Your Strategy Needs a Business Model Face-Lift

To return to the quote by Clayton Christensen at the start of this chapter, the problem is that most organizations don’t know where they are starting, much less where they are headed and how to get there. We wrote this book to help the leaders of traditional firms—those focused internally on using their own assets and employees to make, market, and sell—enter the world of digital network business models and leverage an external network to contribute its assets, ideas, skills, and relationships and share in the value created. Savvy investors and employees will also find that business model perspective is useful in allocating their capital and energy.

This book began twenty years ago, when Barry Libert, a strategist by background, was researching the sources of value and their migration from tangible to intangible. His first book on value was called Cracking the Value Code, and his research resulted in a simple finding: that traditional beliefs about value were wrong. One such belief was that physical things, such as real estate and equipment, should be accounted as secure and enduring assets, whereas the people who built, managed, and used those assets should be accounted as expenses. Now we realize that whereas physical assets often depreciate, people assets often appreciate—increasing in skills, knowledge, and value over time. This is just as true for customers, properly cared for, as it is for employees. Consider the value of Facebook, whose 1.6 billion customers create all the content for the platform, acting as both contributors and subscribers.

At around the same time that Libert was researching value at a large consulting firm, Jerry Wind, a senior faculty member at University of Pennsylvania’s Wharton School, was researching how firms were organized. Wind’s work on network organizations versus traditional firms resulted in the formation of the SEI Research Center at Wharton.

The two men met in 2001 and together started examining how the beliefs of leaders and boards shaped the actions and outcomes of firms, including their organizational design and financial performance. Libert’s book on networks was called We Are Smarter Than Me, and Wind’s, The Network Challenge.

In 2013, Libert partnered with Megan Beck, who applied her experience analyzing complex problems and managing organizations through change to explore this dramatic shift, document what it means for legacy organizations, and create a practical guidebook for change. Over the past several years these authors, along with a team of researchers, writers, and technologists, have worked to create this thinking, this book, and the accompanying digital platform.

The team examined the S&P 1500 index, which includes large-cap, mid-cap, and small-cap companies, over a forty-year time horizon, seeking to understand how capital allocation, business models, and economic outcomes were changing with the digital and network revolutions. Their findings are included here. But this book is much more than just research about business models. It also shows you what to do, and how to do it, in order to achieve growth and value in a world dominated by digital networks. In short, your existing strategy and organizational design need a business model face-lift.

Adopt New Thinking

The way most of the world thinks about assets is wrong. Physical assets, the darlings of the Industrial Revolution and the basis of today’s largest firms, depreciate, become obsolete, can be destroyed by flood and fire, are expensive to move, and aren’t capable of innovation (because, after all, they don’t think). People, on the other hand, have a lot of potential. Whether employees, customers, or partners, people can generate new ideas, solve problems on their own, promote and share brands, and serve various other functions. With proper training or cultivation, people appreciate, rather than depreciate, in value to your organization.

Sometimes leaders make a mistake by thinking they’ve captured the value of people by hiring them as employees or gaining them as customers. This view is simply too narrow. Our consumer spending and our efforts at work represent only slivers of our overall capabilities and assets. Most employees are hired to do a specific job in a specific way; ask yourself how many of your own jobs have accessed your full potential for innovation and productivity. Consider how Airbnb has gained far more than the revenue from lodging rentals. It has accessed the underutilized resources of entire populations—resources that simply were wasted before.

The internet spelled the demise of closed-source business models based on physical assets. For example, Wikipedia and its network of unpaid contributors disrupted a 250-year-old company called Encyclopedia Britannica. Since then, millennials are turning to Yelp instead of Zagat for a restaurant recommendation, to Angie’s List instead of Yellow Pages for service providers, and to LinkedIn rather than a headhunter when they need a job. These digital, open-source, open-platform business models are creating new, exponential insights and connections that yield extraordinary value. Consequently, the emerging power of networks presents new risks for established firms in all industries.

We are at the beginning of a rapid upending of traditional ways of creating value, and it is occurring in every industry. Firm-centric organizations that use their own resources to create and keep all the value for themselves are slowly being replaced by those that share value creation with networks of individuals connected by digital technologies. And these new network-centric businesses offer many economic advantages.

Make It Valuable and Practical

In preparing to write this book and document our research, we regularly heard the same refrain: whatever you do, make it practical and actionable, with the emphasis on actionable. As long-standing authors, advisers, and investors, we have heard the refrain from those we work with: “We get the message. There is work to do—but how do we actually do it? Most of the companies you and others write about (such as Uber, Airbnb, Alibaba, and Etsy) were born as digital networks. They never had to upend their existing business model and become something other than what they are. The rest of us need practical advice and tools so that we can compete, grow, and prosper.”

So we bring this book down quickly from the high-level research to the practical how-tos. Whether you make widgets, provide services, or offer technologies, whether you lead a billion-dollar corporation or a family business, we will help you join the digitally networked world. We have worked hard to make this a how-to book, not a why-to book.

In part I, “The Promise,” we share our research on business models (from firm-centric to network-centric models) and discuss how investing capital in network business models has a dramatic impact on economic value creation.

In part II, “The Principles,” we examine how network organizations operate differently from traditional organizations. Each principle represents a significant shift from the legacy firm to the network organization. You can use these ten principles as levers to accelerate your transition to augmenting your business with the networks that exist around it.

In part III, “The PIVOT,” we share our PIVOT process—five specific steps that you can take, beginning Monday morning, to plant the seeds of digital networks within your own organization and set the path for greater co-creation and shared rewards. Adopting a new business model is not easy, and it is not simple, but these steps will help you define what you need and identify how to implement it in a practical sequence.

In part IV, “The Practice,” we examine what it takes to lead a digital network organization and help you examine the unstated and unrealized mental models that guide your thoughts, actions, investments, and ultimately your organization’s future. We will also discuss what it means to you to be the leader in your own network.

Anticipate a Great Future Ahead

No transition is easy. But our playbook is intended to help leaders create fertile ground for previously unachievable growth, profit, and value. Remember that your organization and your network participants will share this value. In the network age, you cannot do this on your own. Partnering with a network requires actual partnership—a mutual arrangement from which both parties benefit.

Although you could take a mercenary approach, trying to extract as much value as you can from your network, be aware that network members are beginning to see what they bring to the table. The articles they write for LinkedIn, the art they sell on Etsy, and the content they generate for TripAdvisor have value. They want to share in the value, and they will find partners who will let them. In return, they will reward their partners with loyalty, advocacy, information, and assets.

In short, digital networks are changing what we do, how we do it, and who gets rewarded. There is great untapped value in networks, and this book will help you on your journey to becoming a network leader and firm. It gives you the research to motivate you, the principles to guide you, and the practices that will ensure your success.

Doing the hard work and realizing the value of digital networks in your organization—well, that’s your job.

Join the network movement to access our digital tools, audit your business model, and create a plan for growth at openmatters.com.