tested a solution in Houston during 1997 that provided drivers
with a GPS system and reported their (a) time and date of use, (b) average
speed relative to the speed limit, and (c) aggressive braking and acceleration.
Unfortunately, the potential customer savings of $300 per year was not
enough to offset the $500 cost of a GPS system. But Progressive learned

In the late-1990s a team at Progressive identified

an unmet need in the auto insurance market.
Traditional risk-analysis methods left some
drivers stuck paying higher rates than their
individual driving habits would require.
Take the case of Greg S.,
S a 24-year-old
24 year old software
engineer from Racine, Wisconsin:
Im a safe driver never
had an accident or a
speeding ticket. But I end
up paying
i
an absurd
b d
insurance premium just
because Im single, under
25, and drive a nice car.

A team at Progressive set out to see if there was

a way to let customers like Greg S. pay a variable
premium based on their actual driving habits.

about the key elements of a new customer experience, once an affordable

delivery model could be developed.
Byy 2003,
3, the computing
p
g infrastructure in automobiles had changed
g
sufficiently for a new solution: a small device made for less than $20 could be
plugged into the diagnostic port of the automobile (see photo above).
Customers must manually sync-up their TripSense device with their laptop to
send the driving data to Progressive. Their incentive to do so? A guaranteed
5% discount regardless of their actual driving habits, and greater savings if
the data shows they drive safely. Auto insurance had entered the pay-per-use
era, and many Progressive customers co-create their own insurance costs.

+ + +

Secret #4: Find a hungry partner to complete you

27

Case example: Progressive TripSense focuses on information-centric value

Lets analyze TripSense with a view toward how it might
engage prospective partners. Remember steps 6 and 7
in the business model development path?
6.
7.

Who are the other actors in the ecosystem?

What are the possible ways to create value with and
for those actors?

Peer Insight uses a list of 31 value creation questions

to identify potential elements of a business model. The
table at right shows questions 16 through 31, and
indicates whether Progressive would elect to Keep
th opportunity
the
t it for
f itself
it lf or Share
Sh it with
ith a partner.
t

Value Creation Opportunity Template

Progressive
TripSense
16

Question 22 suggests an interesting opportunity:

perhaps fleet operators (such as UPS) would want to
see the driving behavior of their drivers. UPS could be
a channel partner or a customer for TripSense.
Question 26 brings to mind another possibility: a
police department might wish to use TripSense to
rehabilitate drivers
dri ers with
ith too many
man speeding tickets.
tickets
Finally, Progressive off-loaded the manufacturing of the
plug-in device (question 29) to a partner.

Does the buyer need help deciding which offering to select?

Does the buyer need help placing the order?
Does the buyer need help financing the purchase of the offering?
Is there risk associated with this purchase that the buyer might want
to sell?
Does this owner represent an asset that others might wish to reach?

17
18
19
20

4. Information-centric value creation questions

21

You can see that Progressive is primarily interested in

the information value created by TripSense. That is
because Progressives business design is predicated
upon its ability to price risk with greater accuracy than
other insurers. TripSense provides a rich data stream
from which to build competitive advantage.

1. Product-centric value creation questions (omitted for brevity)

2. User-centric value creation questions (omitted for brevity)
3. Owner- or buyer-centric value creation questions

K
S

22
23
24
25

K
K
K

26
27

S
K

Is the info useful to a downstream (or upstream) process?

Is the info useful to a party in a remote location?
Does the info have predictive value?
Does the info provide historical value?
Does the info accrue value over time?
Is there a secondary audience that values the info?
Can we work with the customer to define an information stream that
adds value to them?
5. Value network- or partner-centric value creation questions

28
29
30
31

Is there an opportunity to consolidate upstream and/or downstream

tasks into a simpler offering?
Is there an opportunity to off-load unattractive portions of the offering
to partners?
Are there jobs associated with this system that the operator or owner
may wish to pay others to do?
Are there jobs you currently do that the operator or owner may be
willing to take over?

K = keep, S = share

+ + +

Secret #4: Find a hungry partner to complete you

28

There are effective ways to protect your IP without formal patent rights
Working with partners means exposing at least some of
your intellectual property to another entity. In the
Services Era, very little of the IP qualifies for formal
patent protections.
protections For too many firms,
firms the fear of
losing control of their IP limits their potential
innovation partners to smaller firms they can dominate.
There are effective ways to protect services IP without
formal patent rights. There are two categories of IP
protection that should support your partnership
strategy:
1.
2.

Contractual protections (formal agreements)

Informal protections (see table at right)

The first category is well-understood. The practical

issue many firms face is the frequent delays that occur
under the heading of legal review.
The lesser-known
lesser known category is Informal Protections.
Protections The
table at right shows several of the methods Peer
Insight uses to help clients protect their services IP.

Informal Protection Method

Purpose

Documentation

Prevent the disappearance of the latent

knowledge, increase the effectiveness of the
entrepreneur

Confidentiality

Prevent the spreading of confidential information

to outsiders

Concealment

Prevent the spreading of confidential information

to outsiders

Quick innovation pace

Stay ahead of imitators and accelerate the

development of the business

Di idi off tasks

Dividing
k

Prevent individual
P
i di id l workers
k
ffrom h
having
i access to
the totality of the business model

Recycling of tasks

Reduce the dependence upon key workers by

replicating capability elsewhere

Defensive publication

Preclude others from patenting or owning

owning the
same concept

* Source: IP Management for Services, Tekes, Finnish Agency for R&D (2007).

business model exploration

secret #5 . . .

The on-ramp is part of the business model

A few years back, the New York Lottery had a slogan: Youve
gotta be in to win. It is even more true of business models:
customers have to actually try the experience before anyone
can win.
After 5 years of focusing exclusively on service innovation,
customer experience design, and business model innovation,
one thing has become clear: not enough attention is paid to
creating an on-ramp to tryout. Too many firms think
Marketing will have to sort that out once we get this amazing
experience
built.
i
b ilt
Products have a far easier path to tryout, and 90% of them
fail to meet their ROI hurdle rates. In the case of services,
you cant hold them in your hand or try your friends service
before you buy one. The on
on-ramp
ramp is one of the most crucial
elements to innovate.
The approach taken by GM for its OnStar system provides an
extreme case of on-ramp investment. GM needed a services
growth platform so badly that it:
Built the hardware into every GM car
Licensed it to other auto manufacturers for their cars
Gave away the service free for 1 year
Most companies are hungry to explore new business models,
models
but not that hungry. For a more affordable on-ramp, consider
Progressive Insurance, which offers to take $100 off your
annual premiums if you sign up online to receive statements

+ + +

Secret #5: The on-ramp is part of the business model

30

Were asking our customers to swim upstream

online. Their belief is that they will save more than
$100 over the life of a customer if he/she will interact
with Progressive over the Internet.

The customers that use it, love it.

p were able to make it onto
That means too few p
people
and up the on-ramp to benefits: awareness,

Most business models are

d i
d to
t optimize
ti i h
designed
here
net
promoter

REVENUES

The most common lament I hear about failed services

business models is:

Designing the On-ramp to Benefits

use
purchase

understanding, consideration, tryout, purchase, use, reuse, habitual use, and advocacy.
At Peer Insight, we refer to the table at right as the fish
l dd It
ladder.
I shows
h
the
h set off hurdles
h dl our customers must
overcome, just as a salmon must swim upstream to
spawn. For many business models, 99% of the focus is
on the green area, where the system is up and running,
data is accumulating, and everyone is happy.
A successful Services Era offering must address the
yellow area with experience elements that are
comforting, exciting, or otherwise rich with meaning.
This is not simply a role for marketing. It is a crucial
element of the business model.

repeat
use

habitual
use

tryout
seeking

Innovative on-ramps are

necessary to enable tryout

awareness

BENEFITS

A company that understands this issue clearly is Siemens Building

Automation. One of their recent innovations is a program that
encourages field technicians to voluntarily enroll in a program to sell
time and materials (T&M) add-ons to the facilities managers they
support. Most field technicians dont want to become sales people.
Without their participation, however, these little T&M jobs were
becoming an annoyance to their customers. (continued on next page)

Secret #5: The on-ramp is part of the business model

The on-ramp needs elements that are rich with meaning

Siemens designed a clever on-ramp for its field technicians.
They created a Reward Store filled with nice gifts similar to
American Express rewards. Field technicians would earn a big
chunk of points for enrolling in the program, plus another chunk
of points whenever they fulfilled a T&M job for a customer.
Most importantly, Siemens sent the program announcement to
the field technicians homes described on a postcard so their
spouse would be able to read it, and displaying gifts that a
spouse would find appealing. Within sixty days they reached
over 60% voluntary enrollment in the program, and within six
months nearly 25% of the 2500 field technicians had completed
at least one T&M job for a customer!
Ultimately, Siemens succeeded in fostering tryout because it
recognized its field technicians as people and found a way to
benefit the technicians and their families as well.

+ + +

31

business model exploration

secret #6 . . .

+ + +

32

ROL (return on learning) always precedes ROI

Exploring new business models sounds risky, but in fact
virtually all large enterprises today already have multiple
business models. Unlike GM OnStar, the great majority of
new business models emerged from small bets that built
success slowly, not go
go-for-broke
for broke propositions.
GE Aircraft Power didnt invent the sell guaranteed thrust,
not engines business model after walking out of an off-site
strategy retreat. In his book From the Gut, Jack Welch recalls
how it began innocently enough from the acquisition of an
engine repair firm. The newly acquired firm was accustomed
to working on all types of aircraft engines (notably GE, Pratt &
Whitney, and Rolls Royce) and saw no reason to limit their
services to GE engines just because they had been acquired.
This relationship began a series of modest marketplace
experiments by GE Aircraft Power that today looks like a
wholesale redefinition of the marketplace.
The Batten Institute (part of the University of Virginias
Darden School of Business)) has conducted a studyy of growth
g
leaders executives who have achieved outstanding growth
relative to their industry and discovered their penchant for
placing small bets fast.
Growth leaders are impatient to learn, notes Jeanne Liedtka,
Executive Director off the
a nose
h Batten Institute. They
h have
h
for unsolved customer problems, but contrary to popular
myth they are not gamblers. They are just highly

+ + +

Secret #6: ROL (return on learning) always precedes ROI

33

The lesson is clear: Business model innovators must learn before they earn
adept at minimizing their risk by using a technique we call
affordable loss.
Affordable loss is the process of calculating How much can I
afford to lose to find out if this works?
works? According to Batten,
Batten
once the growth leader has set his pain threshold and it is
often quite low he can focus his efforts on maximizing the
learning from the experiment.
We call
a these experiments
p
learning
a
g
launches, since they often are not on a
linear path to commercialization, says
Liedtka. In our research, Peer Insight
found something similar: some of the
most
successful
business
model
innovators make a practice of testing
concepts they do not believe will work (in
addition to testing concepts they do
believe will work). When we heard the
term learning launch, it immediately
explained this fascinating practice.
practice

established? Can you imagine standing up to the VP of Sales

and telling her you want to show her best prospective customer
a lower price from Allstate?
In fact,
fact Progressive first experimented with the ticker in a state
where they were not yet licensed to write insurance. Thats
right, they risked nothing. You could call this approach timid,
but we prefer to use Battens term: affordable loss.
Today,
y Progressives
g
ticker is one of the signature
g
elements of
their brand, and an important part of the on-ramp to becoming
a Progressive customer.
Again and again, the lesson is clear: business model innovators
must learn before they earn.

Jeanne Liedtka
Executive Director
Batten Institute

Progressive Insurance, for example, has a utility on its website

that provides competitive quote comparisons (inside
Progressive it is referred to as the ticker). They find that
Progressive is the low
low-cost
cost provider about 40% of the time.
time
What kind of courage must it have taken to get the ticker

+ + +

Secret #6: ROL (return on learning) always precedes ROI

34

A template for placing small bets fast

At Peer Insight, we are firm believers in the affordable loss
concept. One simple protocol we use is called the 100-day pilot.
In this approach, we posit that the project must create a working
prototype experience for at least one live customer within 100
days
days.
For many large enterprises, this degree of speed and
commitment to a live experience completely shatters the
corporate norms. One client said, For us, a good 100-day goal
Affordable loss template
A.

B.
C.

The senior leader establishes:

A clear challenge statement . . . . . . . . . . . . . . . . . . . . .

Diverse membership of 2-4 people . . . . . . . . . . . . . . .

A limited number of hours . . . . . . . . . . . . . . . . . . . . . .

A small expense budget . . . . . . . . . . . . . . . . . . . . . . . .

A tight timeframe . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Necessary design protocols . . . . . . . . . . . . . . . . . . . . .

An expert coach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exit criteria

A concrete learning objective . . . . . . . . . . . .

Defined go/no-go criteria for 2nd phase . . . .

Defined structure for the next phase . . . . . .

The team executes the exploration
Leader and team use the lessons to:

Achieve the learning objective

Determine whether future investment is warranted

Enter 2nd phase if appropriate

Build capability for future experiments

would be to create a 100-page powerpoint deck and commission

a 100-page market research study.
The template below shows a typical affordable loss construct for
a business model exploration.
exploration An initial phase might be as
short as 45 days and require two people. Subsequent phases
would merit larger teams, greater investment, and more
rigorous exit criteria. The point is to place small bets fast.

Example project definition

Pilot a self-service solution for expense tracking
1 service marketer, 1 IT developer
Half-time
Half
time for 45 calendar days; not to exceed 200 hours
$10,000 expense budget
45 days
[proven methods the team has experience with]
Staff member from Corporate Concept Studio
See if it can be done with less than 2 hours of hand-holding
Customer is enthusiastic; team is enthusiastic
90-day development phase; 3FT people; $50,000 expense budget

+ + +

Secret #6: ROL (return on learning) always precedes ROI

35

A return on learning approach results in engaged, courageous teams

One crucial advantage of taking a Return
on Learning approach to business model
exploration is the effect it has on your
teams.
The cartoon
scenarios:
1.
2.

at

right

contrasts

two

Traditional risk
management approach
Affordable loss approach

How many times have you seen the team

at left, worn out by the obvious anxiety of
their senior leader
a
and ag
a
agreeing
g tacitly
a y to
just keep their heads low and let the
experiment die?
The difference between these two
scenarios is the leader and how much he
perceives is at risk. The growth leader,
according to Batten, (1) makes better bets
(i.e., hypotheses) and (2) knows how to
hedge those bets. Such leaders learn
faster (ROL) and end up with a bigger ROI.

Comparing Two Approaches to Risk Management

Risk management-based
This better work, and if it doesnt,
Ive got to find out quick and kill it.

Affordable loss-based

senior leader

How is this really going to work?

H much
How
h is
i it
i going
i to cost?
?
Whats the 5-year ROI?
Are you sure?

It wont cost that much, and

I want to know the answer.
I know you can do it.
Can I help you get access to
customers to work with?
Do you have what you need?

Wow hes nervous

Wow,
nervous. Id
better just play it safe.

Im going to go for it.

This could really work.

innovation team

business model exploration

Bonus section . . .

+ + +

36

Insights from a recent Peer Insight study

Peer Insight recently completed an 18-month formal analysis

of business model exploration methods in services
environments. The findings on the pages that follow
illuminate several of the business model secrets shared in
this field guide.
The research model we use captures practical insights from a
diverse group of admired companies and places them in a
broader context. Patterns that are not apparent to individual
companies become strikingly clear when aggregated across
industries. This approach has enabled our research team to
create a steady stream of new-to-the-world insights and
leading-edge methods.

+ + +

Bonus section: Peer Insight research findings

37

Peer Insight recently completed formal research into services business models
A recent Peer Insight global research program analyzed 100
innovation projects from 42 different firms. We looked at three
possible areas to innovate the business model:
Channel: Modify the way your services get to market
Financial Model: Change the way you get paid
Value Network: Collaborate with partners in a new way
For services firms, we found it is fairly common to explore
aspects of the business model. The table below shows how
frequently the three methods were used on the 100 projects in
the research sample.
Figure 1

Fifteen of fifty-two (29%) modestly successful projects

used at least two of the methods; and
Seven of twenty (35%) least successful projects used at
least two of the methods.
Figure 2
Use of at least two types of
business model innovation

14

Most successful

28

15

Modestly successful
Used none of the methods

14

52

37

29%
20

Least successful
Used at least one method

71%

0%

20%

40%

60%

80%

13

100%

Most important,
important the research found that business model
exploration correlates positively with project success. Figure
2 compares the outcomes for the 100 projects. When we
compared the projects based on which ones used at least two
of the three business model innovation methods we found:
Fourteen of the twenty-eight (50%)
(
) most successful
projects used at least two of the methods;

10

20

30

40

50

Number of Projects

We compared the frequency of the three methods of innovating

the business model (results are shown in Figure 3). As we
expected, the method used least often was value network, an
approach which relies on open innovation protocols.
Open innovation (which we discussed in Secret #4) is a little

+ + +

Bonus section: Peer Insight research findings

38

Open innovation may help minimize the risk of poor outcomes

like raising children: simple at the conceptual level and
mystifying at the practical level. One research subject said,
Value network innovation brings an initial rush of euphoria, as
you think about what could be accomplished with the right
partner followed by deep anxiety.
anxiety
Figure 3

most successful
outcomes

least successful
outcomes

Channel

13

Financial Model

16

10

Value Network

15

0%

10%

20%

30%

37%
48%

32%
40%

50%

Firms that find constructive ways to deal with that anxiety may
earn great rewards. Of the 32 projects that attempted to
innovate the value network way, 15 (47%) were among the
projects with most
most successful
successful outcomes,
outcomes 16 (50%) were
among the modestly successful and only 1 (3%) was among
the least successful.
By comparison, channel innovations led to most successful
outcomes
outco
es in 13
3 out o
of 37 (35%) cases, a
and
d financial
a c al model
odel
innovations led to most successful outcomes in 16 out of 48
(33%) cases. Furthermore, the greatest number of least

successful outcomes occurred in these latter two categories

18 out of 19 least successful projects that attempted to
innovate the business model. It seems that engaging the
value network can go a long way toward mitigating the risk of
a failure,
failure even though it does not guarantee success.
success

Describing the Data Set

The 100 projects analyzed in this study were all completed
in the past 36 months. Forty-two different corporations are
included, and five different countries served as the primary
development site for at least one project. The corporations
include:

Apple
Baxter Healthcare
GE
Hewlett-Packard
Intel

Medtronic
ServiceMaster
Siemens
UPS
York

Two-thirds
Two
thirds of the innovations were pure services (example:
(example
AARP Voices of the Civil Rights initiative). The remaining
one-third were hybrid services that included products or
devices as part of the offering (example: Progressive
TripSense pay-per-use insurance requires a plug-in device
for your car).

THIS PAGE INTENTIONALLY LEFT BLANK

+ + +

Peer Insight

Tim Ogilvie
tim@peerinsight.com
(703) 314-3123

Gordon Hui
ghui@peerinsight.com
(703) 535-8175

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