Point: If you’re looking for a new business opportunity, look for individually-fragmented but collectively large areas of economic activity, such as where individuals or small business own a large segment of the market

Story: A business model that connects small businesses and individuals to markets and automates tedious tasks was common to three of 11 new start-ups seeking  funding at Techstars Demo Day August 5, 2010. Here are their stories, followed by six action steps you can take to tap such markets.

Rentmonitor.com helps small-scale landlords. These landlords collectively own 30 million rental units in the US.  Rentmonitor offers an online service that automates many elements of the five key tasks that every landlord faces: 1) advertising available properties; 2) screening renter applications; 3) managing maintenance requests; 4) tracking rental payments; and 5) record-keeping for taxes. In exchange for a monthly fee of only $5-$50 (depending on the number of units), Rentmonitor gives the landlord a suite of online tools to manage their properties. Renters also have access to Rentmonitor to submit a maintenance request or make an online rent payments.

VacationRentalPartner.com addresses the needs of vacation homeowners who rent out their properties when they are not using them. Currently, many vacation homeowners pay a 30% to 50% cut out of their rental revenues to property managers. VacationRentalPartner.com replaces that high-cost property manager with low-cost online services to handle advertising, booking, and housekeeping and maintenance contractors. Although VacationRentalPartner seems similar to Rentmonitor, the two start-ups differ significantly because the needs of ultra-short-term vacation property owners differ significantly from the needs of long-term lease-based landlords. For example, VactionRentalPartner has tools to help fill-in unrented days, such as by promoting off-season rentals to prior guests or with special deals to already-booked renters if they extend their stay to covered the unrented days. VacationRentalPartner also emphasizes the benefits of fast automated responses to booking inquiries. Would-be vacationers expect instant replies from property holders — a less-than-30 second response time to an availability inquiry increases bookings by 200%.

AdStruc.com targets outdoor advertisers with an auction and listing-based marketplace for the buyers and sellers of billboard space. Adstruc address the fragmentation of national, regional, and local billboard site owners that make it hard for advertisers, especially national advertisers, to find and buy the best billboard sites for a large campaign. AdStruc aggregates billboard sites and provides searchable data on available inventory.  AdStruc gives buyers virtual visits to billboard sites through Google Streetview. AdStruc also partnered with Circle Graphics on the printing and shipping of the extremely large format. AdStruc supports the sellers, too, in managing their inventory. “This-space-available” and obsolete signs represent $750 million a year in lost revenue. With AdStruc, sellers can upload their available spaces, automate sales to approve buyers, and auction off space. AdStruc makes money on a share of the transaction fees as well as monthly service fees for managing billboard inventories.

Action

1. Look for individually-fragmented but collectively large areas of economic activity, such as where individuals or small business own a large segment of the market
2. Find the “pain points” in the lifecycle activities of these market participants (e.g., advertising vacant space, vetting renters, researching an opportunity, handling tax records)
3. Automate these processes and offer an online, software-as-a-service tool suite
4. Monetize the service with a low monthly fee, nominal share of transaction price, or through ad sales
5. Connect these small businesses or individuals to large markets (or create them) with automated advertising, inquiry support, booking, vetting, etc.
6. Help people on the other side of the transaction, too, such as with online booking, online payment, and online management of requests.

Point: Business model innovation can take a company to the white space that lies beyond its core business.

Story: Mark Johnson, chairman of Innosight, wrote Seizing the White Space to help companies understand whether they have the opportunity (or the necessity) to innovate their business model.  Johnson defines white space as “the range of potential activities not defined or addressed by the company’s current business model.”  In Johnson’s model, white space resides beyond product extensions, lateral growth in the customer base, or incremental product innovation.  Instead, he focuses on innovations that really change the way a company does business.

Because Johnson’s book focuses on business models, he starts with a framework for analyzing and creating business models. The framework is composed of four boxes: the customer value proposition, the profit model, the processes, and resources of the business.

The customer value proposition delineates why the customer values the product or what the customer hires the product to do.  (Click here for more on “hiring a product to do a job.”)

The profit model encompasses all the crucial financial dimensions that determine viability, including the revenue model, cost structure, target margins, and velocity (i.e., cycle times).

The resources and processes boxes consist of what the business needs (people, technology, information, partnerships, etc.) and how the business delivers the CVP within the bounds of financial viability.  Johnson uses this four-box definition of business models throughout the book to analyze different case examples and to illustrate a repeatable process of building new business models.

Next, Johnson presents a three-chapter section on three conditions that call for new business models.  The conditions occur when 1) a company wants to transform an existing market, often due to changing competition 2) a company wishes to create new markets, such as in emerging market countries 3)  industry or economic discontinuities appear.  Johnson refers to these three situations as white space within, white space beyond, and whites pace between, respectively.

Finally, Johnson devotes a three-chapter section on the process of creating and implementing new business models.  First, he delves into the process of designing a new business, emphasizing the customer value proposition.  Second, he covers the implementation of a new business model and the process of incubation, acceleration, and reintegration of the new model back into the organization (if there is one).  Third, Johnson addresses a crucial issue of business model innovation within existing organizations — the challenge of innovation in the face of a dominant incumbent (see also this post for related material on corporate antibodies).

Johnson’s overall point is that business models aren’t arcane or serendipitous magic — they can be intentionally developed and implemented as a repeatable process.

Throughout the book, Johnson uses dozens of interwoven case studies of varying lengths to illustrate his points.  These examples include well-known management-book favorites (Amazon, iPod/iTunes, Dell, Southwest Airlines) as well as less-known examples (Lockheed-Martin, Better World, Hindustan Lever, Tata Motors, Hilti).  His point in using these examples isn’t to provide new business histories or reveal previously-untold best practices but to show how a wide range of businesses fit into his framework of the four-box business model and illustrate his process of seizing the white space.

Figures in the book also provide quick brainstorming fodder:  19 business model analogies, 14 levers on the customer value proposition, and 19 common dimensions of interference between incumbent and new business models.

Overall, the book will be most useful for executives thinking about changing their company’s business model or expanding in radical new directions  The in-depth discussions of business models can also aid entrepreneurs looking to build a business model.  Finally, product innovators should consider this book if they think their innovations involve significant changes in customer value proposition, the profit formula, key resource, key processes.  These changes, by definition, call for a new business model and the potential that the innovative product may need to be treated differently than the company’s previous products.

Action

• Know your current business model
• Look beyond adjacencies to consider how business model innovation can open new horizons
• Watch for opportunities, threats, and economic discontinuities that may call for new business models
• Build and implement new coherently-designed business models as needed

For the next stop on the virtual book tour, see: Braden Kelley, Blogging Innovation and Jeffrey Phillips, Innovate on Purpose

Point: Breakthrough innovation requires nonlinear change

Story: In his presentation at the World Innovation Forum, strategist and Dartmouth professor Vijay Govindarajan used the analogy of Olympic high-jumping to illustrate the non-linear thinking that companies need to make to create breakthrough innovations. The traditional approach to high-jumping until 1920 was the “scissors” approach: jumping over the bar with a scissoring motion similar to what is used by hurdlers. The highest jump possible was about 5′ 3″.
The best approach to jumping higher, however, is to identify the limiting factor in the jump. For high-jumping, the limiting factor is the jumper’s configuration of body parts relative to their center of gravity and to the bar. In the 1920s, the innovation called the “western roll” changed the jumping style from a hurdling over the bar with a scissors kick to rolling over the bar sideways with the jumper’s back to the bar. In the 1960s, the innovation of the straddle changed the center of gravity even further with the jumpers keeping their belly to the bar. And in 1968 the Fosbury flop (invented by Dick Fosbury) changed the motion yet again: jumpers launch themselves straight up into the air using both feet, and then they twist over the bar so that the head clears first.
The challenge for organizations: you can’t win by incrementally improving the incumbent scissors kick if your competitors are inventing the western roll or the Fosbury flop. Breakthrough innovations require removing or changing the limiting factor. This often means breaking old assumptions. Prior to the Fosbury flop, all high jump techniques assumed that the jumper goes feet-first over the bar and lands on their feet. Fosbury jumped head first over the bar to flop on the mat and extended the possible jumping height to over 8 feet.
Action:

• Document the fundamental limits that seem to prevent further incremental innovation
• Consider ways to break those limits or bend those limits
• Examine the “how we’ve always done it” assumptions to find opportunities for radical change

See Vijay Govindarajan’s blog here.