2018 was yet another fascinating year. I am getting many questions (and positive feedback) on a daily basis. I decided to make your most common questions the highlight of the year.
Most questions revolve around how you should go on about their innovation ideas. Many of you already have an idea/concept while others have founded a start-up based on their idea.
In my responses, I typically refer back to certain sections of my previous articles. So, why not do the same for everybody’s benefit? To be as specific as possible I have added direct links to the most appropriate section of the respective article rather than a wholesale link to an entire article.
How to develop your innovation idea
Throughout the year I have covered the tools that I find most suitable to sharpen your innovation idea. The most useful tools come from professor Michael Porter’s framework of strategy which he and others have refined over decades. (Michael Porter is being cited for the term “strategy” more frequently than the 5 runner-ups on “strategy”.)
Some think that start-ups don’t need a strategy and only experimentation. You could not be further from the truth. Show me a company that does not need to have a customer value proposition, a value chain or key activities? (Even if it changes along the way based on data-driven experimentation.)
The first 5 steps are essential ingredients for any innovation idea and the latter two optional:
- Step 1: Define your Customer Value Proposition
- Step 2: Define your Value Chain
- Step 3: Enhance your Value Proposition with the right Key Activities
- Step 4: Trade-offs: Decide what you are not going to do (yet)!
- Step 5: Decide on the Business Model
- Step 15 (or so): Analyse the industry landscape
- Step 0: Start with examples (if you don’t have an idea already)
As always, we will have comprehensive, real-world examples. Let’s get started!
Step 1: Define your Customer Value Proposition (CVP)
Any company of any age needs to be clear about their (hopefully unique) customer value proposition.
Example 1: Uber (CVP in comparison to substitute offerings)
Any start-up or innovation idea needs to have at its heart something that is uniquely different from what is already around. This difference may not need to be earth shattering but it also shouldn’t benign or something that incumbents within a short period of time:
- If we say that Uber has shorter waiting times than taxis this is based on a complex software and algorithmic infrastructure as well as indirect network effects that taxis can’t just imitate
- On a similar token, taxis can’t just reduce their cost structure in a way that would allow them to be able to compete on price (here is the direct link to why not)
- This is before we even take self-driving vehicles into account
Example 2: TripAdvisor vs Booking.com vs Expedia (CVP in comparison to direct competitors)
The difference in value proposition can vary. The differences between Uber and alternate forms of transport (offerings that Uber is substituting and vice versa) are comparably large. But the differences between Uber and its direct competitor Lyft are much smaller (some argue the differences are so small that the dominant player will be determined by the amount of available venture capital which is an important factor but ultimately not the only one).
Let’s look at the three largest online travel agencies (OTAs) as another example. The differences value proposition between online travel agencies and traditional brick-and-mortar agencies are large. But there are also considerable differences among them if you look into the details (though over time they have narrowed down due to copying from each other). Here are the notable value propositions and how the OTAs compare.
With that, we can refine step 1 to:
- Step 1a: Describe your CVP in comparison to substitute offerings (example 1)
- Step 1b: Describe your CVP in comparison to direct competitors (example 2)
Step 2: Define your Value Chain
Every company creates value. That is its main purpose. The value chain tool will help you to bring your value creation process to the point. It starts at the input (or sourcing) side and draws the link to your output side (the value proposition / product to your customer). In the middle are the key value creation activities.
To understand the value of this tool let’s look at two companies that many would think have very similar value chains, TripAdvisor and Booking.com. In its earlier days, TripAdvisor was a pure travel recommendation site but since has made. And you can still tell the differences today when you look at their sites in detail and compare.
Basically, TripAdvisor was creating high-value advertising slots for Hotels (and other travel companies) in which the ads are being placed among the reviews for the respective hotel. With that, the ads were much more likely to be clicked as compared to placing ads in a newspaper (or other traditional places). Booking.com on the other hand, buys up the top ads slots from Google whenever people enter a hotel search. From there, it has pages optimised to sell hotel rooms through their pages by offering – among other things – the lowest prices and comparisons, etc.
The reality is more complex and I have compared both value chains in detail under this direct link. Most tellingly, TripAdvisor still makes the majority of its revenues from its initial value proposition.
Expanded value chain
The value chain in its original form looks very basic though it is an art to sharpen your idea to one punchy line. But you can add more relevant detail to it. This is what I have done in the example below.
I have developed an extended value chain for sharing economy platform business models. You can do something similar for your idea.
- It shows different options for each of the steps of the value creation process
- Starting from one idea you can play with different options for each of the steps
- Here is the thing: some businesses differ from another by just one of these elements keeping everything else the same!
- Take Turo: It a mix of Uber and Airbnb
- Like Uber, Turo allows car owners to make money with their car but not by driving
- Like Airbnb, this happens by renting out their car to others
- The key differences to Uber are the asset operation and the asset distribution models
- The only difference to Airbnb is the asset class
You can develop a similar value chain for your innovation idea. Play around with potential differences to others. It can help you to decide which elements you should focus on. It can help you to decide which parts of the value chain differentiates you from others. If this is not a useful approach for a start-up, a young company or just an innovation idea – then what is?
Step 3: Enhance your Value Proposition with the right Activities
The value chain shows the set of key activities that deliver your unique value proposition. The next level of detail in elaborating your idea would be an activity map. Not only does it look cool but it also helps you to structure your ideas even more.
More importantly, it is designed for you to choose the right set of activities that amplify each other in delivering your unique value proposition.
The key is to choose the set of activities that underpin the differentiating point in your innovation idea. Take the above example of Airbnb:
- They deliver a value proposition that is very different to hotels in that they bring together individuals
- They then don’t try to imitate a hotel-like feeling in all their activities. They pronounce the personalised (and person-to-person) propositions
- When Airbnb expanded their offering they chose person-to-person interactions, such as events and experience hosting at the destination
- They have many pages where guests make recommendations on which places to visit in their home city
- And they have destination pages that are featuring local experiences
- This is very different to large hotel chains that e.g. make a deal with other large corporate (e.g. Disney World) to provide a 10% discount for their guests
It is really something to think about. Here is where differentiating ideas and sets of activities play a role. Michael Porter calls this fit (of all activities) across the value chain.
Step 4: Trade-offs: Decide what you are not going to do (yet)!
One of the biggest mistake people make is to do everything under the sun in relation to their idea.
“The essence of strategy is choosing what not to do,” Michael Porter
If you are a company like Amazon you can embark on many different directions at once. But Amazon’s story begins with exactly that decision: what not to do. Jeff Bezos believed in online retail. But he made a conscious decision to focus on exactly one category: books. Some 20 years later Amazon has several hundred million product titles. But he started with the decision to just focus on one thing in the beginning.
Among all tips, this is probably the most difficult one for innovators. But if you track down the history of some of the biggest companies you will be surprised how simple they have started.
Here is an activity comparison between TripAdvisor and traditional travel magazines/catalogues with hotel reviews. The key difference was to allow travellers to contribute recommendations/reviews rather than professional writers. They had to accept that the quality among the reviews would vary vastly and make decisions to enhance the positive consequences while reducing the negative effects.
Uber and Airbnb are good examples. They both started with one thing. They started to expand to adjacent areas (e.g. UberEats, Uber Freight, Uber self-driving vehicles or Airbnb Events, Restaurants, etc) only after having grown to many million customers a day.
Make distinguishing trade-offs
In your trade-offs, aim to distinguish yourself from others. It is the distinguishing (or unique) value propositions that makes your innovation idea! Copying someone is never a good idea if you just get started.
Sure there are exceptions to this. E.g., large companies do copy based on requests from their customer base to match featured offered by companies. Or. if your idea is about being able to create something at a much lower price point due to a new technological process. But in most cases, copying should not be the centrepiece of a start-up.
Step 5: Decide on the business model
Another useful tool that I have used to describe innovative companies is the business model canvas. Don’t skip steps 1-4 to jump to this tool. The above tools are the crucial ones. The business model canvas adds a number of elements to the thoughtprocess, esp the cost structure and revenue streams.
Here is the example of Uber.
I have covered the business model canvases of some exciting companies.
Dedicated tools for platform business models
I get often contacted by my readers on their platform business model idea (I guess this is how many of you found my page). I quite frequently recommend to think about the following items that are great mental models to structure your platform business idea:
- Indirect network effects diagram: identify all positive and negative direct & indirect network effects
- Search and transaction costs tool: what are the search & transaction costs you save for your users?
- How to get to critical mass: which of the 8 tactics can you use?
- Strategy map: Where you are starting from?
Step 15 (or so): Analyse the industry landscape
Porter’s Five Forces
Most people know Michael Porter’s work from Porter’s Five Forces analysis. So, they directly jump into the Five Forces analysis. And while that is also a good tool, it probably is not the best tool to get started. I have done this exercise for Uber (See below) but would not necessarily recommend the above tools for the early phases of your innovation ideas.
I think it is very difficult to do a five forces analysis on brand new ideas. There is a great risk of it being discouraging. If you had made such analysis on Airbnb, Uber, Booking.com, Expedia before they started it may have “proven” that the incumbents will crush you. Things came quite differently. E.g. Booking.com is bigger than the biggest airline and the biggest hotel chain combined in market cap.
Do steps 1-4 first before you populate this tool for your idea. It still gives you valuable insights into the industry setting. However, do it with a positive learning attitude. Don’t let it discourage you. Ask how you can use the insights to further improve your idea.
Step 0: Start with examples (if you don’t have an idea already)
I know many of you already have a starting idea (and thank you to the many people who share their ideas with me). If you are not at that point you can get some inspiration from other examples.
I have created a high-level overview with examples for platform business models. You could do this also for your area of interest.
The expanded value chain shown under step 2 can be used to describe companies like Uber, Airbnb, Turo, TaskRabbit, Mobike and many more. Where ever a service or an asset is being shared. These fall under what I have called an asset sharing platform business (basically the two branches on the top-right cover on the image).
Start with learning from others
Here are two articles with many examples:
And then there are our reports covering in-depth examples:
- Amazon (Alexa/AI, Prime Video, Prime (overall), Kindle, AWS)
So here we have it. Boiling it down to the most important elements it looks seemingly simple:
- Customer Value Proposition
- Value Chain
- Value Enhancing Activities
- Business Model
Innovation is not simple but it will reward those who have determination. Using these tools to elaborate on your idea will give you a great starting point.
Completing these exercises may take you anything from a few hours to a number of weeks. If you have been in the respective industry for a long time and had the idea for some time then you can use these tools to just write down your idea in a structured way.
If you are new to the industry or your idea is quite different to anything existing it might take you a few weeks of research and refinement along the way.
In either case, it cannot be a fire-and-forget approach. Once you have written down your ideas in these tools you will always come back refine, probably completely redo things as you start the execution and learn from the captured data. So keep your notes in a good place.
Setting aside some time
If you have a full-time job and a family like myself here is a time management tip: I am working on my articles for 1-2 hours every morning getting up early (incl weekends). Once I have done that, that’s it. I can put things aside for the rest of the day and focus on my work and family. I am not trying to squeeze in an additional 10, 20 or 30 minutes in at the end of the day. It is unproductive and takes it away from other valuable things, such as your family. If you don’t have any such constraints, well: go for your passion!
Finally, I want to thank you for your interest in my pages. From Google Analytics, I can see we have a good rate of return visitors which is great. Connect to me via LinkedIn if you want to keep in touch that way. With that …
Happy New 2019 to all of you.
Make 2019 the year of your idea!