Business Model Innovation Proposal

F A L L 2 0 1 6 I S S U E

Clayton M. Christensen Thomas Bartman Derek van Bever

The Hard Truth About Business Model Innovation Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models.

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The Hard Truth About Business Model Innovation

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THE LEADING QUESTION How can executives improve their odds of success at business model innovation?

FINDINGS �Understand that, over time, business models become more resistant to change.

�Analyze how consis- tent a proposed business model innovation is with the priorities of the existing business.

SURVEYING THE LANDSCAPE of recent attempts at business model innovation, one could be forgiven for be-

lieving that success is essentially random. For example,

conventional wisdom would suggest that Google Inc., with its

Midas touch for innovation, might be more likely to succeed

in its business model innovation efforts than a traditional,

older, industrial company like the automaker Daimler AG.

But that’s not always the case. Google+, which Google

launched in 2011, has failed to gain traction as a social net-

work, while at this writing Daimler is building a promising

new venture, car2go, which has become one of the world’s

leading car-sharing businesses. Are those surprising out-

comes simply anomalies, or could they have been predicted?

To our eyes, the landscape of failed attempts at business

model innovation is crowded — and becoming more so — as

management teams at established companies mount both of-

fensive and defensive initiatives involving new business

models. A venture capitalist who advises large financial ser-

vices companies on strategy shared his observation about the

anxiety his investors feel about the changes underway in their

industry: “They look at the fintech [financial technology]

startups and see their business models being unbundled and

attacked at every point in the value chain.” And financial

services companies are not alone. A PwC survey published in

2015 revealed that 54% of CEOs worldwide were concerned

about new competitors entering their market, and an equal

percentage said they had either begun to compete in

FALL 2016 MIT SLOAN MANAGEMENT REVIEW 31

Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models. BY CLAYTON M. CHRISTENSEN, THOMAS BARTMAN, AND DEREK VAN BEVER

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nontraditional markets themselves or considered

doing so.1 For its part, the Boston Consulting Group

reports that in a 2014 survey of 1,500 senior execu-

tives, 94% stated that their companies had attempted

some degree of business model innovation.2

We’ve decided to wade in at this juncture because

business model innovation is too important to be left

to random chance and guesswork. Executed correctly,

it has the ability to make companies resilient in the face

of change and to create growth unbounded by the lim-

its of existing businesses. Further, we have seen

businesses overcome other management problems

that resulted in high failure rates. For example, if you

bought a car in the United States in the 1970s, there

was a very real possibility that you would get a “lemon.”

Some cars were inexplicably afflicted by problem after

problem, to the point that it was accepted that such

lemons were a natural consequence of inherent ran-

domness in manufacturing. But management expert

W. Edwards Deming demonstrated that manufactur-

ing doesn’t have to be random, and, having

incorporated his insights in the 1980s, the major auto-

motive companies have made lemons a memory of a

bygone era. To our eyes, there are currently a lot of lem-

ons being produced by the business model innovation

process — but it doesn’t have to be that way.

In our experience, when the business world en-

counters an intractable management problem, it’s a

sign that business executives and scholars are get-

ting something wrong — that there isn’t yet a

satisfactory theory for what’s causing the problem,

and under what circumstances it can be overcome.

This is what has resulted in so much wasted time

and effort in attempts at corporate renewal. And

this confusion has spawned a welter of well-mean-

ing but ultimately misguided advice, ranging from

prescriptions to innovate only close to the core

business to assertions about the type of leader who

is able to pull off business model transformations,

or the capabilities a business requires to achieve

successful business model innovation.

The hard truth about business model innova-

tion is that it is not the attributes of the innovator

that principally drive success or failure, but rather

the nature of the innovation being attempted. Busi-

ness models develop through predictable stages

over time — and executives need to understand the

priorities associated with each business model

stage. Business leaders then need to evaluate

whether or not a business model innovation they

are considering is consistent with the current pri-

orities of their existing business model. This

analysis matters greatly, as it drives a whole host of

decisions about where the new initiative should be

housed, how its performance should be measured,

and how the resources and processes at work in the

company will either support it or extinguish it.

This truth has revealed itself to us gradually over

time, but our thinking has crystallized over the past

two years in an intensive study effort we have led at

the Harvard Business School. As part of that research

effort, we have analyzed 26 cases of both successful

and failed business model innovation; in addition,

we have selected a set of nine industry-leading com-

panies whose senior leaders are currently struggling

with the issue of conceiving and sustaining success

in business model innovation. (See “About the Re-

search.”) We have profiled these nine companies’

efforts extensively, documented their successes and

failures, and convened their executives on campus

periodically to enable them to share insights and

frustrations with each other. Stepping back, we’ve

made a number of observations that we hope will

prove generally helpful, and we also have a sense of

the work that remains to be done.

There are a number of lessons that managers can

learn from past successes and failures, but all depend

on understanding the rules that govern business

model formation and development — how new

models are created and how they evolve across time,

the kinds of changes that are possible to those mod-

els at various stages of development, and what that

means for organizational renewal and growth.

The Business Model’s Journey The confusion surrounding business model innova-

tion begins, appropriately enough, with confusion

about the term “business model.” In our course at

the Harvard Business School, we teach students to

use a four-box business model framework that we

developed with colleagues from the consulting firm

Innosight LLC. This framework consists of the value

proposition for customers (which we will refer to as

the “job to be done”); the organization’s resources,

such as people, cash, and technology; the processes3

that it uses to convert inputs to finished products or

ABOUT THE RESEARCH This article assembles knowledge that the primary author has developed over the course of two decades studying what causes good businesses to fail, comple- mented by a two-year intensive research project to uncover where current man- agers and leadership teams stumble in executing busi- ness model innovation. Over the course of the past two years of in-depth study, we evaluated 26 business model innovations in the his- torical record that had run a course from idea to develop- ment to success, or failure. The study identified 10 fail- ures and 16 successes and coded each across 20 di- mensions to identify patterns associated with success and failure.

To further develop our understanding of the causal- ity behind the relationships we observed, we also as- sembled a cohort of nine market-leading companies from industries as diverse as information technology, con- sumer products, travel and leisure, fashion, publishing, and financial services. Each of these companies is at- tempting to execute some degree of business model innovation. We observed these companies as they undertook their business model innovation efforts and conducted interviews with more than 60 C-level execu- tives across the nine companies. In addition to our interviews, we convened two working sessions at Harvard Business School that brought executives from each company to- gether to discuss the challenges, opportunities, and realities of business model innovation from the perspective of the manager.

SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 33

services; and the profit formula that dictates the mar-

gins, asset velocity, and scale required to achieve an

attractive return.4 (See “The Elements of a Business

Model.”) Collectively, the organization’s resources

and processes define its capabilities — how it does

things — while its customer value proposition and

profit formula characterize its priorities — what it

does, and why. 5

This way of viewing business models is useful for

two reasons. First, it supplies a common language

and framework to understand the capabilities of a

business. Second, it highlights the interdependencies

among elements and illuminates what a business is

incapable of doing. Interdependencies describe the

integration required between individual elements of

the business model — each component of the model

must be congruent with the others. They explain why,

for example, Rolls-Royce Motor Cars Ltd. is unable to

sell cheap bespoke cars and why Wal-Mart Stores Inc.

is unable to combine low prices with fancy stores.

Understanding the interdependencies in a business

model is important because those interdependencies

grow and harden across time, creating another funda-

mental truth that is critical for leaders to understand:

Business models by their very nature are designed not to

change, and they become less flexible and more resistant

to change as they develop over time. Leaders of the

world’s best businesses should take special note, be-

cause the better your business model performs at its

assigned task, the more interdependent and less capa-

ble of change it likely is. The strengthening of these

interdependencies is not an intentional act by manag-

ers; rather, it comes from the emergence of processes

that arise as the natural, collective response to recur-

rent activities. The longer a business unit exists, the

more often it will confront similar problems and the

more ingrained its approaches to solving those prob-

lems will become. We often refer to these ingrained

approaches as a business’s “culture.”6

In fact, this pattern is so consistent and important

that we’ve begun to think of the development of a

business model across time as resembling a journey

whose progress and route are predictable — although

the time that it takes a business model to follow this

journey will differ by industry and circumstance.

(See “The Three Stages of a Business Model’s Jour-

ney,” p. 34.) As the diagram depicts, a business model,

which in an established company is typically

embodied in a business unit,7 travels a one-way jour-

ney, beginning with the creation of the new business

unit and its business model, then shifting to sustain-

ing and growing the business unit, and ultimately

moving to wringing efficiency from it. Each stage of

the journey supports a specific type of innovation,

builds a particular set of interdependencies into the

model, and is responsive to a particular set of perfor-

mance metrics. This is the arc of the journey of

virtually every business model — if it is lucky and

successful enough to travel the entire length of the

route. Unsuccessful business units will falter before

concluding the journey and be absorbed or shut-

tered. Now, let’s explore each of the three stages and

how the business model evolves through them.

1. Creation Peter Drucker once said that the pur- pose of a business is to create a customer.8 That

goal characterizes the first stage of the journey,

when the business searches for a meaningful value

proposition, which it can design initial product

and service offerings to fulfill. This is the stage

THE ELEMENTS OF A BUSINESS MODEL A business model is made up of four elements: (1) a value proposition for customers; (2) resources, such as people, money, and technology; (3) the processes that the organiza- tion uses to convert inputs to finished products or services; and (4) the profit formula that dictates the margins, asset velocity, and scale required to achieve an attractive return. Interdependencies, represented here by bidirectional arrows, describe the integration required between individual elements of the business model. They require that every component of the model be congruent with every other component.

A product that helps customers to more

effectively, conveniently, and affordably do a job

they've been trying to do

Assets and fixed cost structure, and the margins

and velocity required to cover them

People, technology, products, facilities,

equipment, brands, and cash that are required to

deliver this value proposition to the

targeted customers

Ways of working together to address recurrent tasks

in a consistent way: training, development,

manufacturing, budgeting, planning, etc.

Value proposition

Profit formula

Resources

Priorities Capabilities

Processes

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at which a relatively small band of resources (a

founding team armed with an idea, some funding

and ambition, and sometimes a technology) is en-

tirely focused on developing a compelling value

proposition — fulfilling a significant unmet need,

or “job.”9 It’s useful to think of the members of the

founding team as completely immersed in this

search. The information swirling around them at

this point in the journey — the information they

pay the most attention to — consists of insights

they are able to glean into the unfulfilled jobs of

prospective customers.

We emphasize the primacy of the job at this

point of the journey because it is very difficult for a

business to remain focused on a customer’s job as

the operation scales. Understanding the progress a

customer is trying to make — and providing the

experiences in purchase and use that will fulfill that

job perfectly — requires patient, bottom-up in-

quiry. The language that is characteristic of this

stage is the language of questions, not of answers.

The link between value proposition and resources

is already forming, but the rest of the model is still

unformed: The new organization has yet to face the

types of recurrent tasks that create processes, and

its profit formula is nascent and exploratory. This

gives the business an incredible flexibility that will

disappear as it evolves along the journey and its

language shifts from questions to answers.

2. Sustaining Innovation Business units lucky and skilled enough to discover an unfulfilled job

and develop a product or service that addresses it

enter the sustaining innovation phase of the busi-

ness model journey. At this stage, customer demand

reaches the point where the greatest challenge the

business faces is no longer determining whether the

product fulfills a job, but rather scaling operations

to meet growing demand. Whereas in the creation

phase the business unit created customers, in the

sustaining innovation phase it is building these

customers into a reliable, loyal base and building

the organization into a well-oiled machine that

delivers the product or service flawlessly and re-

peatedly. The innovations characteristic of this

phase of the business model journey are what we

call sustaining innovations — in other words, bet-

ter products that can be sold for higher prices to the

current target market.

A curious change sets in at this stage of the jour-

ney, however: As the business unit racks up sales, the

voice of the customer gets louder, drowning out to

some extent the voice of the job. Why does this hap-

pen? It’s not that managers intend to lose touch with

the job, but while the voice of the job is faint and re-

quires interrogation to hear, the voice of the

customer is transmitted into the business with each

sale and gets louder with every additional transac-

tion. The voice of the job emerges only in one-to-one,

in-depth conversations that reveal the job’s context

in a customer’s life, but listening to the voice of the

customer allows the business to scale its understand-

ing. Customers can be surveyed and polled to learn

their preferences, and those preferences are then

channeled into efforts to improve existing products.

The business unit is now no longer in the busi-

ness of identifying new unmet needs but rather in

the business of building processes — locking down

the current model. The data that surrounds manag-

ers is now about revenues, products, customers, and

competition. While in the creation phase, the found-

ing team had to dig to discover data, data now floods

THE THREE STAGES OF A BUSINESS MODEL’S JOURNEY A business model, which in an established company is typically embodied in a busi- ness unit, travels a journey that begins with the creation of the new business unit and its business model, and then shifts to sustaining and growing the business unit — and still later to wringing efficiency from it. Each stage of the journey is conducive to a specific type of innovation, builds a particular set of interdependencies into the model, and is responsive to a particular set of performance metrics. Green bidirectional arrows represent interdependencies between aspects of the business model that are well- established at that stage; business model elements in bold represent areas of focus during that stage of business model evolution. Business model elements and interde- pendencies shown in beige are still somewhat flexible at that point in the journey.

• Market-creating innovations • Metrics about job to be done • Data about context of the job • Flexible business model • Language of questions

about the job and context

• Sustaining innovations • Income statement metrics • Data about customers • Processes emerge • Language of statements

about products, customers, competitors, and markets

• Efficiency innovations • Balance sheet, ratio metrics • Data about costs, efficiency • Rigid business model to

facilitate modularity • Language of statements

about cost and efficiency

Creation

Sustaining Innovation

Efficiency

Market forms and business begins to grow

Processes form in response to recurrent tasks

Performance oversupply

may creep in Modular structure

forms Investors demand return of capital

Value proposition Resources

ProcessesProfitformula

Value proposition Resources

ProcessesProfitformula

Value proposition Resources

ProcessesProfitformula

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the business’s offices, with more arriving with each

new transaction. Data begs to be analyzed — it is the

way the game is scored — so the influx of data pre-

cipitates the adoption of metrics to evaluate the

business’s performance and direct future activity to

improving the metrics. The performance metrics in

this phase focus on the income statement, leading

managers to direct investments toward growing the

top line and maximizing the bottom line.

3. Efficiency At some point, however, these invest- ments in product performance no longer generate

adequate additional profitability. At this point, the

business unit begins to prioritize the activities of effi-

ciency innovation, which reduce cost by eliminating

labor or by redesigning products to eliminate com-

ponents or replace them with cheaper alternatives.

(There is, however, always some amount of both

types of innovation — sustaining and efficiency —

occurring at any point of a business’s evolution.)

Broadly, the activities of efficiency innovation in-

clude outsourcing, adding financial leverage,

optimizing processes, and consolidating industries to

gain economies of scale. While many factors can

cause businesses to transition into the efficiency in-

novation phase of their evolution, one we have often

observed is the result of performance “overshoot,”

in which the business delivers more performance

than the market can utilize and consumers become

unwilling to pay for additional performance im-

provement or to upgrade to improved versions.

Managers should not bemoan the shift to efficiency

innovation. It needs to happen; over time, business

units must become more efficient to remain com-

petitive, and the shift to efficiency innovations as

the predominant form of innovation activity is a

natural outcome of that process.

To managers, the efficiency innovation phase

marks the point where the voice of the shareholders

drowns out the voice of the customer. Gleaning new

understanding of that initial job to be done is now

the long-lost ambition of a bygone era, and manag-

ers become inundated with data about costs and

efficiency. The business unit frequently achieves

efficiency by shifting to a modular structure, stan-

dardizing the interdependencies between each of the

components of its business model so that they may

be outsourced to third parties. In hardening these

interdependencies, the business unit reaps the

efficiency rewards of modularization but leaves flex-

ibility behind, firmly cementing the structure of its

business model in place. Deviations from the exist-

ing structure undermine the modularity of the

components and reduce efficiency, so when evaluat-

ing such changes, the business will often choose to

forsake them in pursuit of greater efficiency.

Now, when the business unit generates increasing

amounts of free cash flow from its efficiency innova-

tions, it is likely to sideline the capital, to diversify

the company, or to invest it in industry consolidation.

This is one of the major drivers of merger and ac-

quisition (M&A) activity. Whereas the sustaining

innovation phase was exciting to managers, customers,

and shareholders, the efficiency innovation phase re-

duces degrees of managerial freedom. Efficiency

innovations lure managers with their promises of low

risk, high returns, and quick paybacks from cost reduc-

tion, but the end result is often a race to the bottom that

sees the business’s ability to serve the job and customers

atrophy as it improves its service to shareholders.

The natural evolution of business units occurs all

around us. Consider the case of The Boeing Co. and

its wildly successful 737 business unit. The 737 busi-

ness was announced in 1965 and launched its first

version, the 737-100, in 1967, with Lufthansa as its

first customer. With orders from several additional

major airlines, the new business unit demonstrated

that its medium-haul plane fulfilled an important job

to be done. Before even delivering the first -100,

Boeing began improving the 737 and launched a

Managers should not bemoan the shift to efficiency innovation. It needs to happen; over time, business units must become more efficient to remain competitive.

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stretched version, the -200, with a longer fuselage to

meet demands from airlines requiring greater seating

capacity. Boeing entered the sustaining innovation

phase and continued to improve its product by devel-

oping several generations of new 737s, stretching the

fuselage like an accordion while nearly doubling the

plane’s range and more than doubling its revenue per

available seat mile. The business continued to im-

prove how it served customers with the Next

Generation series in the 1990s, which offered even

bigger aircraft and better avionics systems.

Facing increased competition and demands for

improved financial performance, the 737 business

shifted its focus to efficiency innovation in the early

2000s. To free resources and liberate capital, Boeing

began to outsource aspects of 737 production. Most

notably, Boeing sold a facility in Wichita, Kansas, that

manufactured the main fuselage platform for the

737 to the Toronto-based investment company Onex

Corp. in 2005. Outsourcing subsystem production

allowed the business to improve its capital efficiency

and deliver improved returns on capital.10

Given that road map, what is the hope for com-

panies that seek to develop new business models or

to create new businesses? Thus far in this article

we’ve explored the journey that business units take

over time. And while we’re not sure that a business

unit can break off from this race, we know that its

parent companies can — by developing new busi-

nesses. Although the processes of an individual

business unit’s business model propel it along this

journey, the opportunity exists to develop a process

of business creation at the corporate level. But doing

so successfully requires paying careful attention to

the implications of the business model road map.

Implications For Business Model Innovation It’s worth internalizing the road map view of busi-

ness model evolution because it helps explain why

most attempts to alter the course of existing

business units fail. Unaware of the interdependen-

cies and rigidities that constrain business units to

pursuing their existing journey, managers attempt

to compel existing business units to pursue new

priorities or attempt to create a new business inside

an existing unit. Using the road map as a guiding

principle allows leaders to correctly categorize the

innovation opportunities that appear before them

in terms of their fit with their existing business

model’s priorities. Several recommendations for

managers emerge from this insight.

Determine how consistent the opportunity is

with the priorities of the existing business model.

The only types of innovation you can perform nat-

urally within an existing business model are those

that build on and improve the existing model and

accelerate its progress along the journey — in other

words, those innovations that are consistent with

its current priorities — by sharpening its focus on

fulfilling the existing job or improving its financial

performance. Therefore, a crucial question for

leaders to ask when evaluating an innovation op-

portunity is: To what degree does it align with the

existing priorities of the business model?

Many failed business model innovations involve

the pursuit of opportunities that appear to be con-

sistent with a unit’s current business model but that

in fact are likely to be rejected by the existing busi-

ness or its customers. (See “Evaluating the Fit

Between an Opportunity and an Existing Busi-

ness.”) To determine how consistent an opportunity

is with the priorities of the existing business model,

leaders should ask: Is the new job to be done for the

customer similar to the existing job? (The greater

the similarity, the more appropriate it is for the ex-

isting business to pursue the opportunity.) How

does pursuit of the opportunity affect the existing

profit formula? Are the margins better, transaction

sizes larger, and addressable markets bigger? If so, it

is likely to fit well with the existing profit formula.

If not, managers should tread with caution in

The only types of innovation you can perform naturally within an existing business model are those that build on and improve the existing model and accelerate its progress.

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asking an existing business to take it on — and

should instead consider creating a separate unit to

pursue the new business model.

This distinction helps explain the performance

of the two innovations with which we opened this

article. Google saw Google+ as an extension of its

search business and chose to integrate Google+

into its existing products and business. Google+ ac-

counts were integrated into other Google products,

and the business saw the incorporation of informa-

tion from users’ social networks as a way to generate

improved, tailored search results. Viewed through

the lens of Google’s business model, a social net-

work allowed the business to generate greater

revenue and profitability by better targeting adver-

tisements and delivering more advertisements

through increased usage of its product platform.

However, consumers apparently didn’t see the

value from combining search and social network-

ing; to the consumer, the jobs are very different and

arise in different circumstances in their lives. So

while Google maintains its exceptional search busi-

ness, its social network failed to gain momentum.

Contrast Google’s experience to that of Daimler,

which recognized that car2go was a very different

business and established it far afield from the home

office and existing business. Daimler started car2go

as an experiment tested by its employees working in

Ulm, Germany. It housed the business in a corporate

incubator that does not report to the existing con-

sumer automotive businesses and designed it from

the outset to fulfill Daimler’s core job of providing

mobility, but without the need to convince consum-

ers to purchase vehicles. Recognizing that the

priorities of a business that rents cars by the minute

are very different from those involved in selling lux-

ury vehicles, Daimler has kept car2go separate and

allowed it to develop a unique business model capa-

ble of fulfilling its job profitably. However, car2go

benefits from Daimler’s ownership by using corpo-

rate resources where appropriate — for example,

car2go rents only vehicles in the Daimler portfolio,

principally the Smart Fortwo.

To achieve successful business model innova-

tion, focus on creating new business models, rather

than changing existing ones. As business model in-

terdependencies arise, the ability to create new

businesses within existing business units is lost. The

resources and processes that work so perfectly in

their original business model do so because they have

been honed and optimized for delivering on the pri-

orities of that model. The classic example of this was

the movie rental company Blockbuster, which at-

tempted to develop a new DVD-by-mail business in

response to the rise of Netflix Inc. by integrating that

offering with its existing store network. This “bricks-

and-clicks” combination made perfect sense to

Blockbuster’s managers, but what became obvious

only in hindsight was that the two models would be

at war with each other — the asset velocity required

to maintain a profitable store network was incompat-

ible with the DVD-by-mail offering. The paradox

that managers must confront is that the specialized

EVALUATING THE FIT BETWEEN AN OPPORTUNITY AND AN EXISTING BUSINESS Determining whether an opportunity aligns to a business’s existing priorities is not an exact science, but there are questions that managers should ask to gauge how closely an opportunity aligns to the existing priorities. The greater the degree of alignment, the better it is to pursue the opportunity through the existing busi- ness; conversely, the greater the difference, the more necessary it will be to pursue the opportunity through a separate, dedicated business unit that has the autonomy to develop a unique business model to fulfill those objectives.

IN THE CREATION STAGE In this phase, the entirety of the business unit’s focus should be dedicated to understanding the primary business, accom- plished through discovery of the job to be done and “pivoting” of the business model to effectively fulfill the functional, emotional, and social attributes of that job or a superior unfulfilled job that is discovered.

IN THE SUSTAINING INNOVATION STAGE In this phase, managers should evaluate the fit between the opportunity and the existing business unit on the basis of the consistency with the existing unit’s job to be done and the effect on its income statement. Questions managers should ask include:

Does the innovation opportunity… • Improve our ability to better serve the existing job to be done, in similar

circumstances in customers’ lives? • Grow our current addressable market or bring new customers into our

market? • Improve our revenue growth, profitability, or margins? • Help us to make more money in the way we are structured to make

money?

IN THE EFFICIENCY STAGE When the business unit is focused on efficiency, managers should evaluate the fit between innovation opportunities and the ex- isting business by the impact on the balance sheet. Questions managers should ask include:

Does the innovation opportunity… • Enable us to serve our existing customers with lower costs? • Allow us to use our capital more efficiently? • Allow us to liberate capital currently invested in the value chain? • Enable us to modularize our offering to facilitate outsourcing and other

partnerships for non-core elements of the model?

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capabilities that are highly valuable to their current

business model will tend to be unsuitable for, or even

run counter to, the new business model.

Building a Business Creation Engine For some time, we’ve argued that companies should

build a business creation engine, capable of turning

out a steady stream of innovative new business

models, but to date no company we know of has

built an enduring capability like that. We think that

such an engine of sustained growth would quickly

prove to be a company’s most valuable asset, pro-

viding growth and creating new markets. But

unleashing this growth potential requires very dif-

ferent behaviors than those required to successfully

exploit existing markets.

The challenge, as the journey metaphor we’ve de-

veloped here should make clear, is that what is

necessary is to turn an event — the act of creating a

new business and a new business model — into a re-

peatable process at the corporate level. It must be a

process because events are discrete activities with de-

finitive start and end points, whereas processes are

continuous and dynamic. Learnings from a previous

event do not naturally or easily flow to subsequent

events, causing the same mistakes to be repeated

over and over. In contrast, processes by their nature

can be learning opportunities that incorporate in fu-

ture attempts what was discovered in previous

iterations. Enacted as a process, the act of creation

will improve over time and refine its ability to dis-

cover unfulfilled customer jobs and create new

markets; the success rate will improve alongside the

process, creating a virtuous cycle of growth.

While we have not discovered a perfect exem-

plar of this discipline, we have been tracking the

efforts of some leading companies that are intent

on building such a capability. While it is too early to

hold any of them up as success stories, we can

nonetheless discern five approaches that we believe

have the potential to lead to success. Let’s look at

each of these approaches in turn.

Spot future growth gaps by understanding

where each of your business units is on the jour-

ney. In our course at Harvard Business School,

we teach students to use a tool called the aggregate

project plan to allocate funding to different types of

innovation.11 Such a plan categorizes innovations

by their distance from existing products and mar-

kets and specifies a desired allocation of funding

to each bucket. We see application for this tool here

as well.

The innovation team at Carolinas HealthCare

System, a not-for-profit health care organization

based in Charlotte, North Carolina, performed

this type of analysis and identified a need to field

additional innovation efforts that reflected the or-

ganization’s belief that hospitals will be less central

in the health care system of the future. Armed with

this view, Carolinas HealthCare System has been

able to plan innovation activity by type, ensuring

that the organization invests appropriately across

all three categories of the business model journey.

As Dr. Jean Wright, chief innovation officer at

Carolinas HealthCare System, said, “The strength

of the journey framework is that it allowed us to

see that our investments in business creation are

very different from our investments in our existing

businesses. More importantly, it has helped us see

that both types are important.”

Run with potential disruptors of your busi-

ness. Another approach is to create incentives and

channels for entrepreneurs to bring new and, in

some cases, potentially disruptive business models

to you, either as potential customers or as ecosys-

tem partners. ARM Holdings plc, a developer and

licenser of system-on-chip semiconductors, head-

quartered in Cambridge, U.K., has had success

viewing itself as the central, coordinating node of a

Another approach is to create incentives and channels for entrepreneurs to bring new and, in some cases, potentially disruptive business models to you, either as potential customers or as ecosystem partners.

SLOANREVIEW.MIT.EDU FALL 2016 MIT SLOAN MANAGEMENT REVIEW 39

symbiotic ecosystem of independent semiconduc-

tor manufacturers and consumer products

companies, rather than as a traditional semicon-

ductor company that develops and manufactures

proprietary, standard products. Today, nearly

every smartphone and mobile device includes at

least one ARM design. The company achieved this

ubiquity by inviting customers and consumers

into its development process so that it will be the

first company called by customers seeking to de-

sign a new chip. It does this in two ways: first, by

incorporating knowledge across its entire ecosys-

tem that allows it to develop optimized end-to-end

solutions for customers, and second, by employing

a royalty-based revenue model that ensures ARM’s

incentives are aligned with those of its customers.

Start new businesses by exploring the job to be

done. When identifying new market opportunities,

it’s critical that you begin with a focus on the cus-

tomer’s job to be done, rather than on your

company’s capabilities. It’s tempting to look at your

capabilities as the starting point for any expansion,

but capabilities are of no use without a job for

them. For incumbents, this requires staying fo-

cused on the job rather than the market or

capability. One examples of this discipline is Corn-

ing Inc., the manufacturer of specialty glass and

ceramic materials based in Corning, New York.

When it becomes apparent that a Corning business

can no longer generate a premium price from its

technical superiority — when it reaches the effi-

ciency innovation stage, in our framework — the

company divests that business and uses the pro-

ceeds to expand businesses in the sustaining stage

and to create new ones. For example, when Corn-

ing realized that liquid crystal display (LCD) would

eventually replace cathode ray tube (CRT) technol-

ogy to become the future of display, the company

focused on the job to be done — display — rather

than just on the CRT market, which at the time

was important to the company. Corning began

inventing products to enable the growth of the

LCD industry and eventually decided to exit the

CRT market.12 To Corning, businesses serve needs,

not markets, and as technological or market shifts

occur, the company continues to grow by remain-

ing focused on the need, which we call the job.

Resist the urge to force new businesses to find

homes in existing units. When executives start

new businesses, they often look at them and won-

der, “Where do I stick this in my organization?”

They feel pressure to combine new businesses with

existing structures to maximize efficiency and

spread overhead costs over the widest base, but this

can spell doom for the new business. When a new

business is housed within an existing unit, it must

adopt the priorities of the existing business to se-

cure funding; in doing so, the new business often

survives in name but disappears in effect.

Once a new business is launched, it must re-

main independent throughout the duration of its

journey, but maintaining autonomy requires on-

going leadership attention. The forces of efficiency

operate 24/7 inside an organization, rooting out

any cost perceived to be superfluous; standing

against these forces requires the constant applica-

tion of a counterforce that only the company’s

most senior leaders can provide. In the quest for

efficiency, what has been somehow forgotten is the

vital leadership role that corporate executives can

play in fostering organizational innovation by

countenancing the creation of multiple profit for-

mulas and housing these different businesses in a

portfolio of business models.

Use M&A to create internal business model

disruption and renewal. Lastly, while we’ve

focused most of our attention on organic activities,

there’s a very valuable role for M&A in a business

growth engine.13 Although at the extreme, this

approach can result in a quasi-conglomerate

structure that history has proved to be ineffective,

there are exceptions. EMC Corp., based in Hopkinton,

It’s tempting to look at your capabilities as the starting point for any expansion, but capabilities are of no use without a job for them.

40 MIT SLOAN MANAGEMENT REVIEW FALL 2016 SLOANREVIEW.MIT.EDU

E S S AY : B U S I N E S S M O D E L S

Massachusetts, adopted this approach with the

creation of its federation structure when it floated

VMware Inc., a company it had acquired three

years earlier, as a publicly traded subsidiary in

2007. Much M&A activity designed to change an

existing business model fails because it’s done for

the wrong reasons and managed in the wrong way,

often resulting in the integration of units that

should remain autonomous. In contrast, EMC’s

federation structure allows each business to pur-

sue its individual objectives while coordinating the

company’s activity as a whole. This embedded ca-

pability for exploiting existing markets while

identifying and investing in new markets allowed

EMC to expand out of its traditional memory

business into machine virtualization, agile devel-

opment, and information security.

The Greatest Innovation Risk Executives sometimes prefer to invest in their

existing businesses because those investments

seem less risky than trying to create entirely new

businesses. But our understanding of the business

model journey allows us to see that, over the long

term, the greatest innovation risk a company can

take is to decide not to create new businesses that

decouple the company’s future from that of its

current business units.

We take great hope from the insights about

business model innovation and corporate renewal

that we have explored in this article — not because

we believe that business units can evade or escape

the journey that we have described, but because we

believe that the corporations that house these units

can. There remains much to be learned about

corporate renewal and the business model journey,

but we hope that insights from the business model

road map can help companies learn how to create

robust corporate-level business creation engines

that will renew their organizations and power

growth. The challenge is great — but so are the

potential rewards.

Clayton M. Christensen is the Kim B. Clark Professor of Business Administration at Harvard Business School in Boston, Massachusetts. Thomas Bartman is a former senior researcher at the Forum for Growth and Innovation at Harvard Business School. Derek van Bever is a senior lecturer of business administra- tion at Harvard Business School, as well as director of

the Forum for Growth and Innovation. Comment on this article at http://sloanreview.mit.edu/x/58123, or contact the authors at smrfeedback@mit.edu.

REFERENCES

1. PwC, “2015 US CEO Survey: Top Findings — Grow and Create Competitive Advantage,” n.d., www.pwc.com.

2. Z. Lindgardt and M. Ayers, “Driving Growth with Business Model Innovation,” October 8, 2014, www.bcg.perspectives.com.

3. See D.A. Garvin, “The Processes of Organization and Management,” Sloan Management Review 39, no. 4 (summer 1998): 33-50. In discussing processes, we refer to all of the processes that Garvin identified in that article.

4. This business model framework was developed in 2008; see M.W. Johnson, C.M. Christensen, and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12 (December 2008): 50-59.

5. For more information about organizational capabilities, see C.M. Christensen and S.P. Kaufman, “Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities,” module note 9-607-014, Harvard Business School, Boston, Massachusetts, August 21, 2008, http://hbr.org.

6. See E.H. Schein, “Organizational Culture and Leader- ship” (San Francisco, California: Jossey-Bass, 1985).

7. It’s worth noting that startups typically begin with one business unit, which is the company. Then as the organi- zation grows, companies typically create corporate offices and business units that separate responsibility for the administration of the organization from the specific business. Today, managers tend to operate lean corporate offices that often function as thin veneers between the business and investors, but we believe that there is a vital role for the corporate office in leading business creation and developing innovation.

8. P.F. Drucker, “The Practice of Management” (New York: Harper & Row, 1954).

9. For a more complete treatment of jobs to be done, see C.M. Christensen, T. Hall, K. Dillon, and D.S. Duncan, “Competing Against Luck: The Story of Innovation and Customer Choice” (New York: HarperCollins, in press).

10. W. Shih and M. Pierson, “Boeing 737 Industrial Foot- print: The Wichita Decision,” Harvard Business School case no. 612-036 (Boston, Massachusetts: Harvard Business School Publishing, 2011, revised 2012).

11. S.C. Wheelwright and K.B. Clark, “Creating Project Plans to Focus Product Development,” Harvard Business Review 70, no. 2 (March-April 1992): 70-82.

12. Authors’ teleconference with David L. Morse, execu- tive vice president and chief technology officer, Corning Inc., March 8, 2016.

13. J. Gans, “The Disruption Dilemma” (Cambridge, Massachusetts: MIT Press, 2016).

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