A New New Innovation Strategy

Today’s Unicorns – super-successful venture-backed tech companies valued at $1 billion or more – are pioneering a new innovation strategy that has implications for any business.  What they’re doing is reinventing the operating model, the way an enterprise delivers value, and they’re doing this in a way that benefits their customers and their own profitability, to say nothing of their equity value.

PDMA’s awesome diagram lays out the three business model dimensions:  create value, deliver it and capture it. The primary value has to be the benefits your customer derives from the way you satisfy a significant unmet need with the product or service you create – or there won’t be any financial return.  Every business has to be customer-centric, so it’s not surprising that this is the kind of innovation we hear about all the time.  But it’s not the only one possible.

Revenue models have been innovated as well – such as the razor/razorblade model invented more than a century ago by King Gillette, the equipment leasing model introduced by Xerox in 1959 for the first successful plain-paper copier and the freemium model that began with shareware in the 1980s and gained its new name as the result of a 2006 blog post by Fred Wilson, the VC.  .

Innovating the operating model through which an enterprise delivers value is more unusual.  Companies have used electronic computing to scale processes since the late 1930s, and the Unicorns are leveraging technology to the hilt.  In fact, they are software companies – but with a difference.  They don’t sell software.  They use software to manage operations efficiently, conveniently and without human intervention and then they sell what the software does, not the software.

For Uber, this means using phone app technology to connect customers to the system, demand calculation technology to locate the nearest vehicle, predictive technology to manage taxi supply and demand, and an overview of all drivers and all pending requests for quality assurance. Both Uber and Airbnb deliver tangible real world services with no sign of software in the end product delivered to a customer.

In addition to leveraging computer technology, these companies leverage external people even for mission-critical processes.  Uber hires no drivers; Airbnb hires no hotel works.  Instead, they  rely on “staff members on demand.” They also own no resources – no inventory.  The staff members supply the resources.

By eliminating the need to invest in resources and operating activities, the new operating model lets management focus on revenue-related activities, such as marketing, product development and community management.  It also delivers superior value to customers in terms of new choices that offer greater convenience and, at times, lower price.

The value captured by the business?  A revenue model that minimizes fixed costs, enables maximum support for revenue generation and, as a result, gross margin that scales exponentially.  This gives birth to what Cowboy Ventures founder Aileen Lee called Unicorns, the billion-dollar tech startups setting new standards for equity value.

But any size business can benefit from an operating model that leverages computing technology, relies on staff that’s on demand, and/or uses resources supplied by that external staff. Salim Ismail describes some of the specifics in his book The Exponential Organization.  The vision is an enterprise that is “ten times better, faster and cheaper” and whose impact, or output, is disproportionately larger than its peers.  Are you ready and willing to give this a shot?

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