Individually. Collectively. Personally. Organisationally.

But the less obvious truth is that failure can lead to success.

To err is human

I missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.

Believe it or not, these are the words of Michael Jordan, arguably basketball’s “greatest of all time.” His accomplishments include “two gold medals, six finals MVP awards, five league MVP awards, three All-Star MVP awards, ten scoring titles, Defensive Player of the Year and an induction to the Hall of Fame in 2009.”

Before creating the revolutionary vacuum cleaner we know and love today, Sir James Dyson invested 15 years, nearly his entire savings, and built 5,127 prototypes before he got it right.  In his words that means, “There were 5,126 failures.”

Scott Sandage (author and associate professor of history at Carnegie Mellon University) says:

To paraphrase the anthopologist Marshall Sahlins, academics can be certain of two things: someday we’ll be dead and eventually we’ll all be proven wrong. (Sahlins’ tip for a successful career: make sure the first precedes the second.)

Of entrepreneurship, Charlie Gilkey says:

You’ll make too little and sweat it. You’ll make too much and blow it. You’ll say Yes and kick yourself for it. You’ll say No and spend the rest of the year remembering the ‘wrong’ forks you took.

And the good news is…?

All of these people have experienced failure. They’ve admitted failure. And they’ve known success.

While failure is uncomfortable, difficult, embarrassing and, at times, devastating, it can also be a catalyst for learning, change and reward.

In some cases, failure is essential for achievement and inherent to attaining a goal.

Alberto Alessi, winner of the Design Award for Lifetime Achievement and third generation head of the iconic Italian design firm, told Fast Company:

I have to remind my brothers how vital it is to have one, possibly two fiascoes per year. Should Alessi go for two or three years without a fiasco, we will be in danger of losing our leadership in design.

Walking the winding road to success

Much as we like to think of the journey to success as being like a Roman road, straight and unswerving, in reality it almost always involves roundabouts, u-turns, blind alleys, detours and hairpin bends.

I love the below cartoon (attributed to Demetri Martin, This is a book) and, having become an online meme over the last couple of years, it would seem that it has resonated with others also.

Following such a winding path does however require persistence, tenacity, determination and resilience—it is not easy to keep going in the face of multiple setbacks. Honesty, transparency, maturity and humility are also all needed.

Yet, numerous authors have observed that it is these very traits that can be the source of reward.

For more than 100 years, psychologists and scholars have shown that perseverance seems to be inherent to success over and above either talent or intelligence. Honesty and transparency can also result in the development of credibility and trust.

Avoiding the anti-failure bias

Accepting and admitting failure requires us to confront our fears. It also involves risk—risk of rejection, risk of misunderstanding and risk of consequences. Perhaps this is why we naturally shy away from failure and seek to avoid it whenever possible. Rita McGrath (a professor at Columbia Business School) has coined this tendency the “anti-failure bias.”

But, as we have already seen, failure does not always have the negative impact we so fear. In fact, McGrath points out that an avoidance of failure can itself have unintended and negative consequences. Ironically, failure can be caused and exacerbated by a blinkered desire for success.

We therefore need to create a culture in which it is acceptable to fail, both individually and organisationally. A culture that encourages experimentation and learning. A culture in which individuals and organisations are encouraged to admit their failures and move beyond them.

Many designers and developers have already learned this lesson and agile methodologies encourage their users to: “Fail early, fail fast, fail often.” In essence, this involves rapidly prototyping ideas to test their strengths and weaknesses, discover their failure points, and unearth future improvements. Rather than investing vast amounts of time and money into a fatally flawed project, such an approach ensures that “every failure is a step on the path to success.”

A big, fat BUT…

In writing this article, I do not wish to portray the idea that all failure is good. Circumstances in which failure has resulted in crippling and catastrophic consequences are within all too easy reach: the Fukushima Daiichi nuclear disaster; the global financial crisis; or the Deepwater Horizon oil spill, to name but a few. In both these disasters and within our own circles, there will be people “for whom failure is a crushing reality, not an inspiring lesson.”

Failure is never without a cost. In a working paper on life after business failure, the authors identify entrepreneurial failure as having three primary costs: “financial, social and psychological.” In some cases, it is possible to moderate and recover from these; at other times, the costs can prove debilitating.

Tellingly, the authors also observe that struggling ventures that delay cessation have variously been referred to as “‘permanently failing’…’unproductive’…’chronic failures’.. and ‘the living dead’”. It seems safe to assume that none of these are desirable states.

Whilst the journey to success is undoubtedly a winding road, ploughing ahead in the face of warning signals at every juncture is surely a fool’s errand. Failure is nuanced and we need to understand this.

Jamer Hunt, writing on Fast Co.Design, suggests that “we need a failure spectrum.” I believe this is a brilliant idea and it is one that I intend to explore further in a later post.

In the meantime, it is enough to say that we need to be able to identify when failure is (or at least can be) productive; when it is a sign that something is wrong and we should quit; and when preventative measures should be taken to avoid it.

Breeding success—a failure how to

All in all, this therefore begs the crucial question: How? How do we affirm failure correctly and effectively? How do we encourage perseverance and daring? How do we embrace failure and turn it into success?

That, my dear readers, is something for another day…

And for those of you who like the research…

Hunt, J. (2011). Among six types of failure, only a few help you innovate. Fast Co.Design

McGrath, R.G. (1999). Falling forward: real options reasoning and entrepreneurial failure. Academy of Management Review, 24(1): 13-30.

Salter, C. (2007). Failure doesn’t suck. Fast Company

Sandage, S.A. (2012). Get back in the saddle. Times Higher Education

Ucbasaran, D., Shepherd, D., Lockett, A. & Lyon, J. (2012). Life after business failure: the process and consequences of business failure for entrepreneurs. CSME Working Paper.

Wylie, I. (2007). Failure is glorious. Fast Company

Acknowledgements…

Special thanks must go to Scott Sandage whose article inspired this discovery into failure and from whose writing the title of this article was borrowed.

For me, I love comparing and choosing software, using it, getting to know it and learning about the efforts and ideas that developers have put into their baby. I love the power that software has to transform an action, a process or even an entire organisation.

The trouble is that choosing and using software can be a bit of a Marmite process—especially in a business environment. You’ll either love it or hate it. Software inevitably transforms your life one way or another—for good or for bad! Generally, the more core a software solution is to key business processes, the more this is true. Choose and commit to the wrong software solution and you can bring a business to its knees very quickly. I’ve seen this happen a number of times to unsuspecting organisations and it’s not pretty!

Think of selecting software as a little like marriage—it’s easy to commit but hard to get out of. When you achieve the perfect match, life couldn’t be better. But get it wrong and separation tends to be a painful, messy process.

So what are the rules of software commitment that minimise the risk of marrying in haste and repenting at leisure?

1. Understand yourself and what you are looking for

If you don’t understand yourself, your organisation, and how you work, you won’t be able to decide what you’re really looking for and whether there is a good fit or not. Most people have some sort of list for ‘My ideal partner is…’, based on their own understanding of themselves and what they feel would work in a relationship. Choosing software is not much different. Although ideal partner lists aren’t always 100% correct and you may later discover that certain assumptions were wrong, developing an ideal software list is a great start to the selection process. Before you begin to select any software, it’s vital that you first understand your business, the core processes that make your business tick, and what success looks like for you. What features can you really not live without? What are you happy to compromise on? What are the end objectives that you want to achieve? These are the criteria that will help you to find your ideal partner.

2. Work through stuff together

Looks aren’t everything, right? While aesthetics are obviously important in the attraction process, there is a strong case for the ‘It’s what’s inside that counts’ perspective to gauge how well you will get on as a couple over the long term. And the only way to really find out what’s inside is to work through important stuff together. You need to find out whether your individual approaches to life are remotely on the same page. Committing to software is much the same. It’s vital to work through real business scenarios with the software yourself and you should always insist on both a demo and trial that uses your own case studies, data, processes and tasks. Don’t just rely on standard demos and don’t let a salesperson do it all for you—they are practiced at making their software look brilliant and easy to use, even when it’s not! By working through practical scenarios and day-to-day processes, you’ll soon begin to see whether you have an attraction that goes beyond the first few clicks!

3. Dig deeper

With software, as with people, sometimes not everything is as it appears on the surface. That’s to be expected—we don’t always like sharing our weaknesses, especially when they make us vulnerable. A software sales person is even less likely to be completely open and honest with you as it’s in their best interests to make a sale. The website of a software product is also unlikely to list everything that the software can’t do. That’s why it’s up to you to ask the right questions and dig deep. Software sales can be a case of ‘truth by omission’ so it’s your responsibility to find out what they haven’t told you. Unfortunately, this courtship tends to be a bit more one-sided than is ideal but, with software selection, I’m afraid that’s the way it tends to be. Caveat emptor—let the buyer beware!

4. There is no such thing as the perfect partner

As Debbie may occasionally tell you on a bad day, there is no such thing as the perfect husband—I know, shocking right?! And likewise, there is no such thing as the perfect software. Unless you buy a bespoke solution, no software will have been designed for you personally but rather for someone a bit like you. This means that it’s highly unlikely you’ll find software with a perfect fit. You therefore need to look for best fit solutions—software that most appropriately fits your processes and that you can live with on a daily basis. Of course, each solution will have its own strengths and weaknesses but inevitably you’ll be able to live with some, whilst others are going to drive you insane! The secret is choosing the former and avoiding the latter.

5. Know where to draw the lines

Different relationships work in different ways—it may be that you’re responsible for the admin and your partner looks after the garden. Maybe you co-parent your kids. Wherever the responsibilities lie in a relationship, it’s always an idea to play to your strengths. If both of you suck at housework or DIY, you might hire a cleaner or a handyman. Knowing where to draw the lines between software works in a similar fashion. It isn’t often that one piece of software can be all things to all people. Indeed, software that claims to do everything is, in reality, often unwieldy and mediocre at most things, whilst being excellent at few. You will therefore need to decide which software solutions will best look after which processes. You’ll also need to consider how the solutions will effectively integrate with one another without things dropping through the cracks. Making these decisions often requires a bit of juggling as you work out what fits where and the boundaries will, on occasion, require reworking and renegotiation. But, as with any successful relationship, that’s all part of the fun!

6. Don’t think you can change them

Starting any relationship with the aim of changing your partner into something they are not is a dangerous plan and one that’s doomed to failure. The fact is, people don’t change easily. Evolve? Yes. Change? No. Established software is similar in its inability to accommodate significant changes. The sales people or developers may promise change but in reality it’s not that simple. Software tends to be built around a fundamental concept, philosophy and envisaged use scenario, so promising change is the equivalent of an architect promising to create a mansion out of a bungalow. Yes, it’s technically possible but only if you knock it down and start again. In most cases, you might as well have bought a mansion in the first place! As a rule of thumb, tweaks are fine but you should be very sceptical of promises for deep changes to core functionality. Such changes are usually risky, expensive, create more problems than they solve, and are often no more effective than putting lipstick on a pig! Software as a service (SAAS) solutions tend to be even more inflexible. By its very nature, SAAS offers a one size fits all solution—the entire business model hinges on solutions for the masses. Whether software as a service or boxed software, whatever you do, don’t commit to it based on a vague promise of added functionality sometime in the future.

7. Ask the children

I’m not for one moment suggesting that your staff are your children or that you should treat them as such! However, much like parental decisions not only affect the adults but also influence the children, you need to realise that a software partnership isn’t just between you and the software provider—others within your organisation are going to have to live with your decision day in, day out. Get your colleagues involved at an early stage. Involve them in developing the statement of requirements, invite them to meetings, and ask them to test the software themselves. Be conscious of those people who will be most impacted by your decision—they will usually be the ones who get shouted at if they can’t do their job properly due to poor software and they won’t thank you for a poor choice! Where possible, make a business-wide decision as to which solution to commit to. Remember, unlike children, your colleagues can walk out if you get it really wrong. Businesses have lost good staff through poor software selection and implementation because dealing with bad software on a daily basis made their jobs nigh impossible.

8. It’s not just about the wedding

Long-term marital success is as much about life after the wedding as it is about your partner selection and promises of commitment. You need to give each other time to settle in and adjust. Make time for one another, continue to talk, resolve differences, and put one another first. In a successful software partnership, continued commitment following the initial selection process is vital. Surprisingly, choosing your software is actually the easy bit of the process. Without a full and proper implementation, you could in fact create a failed project even if you have selected the right partner. In rolling out the software you should be aware that staff will need training; an effective transition from the old way of working to the new will need to be made; and there are likely to be teething issues that will need to be resolved. Longer term, adjustments will need to be made to ensure that the software continues to evolve with you. Of course, you can’t do this on your own. Both you and the software provider need to remain completely committed for the long haul, even—or should I say, especially?!—after the initial honeymoon period is over.

9. Trust is important

Trust is important for any relationship and especially for one in which there is a long-term commitment. Without trust, a relationship can be at best difficult and at worst impossible. Likewise with software, the concept of trust is critical. You need to trust the software’s security, its resilience, your backup of the data, the service level agreement (SLA), and the fact that the future road map of the software is going where you need it to. After all, you are entrusting your business to this software. Not only that but you need to remember that you are not just choosing the software itself but also the people and the organisation behind it. You will be reliant upon the competence of the team who develop and build it; the responsiveness and helpfulness of those people who answer your urgent support requests; and the wisdom of the owners and managers who determine the long-term direction and success of the business. Can you trust them to do good by your organisation? Do they really understand your needs? Are they consistent and congruent in their relationships? Are they people you’ll enjoy working with well into the future? By doing your due diligence upfront, you’ll reduce the risk of being disappointed and heartbroken later on.

10. Money matters

Research suggests that money is one of the topics most argued over in a committed relationship. Differing expectations and differing priorities have to be worked through, compromises made, and a shared understanding developed if money isn’t going to become an issue that gets in the way of a relationship. If this kind of understanding can’t be reached it begins to suggest the partners might indeed be incompatible. Likewise with a software partnership, financial priorities and budgeting can be an issue. Knowing how much to spend on software is not always obvious, especially when price is not directly correlated to quality or even value. In reality, you can only ever really make a comparative decision between differing software options, balancing the complex mix of functionality, best fit, price, licensing model, consultancy and training fees, ease of implementation and upgradability. In the end, you’ll need to choose the solution that you feel provides the best return on investment. It may be that you have a natural tendency to spend very little or to spend a lot. At the end of the day, it’s not about your personal spending preferences but about the business case, the range of software options available to you and, ultimately, what will be best for your business—even if it takes you out of your comfort zone.

Enjoy the process

Hopefully I haven’t scared you off either marriage or software selection after all that! As I said at the beginning, I love software and, as Debbie will testify, I get particularly absorbed during a software selection project largely due to the fact that I’m having so much fun! I’m also an advocate of healthy and happy marriages—after all, I found not only my wife but also my business partner too.

Whilst some businesses are happy to approach software selection with little more thought than a drunken and impromptu wedding to a stranger in Vagas, only to wake up the next day regretting the fact that they didn’t put a bit more thought into choosing a more suitable partner, there are some who are wiser and heed the call to approach software selection as you would a serious courtship. Hopefully, you, dear reader, fall into the latter category!

Also, do remember that, much like marriage, you need to go into software selection knowing that you’ll always have a lot to learn. So be willing and able to get stuck in. Grow. Make mistakes. And, most of all, enjoy the process! Sometimes, even if you follow all the rules and do absolutely everything right, it won’t always work out, but at least you’ll be able to look yourself in the mirror and say, “I gave it my best shot.” And, after that, you will pick yourself up and start over again.

In cases like these, the tendency can be to attempt to overcome resistance by redoubling efforts, increasing the number of improvement initiatives and hoping that, with enough management sponsorship, progress can be maintained.

In reality, once an organisation has reached a certain point on its improvement journey, the more you implement, the harder it can be to hold the gain—let alone achieve true transformation. When you get to this stage, adding more is no longer an effective solution.

What about a different approach? In order to catalyse change, why not take away rather than add?

What you choose to subtract will depend on the transformation you want to achieve, your specific business and your individual situation, but here are a few examples to give you a little inspiration.

Customer service

Do you want to achieve true transformation in customer service? You’ve written the guidelines, done all the training and worked with your staff to ensure service improvement, yet you still feel you lack a certain ‘wow’ factor in the service your organisation delivers.

Time to take away

Take away the restrictions that govern how your customer service staff support customers and move to an ‘If it makes the customer happy, do it!’ approach. By taking away restrictions, you shift focus onto the customer and the relationship that your staff have with them. If this approach feels risky and dangerous, it could reveal that you don’t entirely trust your staff and it is restrictions that keep the wheels turning rather than a great culture and core values. If this is the case, it’s not surprising that you don’t have the customer service wow factor! You need staff you trust, who value your customers as much as you do, and who have the power to make a difference.

Culture change and engagement

What if you’re looking for culture change? Are your staff tired, demotivated and fed up of the rules? Maybe you’re looking for an opportunity to shake things up and transform internal staff engagement.

Time to take away

Organisations can inherently communicate resistance, stuffiness and a lack of trust—often through rules, expectations and management looking over shoulders all the time. Want to communicate trust? Let people decide their own holiday quota as long as they get the work done. Bums on seats mentality? Let people work when they want to or allow them to work from home—you could even follow Plantronics’ example and take away desks so there are not enough to accomodate every one of your staff. Want to increase productivity? Do what Best Buy did—take away the work day and move to a results only work environment. Risky? Maybe. But if your staff stop working or you don’t know what they’re up to, this reveals a more serious performance management issue that needs confronting. Removing such safeguards would certainly motivate managers to focus on engagement and collaboration too!

Sales and profitability

Are you looking to increase sales and improve profitability? Often, in our attempts to make ours the company to buy from, we default to adding to product and service ranges or adding features. This isn’t always a sure fire route to increased profits

Time to take away

Maybe your extensive product range is getting in the way of client decision making. Too many options have been proven to reduce sales rather than increase them. What about product features—are your products overwhelmed and overflowing? Halve the number of features and focus on creating a small, high quality feature set that out shines that offered by anyone else. Are you making customers jump through hoops to buy from you that, if you’re honest, are just there to make your life easier or exist only as a legacy? View the buying process through the eyes of your customer—get rid of the hoops and make it as easy and frictionless to buy from you as possible. Try out an exercise in reduction: reduce options, reduce features, remove hoops. Risky? Sure. But you’ll soon find out if complexity is making up for quality or if abundance is hiding an uncompetitive offering.

Subtraction can give you more

What you subtract from your business is very much up to you but it’s important to understand that it’s not just the addition game that can result in the magic 2 + 2 = 5. Subtraction can also reward you with 5 is the magic number!

At the end of last year, Debbie took an in depth look at the art of simplicity and the idea that less can be more, both for your customers and your bottom line.  Whilst Debbie’s article focused on simplifying product ranges and services, less can be more in performance improvement and change initiatives too. Assessing what you could take away to achieve results (rather than what you could add) gives you a completely different perspective on problem solving and can help to reduce organisational friction too.

Although removing safety nets can feel dangerous, having the faith to trust your staff and your organisation can have surprising results. It can also give you a great insight into areas that may be functioning adequately but are in reality only propped up by the safety nets that hold them in place. Dare to embrace subtraction, to catalyse change, and to achieve added value in the process.

Together, the team at EngCo worked out a price that included a 10% profit margin on the work and sent the US firm a quote for £244,000. However, the company shortly came back to them and asked for the quote in US dollars (USD) instead of pounds (GBP). John readily agreed and his sales manager duly converted their fee. Using a currency converter, she moved everything into dollars with a conversion rate of 1.4334 on 20 May 2010, rounded the figure up to $350,000, and sent the quote off again. The US company quickly accepted and John and his team were thrilled to have been selected!

EngCo got started on the work straight away, spent a couple of months completing the order and invoiced the client in early August. The client was delighted and paid almost immediately.

Great news…or not so much!

The trouble was that, having converted their original quote to US dollars, EngCo only received £219,485 instead of the £244,000 they’d accounted for! In the process, they effectively lost £24,515 and just over 50% of their profit margin.

So what went wrong?

When the US client paid EngCo Ltd, the exchange rate for USD to GBP was 0.6271. This meant that although the US company still paid $350,000 at their end, EngCo received much less than anticipated as they had converted their quote when the exchange rate was more favourable.

What could John have done differently?

There are a number of things that John could, and should, have done to protect EngCo from the risk of exchange rate fluctuations.

Quote in EngCo’s own currency

To be fair to John and his team, this is what they did initially and all would have been fine had the US firm not asked for a quote in US dollars. The team could however have been smarter when dealing with the request for a new quote.

For example, John could have quoted in dollars but negotiated with the client over who had exposure to exchange rate fluctuations and within what limits, thereby triggering a re-calculation mechanism should exchange rates become unfavourable.

He may also have been able to negotiate phased payment for the project (including an upfront deposit), again reducing EngCo’s currency exposure and significantly smoothing their cashflow.

Foreign currency account (or local bank account)

Another simple solution would have been to set up a US dollar account with EngCo’s bank and ask the US company to pay into this (John would simply have needed to provide the client with the IBAN and BIC numbers for the currency account). While this wouldn’t have protected EngCo from currency fluctuations at the point of conversion, John would have been in control of when the monies were converted to GBP (unless, of course, he needed the cash to cover overheads, in which case this option would have offered less benefit).

Setting up a foreign currency account would have also meant that if John had further expenses in the US (such as setting up an international office), he would have been able to pay in US dollars directly from this account, thereby entirely removing any exchange rate risk from these transactions.

Alternatively, if John was committed to the US market, he could even have set up a local US bank account through his existing UK bank. This option would have been particularly attractive if EngCo ever wished to give the impression of being a local US company.

Forward foreign exchange contracts

If John had been completely certain of when his team would invoice and when EngCo would be paid, he could have set up a forward foreign exchange contract. This would have meant that John was committing to converting $350,000 to GBP at a fixed point in time and at a pre-agreed exchange rate—a great solution for removing exchange rate uncertainty in a predictable transaction.

That said, a forward contract would also have had the potential to expose John to significant risk if he had not been paid on time. A forward foreign exchange contract requires that, whether payment has been received from the client or not, the exchange must be actioned regardless. Had John not been paid, he therefore would have had to find $350,000 from somewhere else in EngCo!

Similarly, if the August exchange rate had instead gone in EngCo’s favour, John would still have had to convert at the agreed forward contract rate, thereby missing out on any additional profit.

Currency options

Currency options are in some ways similar to forward foreign exchange contracts in that they enable you to buy or sell currency at a specified exchange rate at a given time. As the name suggests however, the key difference between currency options and forward contracts is that options are optional!

If John had pursued this path, he could have bought an option to sell EngCo’s US dollars at a pre-determined exchange rate but later decided whether or not to use the option. John could even have purchased an option before he knew he had won the contract, giving him the security that, whatever happened, EngCo’s margins would have been protected. If EngCo hadn’t won the contract, if the client had failed to pay when expected, or if the August exchange rate had gone in EngCo’s favour, John could then have simply chosen not to use the option, only taking the hit on the option premium.

Don’t leave your foreign transactions to chance

As John’s story illustrates, currency can have a significant impact on your profit margins and you can incur huge losses if you’re not careful! We tell the story here with two fairly stable currencies but the risks and effects are magnified further when dealing with countries in which currencies are more unpredictable.

For those of you who are looking at internationalising or are dealing with international clients, take heed! The uncertain financial environment that we find ourselves in at present only increases the likelihood of uncertain and extreme currency fluctuations, so don’t leave your transactions to chance.

Similarly, in our story, John was certain of the buyer’s ability and willingness to pay and he was able to cover his working capital requirements through EngCo’s reserves: if a relationship with a client is less certain for any reason or you are unable to fund the cashflow requirements of the project yourself, you should also look at reducing risk through various export finance and insurance options.

On the other, there is the business model that exploits it.

Entrepreneurs, management teams, businesses and organisations often fall into the trap of making no distinction between these two. They have no process for separating the two elements from one another and frequently fail to untangle their core idea from the business model it first arrived with.

It is easy to assume that because an idea arrives along with some logic for how money can be made from it, that’s the way its going to be. The idea and the business model become neatly packaged up as one and the same. It’s difficult for people to break out of their norms and assumptions to look at their idea from a different perspective.

By only considering one business model however, organisations run the risk of ruining a perfectly good idea with a less than ideal business model. Usually, there are many potential business models and many different ways that money can be earned from the same idea—at least one of which may be your key to substantial success!

Allow me to demonstrate with an example.

An idea…

Clothes Horse is a New York start-up that helps online shoppers choose the right size clothes for their body shape even when a shopper is unsure about sizing variations and quirks between different brands.

If an online store is using the Clothes Horse platform, Clothes Horse has access to sizing data about their clothes. As an online shopper, you can then use the Clothes Horse app to discover your sizing by answering a few simple questions about your height, weight and body type. Clothes Horse then puts these two pieces of information together using some clever algorithms and calculates which size will provide the best personal fit. On top of that, Clothes Horse is also able to compare your sizing to a whole bunch of data about the average sizes of a plethora of brands to provide you with a more accurate recommendation. (Click on the image below to enlarge it).

In testing, they’ve found that this intelligent sizing increases online conversion rates by around 13% and reduces costly returns too (normally, more than 60% of clothing returns are driven by fit).

Can have many different business models…

At present, Clothes Horse works by adding a ‘What size am I?‘ button to each product page and, with the backoffice data entered by the retailer about their clothes, they are able provide an effective service to both the online consumer and the store. From recent reports, they are also working on developing a full shopping profile for users based on brands they like on Facebook—a profile that consumers will eventually be able to take with them as they shop across the web.

I haven’t been able to glean the exact business model they are using but, as we shall see, there are many different models that could be used to turn Clothes Horse into a profitable venture, each of which would potentially result in a radically different business. Clothes Horse could…

1. Sell their app and reference database to retailers as an installable software combination that sits on the retailer’s web servers and integrates with their website. This would incur a one-off fee and the Clothes Horse database would be updated on a regular basis in much the same way as Microsoft and Apple release regular software updates.
2. Sell an app direct to consumers for whom it would act as a single profile through which consumers could shop at any retailer. This would incur a one-off fee for each consumer in the same way as apps are bought through iTunes or Google Play.
3. Sell their app to retailers as a software as a service (SaaS) tool that integrates into the database of each retailer. This could be charged for on a monthly subscription and priced dependant upon volume of use or size of retailer.
4. Give away the app and reference database to retailers as a free SaaS tool but take a small percentage cut of each online sale that Clothes Horse facilitates.
5. Offer the app and reference database to retailers as a pay-as-you-go SaaS tool whereby the retailer is only charged each time an online customer users the Clothes Horse functionality.
6. Offer retailers an end-to-end service wherein Clothes Horse measures sample clothes from a retailer (saving the retailer the effort of adding their own sizing measurements to the Clothes Horse database). Clothes Horse could then charge the retailer for both this personal service and the use of the app and reference database.
7. Operate a franchise model in which the reference database remains central but Clothes Horse franchisees receive commission on every retailer they sign up to Clothes Horse. This model could also be combined with the end-to-end service above, whereby franchisees could receive commission for each new item of clothing they measure and add to the reference database.
8. License their intellectual property to one or several major clothing retailers for exclusive use online.
9. License their intellectual property to one or several major e-commerce developers for integration within their backend systems.
10. Approach manufacturers of the clothes themselves, charging for sale of the data that Clothes Horse gathers on consumer body sizing and best fit to enable the manufacturers to improve garment sizes.
11. Offer consumers a sophisticated sizing service (similar to that of the Left Shoe Company) in which each consumer is measured using a full body scan, after which they use the Clothes Horse app to obtain almost perfect sizing recommendations. This could even be extended to allowing consumers to try clothes on using their own personal online avatar.

The list of business models here is not definitive nor exhaustive, nor is each individual business model necessarily mutually exclusive from another, but it’s clear from this list alone that there are all manner of business model configurations that could deliver for Clothes Horse. The central idea is the same throughout—a huge database of clothes, covering lots of different brands, that is matched to individual consumer sizes—but this one idea can be exploited in many different ways.

Which means that…

It is vital to separate your central idea from your business model. Doing so will enable you to maximise your idea’s potential and to avoid ruining it with a weak or less than optimal business model. You may have immediate gut reactions as to which models in the list above would be the most viable and/or the most profitable for Clothes Horse but it’s clear to see that without exploring the full range of possibilities, the organisation could miss a truly lucrative opportunity.

So, next time you’re exploring an idea, take the time to exhaustively explore the different business models that you could use to exploit it. Think about which model will best maximise your revenue, meet your risk profile and deliver the best value to your customers. You never know what opportunities are out there until you start uncovering them!

Out of reach but not out of sight

In other words, you should be able to visualise your organisation achieving its vision but it should not be possible for your organisation to reach out and take hold of the vision straight away. True vision is a balance between these two ideas.

If you cannot picture or imagine your organisation achieving its vision, no matter how hard you try, it is likely that this ‘out of sight’ vision is either the wrong vision for your organisation—one that does not fit with your organisation’s passions, purpose, values and beliefs—or it is so over-ambitious as to be unachievable. Vision of this kind will help no one. It may lead you in entirely the wrong direction and it is unlikely to ever be achieved. It certainly will not benefit your organisation over the long-term.

On the other hand, a vision that is within reach and can easily be grasped tomorrow, within the next month, the next year, or even the next five years, is not really a vision. Vision should be a future-oriented goal that is exciting, inspiring, motivating and more than a little stretching. It should challenge you to achieve more and to push your organisation beyond its comfort zone. Without this kind of vision, you are merely dealing with the day-to-day, month-to-month and year-to-year—reacting to your future, rather than creating it.

Warwick Business School certainly stand by the Dean’s assertion. Their vision is:

To be the leading university-based business school in Europe

And they describe their mission as:

• To produce and disseminate world-class, cutting edge research that is capable of shaping the way organisations operate and businesses are led and managed.
• To produce world-class, socially responsible, creative leaders and managers who think on a global scale, regardless of the size of their organisation.
• To provide a return on investment for our students and alumni over their entire careers.

Hopefully they also have a vivid description of what it will look like for them to achieve their vision and measures of success that will enable them to know when they have become the leading university-based business school in Europe.

Out of reach but not out of sight is also a perfect description for an element of vision that Jim Collins and Jerry Porras coined BHAGs—”pronounced BEE-hags and shorthand for Big, Hairy, Audacious Goals.” Warwick Business School’s vision is certainly a big, hairy, audacious goal!

Four approaches to creating a BHAG

For those of you who read my earlier article that introduced the vision framework created by Collins and Porras, you will already be familiar with BHAGs. Something I chose to leave out of this article however was the fact that Collins and Porras also believe that there are four “approaches” or “broad categories” into which all BHAGs fall: target, common enemy, role model and internal transformation. As we shall see, Warwick Business School have chosen a target BHAG.

Targeting

Much as the word ‘target’ implies, a target BHAG involves “setting a clear, definable target and aiming for it,” in the same way as an archer or marksman would aim to hit their chosen target.

For Collins and Porras, a target BHAG can be either qualitative (such as Ford Motor Company’s vision to “democratize the automobile” in the early 1900s and the 1960s NASA moon mission) or quantitative (such as Walmart’s vision in 1990 to “become a $125 billion company by the year 2000—which, incidentally, it achieved and exceeded!)

Typically, quantitative targets are likely to be financial or may involve an increase in physical size. Qualitative targets, on the other hand, are typically “defined in terms of taking the company to an entirely new level of overall prestige, success, dominance, or industry position.” Warwick Business School’s BHAG would fall into this category. Whilst their undergraduate programme has already been ranked #1 in the UK in 2010, their vision is to become the leading university-based business school not only in the UK but also in Europe, and to lead in quality for their research, graduates and programmes—a new level of prestige, success, position and potentially dominance, all in one!

Common enemy

Common enemy BHAGs involve David versus Goliath motivation and “a goal focused on defeating a common enemy.” Collins and Porras cite the examples of Nike’s 1960s mission to “Crush Adidas” and Honda’s 1970s response of “Yamaha wo tsubusu! (We will crush, squash, slaughter Yamaha!)”. When interviewed by Collins and Porras in 1990, an anonymous board member of Nike even remarked: “Our idea of a perfect day is to get up in the morning and throw rocks at our competitors.”

Typically, common enemy BHAGs are set by companies striving to become number one and, as evidenced by the comments above, they tap into the motivation to fight and to win. Common enemy BHAGs can therefore also be useful if your organisation is struggling against the force of its competitors: “they can transform an organization whose back is against the wall and that is concerned about its very survival.” And, as “people don’t like to ‘just survive’, they like to win,” common enemy BHAGs can take your organisation beyond surviving to overcoming and to even coming out on top.

However, as Collins and Porras observe, common enemy BHAGs can have their drawbacks: “…it is difficult to spend your entire life ‘at war.’ And what do you do when you’ve defeated the enemy and become number one? What happens when you are no longer David, and have become Goliath?” Beware the “we’ve arrived syndrome” and ensure that you create another BHAG as soon as you’ve achieved your last!

Role model

Role model BHAGs do what they say on the tin: they involve selecting a role model (usually another business, organisation or person) and seeking to emulate their traits and success. Although less common than target or common enemy BHAGs, Collins and Porras believe that role model BHAGs suit up-and-coming organisations and they found that they were “usually set by promising small to mid-sized companies with bright prospects in their industries.”

Examples of role model BHAGs include that of Giro Sport Design, which as a young company in the early 1990s sought to “be to the cyclying industry what Nike is to athletic shoes and Apple is to computers.” In the 1940s, Stanford University similarly desired to “become the Harvard of the West.”

Collins and Porras are quick to point out however that role model BHAGs are only effective to the degree that the role model you select “generates powerful images for [your] company members. Sometimes, the images generated may be so complex that they do not mean the same thing to all members and, as such, don’t provide the integrative force required of an effective mission.” To this end, be sure to select an identifiable and easily understood role model for this type of BHAG.

Internal transformation

Last but not least, internal transformation BHAGs differ somewhat from common enemy, role model and, to a degree, target BHAGs, in that they are focused internally rather than externally. Internal transformation BHAGs seek to transform your company from within. Such transformation could, in turn, lead to increased sales and external success but it is not the focus.

For this reason, Collins and Porras suggest that internal transformation BHAGs are suited to “large, established organizations” or “old organizations that need to dramatically change themselves in order to remain competitive and healthy (or, sometimes, to regain their health).” They cite the example of General Electric which, in 1986 and to cope with the inefficiencies of its size, stated that: “In addition to the strength, resources and reach of a big company, which we have already built, we are committed to developing the sensitivity, the leanness, the simplicity and the agility of a small company. We want the best of both…[a] big-company/small-company hybrid.” If your organisation could benefit from radical revitalisation, an internal transformation BHAG may be for you.

What’s your big, hairy, audacious goal?

We’ve already seen that…

• Warwick Business School want to become the leading university-based business school in Europe.
• Walmart exceeded their goal for the year 2000 and just keep growing—in their last fiscal year, they reported net sales of $443.9 billion, an increase of 5.9% over the previous year.
• NASA achieved their vision of “landing a man on the moon and returning him safely to earth.”
• The year after they established their vision, Honda “so thoroughly defeated Yamaha that Yamaha later publicly apologized to Honda for having claimed that it would dominate Honda.”
• Giro Sport Design (now known as Giro) have grown from creating the first ventilated, lightweight cycling helmet in 1985 to now being a world leader in equipment for cycling, skiing and snowboarding with goods that “are worn by millions of riders around the world” and showcased at events such as the Tour de France.
• And time will tell for General Electric. Having taken a thorough beating in the financial crisis as General Electric’s financial services division plunged the company into the red, we will now find out whether the giant really does have the agility of a small company as it seeks to return to what it knows best (making stuff) and turning its fortunes around.

So, following that inspiration, what is your big, hairy, audacious goal for the future of your organisation?

Although many of the examples above involve corporate giants, BHAGs are in fact for everyone. In its early days, Giro was a single product start-up in which the founder, Jim Gentes, “stocked inventory in his bedroom, used his garage as a manufacturing plant, and expanded by trading a helmet with his neighbour for use of his garage.” From such humble beginnings has come great success!

And even if world domination is not your thing, BHAGs can be a powerful motivator for the goals that you do wish to achieve. Collins and Porras even note that there is a special case for BHAGs in start-up companies in which it is more than enough to set the big, hairy, audacious goal of “reach[ing] a point where survival is no longer in question.”

Whether you need to take on your competitors, emulate an organisation that you admire, strive for an out of reach target or transform your company from within, BHAGs can be incredibly powerful motivators. Their success does not even have to be measured by whether or not you achieve the BHAG itself because you will accomplish so much more along the way.

One of my favourite quotes comes from Louise Keeney, Director of Bondeye Optical, who when we were working with them described this perspective on vision as, “Aim for the stars and clear the fence.” Setting a BHAG is very definitely aiming for the stars but, whether you reach the stars or not, you will certainly clear a fence or three along the way—fences that you may not otherwise have cleared had you not created a vision in the first place.

And, as the examples above show and research has continually supported, those companies who set themselves big, hairy, audacious, out of reach but not out of sight goals do in fact achieve them on a surprisingly consistent basis.

So, what are you waiting for? Set a big, hairy, audacious goal today and find out what your organisation really could achieve in the next 10 to 30 years!

And for those of you who like the research…

Collins, J.C. & Porras, J.I. (1991). Organizational vision and visionary organizations. California Management Review. 30-52.

Collins, J.C. & Porras, J.I. (1996). Building your company’s vision. Harvard Business Review

Have you ever heard those words and would you ever wish to hear them? Would you actively seek out conversations with people likely to utter words to that effect? My guess is that your answer would be a resounding “No!” on all counts.

Seeking out conversations with people who are likely to challenge your organisation, your ideas and your plans may seem like a strange and slightly masochistic way to spend your time. As a leader however, you have a responsibility to look ahead and to find approaches that ensure the continuing success of your business. This responsibility includes reaching out to, and gaining insight from, those who see the world from a different perspective to both yourself and your leadership team.

Rita McGrath, author of the paper Business Models: A Discovery Driven Approach, raises the importance of what she has coined “critical conversations”:

There is a human dimension to competing on new business models that we are…beginning to understand. Encouraging leaders to question the viability of a business model, and to have the right conversations with those who might challenge it, will become increasingly important.

While McGrath’s paper is focused solely on business modelling, I believe the idea of critical conversations can be more broadly applied.

What are critical conversations?

The word ‘critical’ has a number of quite different definitions. Whilst McGrath does not explore in detail the nature of such conversations and it is difficult to elicit the exact definition that she is using, I believe that, in this context, critical can be understood in almost all senses of the word. According to several dictionary sources, critical can variously mean:

Characterised by skillful judgment and careful evaluation
Involving an analysis of the merits and faults of a given work
Incorporating a detailed and scholarly analysis and commentary
Of or pertaining to critics or criticism
Expressing adverse or disapproving comments or judgements
Forming or having the nature of a turning-point, transition or important juncture
Being in or verging on a state of crisis or emergency
Urgently needed
Having decisive or crucial importance in the success or failure of something
Absolutely necessary, indispensable or vital

Seeking out conversations that embody and embrace all of these ideas brings an interesting and challenging richness. In essence, critical conversations should give you insight into:

• Factors that could cause your business to succeed or fail
• The merits and faults of your organisation, business model and strategy
• Key threats to your business
• Opportunities for your organisation
• Emergent factors that have the potential to disrupt the status quo
• Situations that could become disastrous

Ignore them at your peril

Critical conversations have the potential to be deeply uncomfortable and challenging, so why on earth would you want to put yourself through them?! Like it or not, the fact that they are uncomfortable, difficult to hear, and challenging is precisely the point!

As humans, we naturally seek out those who have similar views, interests and beliefs to us and this is no different in business. Information, beliefs, attitudes and behaviours that are inconsistent or that do not fit together create an unpleasant state of psychological tension known by psychologists as ‘cognitive dissonance’. Because we dislike how dissonance feels, we naturally seek to minimise our experience of it by reducing inconsistency; Dieter Frey and Marita Rosch (creators of the selective exposure hypothesis) even found that we will deliberately and selectively avoid exposure to information that could cause dissonance.

As a result, we develop blind spots—factors that are obvious to others become seemingly invisible to us. Organisations are no different. Think the Global Financial Crisis for a perfect example.

Critical conversations are about minimising your blindspots. Although these conversations are likely to cause tension and discomfort (at least in the short term), they are all about enabling you to anticipate the black swans of this world, to discover the unknown and to better understand both the present and the future by viewing it through the eyes of others.

A lesson from the high seas

Allow me to illustrate with a story. My family are avid sailors. I grew up learning to sail and am a qualified sailing instructor. Whilst Debbie and I have been somewhat spoiled by the fair seas and blue skies of the Mediterranean, my brother is currently sailing across the Atlantic and my parents regularly skipper their own yacht.

When you’re out sailing, you can only see as far as the horizon. There are some sailors who believe this information is all they need to stay safe—let’s just say that I’d rather not be on a boat with them! Yes, these sailors can monitor the wellbeing of their crew; assess their clothing, waterproof and safety equipment requirements; decide how much to reef the sails given the current conditions; steer their boat; and monitor the horizon. But if that’s all they’re doing, they’re a danger to themselves and their crew! (I hasten to add at this point that none of my family would fall into this category.)

Weather can change quickly and things can appear over the horizon remarkably rapidly. Using only visual clues gives a sailor little in the way of warning time—a couple of hours at best.

In addition to visual monitoring, an experienced sailor will also use their charts and maps to guide them; check tide tables, GPS and radar; monitor wind speed and direction, atmospheric pressure, cloud formation, and wave structure; listen to regular weather forecasts; and monitor the radio for coastguard announcements and distress calls.

Together, these factors come together to enable a sailor to predict—with reasonable certainty—what is going to happen over the next 12, 24 or 48 hours, if not longer. Rather than finding themselves at panic stations, with no time to turn back, when they spot a major storm on the way, an experienced sailor has already made allowances. They may even have set off early for a different port. By the time the storm hits, they’re already tucked up in harbour. In contrast, the sailor who relied only on their view of the horizon may already be lost at sea.

For me, this is a lesson for both life and for our businesses. Critical conversations are much like tide tables, radar, weather forecasts, cloud formations and radio announcements. They enable you to see what someone else sees and to spot both trouble and opportunities before it’s too late to adjust your course. Although these conversations can be easy to avoid and ignore, particularly when you already have a strategy in place and a destination in mind, seeking out critical conversations will hopefully ensure that you never hear, “I could have told you so!”

So who should you converse with?

The short answer? Those who see further ahead or who see the world from a different perspective to yourself.

More practically, McGrath suggests there are three types of people with whom conversations are likely to yield valuable insights:

• Leading technologists within your firm or those working on designing next generation concepts. It is their job to be gazing into the future and to tease out and develop future concepts. More often than not, technologists will realise future possibilities well before you do—they may see existing markets disappearing before their eyes or new markets emerging. However, as McGrath points out, technologists and designers often do not actively share what their insights mean for your business, so you will need to seek them out and ask critical questions.
• People who are knowledgable about oblique competitors and substitutes. McGrath cites the example of an entertainment company—typically, entertainment requires that customers spend their time in a particular way and anything else that consumes their time will compete for their attention and therefore for sales. By understanding those competitors and substitutes that do not compete head-to-head with your organisation but nonetheless have the potential to unseat your influence gives you a much broader perspective and places you in a much stronger position.
• People who aren’t your customers today but could be yours or someone else’s tomorrow. According to McGrath, these are generally customers who are “too poor to afford your offer, or who are geographically remote or otherwise somehow not in [your] firm’s immediate line of sight”. Although these people do not directly influence your organisation today, this does not mean that they will not influence it in the future. Understanding their needs and opinions may also offer a valuable learning opportunity for today.

I’d like to add several other sources:

• Your employees. Although many employees are not paid to give their opinions, they are nonetheless likely to hold them. Those employees who interact with your customers every day probably know your customers far better than you do. New graduates and recruits often have an uncoloured and excited view of the future. Many of these people are able to offer a different and important perspective.
• Relevant bloggers and thought leaders. Reticent and retiring these people are not. They spend vast swathes of time reading, learning and looking at things from a bird’s eye perspective. It is their job to develop opinions and they usually don’t mind sharing them. In some cases, they may know more about where your business is headed and customer opinion than you. At other times, they will be able to see and anticipate unexpected trends, events and factors long before they begin to have a noticeable effect.
• Futurists and futurologists. Futurology is defined as “the science and study of sociological and technological developments, values and trends, with a view to planning for the future” and Wikipedia observes that it is often concerned with the three P’s and a W: Possible, Probable, and Preferable futures, plus Wildcards. Whilst it can be expensive to hire futurists, many organisations and individuals publish books, reports, blogs and other insights—although not conversational these can certainly serve as sources of insight. Conferences and events, such as those held by TED, are also a great place to meet and converse with people looking to the future.
• Experts in industries that are not directly related to your own. It may sound like a strange idea to deliberately look to industries that, on the surface, appear to be largely irrelevant to your own. However, by keeping an eye out for disruptive innovations that have the power to change the way we all work or to directly impact your own industry, you ensure that you stay ahead of the game. Not only that but even unlikely industries can have shared characteristics and yield valuable insights.

How should you hold a critical conversation?

To hold a decent critical conversation requires emotional and intellectual maturity. Your aim is to question, listen and hear with an open mind. It really doesn’t matter at this stage if you agree or disagree with the responses. Even opinions with which you vehemently disagree can be an important window on the future—they may even turn out to be right. Treat the person you’re talking to a little like a mystic or oracle—although you may not always understand the relevance of what they are saying, stay open-minded and take the time to work out what it means for you.

Ask open and challenging questions. Ask dangerous questions. Ask questions that challenge the status quo. Ask questions about the future.

You are looking for the unknowns. Factors that are almost imperceptible but vital to your success. Just because something is out of sight for you, doesn’t mean it is for others—you only have to consider Blockbuster versus Lovefilm, or Kodak versus digital, for practical examples of this in action.

After your conversations, take time to reflect, filter and understand. Engage with their content wisely. Not all critical conversations will be right and not all of them will agree with one another. Remember your lessons from GCSE history—assess your source! Consider every insight and learn from those opinions you believe are relevant. Discuss the insights with your management team and encourage them to engage in their own critical conversations.

Turning insight into action

If a conversation is truly critical, it will inevitably require both change and action. As a team, you will need to decide what the insights mean for your organisation:

• What changes do you need to make?
• What does it mean for your strategy?
• What does it mean for your business model?
• Do the insights change your goals/markets/products/services/people/partners?
• How does what you’ve learned translate into action?
• How are you going to implement change?

The true value of critical conversations lies not in their insights but in the impact of the resulting action that is taken.

Interestingly, action brings us full circle to the main focus of McGrath’s paper: using a discovery driven (rather than analytical) approach—one that involves “significant experimentation and learning”. It’s likely that your critical conversations will raise many questions and there will still be many unknowns—taking action is not about knowing the right answer or getting your implementation and ideas right first time. Instead, move forward with a discovery driven approach: develop assumptions, prototype and test, rework and rebuild until your organisation and your business model work. And then do it all over again.

And for those of you who like the research…

McGrath, R. (2010). Business models: a discovery driven approach. Long Range Planning. (43) 247-261.

Attempting a definition

Personally, I find Osterwalder’s approach to defining what a business model is both simple and useful.

As the term business model intuitively suggests it has something to do with business and it has something to do with models. A quick lookup in the online version of the Cambridge Learner’s Dictionary (Cambridge 2003) returns no result for the full combined term but the following definitions for the two separate terms:

• business: the activity of buying and selling goods and services, or a particular company that does this, or work you do to earn money.
• model: a representation of something, either as a physical object which is usually smaller than the real object, or as a simple description of the object which might be used in calculations.

…Thus, in the case of a business model, the model (i.e. representation) shall help understand, describe and predict the “activity of buying and selling good and services” and “earning money” of a particular company. But as the notion of buying and selling seems too narrow, I try to extend it. So differently put, the business model is an abstract comprehension of the business logic of a company. And under business logic I understand an abstract comprehension of the way a company makes money, in other words, what it offers, to whom it offers this and how it can accomplish this.

I also find it useful to think of business models in much the same way as Joan Magretta describes them: “They are, at heart, stories—stories that explain how enterprises work.”

In many ways, there is no right or wrong definition of what a business model is, but it is useful to develop a shared understanding and to that ensure we are all on the same page.

A very brief lesson in history

Business models have, in essence, existed since the beginning of time. Although a business model is not always explicitly stated nor actively used for prediction and evaluation, every organisation has a logic to the way in which they do business and, in this sense, every organisation has a business model.

Many academics have charted the evolution of our present day concept(s) of business models and Anders Sunderlin has even created an impressively comprehensive timeline of the business model concept. We shall not attempt to reproduce such a history here!

Rather, we hope to fill in the broad brush strokes and to provide a background to the new generation of business modelling that we find ourselves with today.

According to several reviews, the term ‘business model’ first appeared in an academic article in 1957 and then appeared again in the actual title of a paper in 1960—Educators, electrons and business models: A problem in synthesis (written by Jones and published in Accounting Review).

However, Magretta observed that the term only really came into widespread use “with the advent of the personal computer and the spreadsheet.” Spreadsheets and computing power gave us the ability to more easily model the behaviour of our businesses. By using mathematical formulas and equations to calculate the interactions between each component of a business, it became possible to test out assumptions and to determine how individual changes impacted the whole. Questions about price sensitivity, choice of channel, cost structure and more, could now all be answered with the tap of a few keys. Not only that but, in the words of Magretta, “By enabling companies to tie their marketplace insights much more tightly to the resulting economics—to link their assumptions about how people would behave to the numbers of a pro forma P&L—spreadsheets made it possible to model businesses before they were launched.” Theoretical modelling became tied to real numbers.

Interest in the idea of business modelling truly boomed however from 1995 onward. Suddenly, the expression ‘business model’ began to appear in numerous contexts and forms, both in academic and non-academic publications—although as Osterwalder observed, “it can be said that the expression was inflated through journalists, business people and academics that used it in relationship with e-commerce, start-up companies and high tech companies.” A genuine interest in business modelling is nonetheless apparent. Sunderlin’s timeline shows that, since 2000, multiple attempts have been made to understand what exactly a business model is and to create a clear business modelling framework.

A fly in the ointment

Despite growing interest, there have historically been several problems with the business modelling concepts and frameworks that have been developed.

1. Many business model concepts were financially based, particularly those that relied on spreadsheets and mathematical modelling.
   Inherent within mathematical or financial models is an inability to create or invent a business model—in order to program a mathematical model, the model must have already been created at a conceptual level. Therefore, agile prototyping is difficult, if not impossible. Similarly, such models are only as good as the assumptions on which they are based, meaning that any conceptual errors prove at best misleading and at worst disastrous. Laborious and time consuming, these models are also somewhat limited to the realm of those who have either mathematical or computer science expertise.
2. Those concepts that weren’t financially based were often academic, complex and inaccessible.
   Many of the models depicted in Sunderlin’s timeline are somewhat impenetrable for anyone without a business degree and would certainly be very difficult to use on a day-to-day basis in the real world.
3. In general, the concepts lacked a shared language and there was little standardisation.
   Although in theory many people were attempting to contribute to the same idea, each new concept was distinctly different from the last. Not only that but even a single framework could generate models that were almost unrecognisable from one another even when modelling the same business. This made it difficult to draw comparisons between different business models and prototyping or evaluation of models was very difficult.

Enter the Business Model Generation

In 2004, a new generation of business modelling began to emerge that was, in large part, aimed at solving these dilemmas. Driven initially by Alex Osterwalder’s PhD dissertation on the topic of business model innovation and ontology, the approach he outlined started to be applied around the world.

In 2006, Osterwalder and Professor Yves Pigneur embarked upon a project to create a book that accompanied their business modelling methodology, resulting in the publication of Business Model Generation.

Now used by over 100,000 people and organisations from start-ups right the way through to giants such as 3M, Capgemini, Ericsson and Deloitte, Business Model Generation provides a practical, easy-to-understand framework for anyone interested in improving an existing business model or creating a new one.

Interestingly, Alex and Yves felt that they couldn’t “credibly write a book about business model innovation without an innovative business model.” Rather than following a traditional publishing route, they instead launched the Hub, an online platform through which they could share their writings and gather feedback from day one. Not only did this finance the book’s production as people had to pay to join the platform but it also meant that the book was co-created by 470 practitioners from 45 countries.

Highly visual in its approach, the central premise of Business Model Generation is the Business Model Canvas.

Explained in just over 2 minutes in the video below, the canvas is a simple but rigorous business model framework that visually represents “the nine basic building blocks that show the logic of how a company intends to make money.” Not only is the canvas easy to use but it also enables a shared language for  business modelling—both ‘quick and dirty’ and systematic prototyping, comparison and evaluation have now become possible. Teams can, at long last, see, interact, engage with, share and compare their business model in a very tangible way.

Click here to view the video on YouTube.

And, if all that wasn’t enough, there is even a Business Model Toolbox for the iPad and a web version of the toolbox is on its way soon! Old school can be good though too—we’ve found that printing the canvas onto A0, blu-tacking it to a wall and sticking Post-it notes all over it works really well in a team environment.

Although the Business Model Generation is certainly not the end of the story and there have been further conceptual developments in recent years, for us, Business Model Generation remains the clearest, most practical framework available and it is our concept of choice to date.

What does all this mean for you?

A business model isn’t just a theoretical construct or a nice thing to explore on a management away day—rather, it describes the fundamentals of what makes your business competitive. By mapping out your business as a whole, it becomes possible to design and assess new opportunities, to innovate and evaluate, and to question, transform and challenge without losing sight of the bigger picture or getting bogged down in endless number crunching.

In our experience, the Business Model Canvas enables owners, managing directors and teams to ‘see and touch’ their business model. It gives visual clarity to thoughts and ideas that would otherwise remain conceptual and difficult to pin down, enabling you to gain a clear sense of how everything works together and to assess the strength of your own model. The canvas also enables quick and easy comparisons to be made between alternative business models or even between your model and that of your competitors’—now that’s one way to stay ahead of the game!

Whether you’re sketching out the seed of an idea or assessing an organisation that has been doing business for years, business modelling enables you to prototype, develop, evaluate and test as you strive to enhance your competitive edge. Use business modelling and the Business Model Canvas to:

• Discuss, create, clarify and communicate strategy within your organisation
• Create a single view of your business that anyone can understand
• Map out your competitors’ business models and compare them to your own
• Design and invent innovative new business models
• Communicate your business model to your stakeholders
• Easily create a business plan having mapped out the fundamentals

In the words of Osterwalder and Pigneur themselves:

…the scale and speed at which innovative business models are transforming industry landscapes today is unprecedented. For entrepreneurs, executives, consultants, and academics, it is high time to understand the impact of this extraordinary evolution. Now is the time to understand and to methodically address the challenge of business model innovation.

And for those of you who like the research…

Magretta, J. (2002). Why business models matter. Harvard Business Review.

Osterwalder, A. (2004). The business model ontology: a proposition in a design science approach.

Osterwalder, A. & Pigneur, Y. (2010). Business Model Generation. New Jersey: John Wiley & Sons.

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