Business model innovation is an incredible tool but one that often isn’t considered by those developing new products. As part of our mission to explore the wide-ranging commercial opportunities for new product developers, ITERATE team members Gethin Roberts and Holly McSweeney recently interviewed Dr Jay Bal to understand why business model innovation needs more attention. Dr Jay Bal is Professor at the University of Warwick and leads both the Master Program in Innovation and Entrepreneurship and the Master of Research in Business Transformation. Dr Jay Bal vibrantly explained why combining product and business model innovation is vital if businesses want to really succeed and make an impact. In part one of our interview, we covered what is driving the need for business model innovation today and why new start-ups are especially well-placed to experiment with business models. Jay also shared why there is freedom in business model innovation, as it helps us focus less on failure and instead on pivoting.

 

Could you give us a little background about yourself, about your work and what you specialise in?

I’m currently Professor at the University of Warwick. My main interest areas are technology, I’ve got a background in AI and I also know quite a lot about manufacturing processes. But my main interest really is business transformation, but I think increasingly – as a result of the fast-changing world around us – I’m really interested in transforming whole industries. So, for example, currently we’ve got a big project ongoing in the midlands about how to transform the old automotive industry into a very different industry that’s fit for supplying electric vehicles. So, a wide background, I’ve worked for the World Bank and the Commonwealth Secretariat, in training managers in incubators, worked as a consultant for a whole range of countries on poverty alleviation through business development. As a result of that, I’ve managed to visit a lot of exotic islands because they seem to be the main customers for this kind of work. Places like Fiji, Samoa, Vanuatu. So, I’ve had a rewarding and interesting career.

 

“Increasingly – as a result of the fast-changing world around us – I’m really interested in transforming whole industries”

 

You mentioned that you’re looking more into how whole industries can be transformed rather than just on an individual business level, one thing we were particularly interested to know is how you see this looking now, post-Covid? Is the need to innovate with your business model or to innovate across industries more urgent now?

Well, I think there’s the old saying, innovation is driven by necessity. So, I think in the last year we’ve seen quite interesting innovations driven by the necessity of Covid. But I think there are four key pressures at the moment that I see are driving this need for innovation.

The first one is really changes in customer needs and demands; so, what we’re seeing is a change where for most products and services, supply exceeds demand. You only really make money for a short period of time when demand exceeds supply, that’s when you can charge what you want. But in the modern connected world, pretty soon other people come along, supply increases and there you’re then into retaining market share. So, I think innovation is critically important in that kind of world.

And secondly, I think that changing customer profiles or needs is an important factor. We’ve all got too much stuff and there’s a change from customers into experiences. A lot the design implications are more about how do we enhance experiences with products and services, so there’s a lot of business opportunities opening up around the changing needs of customers from stuff to experiences.

The third factor is these black swan events and Covid-19 is a black swan event. Other ones are at the moment, for example, the Suez Canal blockage, the current shortage of chips, that’s caused a lot of the automotive industry to shut down. So, what seems to be happening is that these black swan events seem to be occurring more often and this is driving us to innovate, to innovate in products and services.

And then finally, zombie businesses. I’ve got a bit of an obsession about zombie businesses. If you look at the figures in the UK before Covid, about 15% of all businesses are what I’d call zombie businesses. These are businesses that survive, they make enough money to keep going, but they never make enough money to pay back all the money they owe. So, these zombie businesses they employ, but also, they block the mechanisms that you get in fully free markets, i.e., it’s hard for me to do a start-up business when there’s a zombie business already occupying and filling the needs of those customers. Normally, those businesses would fail and then a start-up business with a better value proposition would come along. It’s very hard to displace these zombie businesses because typically as a new start-up, it’s not about being a bit better, you have to be three times better to be able to overtake a zombie business in your sector.

So, there are these four challenges that I see are driving innovation, or the need for innovation.

 

“It’s not about being a bit better, you have to be three times better”

 

So, then, the early-stage start-up who we’re talking to has a real challenge on their hands; how do they actually compete? What do they do? Would you say it’s harder for a start-up to be innovative or do you think there’s also an opportunity there?

I think really the answer to this is the topic of our conversation. I think one of the big advantages that new start-up businesses and early-stage businesses have is the ability to innovate on the business model that’s being used.

So, one of the things I’m doing at the moment, I’m head of the WMG (Warwick Manufacturing Group) incubator and accelerator. In the incubator we’re helping new start-up businesses, but in the accelerator, we’re taking businesses that have existed for a while but have not really managed to grow.  And it’s interesting, because what we find – technically this is termed product-market fit – but what we find is that the products they’re offering don’t fit the market they’re targeting. And quite often we have to change the target market. An example is a guy who quit his job, set up a business and created a collaborative working tool and he was targeting it for doctors and GPs. This is a common problem: people tackling areas they don’t know enough about. So, first of all we had to tell him that doctors don’t specify these tools, probably the practise manager will specify it, but then the practise manager doesn’t want to take risks since the majority of their money comes from the NHS, so they will only use the ones that the NHS recommend. And to get accepted by the NHS – as you know – is like a four-year project, it’s not something you do very quickly. So, what we had to do was to look at what the attributes of the product were and then innovate or brainstorm around what other applications there may be for that product.

So that’s what we mean by product-market fit, products don’t fit the market the entrepreneurs target them at, maybe because they don’t have a wide enough appreciation of other markets. And I would argue that probably, in the majority of cases with start-ups, they’ve targeted the wrong market, or they’ve targeted the wrong customers within that market. Nothing wrong with their product or service but they’re targeting the people who will not benefit the most from that offering and that’s part of business model design. I think another key problem that start-ups have is they create products (going back to this market-fit), they create products that are nice, or useful to a large number of people. And this is a path to death, really.

If you look at a lot of examples of business models, the classic example is Airbnb; now, they’re the world’s largest accommodation provider and in ten years they’ve gone from being a little start-up to the world’s largest accommodation provider, bigger than hotel chains like Hilton and all the others. The fact is that they didn’t start off as an accommodation provider, they targeted a very niche market which was cities or locations where there were large events – pop concerts or conferences – which overwhelmed the local accommodation capacity.

And successful businesses start out with a very targeted, specific need and they satisfy that need and then they grow the business from there. Too many target general use and a broad customer base because they think it’s safe; they think, some people might find it useful. They’re a product looking for a market, rather than a market which designs a product.

 

“They create products that are nice, or useful to a large number of people. And this is the path to death really”

 

Obviously, you’ve got your accelerator and the people you’re working with who are able to identify different applications for a product. But how might a start-up actually go about exploring that themselves? If they think that their product is suited to one target market and they find that actually the scale of the opportunity isn’t there? Should they look again at their product and to try and understand where else they could apply it? Or should they reach out to someone like you?

The standard lean start-up process is recommended for start-ups and I think you mentioned pivoting earlier on; typically, even in my one-week course where we start off with an idea and try and develop an innovative business model, the student teams pivot three or four times in that week. Now I think there’s some research that says that you won’t arrive at a successful business until you’ve pivoted around three or four times. And a pivot is either you change what you’re offering and keep the same target customers, or you change your target customers and keep what you’re offering. One of the other major things you can think about which would allow you to have a better fit, is thinking about channels. If you think about the classic sales funnel, all those steps, from how the customer finds out about the product, builds trust in the product, tests the product, and then finally buys and rebuys the product. So, there’s a huge number of variables in the business models and understanding these variables and understanding what different people have done in different situations is the added knowledge that consultants, incubators and even quite often investors bring to start-ups.

 

“A pivot is either you change what you’re offering and keep the same target customers, or you change your target customers and keep what you’re offering”

 

What we see sometimes is that people try and build up their target persona and almost create their target market themselves and then in doing that, they distance themselves from the original need – they’re thinking very narrowly. In doing so, it makes the entire process of starting a business and developing and bringing a product to market seem a lot riskier. Whereas actually, it seems like what you’re saying is that there’s a lot more flexibility and variation that can happen?

One of the biggest problems which kind of describes the situation you’re talking about is people fall in love with their idea; trying to get them to change their thinking and see alternatives is very very difficult. And I think I see more failures because people have fallen too in love with their original solution. Whereas, in practise and in the process of business model design, most people get it wrong. They think their goal is to design one business model, it isn’t: it’s to design a number of different business models which may work. So, with any kind of problem you get a solution space, you get an area where good and bad solutions exist, and your job is to explore that solution space to find a good solution. Hopefully, you can find the optimal, the best solution, but not always. And that’s why, rather than trying to produce one solution, what you need to do is produce three or four solutions. And then, the process is to test those solutions. But most start-ups they tend to go ahead and produce one solution and then start trying to make it work. Whereas, the real methodology is to use the tools, the process of business model design, create four or five different solutions and quite often these solutions are created using standard business models. So, there are a number of standard models where you can learn from the experience of other companies in terms of what challenges they’ve had, what benefits they’ve brought, take them to your idea, create different business model possibilities around these standard models and then evaluate them, work out which one is best.

 

“Most people get it wrong. They think their goal is to design one business model, it isn’t: it’s to design a number of different business models which may work”

 

How would a start-up do that? With a physical product, if we’re developing a product, obviously prototyping that product, testing it, evaluating it, getting market feedback is part of that process before you even get to market. So how would a start-up “prototype” different business models? And how long should they do that for? Is it a year with one business model and then try another?

That’s a really good question because often I’ve had founders come to me and say everyone says we should stick with it and carry on and persevere and show real determination, but at some stage you’ve got to say enough is enough. What I always say is, don’t quit, but pivot. If you keep pivoting, I think it’s really a race, can you pivot enough times to something that’s successful before you go broke. And that’s why the process of design and evaluation needs to be very structured and quick and easy to undertake because then you can do more pivots.

 

“What I always say is, don’t quit, but pivot”

 

On that topic of ‘how long should I stick at this before I say it’s a failure?’ Or ‘I’m not making any money; how much longer should I do this?’ How can you attribute success or failure to either the product or the business model? Are there any signals that you could pick up on or metrics that you could track that could indicate that maybe the problem is with the business model as opposed to with the product?

I would argue that that’s part of the evaluation procedure; we have a four-stage process. So first of all, this is founder-problem fit: how well does the founder understand the problem that their solution is trying to address. And we see often that they don’t really understand them properly. And really, the best founders are the ones who personally experience that problem, because then they have real insight into it. Then from the founder-problem fit you get problem-solution fit: how well does your solution actually address the problem that you’ve identified. And quite often, because of poor fit on founder-problem, you end up with solutions that are maybe too niche or too broad. And then, after you’ve got the problem-solution fit, you get what I call the product-market fit. The solution has got to fit the market and that means making decisions around the business model, around some of the things we’ve talked about, the journey to discover the product, to build trust in the product, to try out the product etc. So, then you’ve got that product-market fit. And then you’ve got the scale-up fit: can the solution we’ve got actually scale up to become a viable business. So, we go through these four fits in terms of assessing proposals, taking people through the process from an idea, hopefully to a successful business through a number of pivots.

 

“the best founders are the ones who personally experience that problem”

 

Part two of our interview with Professor Jay Bal will be released next week. The discussion evolved to cover topics such as the future of business model innovation and the challenge of legitimisation that affects so many start-ups.