What I learned later on though is that for some people, especially those who have a limited business background, it can be a little intimidating to understand and use. A simpler, less complex version was needed. That’s when I decided to create the Business Planning Canvas.

In this post I’ll share why the business planning canvas exists, how it is different from the classic business model canvas and I’ll walk you through step-by-step in creating a business plan using the canvas.

If you would like to download a free, editable, PowerPoint version of the Business Planning Canvas, click below.

Free Canvas Download

A Complete Business Plan On One Sheet of Paper

For startups, creating a business plan is often the least exciting part of getting their business up and running. Many startup founders are driven by passion to create interesting solutions to problems and creating a business plan is usually a necessary chore. The purpose of the business planning canvas is three-fold:

1. Simplify the business plan creation process
2. Guide founders to think through the critical elements of their business idea
3. Document and track business plan assumptions

With the business planning canvas, entrepreneurs and startup founders can quickly and easily think through and document their entire business plan on one sheet of paper.

What’s Different About The Business Planning Canvas?

The original business model canvas was the first to organize and layout a business plan on one page. While revolutionary when it came out, I’ve found it’s usefulness to be limited in practical situations. There are oddities about it that don’t seem to accurately reflect the needs of a founders or investors. For example, I’m used to reading pages left to right and top to bottom. If you do that with the business model canvas, you’ll start by figuring out what partnerships you need for your new business idea. While partners are important, that’s certainly not where I’d start when it comes to creating a business plan. In the business planning canvas, the customer segment and problem to be solved are first at the top left.

The second major difference is the business model canvas doesn’t have a good way to explain and list the structure of the business or organization itself. In the business planning canvas, the organization is clearly listed along with the capabilities, advantages and partners that make up the organization.

The third thing is the business model canvas does not have a place for explaining the overall market, industry and technology environment. In the business planning canvas, these are clearly given space so you can think through and know what sort of environment your business will live in.

The fourth and last thing is the business model canvas does not provide a detailed understanding of the economics underpinning the business. They list two boxes, one for costs and one for revenues. Well when you actually have to put a business plan together, the costs, revenues and profitability of the business are a little more complicated. In the business planning canvas, costs are clearly listed under the items they support and in the organization column you can model the overhead costs and overall operational profitability of the business idea.

Those are the main reasons I felt the need to create the business planning canvas. Now let’s dive into what it is and how it can help you and your business.

Introducing The Business Planning Canvas

It’s my experience that the core of every business is comprised of four essential things:

1. Customer Segment
2. Channel
3. Solution
4. Organization

The business planning canvas includes each of these items organized in a logical and easy to use format below.

Here is the same canvas but with explanations in each box:

If you would like to download a free, editable, PowerPoint version of the Business Planning Canvas, click below.

Free Canvas Download

Starting from the top left and moving right, we’ll think through an entire business plan using the canvas and a company I came across on TechCrunch called Mirror. I chose this company because it’s an interesting startup with a concept for in-home workout classes delivered via a smart mirror. Other than being intrigued by their business idea, I have no affiliation with them.

The Customer

For Mirror, after looking through their website they use images of people that are very fit and active and who work out at home, or at least want to work out at home but are currently going to a gym and paying for a gym membership in order to be instructed by trainers.

To put this into a concise statement, I’m going to say that their target customer segment is: People who work out at home or people who work out at the gym but would like to work out at home so long as they could be instructed by trainers.

Job to be Done

The job to be done is a way of thinking about a customer segments fundamental needs. The idea is that people buy products and services in order to get a job done.

The job to be done for Mirror’s target customers is to be fit and healthy. Anything that allows them to achieve that outcome is a potential competitor to the Mirror product. This includes running shoes, a treadmill, exercise videos, gym memberships, etc.

Problem

For Mirror, it seems like they are targeting people who want an interactive workout experience but who don’t want to travel to the gym everyday to get it. For some people a gym membership may be inconvenient or they may not like the trainings provided by their local gym. Either way, it’s not hard to envision a customer who wants to be trained well but doesn’t want to have to go to a gym everyday.

Competition

While there is no direct product competitor to the Mirror, meaning that there are no other Mirror-like at-home gym solutions, the primary competition for Mirror is a gym membership and other home gym equipment. Typical gym memberships can range anywhere from $30-80/mo depending on the level of access you purchase. Typical home gym equipment, such as treadmills and Bowflex can range anywhere from $500-5000.

Another alternative for this customer segment is at home workout videos such as BeachBody’s P90X. Access to these types of videos can be achieved for free using YouTube, mobile apps or direct purchases from the content providers for anywhere from $5-200.

Solution Price and Frequency

For Mirror, I found on their website that the Mirror hardware itself costs $1495 and the subscription to workout routines is $39/mo. 

Segment Trends

According to this article on cnn.com the major trends in health and fitness are the growing popularity of high intensity interval training (HIIT), the re-emergence of group trainings over personal training, the impact of wearable technology and body weight training.

Market Size and Statistics

The market size can be thought of as two markets: 1) the market for gym memberships and 2) the market for gym equipment manufacturing.

In a report by IBISWORLD on “Gym Health and Fitness Clubs in the US” it claims the market for gym and fitness club membership revenue in the US is $27.1B.

In a separate report by IBISWORLD on “Gym & Exercise Equipment Manufacturing Industry in the US” it claims that total revenue in 2018 for gym and exercise equipment in the US is $2.0B

Filling Out The Customer Section of the Canvas

Now it’s time to take the information we listed above and plug it into the canvas. Below I took a blank Business Planning Canvas and filled in the left hand side under the Customer.

Note that when you do this for your business idea you may not have all the information for one section at a given time. Because of that, it’s ok to skip around and to come back to prior sections that you’ve filled in and update them with new information.

The Solution

Now that we’ve clearly identified our customer, including the market size, related trends and the price they currently pay to solve the problem we’re tackling, we can now start to document the solution idea.

In this case, since I’m using Mirror as an example, I have all of the data I need already to fill out the canvas. In most cases you may not have all this data and will need to think it through or do more research. That’s fine as the purpose of this canvas is to be a living document of your assumptions and is updated anytime you learn something new.

Mission and Values

Simon Sinek famously said “People don’t buy what you do; they buy why you do it. And what you do simply proves what you believe.”

This insight is an essential component to creating any new business. That’s why before we start diving into the meat of what you are creating we need to explicitly state your mission in creating this business and the core values that drove you to do it.

For example, with Mirror the CEO and Founder Brynn Putnam explained her primary reason for creating Mirror as:

“No matter who you are or where you are, you can work out with world-class trainers.”

Essentially her mission with Mirror is to give everyone access to world-class fitness training from the comfort and convenience of home.

Product or Service

Now that we have our north star and purpose for creating the business, we need to clearly explain what the product or solution is that is going to solve our target customers problem.

In this case, I took the following description from the Mirror website:

The nearly invisible, interactive home gym.

While that explains it conceptually, it’s also helpful to describe it in terms of a specific product and service. Since Mirror is both, we can add the following to further clarify…

An attractive and affordable mirror which doubles as a display for delivering world-class workouts from top trainers.

Cost of Goods & Services

The next section to think through is the variable cost to create the solution. In Mirror’s case, the cost is mostly captured by the cost to manufacture the hardware. There may be other costs related to creating new workout training videos but I left those out for simplicity since they could also be covered under general and administrative costs.

Regarding the cost to manufacture the hardware, since I have no knowledge of what this number is and I doubt it’s documented anywhere publicly, I’m going to assume it’s $1200 and move on. Note that this cost represents the cost to the company to create and have ready in inventory for final shipment to customers a single Mirror. It does not assume that Mirror will only make and sell one, it merely assumes the average cost to make one, regardless of how many in total are made.

Contribution Margin or Profit Per Unit Sold

This section we’ll skip for now since we need to go through the Channel section first to be able to completely fill out this part of the canvas.

Solutions, Providers & Technologies

The purpose of this section is to ensure you think through the competitive landscape by listing the existing solutions, providers and technologies available to the target customer as an alternative to buying your solution.

This is similar to the competition section where we listed the prices of alternatives to buying your solution. In this section we’ll be expanding beyond just talking about price by giving specific examples and technologies available.

In this case I wrote down four things:

1. Equipment such as Bowflex, NordicTrack, PreCor, ProForm treadmills, etc.
2. Gyms such as Golds Gym, 24hr Fitness, Anytime Fitness, Planet Fitness, etc.
3. Workout videos such as BeachBody, YouTube and others
4. Technologies such as Apple Watch, Fitbit, etc.

Business Planning Canvas with Customer and Solution Filled Out

Now that we have the Solution section filled out, it’s time to move on to the Channel.

The Channel

No business can exist without a reliable path to reaching customers. The purpose of the channel section is to describe the means by which the business will consistently reach customers in terms of generating awareness and making the sale as well as delivering the solution and any ongoing support needed to ensure customer satisfaction. We’ll also outline the costs associated with this channel and describe any current channels in use and/or channel trends that we should be aware of.

Awareness and Sale

The first thing to figure out relative to the go-to-market channel is how will you generate awareness and drive sales for your business?

In Mirror’s case I found out about them via TechCrunch and blogs that cover startups. In other words, Mirror is gaining some awareness with consumers via these channels. However, just because that’s how I found out about Mirror doesn’t mean that’s how they will successfully generate awareness to their target customer segment. They might get some early adopters who are both interested in startups and in working out from home but more likely they will need to drive awareness via other more expensive means such as Facebook ads, YouTube ads and Google Adwords.

From a sale standpoint it appears they are relying solely on their website for explaining the product features and benefits and generating sales. I can’t find any evidence of a dedicated sales staff.

Delivery and Support

Now that we have an idea of how to drive awareness and sales with our target customer segment, we need a plan for how to handle delivery and support of the solution.

With Mirror they are offering a “White Glove Delivery” where they will have a professional bring the Mirror to your home and install it in a place of your choosing.

Ads, Sales, Delivery and Support Costs

The next element of the channel to think through are the costs associated with awareness, sale, delivery and support.

The best way to think about this cost is to spread it over an assumed volume of sales and determine how much it will cost on a per unit basis. For example, with Mirror they will be incurring costs each time they generate awareness, make a sale, complete a delivery and install and take a support call. To figure out the costs involved I’ll make a few assumptions:

Generating awareness with PR is free but eventually they will likely need to start running ads. Let’s suppose they set aside an advertising budget of $10k/month. At that amount of ad spend let’s suppose they make 100 sales on the website. This means that on a per unit basis, the advertising cost was $100 ($10,000/100=$100).

From a sales standpoint, since they seem to be relying solely on their website to make and generate sales, and not some sales commission structure with actual sales people being paid, we can assume the costs of hosting and maintaining the site are negligible or can be rolled up under general and administrative overhead costs. That’s just the portion of a sale where the benefits of the product are explained though. We should also account for the costs of running the transaction itself since they take credit card on their website and are likely needing to pay credit card processing fees. In this case let’s assume 3% of the total transaction which includes the cost of the hardware, $1495 plus the cost of the first month’s subscription of $39 or ($1495+39)*0.03 = $1534*0.03 = $46.02 for credit card processing.

For delivery and support we need to make some additional assumptions. Regarding delivery, Mirror is shipped to the home or a nearby distribution center and installed by “White Glove Delivery.” For purposes of this exercise let’s assume it costs $50 to ship and $75 to have it installed professionally for a total of $125 for delivery.

For support costs we can use an approach similar to what we did for advertising since support costs are generally a function of volume. Let’s suppose they sell 100/month and that on average, 10% of buyers call in with an issue on any given month. That means for any given month (in the short-term) around 10 people may call in to ask for support. At those numbers it almost makes more sense to just roll that under general and administrative costs rather than to show it as variable.

To summarize the channel costs we have the following:

• Advertising: $100/ea
• Sale: $46.02/ea (for cc processing fees)
• Delivery: $125/ea
• Support: $0 or rolled up under general and administrative costs
• Total: $271.02/ea

This means that on average, if Mirror sells 100/month then their channel costs on a per unit sold basis are roughly $271.02.

Current Channels & Trends

The last section under channel to think through are the current channels in use by other solution providers and any important trends or changes with those channels that it will be helpful to be aware of.

From a current channels standpoint it’s easy to note that other exercise equipment is sold both via brick and mortar (e.g. Walmart, Costco, etc.) and online via Amazon or direct from the manufacturer.

While it’s hard to know specific channel trends without actually being engaged in the market, it’s probably still fair to say that broadly speaking the major trends are twofold:

• The retail shift away from brick and mortar to online
• The shift away from local wholesalers to manufacturers selling directly to end customers

The reason to document these shifts is to understand where your business idea is relative to broader trends. In the case of Mirror since it appears they are only selling online and direct to end-customers then we can assume their business model is in harmony with the overall market trend.

Canvas with Customer, Solution and Channel Filled Out

The Organization

The last major piece of the business planning canvas to think through is the organization that supports all of the product, channel and customer activity. In this section we’ll outline the major elements to supporting the business as well as define specific estimates around how profitable the overall business can be.

Business name, owners and resources

This section is a straightforward listing of the business name, the owners of the business and the resources (either financial, intellectual or otherwise) the business will have at its disposal.

In Mirror’s case I was able to lookup their profile on Crunchbase and find that they started out in late 2016 under the business name “Curiouser Products Inc” led by CEO and founder Brynn Putnam with $2.6M of venture backed equity funding. Since then they have raised additional financing but I’ll ignore those for now since we’re using the canvas as if we were just starting out to document the overall business idea.

Also listed on Crunchbase were three other team members who handle marketing, product and engineering. For completeness, I’ll list those individuals on the canvas as well.

Team capabilities, advantages and partners

Once you’ve clearly outlined the business name, ownership structure and resources (both financial and human) you then need to outline the capabilities, advantages and partners of the business. This section is designed to help you think through why and how your business will stand out against the competition when it comes to creating the solution. These include expertise, experience, relationships and partnerships with other people or organizations needed to effectively execute the business plan.

In Mirror’s case I think it’s notable that the founder Brynn Putnam currently runs a successful gym in NYC suggesting that she has proven an ability already to run effective gym memberships and workout programs. This capability reduces the risk of failure to the business plan.

Other notable advantages that could be listed include the business location in NYC which brings along with it access to tech talent and access to her current gyms trainers.

From a partnership standpoint the most important is likely their manufacturing supplier for the Mirror. I couldn’t find any specific information on who supplies the mirror so I left that part out.

Fixed Cost: General and Administrative

In this section we’ll put a dollar amount in terms of ongoing costs required to sustain the resources in the business. To do this we just need to create a simple list of ongoing fixed costs that the business will incur over a given year. These types of fixed costs generally include payroll, rent, utilities, office supplies, etc.

In the case of Mirror, I made several assumptions regarding their first year in business and came up with the following. Note that Mirror’s location in NYC is a major driver for the high salaries, rent and utility costs.

For payroll and other general expenses I made the following assumptions:

• 5 Full-time employees (the four listed in the name, owners and resources section as well as one more off-site contractor)
  • If each employee made $150k/year in salary while their travel and expenses adds another $50k/year then expect to pay $200k*5 = $1M/year in payroll and travel and expenses
  • Note for middle managers or executives a 1.33X multiplier on salary is usually a good rule of thumb number for estimating travel and expenses. Don’t make the rookie mistake of just using the salary cost as the total cost for supporting that employee!
• Rent: Assuming a roughly 3,000 square foot office and a rental rate of $83/sqft/year (within the normal rent range for NYC – see here for more info) then the total for rent in a year would come to $250k/year
• Utilities: With internet, heating, cooling, water, etc. I just estimated it to cost around $20k/year
• Office supplies: computers, desks, tv’s, monitors, phones, etc. I put at $30k/year

There could be other costs that I’m leaving out but this is a pretty good list for now. When we add all of these up we get $1.3M/year in general and administrative fixed costs.

Contribution Margin or Profit Per Unit Sold

With the price data from the Customer section along with the variable costs listed under Channel and Solution, we can now calculate the contribution margin per unit sold. Contribution margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by a business represents the total earnings available to pay for fixed expenses and to generate a profit. The equation is as follows:

Contribution Margin = Solution Price – Channel Variable Cost – Variable COGS

In Mirror’s case since they are selling both a hardware component and a subscription, we’ll calculate the contribution margin for each separately.

For hardware we take the price from the “Solution Price” and subtract the Channel Variable Cost and the Variable COGS as follows:

Hardware: $1495 – $271 – $1200 = $24/unit

Now I’ll do the same thing for the subscription only in this case I’ll use a yearly number of $39*12=$468 to keep the time frame the same across the board.

Subscription: $468 – $0 – $0 = $468/unit

You’ll notice that I assigned all channel variable costs to the hardware and none to the subscription. This is a debatable choice since there will likely be costs associated with selling people subscriptions after the first year expires. That said it doesn’t impact the overall analysis very much and for simplicity sake I left them assigned to the hardware.

Now for a total contribution margin for both hardware and subscription we get $468 + $24 = $492/unit.

This essentially means that for every new Mirror bundle of hardware and subscription sold there is $492 available to help cover the fixed costs of the business. They call it contribution margin because it’s the margin available that contributes to paying for the fixed costs.

Operating Profit & Breakeven Volume

Next we’ll use the numbers above to determine how much volume in sales the business needs to achieve in order to turn a profit. This can be a very handy number as it helps keep the business focused to help it stand on its own.

The formula for calculating this is very simple. All you do is take the total fixed costs (general and administrative) and divide them by the total contribution margin per sale.

Breakeven Volume = Total Fixed Cost / Total Contribution Margin

In Mirror’s case, using the assumptions above we get the following:

$1,300,000 / $492 = 2643 units to breakeven

With this as our starting point, we can now manipulate the equation to estimate total profit for a given level of sales volume using the following:

Operating Profit = $492 x Volume – $1,300,000

For example, now that we know Mirror must sell at least 2643 units in order to breakeven, we know if they sold fewer than that they will lose money (and will need to find some way to cover those losses – either through more money from investors or using debt) and if they sell more than that they will make money. What if they end up selling 3,000? Let’s estimate how much profit they’ll make:

$492 x 3000 – $1,300,000 = $176,000

So at a sales volume of 3000, Mirror could estimate achieving a $176k profit – assuming all these numbers are accurate.

Which brings me to an important point…just because you can estimate these numbers now does not mean they will be accurate later. Inevitably you will want to always revisit and revise these assumptions as you learn more and gain a track record. Mirror has been on the market now for a while and it’s almost a certainty that they grossly over or underestimated something (and most likely several things) from their original business plan. So think of these as your first stake in the ground for what you think the business model is and update it from there.

Where this framework comes especially in handy is in talking to investors. When you are able to show a clear path to profitability – such as Mirror achieving 3,000 in sales – you will be taken seriously so long as your other assumptions seem reasonable. Investors need to know one thing: when will they get their money back. And in Mirror’s case, if they had started with the Business Planning Canvas, they might have reasonably said “When we sell 3,000 or more units!”

Industry dynamics

The industry dynamics section is intended to document anything noteworthy that is changing in the industry. This can include things like consolidation, vertical or horizontal integration, etc.

In the case of Mirror in the fitness industry, according to this article there is a trend towards more specialty fitness centers gaining traction against the big traditional gyms such as Gold’s Gym. This is an interesting fact especially for Mirror since, as mentioned earlier, their founder Brynn Putnam happens to own and operates a specialty fitness center as well.

Another trend mentioned in the article is the proliferation of fitness content online that is low-cost and easy to access via computer, smartphone or smart TV.

These trends are important to consider when creating a business plan. The key to look for is whether or not your business plan is in line with current trends or not. In Mirror’s case the industry trends appear to be nice tailwinds for them since the founder has experience leveraging the trend already with her specialty fitness center and by distributing fitness content to Mirror via the internet.

Regulatory dynamics

The last section of the Business Planning Canvas to think through is the regulatory environment your business will live in. This is where you would document noteworthy regulations that do or may affect your businesses chances of success.

For example, with Mirror and the fitness industry in general, after Googling “Fitness industry regulations” I was able to find a number of articles on important legislation or proposals that impact the industry. For example, this article from ClubIndustry.com states that several states have attempted or are attempting to pass stricter licensing and registration requirements for personal trainers. Evidently the low barriers to entry have led to some court cases where trainers are sued for club member injuries. It’s unclear how this trend would impact Mirror but it could be argued that it is good for Mirror as they could ensure only high-quality trainers are allowed onto the platform and it could help reduce competition from other specialty trainers.

Completed Example Canvas for Mirror

If you would like to download a free, editable, PowerPoint version of the Business Planning Canvas, click below.

Free Canvas Download

Conclusion

The Business Planning Canvas represents the simplest and most effective business planning tool I’ve ever used. As you think through your business or business idea, using the business planning canvas as a start and then filling in more details and updating it as you go can dramatically help in refining your idea, pitching to investors and focusing your team. 

The post The Business Planning Canvas: A Simple, Fast and Effective One-Page Business Planning Tool appeared first on Ignition Framework.

In my original post, I listed the following:

1. Breakthrough
2. Sustaining
3. New Market
4. Disruptive

In this post I want to clarify what I mean by each and change the name of the first from breakthrough to Integrative. I’ll explain why below.

But first, we need to establish some agreement on the definition of innovation itself.

The Definition of Innovation

There are a lot of definitions, so many that it’s been difficult to have a meaningful conversation around the word itself. That said, I subscribe to this definition that I heard first-hand in 2011 from Kenneth P. Morse of MIT:

“Innovation is invention plus commercialization” – Kenneth Morse, MIT

He also adds the following insight:

“It usually takes an entrepreneur, working with the inventor, to bring novel technology from the cool comfort of the laboratory to the cruel crucible of the marketplace.” – Kenneth Morse

If you haven’t seen his lecture on it, I highly recommend watching it here.

While Kenneth’s remarks came from an entrepreneurship angle, the definition still holds if you are in a big company with new technology that you have been tasked to commercialize.

With Kenneth’s definition in mind, another way to frame what he said is to think of innovation as happening at the intersection of a market, new technology and a sustainable business model. The image below illustrates this idea.

This means that for innovation to happen you need three things:

1. A market with a need for a solution
2. A technology that could enable the solution to be made
3. A business model that can create, support, deliver and sustain delivery of the solution to the market

In other words…Invention + Commercialization.

What Is Different About This List?

Several years ago as a new product manager, I needed a systematic approach to innovation within a large company. I was well versed in Clayton Christensen’s theory of disruptive innovation, value chain evolution and jobs to be done. But despite that training, I still felt like major areas were not clear or without sufficient explanation. The theory of disruptive innovation was describing very well one piece of my experience but important parts were still missing with the theory. Aside for most of Christensen’s work, I felt like most innovation theories were confusing and out-of-touch with reality.

For example, I read a lot of articles on “types of innovation” and found a wild assortment of ideas on this exact topic. If you Google “Types of Innovation” you’ll get a lot of responses – all of which seem to claim to be the authoritative list of types.

Larry Keeley wrote a book titled “Ten Types of Innovation” and listed things like “profit model,” “channel,” “process,” etc. All of which are legitimate points if your definition of innovation is broader than what Morse described.

The OECD outlined four types of innovation as “Product,” “Process,” “Marketing,” and “Organizational.” Which is another list that is valid with a broader definition of innovation than what Morse described.

Greg Satell created his own version of the four types of innovation and his list consists of “Basic Research,” “Sustaining,” “Disruptive,” and “Breakthrough.” This list is very similar to the list I created in October of 2013. I was not aware of Greg’s work when I made mine (his HBR article was written in 2017) but the only meaningful difference was his inclusion of “Basic Research.” I don’t include basic research because it falls outside Morse’s definition of innovation as well.

Even Clayton Christensen himself created what he called three categories of innovation including “Performance Improving,” “Efficiency,” and “Market Creating” innovations in an article titled The Capitalists Dilemma. The unusual part about this list is while “Performance Improving” is basically synonymous with “Sustaining,” the other two, “Efficiency” and “Market Creating” are two sides of the same type – disruptive.

I could show lots of other examples of “types of innovation” that people have come up with but I think you get the idea.

This leads me to the broader point, in this article, the four types of innovation that I describe will each fall into the overall definition of invention plus commercialization and they are framed in terms of a specific type of value proposition for each.

Which brings me to my next point…

Innovations Can Be Described Using Economics And Basic Value Propositions

In this list of innovation types, I focus on fundamental economics and value propositions. Markets are still best described by economics on a macro level, and the success of certain products and services are best described by economic value propositions on a micro level.

These value propositions can be simplified down to this equation:This equation says that whenever someone has a need, they evaluate ways of filling that need by taking the benefits of a solution, less the cost and determine which option they believe will bring them the most net value.

If the value proposition is highly relevant to the consumer who hears the message and they agree with the message, they will likely choose to purchase that solution. Over the long run, the product or service that offers the most net value to consumers will most likely win. Each piece of the equation can be described as follows:

Benefits – any tangible, emotional or perceived gain arising from the use of a product or service.

Costs – any tangible, emotional or perceived losses incurred from the use of a product or service.

Net value – the positive or negative net result of a consumer’s evaluation of the utility of a product or service in their life.

For new innovations and value propositions to succeed they must be viewed in comparison to other value props and be seen as the value proposition with the most net value to the consumer.

Below is an example of what most consumers face everyday when considering meeting a specific need.

In order to be innovative, you must achieve a dramatic and positive change to the net value, or bottom line, of a value proposition. To effect a dramatic positive change to net value (to the consumer), you must either dramatically increase benefits of the value proposition or dramatically decrease costs. Some innovation opportunities may even allow you to both dramatically increase benefits, and dramatically reduce costs at the same time – typically this only happens when a new technology comes along.

With this as the background, let’s dive into my updated four types of innovation.

Four Types of Innovation

In general, I categorize innovation into one of the following:

1. Sustaining (iPhone 7 to iPhone 8, Gen 2 to Gen 3, etc.)
2. Disruptive (Netflix, Chromebooks, Mini Steel Mills, etc.)
3. New Market (Arm and Hammer Baking Soda)
4. Integrative (the first Apple iPhone, Tesla Model S, Nest Thermostat, etc.)

Innovation Type 1: Sustaining Innovations – Keep The Lights On By Keeping Existing Customers Happy

Sustaining innovation is arguably the most common type of innovation in capitalist, market economies. A sustaining innovation is defined as an incremental improvement to an existing solution that further satisfies existing customers.

The images below illustrate the path of a sustaining innovation relative to the distribution of needs in a market. Clayton Christensen developed this model and explained it very well. In general, people with a need for a job to be done form a market. Among those people in a market are segments of users with needs ranging from sophisticated to basic. The people with sophisticated needs for that job to be done are willing to pay a higher price for a high performance solution. 

For example, there is a global market for smartphones. While smartphones do many jobs well, the primary job to be done could be described as “Communicate with others and help me speed up daily tasks while on the go.” For some users, doing this job well means just having the ability to run a limited set of functions such as phone calls, text messages, email, music and web browsing. These are basic needs that would satisfy the lower-end segment needs. For other users, doing this job well means having a gorgeous screen to look at, powerful speakers to play music out loud with and advanced security features to make it easy and convenient to authenticate you as the rightful user. These are sophisticated needs that satisfy the high end of the market.

Over time, the needs of people in a market will inflate gradually and what people used to think was novel and unique will eventually become expected across the board. With smartphones, this has happened already with screen size. In 2007, when Apple launched the iPhone (arguably the world’s first true smartphone), the screen was 3.5″. Other smartphones that came out were around that size as well. Several years later Samsung introduced the Galaxy Note with a 5.3″ screen size. Over time the entire market began to prefer screen sizes of at least 4.5″-5″ or larger.

To keep pace with these most demanding customers, companies create sustaining innovations to meet their needs. The goal of an existing provider in a market is to sustain their current business model and meet the needs of the most demanding customers who are willing to pay a premium for the added performance.

In the iPhone’s case, lately Apple has been very aggressive about pushing the market into higher and higher performance (and prices). The risk they run is in alienating the average or low-end user base with products that are overkill and too expensive for their desires.

That said, Apple is usually happy to cede the lower third/half of a market to other providers. Steve Jobs once famously said

“We don’t know how to build a sub-$500 computer that is not a piece of junk.” – Steve Jobs

Despite their focus on premium products, for the last several years Apple has worked hard to create numerous sustaining innovations in order to establish a broad lineup of smartphones that can meet the needs of everyone in that upper half of users. They do this primarily through creating new models with better features and price reductions on their prior year models. Note that at Apple’s September 2018 iPhone presentation, they showed a lineup that ranged from $449 for the iPhone 7 (a $100 price reduction from 2017) to a new phone, the XS Max, at a new high price of $1099. This distribution is intended to give Apple complete coverage of the upper half of the market – allowing other providers such as Motorola which sells smartphones ranging from $125 for the Moto E to $400 for the Moto Z to meet the needs of the lower half of the market.

To understand a market, and consequently the implications of various innovation strategies, it helps to map it out in terms of solutions offered for a job to be done and the price of those solutions. I call this a market map. In the image below I’ve created a market map for the smartphone market but limited the products shown to just Apple, Motorola, BLU and Lamborghini to make it simple. While Apple and Motorola’s phones illustrate the breadth of the market, every market always has low outliers and high outliers and it can be helpful to list those as points of reference for the extreme upper and lower bounds of the market. In this case, BLU with it’s $50 smartphone is considered a low outlier with likely relatively low volume and Lamborghini with it’s $6000 smartphone labeled a high outlier with almost certainly very low volume.

Critics have said that by creating all these different phone options (e.g. sustaining innovations), Apple is betraying the values of simplicity and focus that Steve Jobs so adamantly stood for. While there may be some truth to that, Apple is also clearly doing extensive sustaining innovation with the iPhone in order to not just grow but also to maintain their market leadership position.

Remember, for sustaining innovations the objective is to sustain the existing business model and meet the needs of the most demanding customers who are willing to pay a premium. By those terms, Apple is doing a very good job with their sustaining innovation strategy. The only risk to it that they must guard against is overshooting customer needs and going too premium too fast.

That’s when a prime opportunity for disruptive innovation opens up.

Innovation Type 2: Disruptive Innovations – A Low Cost Alternative Enabled By New Technology

During the 1980’s and 1990’s, large corporations that failed because someone else out-innovated them were usually blamed as having incompetent managers. In his seminal work, The Innovator’s Dilemma, Clayton Christensen defied that common storyline by positing that these big company managers were making very rational and shrewd decisions (such as investments in sustaining innovation) given their market position and the requests of customers.

That said, the risk they run is in going too premium, too fast and thus creating an opportunity in the market for someone else to provide a more focused, lower cost solution that appeals to the basic need segments in the market.

This window of opportunity presents itself when the following conditions are met:

1. The market leader keeps releasing higher and higher priced products and services that only appeal to the premium segment of the market
2. Since the latest solutions only appeal the high end of the market, the lower end need customers are cajoled into paying more than they otherwise would because they are effectively forced into buying more than they need
3. A new technology comes along that enables a dramatically (usually ~10X) lower cost and more focused solution that, while still not appealing to the higher end of the market, appeals to the lower end because it’s price is much lower and it does only what they need it to do

I like to refer to these new technologies as technology runways which are platforms on which new solutions are created and improved over time. The image below provides some examples of technology runways.

While there are countless good examples of disruptive innovation (so many that Clayton Christensen’s theory is basically accepted as a law of technology markets), I’ll illustrate my favorite example: Chromebooks.

By 2010 Microsoft and the classic PC architecture was pretty much the only game in town if you wanted to buy a laptop. Netbooks had been around a while with limited success and iPads had just barely launched but for most mainstream laptop PC customers you only had one choice: a Microsoft Windows powered PC laptop that ranged in price from $800-1500. Or if you really wanted to splurge, you could buy an Apple Macbook Pro but that was even more expensive.

For many laptop buyers, especially among the older segments, their only use case was limited to browsing the internet and checking email. But Microsoft PC’s offered so much more! They could run all sorts of apps, everything from Adobe design applications to gaming and everything in between. The image below illustrates the opening in the market for a disruptive innovation to come along.

Around the same time, roughly 2010, cloud computing, the ability to leverage server capabilities to perform heavy computing tasks over a high-speed internet connection, was just starting to gain it’s stride. With that technology, Google thought of an opportunity: create a free operating system focused solely around one app – their popular Chrome browser. The major advantage to this would be since the OS was essentially one app, the computer hardware needed to run it was inexpensive. They partnered with OEM’s who were able to create Chromebooks for roughly 5-10X less expensive than a regular PC laptop – landing at around $150-400 in price.

In the beginning Chromebooks didn’t sell very well. Many people, including then Microsoft CEO Steve Ballmer, initially scoffed at it. For rational reasons too – it was underpowered, unproven in the market and ultimately seemed too low-end to appeal to the PC laptop market.

Yet, as noted in the graphic above, Chromebooks gobbled up market share at an incredible pace. Starting out at less than 1% in 2012 and just 5 years later achieving market dominance with 58%.

The error most big company executives make when evaluating threats such as the Chromebook is the exact error Steve Ballmer made – thinking it’s not going to appeal to people because it can’t do half of what their flagship products can do. That’s just the point of a disruptive innovation – leverage a new technology runway (e.g. cloud computing), do one thing very well (web browsing) and ignore all the other functionality of the premium competitors.

Google’s entry into the PC operating system market has now forced Microsoft to focus on the premium segment of the market where their current Surface line is aimed.

Innovation Type 3: New Market Innovations – Modifying Existing Solutions For New Markets

Another important type of innovation that companies have deployed is one in which they take an existing solution and modify and sell it for use in a different market. The goal of a new market innovation is to target non consumers and expand their existing market. 

One could argue that Google did this with Chrome OS. Not only was it a disruptive innovation in leveraging new technology and creating a more focused solution that was much lower cost, they also modified the Chrome browser to be a light OS and targeted non-consumers, in this case the OEM market, by offering it for free.

Another example I like to use is Arm and Hammer baking soda. Baking soda was traditionally used for baking but when its other uses became compelling, Arm and Hammer modified their packaging to inform consumers that it also can be used for cleaning, laundry and deodorizing.

New market innovations are relatively straightforward to understand and apply but there are two key considerations if you’re going to attempt a new market innovation. The first is understand the new market segments and the second is clearly understand your competition in that new market.

For example, when Arm and Hammer modified its packaging to showcase their baking soda as great for cleaning, laundry and deodorizing, the customer who was looking for baking soda in the store is likely going to think the following…

“I already use Comet for cleaning, is baking soda really a better value than me using Comet?”

Or “I use Tide as a laundry detergent, is baking soda really a better value than Tide?”

Or “I use Febreeze for deodorizing, is baking soda more effective than Febreeze?”

These scenarios pose a handful of challenges for Arm and Hammer in their attempt to penetrate those markets. The first is, how will they reach people beyond just the ones who were seeking out baking soda in the first place? This is a product positioning challenge and may require them to create a dedicated product branded for each use case so they can reach the people who are seeking out cleaning solutions – not just reaching the people who want baking soda and hoping they may also have a need for cleaning solutions.

The second challenge is, even if you do solve the first problem of reaching those who are focused on each use case, how will you position the product to compete well against the incumbent leaders of the new market? In this case, how will you position a baking soda based cleaner against powerhouses such as Comet and Lysol? Or against Tide and Gain in laundry?

The answer is that for new market innovations to be successful, like the Chrome OS example, it helps to have a disruptive value proposition that is ~5-10X better than the incumbent leader. For example, if Arm and Hammer could clearly demonstrate their baking soda was just as good as Tide but 5-10X lower price, that new market innovation has a strong chance of success.

Then The iPhone Changes Everything

In 2007 the world was very different. Most computers ran windows, most high-end phones were called PDA’s (Personal Digital Assistant) and the theory of disruptive innovation alone was a good theory that seemed to describe the vast majority of successful innovations that were discussed at the time.

Then the very first iPhone came along.

It’s well-documented that Clayton Christensen blew it with his theory of disruptive innovation in predicting the market failure of the iPhone. Some commentators even thought this invalidated the theory in general.

Like Christensen, Steve Ballmer of Microsoft also scoffed at the iPhone’s chances for success due to it’s high price and lack of a physical keyboard.

After the iPhone experienced wild success, Christensen modified the application of his theory to describe the iPhone as disruptive to laptop computers in general. Which is true, but less effective as a clear predictive model for innovation success if the theory must be applied in non-intuitive ways like that – otherwise Christensen would have made the right prediction from the beginning!

Despite the imperfections of the theory and the naysayers, the theory of disruptive innovation has been validated countless times in countless industries. But why then was the iPhone different? How did the iPhone succeed when it clearly defies the logic of arguably the most consequential management theory of the last 50 years?

The short answer is, the iPhone was an anomaly.

In Christensen’s book “Seeing What’s Next” he described a model for creating theories in general that is outlined below. Essentially the process consists of observations which are then categorized which can then be generalized into a predictive theory of cause and effect. For every new observation (such as a new product that comes to market), the theory predicts an eventual outcome and that product either ends up confirming the theory or is an anomaly. In the case of Chromebooks, the theory is confirmed. In the case of iPhone, the theory was not confirmed and the iPhone is considered an anomaly.

When Jobs announced the iPhone in January 2007, he started the meeting by saying that he was going to announce 3 exciting new products: an iPod, a phone and an internet communicator.

To position the iPhone against the competition, Jobs used this slide:

This introduction is important because it clearly conveys the value of the iPhone in terms of two things:

1. The combined functionality of an iPod, phone and internet communicator
2. Ease of use

By combining the power of a small computer with a user interface that was easy enough for a child to use, Apple was able to create a game-changing device.

So where did the theory of disruptive innovation break down with regards to the iPhone?

It has everything to do with the fact that the iPhone was not just “a better phone” as Christensen assumed. Rather, as discussed earlier, it is three devices integrated into one:

1. An iPod
2. A phone
3. An internet communicator

Having three devices integrated into one is a vastly different strategy than classical “disruptive innovation” but it can still succeed and the reason is because multiple jobs to be done have now been combined into one solution and the cumulative value (or price) of getting those jobs done is combined as well. Steve Jobs knew this perfectly well and he explained it while walking people through how Apple was going to price the first iPhone. Below is a screenshot of this part of the announcement…

Jobs used the price of an iPod and the price of a Blackberry on a 2-year contract to determine the total price of the iPhone at $499 on a 2-year contract

Below is another screenshot from that part of the announcement…

Jobs used this image to show that iPhone provided so many more benefits than just combining an iPod and a Blackberry into one. Ultimately he built a compelling value proposition.

His thought process was as follows:

A 4GB iPod = $199 price

A Blackberry = $299 price on a 2-year contract

The 4GB iPhone = $499 price on a 2-year contract and consumers get to have a host of other benefits such as video, widescreen, multi-touch, Wi-Fi, Safari browser, HTML email, Cover Flow, visual voice mail, and more all for no added premium.

As shown in an earlier graph, Apple went on to sell millions of iPhones and now the product represents the bulk of Apple’s revenues. The bottom line takeaway is that if you want to create a breakthrough innovation, one way to do it is to combine the functionality of multiple products into one in a way that is simple and easy to use. This is exactly what the iPhone did and because of it, Apple was able to charge dearly for the device and make incredible margins. Keep in mind that the $499 price is a subsidized 2-year contract price from AT&T!

All these conditions and results combine to prompt a new theory of innovation…

Innovation Type 4: Integrative Innovation – Multiple Jobs to Be Done In One Elegant Solution

The main thesis of “Integrative Innovation” is the idea that a market’s ability to adopt more performance and absorb higher prices will increase according to the number and value of jobs to be done that have been integrated into one device in a way that is simple and easy to use. Christensen’s theory of disruptive innovation assumes that in order to be disruptive, products must focus on one job to be done, start at the low-end, improve performance over time and eventually become good enough to capture a large portion of the market. Integrative innovation is the opposite of that. Instead of starting out as not good enough and moving up in performance and cost, Integrative Innovation is about combining multiple jobs into one and creating a very high-performance/high-cost solution to begin with and quickly moving down in cost to capture large portions of the market.

As the above graphic illustrates, the iPhone fits this theory well. In September 2007, just a few months after launch, Apple reduced the price of the iPhone substantially and within a few years even developed a lower-cost model called the 5C.

As a general model, the theory of integrative innovation is represented below.

This also explains, to a large extent, the progression of iPods. The iPod started out with high capacity and a large screen but as time went on Apple introduced smaller, less-expensive models and eventually the iPod Nano became the most popular iPod sold.

The good part about Integrative Innovation and Disruptive Innovation is that they can co-exist by simply representing two opposing types of game-changing innovations. I am still a firm believer in disruptive innovation theory but it clearly falls short in explaining the iPhone – one of the most important innovations of our time.

Another good example of integrative innovation is Tesla. In 2006, a couple years before the first production Tesla Roadster launched, Elon Musk wrote a blog post called “The Secret Tesla Motors Master Plan“. In it he described his plan for Tesla as follows:

“The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.” – Elon Musk, 2006 Tesla Blog Post

Like Musk says in the post, the Roadster is not a mass market vehicle but it gets his foot in the door to start creating what he ultimately wants to build – a high-performance electric car for the mass market. As such, the Roadster almost falls into the high outlier category while the true first integrative innovation that Tesla built was the Model S. The image below is how I interpret his blog post and Tesla’s progression:

Conclusion

In summary, I’ve prepared the following cheat sheet as a way to visualize how the four types of innovation relate to each other in terms of technology and commercialization. I’ve also made this cheat sheet available as a free downloadable pdf you can get by clicking here. Get Your Free Cheat Sheet!

For more information on how to apply the four types of innovation to your business, be sure to sign up for my free three-part video series on innovation available here.  

The post Four Types of Innovation – Updated appeared first on Ignition Framework.

Why The Switch?

In short, I needed a better and faster way to explain what this site is all about. Ignition Framework is a simple, two word name that suggests one thing and one thing only…

“Oh, it’s a framework to help me ignite something.”

Exactly!

“But what are we going to ignite? And why do I need a framework for it?”

This site’s purpose is to help ignite business growth, whether you’re a startup or an established business. Ignition Framework is designed to specifically help with this process.

Flash In The Pan

Too often startups or internal innovation programs end up resembling a flash in the pan rather than an effective and focused beam of energy. Startup founders get excited about their idea, tell their friends and even raise venture capital only to ultimately get crushed by one of the many risks inherent in creating a new business.

The same goes for internal innovation programs at established companies. A team with passion and energy is formed, in some cases even a swanky new building is built to support the new innovation team, only for the concept to languish in layers of bureaucracy and analysis paralysis. Eventually company managers, concerned over the lack of a clear ROI to the initiative, redirect resources elsewhere and shelve the project.

This is what I call a flash in the pan business initiative – it starts out with a bang, sparks of excitement and energy fly, only for the team to ultimately be disbanded.

While the flash in the pan problem can be a result of poor market conditions or a lack of proper resources, too often the reason for failure is a lack of a structured and disciplined framework designed to drive the team to concrete business results as quickly as possible.

Ingredients Required for Sustained Business Growth

Like a fire, every startup (whether standalone or part of a bigger company) needs three things in order to survive and thrive:

• Conditions
• Catalyst
• Container

Conditions are like the perfect blend of air and fuel when starting a fire. For new businesses, conditions that matter are the market environment, technology runway and the business model(s) to be deployed. When the market is ripe, the technology is ready and you have a business model to take your idea to the market, then you have ideal conditions for a new business.

But just like with starting a fire, ideal conditions won’t ignite until you have a spark or catalyst.

Catalysts are like the spark that ignites the air/fuel mixture. For new businesses, the catalyst is the team and the capital needed in order to take advantage of the market conditions. When the right team is paired with the right amount of capital (not too little or too much) surrounded by the right market conditions, a new business can ignite.

Containers are like a well-designed fire ring or the chamber of a cannon. Having the right market conditions, team and capital is only as useful as the focus and direction of the team. Even in the best conditions, teams can lose focus on what they need to accomplish and ultimately fail. With a proper container, or framework, team effort is focused and directed in the most useful and effective ways to achieve immediate business results.

The Focused Beam of Energy

With the Ignition Framework, team energy is focused and directed in a disciplined manner to make the most of every ounce of passion and capital invested into the initiative. It provides the focus and direction for the team similar to how the beam of energy in the video below is focused. 

This is a video of a transparent potato gun from Smarter Every Day’s YouTube channel.

Notice the difference in this video between the flash in the pan. The flash in the pan had a lot of undirected and ultimately wasted energy whereas this video shows very clearly a spark (catalyst) inside a chamber with the right air/fuel mixture for ignition (conditions) and the energy is focused toward and directed (chamber) straight toward the potato. Ultimately the potato is shot and the goal is achieved.

Like the chamber and barrel in the video, the proper framework can organize, direct and focus your team’s effort to take full advantage of your passion, the market environment and give the startup or new venture a strong chance at success.

So what is the Ignition Framework?

Ignition Framework Overview

The Ignition Framework is a template for creating new business growth and tracking it’s progress. Below is an overview of the framework and the way in which business models can be measured against hitting the four key milestones of business model progression.

The framework is designed to walk you through the process of creating a new business from a vague idea to a business that has achieved success and scale.

Like a fire ring or chamber of a cannon, the framework provides clear guidance and organization for any new business initiative. The four key stages of business success are outlined as follows:

Problem / Opportunity Fit

Every Innovation Journey starts with an idea for solving a problem. This is where you clarify what your idea is, what problem you are trying to solve and for whom you are solving it.

To accomplish this stage, typically a successful founder will do the following:

1. Document the business idea
2. Discover the customer and the problem the business is designed to solve using problem research/experiments
3. Assess whether the market, technology and industry conditions are favorable for new business success

This stage is usually done by an individual with passion around an idea at the expense of time and a little money during the research phase.

Problem / Solution Fit

This is the discovery phase where you come up with rapid prototypes in an effort to quickly find, test and validate your solution with your target customer.

To accomplish this stage, typically a small core team of founders or first few employees will do the following:

1. Discover a solution to the problem they’re trying to solve using solution research/experiments
2. Determine whether creating the solution is feasible or not
3. Decide if the solution is something they want to build, and if so, move forward with creating a full team to build it

This stage usually requires more people than just the original founder. Typically it’s a combination of a business person, a technical/engineering person and someone who can design things to show customers as part of the solution experiments.

Product / Market Fit

This is the build stage where you take your validated solution to market with a brand, messaging and channel that generates consistent and sustainable sales volume.

This is the most famous stage because achieving it essentially means you’ve overcome all the major hurdles associated with creating and selling a new solution in a market. Another reason it’s talked about the most is because achieving this stage means your idea has graduated from essentially a research project to a viable business that with additional resources could achieve more success. Once this stage is achieved, investment dollars are easy to come by!

To accomplish this stage, a cross-functional team including marketing, sales and customer support will do the following:

1. Sell a minimum saleable solution to tens (if B2B), hundreds or thousands of customers
2. Create messaging that clearly explains what the solution is and its benefits
3. Validate sales channel and go to market plan via consistent customer acquisition results

An important distinction from this phase versus the prior phase is the need for a minimum saleable solution. In the prior phase you validated the solution via MVP’s (anything you can show to customers that creates validated learning) and in this phase you used those learnings to create a solution you can sell.

Business Model Fit

This is the scale stage where you rapidly extend your solution to more customers and define, model and optimize  your business processes to handle the growth.

This is a stage often talked about simply as scaling. Only a few businesses achieve this status but for those that do, the scaling process can be extremely challenging. High customer demand coupled with the need to hire many people quickly are signs that you are going through the scaling process.

Typically companies that scale successfully have done the following:

1. Defined their long-term strategy and roadmap (this is like aiming the rocket precisely before liftoff – if you don’t aim a rocket before lift off, bad things can happen!)
2. Create scalable workflows and business processes (turn your tribal knowledge into something repeatable and trainable to anyone)
3. Re-organize the team and scale the business (any time you need to scale a business, you need to re-organize the team and go from a team of people wearing multiple hats to a team of people dedicated to optimizing a specific business function)

Typically scaling requires an enormous amount of resources. This is where investors also pile in because they can see the growth and want to be a part of it. While investment returns, on a risk adjusted basis, are typically the highest when investing in companies that have just achieved product / market fit, investment returns for helping businesses scale can also be very lucrative.

Where To Learn More

The Ignition Framework is a part of the overall Innovator’s Masterclass that I offer for free here. In that training I offer more than 100 free slides on how the process works and more details on specific examples. Be sure to check it out!

Conclusion

Over the next several months I will be analyzing startups and internal incubation initiatives using this framework and will post my assessments. As you use this framework you’ll find that it helps organize and focus your discovery efforts in ways that maximize your chances of achieving real business results!

The post Introducing Ignition Framework: A Step-by-Step Approach To Creating and Growing New Businesses appeared first on Ignition Framework.

But first, some background…

In 2008, Alex Osterwalder introduced the Business Model Canvas to the world. Hailed as a way to quickly create a business plan on one page, Osterwalder and the Canvas became massively popular in the business world. The canvas was proving to be especially useful to the startup world as it was an easy and straightforward alternative to the norm of creating a 100+ page business plan.

Due to its simplicity and ease of use, it also became the go-to tool for the Lean Startup movement. It was used as a way to document a startups initial business model hypothesis and from there you could systematically validate and invalidate each part of the hypothesis.

Several years later, in 2014, Osterwalder released the Value Proposition canvas which is a companion to the classic Business Model Canvas. This canvas created a more detailed view into the customer segment you were targeting and the specifics of the solution you were proposing.

In 2015 I needed to create a business plan. I was asked to create a business model from scratch for an IOT product in the home automation market. Having been well-studied on all the ways I could create a business plan I started with the simplest thing I could think of – filling out a Business Model Canvas.

As I started filling out the canvas I learned about the Value Proposition canvas and filled it out as well. Now I had two canvases – one for the business model and another for the value proposition that explained my idea.

After I got done with filling out these two canvases I started using them to talk with others about the idea. That’s when something interesting happened…

I started getting questions about my idea that the canvases couldn’t answer. Questions like these:

1. What is your overall mission or vision for this business model?
2. What will be your unfair advantage?
3. What metrics are most important to validating this business model?

And more questions that I hadn’t thought through yet…

The other thing I discovered is I didn’t like having more than one page (now that I had both the business model canvas and the value proposition canvas) to carry around to talk about my idea. I really wanted everything on one page because it was far less confusing to keep all the ideas straight.

I had thought about using the Lean Canvas by Ash Maurya which had some helpful additions such as the problem statement, the unfair advantage and metrics but I still didn’t like that it didn’t have the value proposition elements all on one page.

The other issue I had with it is the confusing way in which you would go about validating each step. The above numbers represent the order you were supposed to go through in validating the business model. I don’t know about you, but I felt like it was looking at a bowl of number soup rather than a clear and easy to understand process for business model validation.

Innovator’s Canvas 1.0 Is Born

Out of these concerns I decided to create my own version of the business model canvas and hopefully address the concerns I had with the others. I wrote a blog post about it in September 2015 titled The Innovator’s Canvas: A Step By Step Guide To Business Model Innovation.

To date that blog post has been one of the most popular on this website. As I started using the Innovator’s Canvas I found it helpful that I could show the value proposition details as well as the brand promise/why/mission behind the overall idea all in one page.

Some of my peers and co-workers started using it as well and felt like it was a meaningful improvement to both the classic Business Model Canvas and the Lean Canvas.

In conjunction with the Innovator’s Canvas, I outlined a series of steps to take in order to validate the business model hypothesis. Below is the approach I suggested at the time:

As I showed this to people the first thing they said was “Why are they out of order?” Though I thought it was easier to understand than the Lean Canvas with its 9 boxes of number soup, I didn’t have a good response. I took it as usability feedback to consider.

Also I started getting additional detailed questions about the business idea such as the following:

1. How specifically will your channel work? How will you drive awareness of this product/business?
2. What customer problem are you trying to solve in the first place?
3. How much money will you make on a gross margin basis for the product?
4. How much general and administrative overhead will you need to support the initial version of the business model?
5. What are the overall market dynamics like for this idea? What products and technologies are out there now solving this problem?

That’s when the idea for the Innovator’s Canvas 2.5 started to take shape…

Innovator’s Canvas 2.5 is Born

You’re probably wondering why I went from Innovator’s Canvas 1.0 to 2.5. Well the truth is that I’ve always made updates and improvements to the canvas and haven’t always written a blog post about them. Hence the versioning oddity.

The first improvement I wanted to make was putting the customer segment and revenues on the left side of the page so you would see those first. That would mostly fix the issue of having out of order items on the canvas. This was effectively version 2.0.

Then the second improvement I wanted to make had to do with showing more detail around the economic model of the business. I’ve seen too many startups fail simply because they didn’t have a clear understanding of the fundamental economic assumptions in their business model. My goal was to be able to refer to the canvas and quickly and easily understand each major financial assumption. To me, just having boxes for cost and revenues wasn’t sufficient detail to truly understand the economic assumptions behind a business model. Adding these elements ultimately became version 2.5.

In my MBA program I remember learning from our managerial accounting class that the simplest formula to use to understand the fundamental economics of any business was:

Revenue – Variable Costs – Fixed Costs = Operating Profit

I thought about this equation over and over and tried to imagine ways it could be visualized on a canvas. That’s when I started thinking of the essential elements of the canvas as stacks of boxes that sit above those elements in the equation. Above the revenue is the customer segment, the problem they’re trying to solve and the job to be done. The revenue side was easy because I already had a stack of boxes that made sense above it. Revenue essentially represents what the customer is willing to give up at any given time in order to get that job done.

When I started thinking through the rest of the canvas I realized pretty quickly that it would all need to shuffle around a bit in order to make sense. But the possibility of making a much clearer connection between elements on the canvas and the fundamental economics of the business model became really exciting to me.

From a variable cost standpoint I split it out as follows:

Variable Costs = Channel Cost + Cost of Goods/Services Sold

For the fixed costs I changed the wording to match more closely what I figured most business owners refer to it as – General and Administrative.

Then the last element was Operating Profit which I changed to “Value Creation” because that’s the assumption you will be making regarding how to actually make money in order to sustain the business model.

So to summarize the following are the elements I landed on:

While adding the details of the economic model was helpful I still felt like something else was missing. In every business plan I’ve made I’ve always had to address the overall market dynamics including the competition, technology, customer trends, etc. Because of this I decided to include those elements as well and bundle it all up into a version 3.0.

With this as my new theory of how to generally structure the canvas I then went to work on designing the new canvas. Below is what I came up with:

Innovator’s Canvas 3.0 – The Latest

In this version of the Innovator’s Canvas I’ve organized the content as follows:

1. Customer and Problem to solve
2. Channel
3. Solution
4. Support Structure
5. Economic Model
6. Market Environment

Below is an example of the Innovator’s Canvas 3.0 with these themes overlayed.

To download a free PowerPoint version of the Innovator’s Canvas 3, click here.

Part 1: The Customer

The first, and most important part of the canvas, is the customer section. In this section you write down your assumptions about the customer including:

1. Characteristics
   1. E.g. Age, income, location, beliefs, interests, culture, etc.
2. Problem Statement
   1. The primary problem they face that you want to solve
3. Job to be done
   1. The fundamental outcome they are seeking
   2. The pains associated with getting that job done now
   3. The gains they have expressed they would like to experience

Part 2: The Solution

Once you’ve detailed your assumptions about the customer you can then move on to writing out your assumptions about the solution:

1. Mission Statement
   1. The big picture of what your business does and why
2. Value Proposition
   1. How specifically you plan to solve the problem your customer faces
3. Product or Service
   1. A description of your proposed product or service
   2. Pain Killers: How you solve the primary pain your customer faces
   3. Gain Creators: The extra value your solution provides over existing ways to solve the problem
4. Cost of Goods/Services
   1. The cost to make or provide each product or service

Part 3: The Channel

Once you have documented both your customer and your solution, it’s time to think through the channel by which your product (or service) will reach your target customer.

1. Awareness
   1. How will your target customer become aware of you and your solution?
2. Sale
   1. How will you explain the benefits of the solution to the customer and answer their questions?
3. Delivery
   1. How will your solution be delivered to the customer?
4. Support
   1. How will you provide ongoing post-sale support to your customers?
5. Acquisition & Support Costs
   1. How much will it cost you on a per customer basis to utilize this channel?

Part 4: Support Structure

The next piece of assumptions to fill in has to do with the support structure of the business. This includes:

1. Business Structure
   1. The legal entity
   2. The owners
2. Key Resources
   1. Human resources, i.e. the team, needed to build and support the business model
   2. Physical resources needed to support the model (e.g. office space, a new plant, tooling, etc.)
   3. Financial resources needed in order to support the discovery efforts and create the first version of the business model
   4. Intellectual property necessary to have a right to practice or protection of the idea
3. Key Partners
   1. The partners needed to create and sustain the model
4. Unfair Advantage
   1. Your unique advantage to making the solution better than anyone else

Part 5: Economic Model

Once you’ve defined the assumptions about the customer, solution, channel and support structure, you have everything you need in order to create the economic model of the business.

1. Revenue – Pricing & Frequency
   1. The price the customer is willing to pay for the solution as well as the frequency of purchase (over a year)
2. Acquisition & Support (variable costs)
   1. The cost of supporting the acquisition and post-sale support of a customer on a per unit basis
3. Cost of Goods / Services (variable costs)
   1. The cost, on a per unit basis, to the business to make the product or offer the service
4. General & Administrative (fixed costs) 
   1. The cost to pay for the support of the business over the first year
5. Value Creation (profitability)
   1. The expected operating profit of the business and breakeven volume

Part 6: Market Environment

Once you have documented your assumptions about the business model you are trying to build in the sections above, it’s helpful to also document some specifics about the market in general. That’s where the market environment section comes in handy.

1. Market Trends
   • General customer trends including changing demographics, behaviors or preferences
2. Market Size
   • The total number of potential customers who value solving this problem. Also can include the total spend of that market already on solving this problem
3. Current Channels
   • Primary channels that are used today to deliver comparable solutions
4. Current Solutions
   • Current products and services being sold today
5. Current Providers
   • The leading creators of comparable solutions in the market today
6. Industry Trends
   • Shifts in the industry regarding consolidation, fragmentation, etc.
7. Technology Trends
   • New technology that provides a runway for innovation

With that information filled out you now have a crystal clear idea of what your business model assumptions are and are ready to move on to the next step of validation.

Below I’ll explain this process from a high level. For a more detailed explanation and to download these materials and more, check out my free video training for innovators called Innovator’s Masterclass. There should also be a link toward the top and at the end of this article.

Validating (or Invalidating) Business Model Assumptions

Having an idea written out is only the first step of creating a new business. The real work begins when you start to validate or invalidate your assumptions.

Below is a graphic that illustrates the typical order of risk in a business model idea.

This represents the areas of the canvas that are most risky to least risky.

1. Problem / Opportunity Fit: We have verified a customer segment with a burning problem/need that they are willing to pay to fix.
2. Problem / Solution Fit: We have verified a solution to their problem that they would buy right now if it were available.
3. Product / Market Fit: We have verified a channel to reach customers for sale and delivery of the solution.
4. Business Model Fit: We have verified that the business model can be scaled profitably and sustainably.

The last section on market environment is labeled facts because those data points should not be assumptions. You should be able to fill in each of those boxes with objective facts and move on.

Experimentation Is Key

In his breakthrough book, The Lean Startup, Eric Ries outlined a model for startup success that he called the “Build – Measure – Learn” loop.

The idea of this loop was to quickly and inexpensively take an idea, build an MVP, show it to customers and get feedback/data that you can learn from. Those startups that could go through this cycle the fastest were usually the ones with the highest likelihood of success.

In business model validation, following the Build – Measure – Learn loop is critical. To do so you’ll want to setup and track business model experiments. Below is an example of how I create and track those experiments.

1. Step 1: Ask a specific question about the riskiest assumption in your business model. “Our question is…”
2. Step 2: State a hypothesis about what you think the answer to the question is. “Our hypothesis is…”
3. Step 3: Decide what metrics to track that will tell you whether your hypothesis was right or not. “We are right if…”
4. Step 4: Plan and list out the resources you will need in order to setup the experiment. “The resources we need are…”
5. Step 5: Write out how you plan to execute the experiment and the procedure you will follow. “Our procedure is…”
6. Step 6: Write out the observations you saw during and after the experiment. “We observed that…”
7. Step 7: Write out your conclusion by stating whether your hypothesis was valid, invalid or uncertain. Also describe what you learned. “We learned that…”

It’s also helpful to track the time it took to learn each finding as this represent your cycle time through the build – measure – learn loop.

Now let’s move on to running some experiments…

First Risky Assumption: Customer/Problem

The first most risky assumption to validate or invalidate is that you know who your customer is and you believe the problem they face is worth solving. Typically this is the assumption that trips up every idea at first.

“No plan survives first contact with customers” – Steve Blank

The reason this assumption is so challenging is because it’s tempting to think of customers in general or stereotypical terms. Phrases like “millennials,” “homeowners,” “premium car buyers,” “CIO’s,” etc. might sound specific but in reality are far too vague and amorphous to be useful.

In my experience and in working with others who are going through this process the most important activity that you do as a discovery team is talk face to face with customers. Don’t rely on surveys. Don’t rely on consultants. Talk to customers face to face yourself. What you’ll find by doing this is after speaking with hundreds of customers (don’t skimp, talking to 10 customers and calling it good is far too few to actually be helpful) you’ll start to deeply understand the problem you need to solve and you’ll clarify how to segment them. You’ll pick up on clues and commonalities that may not have anything to do with demographics or psychographics but that paint a clear picture of who it is you should be targeting.

You’ll go from saying “millennial homeowners” to “millennial homeowners with a young child where the mother stays at home.”

That’s a segment with enough detail to work with.

Another example is you might go from talking about “premium car buyers” to “owners of 10+ year old luxury 4-door sedans who have started searching online for a new car.”

Another example could be going from talking about “CIO’s” to talking about “IT Directors at Fortune 500 conglomerate enterprises who still use on-premise data storage.”

The point is that even though you wrote out who you think your customer is, it’s likely to change by getting far more specific and useful as you talk to hundreds of customers.

The goal for these initial discussions with customers should be to get to the point where you can accurately predict what they will say. Once you’ve gotten to that point, you usually have enough of a deep understanding of the customer segment in order to build a business model around.

Second Most Risky Assumption: Problem/Solution

The second most risky assumption to validate or invalidate is that your solution idea will actually solve the customer’s problem. This assumption can be tested far faster and cheaper than you might think. The temptation will be to test it after building an elaborate prototype or worse to test it after going into full-scale production.

Rather than spending all that time and money before learning what the outcome will be, the best thing to do is try to simulate the solution for customers in an inexpensive way. If you’re idea is a new smartphone app, create an Invision prototype with a common task flow represented and see what customers think.

If it’s a new piece of hardware, create a 3D print of the object and attach weights to it to simulate look and feel. Tape a phone or iPad to it if it needs a screen and put the Invision app on it to simulate the software experience.

Bottom line is to do whatever you possibly can, as cheaply as you can in order to get feedback from customers about whether or not the solution solves their problem.

Third Most Risky Assumption: Channel

The third most risky assumption is usually the channel to reach your customers. The best way to test this assumption is through channel experiments that utilize real channels to sell and deliver your solution.

For example, if your solution and customer segment lend themselves to this approach, a relatively easy experiment to run is an online ad campaign (either Facebook or Google) that leads to a landing page where you ask people who are interested to leave their name and email. That way when the product is ready you can send them an email about it. This at least helps cover the awareness and sale part of the channel assumption.

Fourth Most Risky Assumption: Support Structure & Economic Model

The next most risky assumption is usually the support structure and economic model of the business. As important as this assumption is to the overall sustainability of the business, it’s still listed as fourth because of the following reasons:

If you don’t know who your customer is…you won’t know what problem you’re trying to solve.

If you don’t know what problem you’re trying to solve…you can’t create a compelling solution.

If you can’t create a compelling solution…then you don’t need a channel.

If you don’t know who your customer is and you don’t have a compelling solution or channel to market…then your support structure has nothing to support and there is no need for an economic model.

The other reason the support structure is least risky is because it’s usually the most flexible component of the model. If you need to get more resources you raise money, hire more people, and connect with more partners.

Also as it pertains to the economic model, if you’re idea is constrained from a cost standpoint then you usually have options for cost reductions down the road – especially as you achieve scale with the business.

As an initial test to determine if the support structure is viable, it’s a good idea to calculate an initial breakeven volume. Below is an example of how to calculate this value:

Breakeven Volume = General & Administrative / (Revenue (price) – Acquisition & Support – Cost of Goods & Services)

For example, let’s say you have the following assumptions for an economic model where you sell computers you make out of your garage:

• Revenue (price) = 1500 (per computer)
• Acquisition & Support = 50 (per computer average)
• Cost of Goods = 1200 (per computer)
• General & Administrative = $500,000 (costs to support the initial business model for a year)

Using the above example we can calculate the breakeven as follows:

$500,000 / ($1500-$50-$1200) = 2000 units

This means that with the assumptions laid out in this example economic model the business would need to sell at least 2000 computers in order to breakeven from a proft/loss stand point. For each additional unit sold above 2000 the business would make an operating profit of $250/ea.

Using this canvas you can also calculate gross profit and gross margin. To do so use the following formula:

Gross Profit = Revenue (price) – Acquisition & Support Cost – Cost of Goods

Using the same example from above we get the following:

$1500 – $50 – $1200 = $250

To calculate gross margin (percentage) you can use the following:

Gross Profit / Price = Gross Margin Percentage

In this example the numbers work out as follows:

$250/$1500 = 17%

The next question you might ask is “What is a good gross margin to have?”

The answer actually depends heavily on two things: 1) how fixed cost intensive your business is and 2) your overall business strategy. Some businesses are heavily weighed down by large fixed costs such as airlines which have to maintain an expensive fleet of planes in order to support their business model. These types of businesses usually need high gross margins (50%+) in order to pay for the fixed overhead of buying and maintaining a fleet of planes. Other companies, such as those in service based businesses like building cleaning companies, have very low fixed costs but much higher variable costs. In that case they may be able to afford low gross margins because they don’t need to support a lot of overhead.

Other companies, such as those in software businesses, have both low fixed costs and low variable costs which enable them to become very profitable on both a gross margin and operating margin basis. The downside to those companies is that they can be extremely competitive because of the low barriers to entry.

Additionally, the strategy you choose has a major impact on the right gross margin targets. In my other post on “The Two Business Strategies: Cost Leadership and Benefit Leadership [and Where Michael Porter Missed the Mark]” I outlined two fundamental approaches to a market. The first was cost leadership where you emphasize to customers how low your prices are relative to the competition (usually necessitating low gross margins). The second was benefit leadership where you emphasize how good your benefits are relative to the competition (usually leading to high gross margins).

Conclusion

Ever since using the Innovator’s Canvas 3 I’ve been able to understand various business models much more quickly and cost effectively. The canvas has been helpful in working with partners, both so they can understand our model a little better and so we can understand theirs. And it’s been a great tool for helping organize business model validation work.

If you also find it useful and would like to learn more or download a PowerPoint version of the canvas, check out my free Innovator’s Masterclass Mini-Course. The first video and set of slides is all about the Innovator’s canvas and how to apply it to your business. The other two videos will help you take your idea and validate or invalidate it one step at a time.

Good luck!

To download a free PowerPoint version of the Innovator’s Canvas 3, click here.

Also below is a version of the canvas that has descriptions for each box. Let me know what you think in the comments section!

The post Innovator’s Canvas 3: How to Quickly and Effectively Document and Validate Your Innovation Idea appeared first on Ignition Framework.

To follow along, click the link below to order my Mixed Strategy Equilibrium Excel Template for just $19.

Order Template

To view my other posts on game theory, see the list below:

Game Theory Post 1: Game Theory Basics – Nash Equilibrium

Game Theory Post 2: Location Theory – Hotelling’s Game

Game Theory Post 3: Price Matching (Bertrand Competition)

Game Theory Post 4: JC Penny (Price Discrimination)

In the examples I’ve used so far, each case illustrated a clear dominant strategy and single Nash equilibrium. But in the real world, this isn’t always the case.

For example, let’s say you’re married and it’s Saturday night and you both want to go out to dinner but your favorite restaurant is Red Lobster and your spouse’s favorite restaurant is Outback. You’re a seafood lover and your spouse is a steak lover. Every time you go out to eat it’s the same argument about where you go. How do you resolve the impasse?

If you’re like many couples, you either “take one for the team” and go with their favorite or your spouse “takes one for the team” and goes for your favorite. But how can we explain this result using game theory?

The answer is to follow these very specific steps:

Step 1: Define the Players

In every game or multi-person interaction, you will have multiple players. The first step to constructing a game theory analysis is to write down the names of the players involved. For simplicity, it’s best to keep the number of players down to just two. Adding more players than two becomes extremely complicated so if your game has more than two players, try to group the players into two broad groups with similar goals.

In continuing the example above, all we have is you and your spouse. To make it easy to keep track of, let’s assume “You” are Mary and “Your spouse” is John. So we list them below:

1. You –> Mary
2. Your spouse –> John

Simple right? Now on to step two…

Step 2: List the Most Relevant Choices Available to Each Player

This part is pretty simple as well. All we do is take each player and list the choices available to each player. To do this I’ll simply list the two choices for each player in our example.

1. Mary
   • Red Lobster
   • Outback
2. John
   • Outback
   • Red Lobster

Even though I put the choices in order of preference in the list above, putting them in order is not necessary for the analysis. I just put them in order so I could remember which person liked which restaurant better.

Okay, now that we have the players and the choices available to each player listed, there are just a couple more steps before we can start the analysis.

Step 3: Create The Scenarios Matrix

Most people who explain game theory (college professors, etc.) skip this step and jump straight to figuring out the payoff matrix. I’ve found that to be a mistake because often the most challenging part of game theory is simply creating an accurate payoff matrix. By creating a scenarios matrix first, we make it easy to create a payoff matrix.

So what is a scenarios matrix?

A scenarios matrix shows the players and list of choices available to the players in a table or matrix format. The cells inside the matrix represent the specific scenarios that can play out. To setup a scenarios matrix simply take the player names and choices available to each player and list them in a table like below:

Now with the scenarios matrix setup, it’s helpful to think through and write out each scenario within each blank cell. For example, if “Mary” chose “Red Lobster” and “John” chose “Red Lobster” as well (in other words they decide to go to Red Lobster together), then the scenario to write in the first blank cell to the right of “Mary” and “Red Lobster” and underneath “John” and “Red Lobster” would be “Mary and John both choose to go to Red Lobster.”

If you do this for all blank cells, you get the following completed scenarios matrix:

The great part of having a scenarios matrix is it illuminates all the possible choice combinations available and lets you think through each of them one-by-one. In many cases, this step turns out being the most valuable step in the process. But there are a few more steps before we reach the conclusion of the analysis.

Step 4: List How Much Each Player Values Each Choice

This is the step that is usually the most challenging to figure out with a reasonable level of accuracy. But there are a few ways to do it that are relatively easy and straightforward. In our simple example, we can just ask Mary and John in a survey to rate each scenario on a scale of 0-10. For example, below is a survey we could create and ask both of them to answer:

1. It’s Friday night and you and your spouse are trying to decide where to go out for dinner. Suppose only the four scenarios below were the set of possible things you could do. Please rate each scenario on a scale of 0-10 how much fun you will have if that scenario played out (10 being the most fun possible, 0 being no fun at all).
   • You and your spouse both go to Red Lobster
   • You and your spouse both go to Outback
   • You choose to go to Red Lobster alone and your spouse chooses to go to Outback alone
   • You choose to go to Outback alone and your spouse chooses to go to Red Lobster alone

Now that we have a survey created, let’s ask Mary and John to fill it out. Suppose the following is how they answer:

1. Mary’s response:
   • You and your spouse both go to Red Lobster –> 9
   • You and your spouse both go to Outback –> 6
   • You choose to go to Red Lobster alone and your spouse chooses to go to Outback alone –> 1
   • You choose to go to Outback alone and your spouse chooses to go to Red Lobster alone –> 0
2. John’s response:
   • You and your spouse both go to Red Lobster –> 5
   • You and your spouse both go to Outback –> 10
   • You choose to go to Red Lobster alone and your spouse chooses to go to Outback alone –> 0
   • You choose to go to Outback alone and your spouse chooses to go to Red Lobster alone –> 2

Now all we need to do is list these values in a payoff matrix such as the one below. To make it easy to keep track of the payoffs for each I’ve color coded the payoff values to correspond with either Mary or John. All we need to do is enter the values for each cell following the logic in the diagram below:

Once we do this for all the open payoff cells, we get the following:

Step 5: Find the Pure Strategy Nash Equilibrium

Now that we have the payoff matrix complete, the next step is to find the Nash equilibrium. Here it is important to point out that there are two kinds of strategies, pure strategies where the payoff of a choice is always better than the payoff of the other choice. That’s the kind of payoff I’ve discussed in my previous posts on game theory. But when one choice isn’t always better than the other then it’s called a mixed strategy which means that you tend to mix between each choice depending on the timing and circumstances.

Let’s analyze Mary’s options first. Mary can either choose Red Lobster or Outback. If she chooses Red Lobster, depending on what John chooses, her payoff will be either 1 or 9. If she chooses Outback, her payoff will be either 0 or 6. For Mary this poses a bit of a dilemma because if John chooses to go to Outback, Mary will choose to go to Outback as well because a payoff of 6 is better than a payoff of 1. However if John chooses to go to Red Lobster, then Mary will choose to go to Red Lobster as well because a payoff of 9 is better than a payoff of 0. The summary is that even though Mary prefers Red Lobster over Outback, she actually prefers spending dinner with John more than she prefers getting her top restaurant choice.

From John’s perspective it’s basically the same issue. If he chooses to go to Red Lobster his payoff is either going to be 0 or 5 and if he chooses to go to Outback, his payoff is either going to be 2 or 10. This simply means there is no pure strategy equilibrium for either Mary or John but that they both prefer going to dinner together versus going to dinner alone. Hence there are two pure strategy equilibria – they either both go to Red Lobster or they both go to Outback.

PSE stands for Pure Strategy Equilibrium

Okay that’s simple enough. But another question arises: how should Mary decide when to “take one for the team” by choosing Outback instead of Red Lobster and conversely how should John decide when to “take one for the team” by choosing Red Lobster instead of Outback?

Turns out there is a mathematical way to find out.

Step 6: Find the Probability of a Player Making A Certain Choice

From a game theory perspective, this is the step where most people get confused. I know I was when I was first exposed to mixed strategies. To help avoid confusion, before diving straight into setting up and performing the calculations, I want to talk through John and Mary’s story a little more in a way that hopefully helps frame why we’ll setup the calculations in the first place.

First of all its important to note that we are trying to help Mary create a framework for deciding between two options: choosing Red Lobster and choosing Outback. We’ve already determined that Mary only gets meaningful utility from going with John so it’s not really worth it to her to go to Red Lobster alone. Her optimal scenario is to go to Red Lobster with John every time. But we know that’s not possible since John prefers Outback and his optimal scenario is to go to Outback with Mary every time.

Given their situation, there are two general approaches they could take to deciding when to go to Red Lobster (Mary’s first choice) or when to go to Outback (John’s first choice), one is to follow a pattern, another is to decide at random.

Following a Pattern versus Choosing at Random

Let’s suppose John and Mary agree that they will trade off each month on who chooses where to go. For example, Mary could say to John that every odd month he gets to choose and every even month she gets to choose. This arrangement provides a very clear and easy to understand pattern to follow. Sounds reasonable and fair but there’s one critical problem with it: Mary’s decision-making criteria is exposed and now subject to manipulation by John.

Let’s suppose John and Mary have a great relationship in general but they always seem to argue about this particular point and both Mary and John are quite clever at getting their way on this issue. If they follow the pattern that Mary suggests above, John can now employ various strategies to distort that pattern in his favor. For example, in January Mary agrees to go to Outback with John because January is an odd month. This was Mary’s suggestion. But in February, an even month when Mary gets to choose, John unfortunately gets ill and it turns out they won’t be able to go after all. Illnesses happen occasionally so it’s reasonable to give John a pass on going to Red Lobster in February.

March roles around and since it’s an odd month, John gets to choose – they both go to Outback, again.

April comes and finally Mary gets to choose where they go. They set aside a night in their busy schedule but despite the planning John forgot to mention him and his friends had been planning a get together to watch a basketball game and he won’t be able to make it.

Mary catches on. She can tell she’s being manipulated by John who is using her own suggested pattern against her.

This is the problem with making decisions by following a predictable pattern – competitors will exploit that pattern and use it against you!

What’s the solution? It’s simple: to have the other player think your decisions are made randomly. This is the best solution for game theory strategy that involves situations that repeat themselves (i.e. “repeated games”) and that have multiple Nash equilibrium.

John and Mary’s case is kind of a silly example of this but think about it in a variety of competitive settings such as business or war and you quickly see how important this concept is.

Imagine if you were running a retail store and every year for Black Friday you decide to mark all toys down 30%. This is a simple way for you to manage Black Friday and you’ve done it for several years in a row now.

Now consider what your competition across the street, another retailer who also sells toys, is thinking. They’ve started to notice this pattern of yours and they want to figure out a way to exploit it so they can drive more sales to their store. So the next Black Friday they decide to mark things down 35% and tout that all their sales are better than yours. All the customers flock to your competitor and from then on out you decide to be much more creative in your Black Friday sale initiatives.

In war this concept is even more crucial. Some of the most important battles in history were turned in favor of the side that held “the element of surprise.” The Battle of Incheon during the Korean War is a classic example of this.

Another example is the rock, paper, scissors game. If your opponent knows that you tend to alternate between rock and paper, they’ll choose to alternate between paper and rock and defeat you.

Or think about why football players and coaches watch so much game footage of their opponents. The hope is to discover and learn the opponents patterns of play calling and execution.

In short, following a pattern as a decision framework can have negative consequences if that pattern is discovered by your opponent. Hence the advantage of being perceived to make decisions randomly.

Just because your strategy is perceived as random doesn’t mean it’s actually random. Your goal is to give your opponent the impression that you make decisions randomly, not that you actually should make them randomly. What I mean by that is by determining beforehand the probabilities you should pick a strategy with, you can follow a pattern of randomness. Following a pattern of randomness, using probabilities as your guide, is much more difficult to exploit than following a simple pattern because you can always skew the probabilities whenever your opponent seems to start catching on. Once you’ve confused them then you can revert back to making choices based on your optimal probability mix.

Getting back to our example, to determine these probabilities, lets first say that Mary will choose Red Lobster with probability p. In other words, we’ll let p represent Mary’s likelihood of choosing Red Lobster. Since her only other choice is Outback, we can also say that her probability of choosing Outback is equal to 1-p. Let’s also say that John will choose Red Lobster with probability q and Outback with probability 1-q. John’s probabilities are incredibly important to Mary because they impact her actual payoffs associated with each choice.

For example, let’s say Mary would like to know the probability of John choosing Red Lobster versus Outback. Since he’s either going to choose one or the other, if Mary knows how likely John is to choose one or the other then she can properly calculate her expected payoffs.

Let’s suppose Mary chose Red Lobster. If she chooses Red Lobster there are two possible scenarios – John chooses Red Lobster and Mary gets a 9 payoff or John chooses Outback and Mary gets a 1 payoff. Since John mixes between Red Lobster and Outback according to the probabilities q or 1-q, Mary can create an equation that represents her average expected payoff for choosing Red Lobster by multiplying her payoff for each scenario by John’s probability for each scenario and adding them together. In this case, the first scenario is that Mary chooses Red Lobster and John chooses Red Lobster with probability q. Mary’s actual payoff then is 9q. The second scenario is Mary chooses Red Lobster and John chooses Outback with probability 1-q. Mary’s actual payoff in that scenario is 1(1-q). If you add those two together you get 9q+1(1-q) which is the total expected payoff for Mary if she chooses Red Lobster.

As shown above the same can be done if Mary decides to choose Outback. In that case her expected payoff is 0q+6(1-q).

Now for the interesting part…

For Mary to truly seem like she’s making decisions randomly, she needs to appear to John as if she doesn’t care if she goes to Red Lobster or Outback. In other words, she needs to seem like she’s indifferent between the two options. The only way she would be indifferent between the two options is if the payoffs for both were equivalent. Therefore the next step for Mary is to set her two payoffs equal to each other and solve for John’s optimal probability!

In the calculations to the left all I did was set Mary’s two payoffs equal to each other and using Algebra was able to solve for q – John’s optimal probability. I was able to check my work using Math Papa’s Algebra Calculator.

The result of this calculation is that John would choose Red Lobster 36% of the time and Outback 64% of the time. What this basically means is that if John is playing the game smartly by seeming to choose Red Lobster or Outback at random then he would mix between the two according to those probabilities. He would choose Red Lobster 36% of the time and Outback 64% of the time.

In John’s case the process is the same if he were to analyze Mary’s strategy. If we put ourselves in John’s situation we then calculate his payoffs as a function of Mary’s decision below.

Note that John’s payoff for choosing Red Lobster is expressed as 5p+0(1-p) and his payoff for choosing Outback is 2p+10(1-p). We then set those payoffs equal to each other and solve for Mary’s optimal probability mix. See below for that calculation:

The result of this is that Mary would choose Red Lobster 77% of the time and Outback 23% of the time.

Now that we know each players optimal mixing strategy we can create the framework for Mary to make her decision. In game theory we call this a “reaction function.”

Step 7: Determine the Optimal Response By Creating A Reaction Function

A reaction function is simply a formula that calculates the optimum response given another players actions. For example, in this case, since there is no pure strategy and we know that John will be mixing between choosing Red Lobster and Outback, our objective is to give Mary a framework for her to make an optimum choice depending on how often John chooses Red Lobster (q). To do that we simply use the two equations we found that calculate Mary’s expected utility given John’s choice of q.

Mathematically these are expressed as the following:

Mutility-Outback(q) = 0q+6(1-q)

Mutility-RedLobster(q) = 9q+1(1-q)

With these equations we then create the following reaction function table and graph.

What this reaction function does is tell Mary what her optimal choice is given how often John chooses Red Lobster. Said another way, let’s say Mary has been keeping detailed track of each choice John makes every month (or week) when they decide to go out to dinner. Let’s suppose she’s seen the following pattern:

Week 1: John chooses Red Lobster

Week 2: John chooses Outback

Week 3 John chooses Red Lobster

This essentially means that John has chosen Red Lobster 67% of the time. According to the graph above she should choose Red Lobster as well because that choice will give her an approximate utility of 6.

However let’s suppose she noticed a different pattern such as the following:

Week 1: John chooses Outback

Week 2: John chooses Outback

Week 3 John chooses Outback

This essentially means John has chosen Red Lobster 0% of the time (i.e. refused Red Lobster) and given this pattern Mary’s optimal choice is Outback according to her reaction function.

Another way to express this is in terms of Mary’s choice of p. Below is a graph that illustrates this:

All this graph is telling us is that whenever John chooses Red Lobster less than 37% of the time (q), Mary should choose Red Lobster 0% of the time (p). And whenever John chooses Red Lobster more than 37% of the time (q), Mary should choose Red Lobster 100% of the time (p).

Note that the same analysis should be done for John as well because that’s how we’ll find out where all of this will eventually settle out in what’s called the Mixed Strategy Nash Equilibrium.

For John here is the analysis:

Jutility-Outback(p) = 0q+6(1-q)

Jutility-RedLobster(p) = 9q+1(1-q)

With these equations we then create the following reaction function table and graph.

The interpretation is the same for John though with different thresholds. Note that the above graph shows that John should choose Outback unless Mary is choosing Red Lobster more than ~76% of the time. If John actually follows through with these reaction functions, it’s safe to say that he’s a pretty stubborn guy!

To follow along, click the link below to order my Mixed Strategy Equilibrium Excel Template for just $19.

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The alternative graph for John is displayed below:

Now that we have both of these reaction functions done we can calculate the mixed strategy Nash Equilibrium for this situation. To do that all we need to do is combine the data from the two best response functions into one graph and find the intersect of the two functions. See below:

And there it is. According to this diagram the Mixed Strategy Nash Equilibrium is that John will choose Red Lobster 36% of the time (and Outback 64% of the time) while Mary will choose Red Lobster 77% of the time (and Outback 23% of the time). Note that PSE stands for Pure Strategy Equilibrium.

The post The Basics of Game Theory: Mixed Strategy Equilibria and Reaction Functions appeared first on Ignition Framework.

When it comes to innovation, invention is only half of the equation. With every great invention you also have to sell your solution to your customers and communicate it’s benefits in ways they will appreciate and be attracted to. For some companies the sales process seems to happen naturally while for others, it’s a constant struggle. Too often the difference comes down to one thing: branding. By the end of this article you’ll have the knowledge and tools you need in order to make your brand truly great.

But what is a brand in the first place?

In this article I’ll explain the concept of a brand as well as give you a simple framework I created called The Brand Canvas that you can use to quickly create your own brand concept. By the end of this article you will have a complete view of what a brand for your new idea should be.

To follow along, you can order the PowerPoint template for just $19 by clicking the button below.

The Essence of A Great Brand

Over the years I’ve heard a number of explanations for what a brand is. Everything from “it’s a logo” to “it’s our style guide.” This is merely scratching the surface of a brand. To truly understand what a brand is we have to strike at the root. That root lies in the minds of consumers.

“A brand is the unique story that consumers recall when they think of you.” – Laura Busche

That’s it. a brand is a story that consumers think of when they think of you. For great brands that story is one in which the consumer is the hero who is transformed from their normal self into someone they have always aspired to become.

As an example of this let’s think through some of the great brands of our time and what makes them great.

One of the best examples of product branding I’ve ever seen was when the Apple Watch came out. Smart watches were nothing new. Samsung and Motorola had offered them for years. But like with most Apple products their take on the watch was going to be different. They wanted to make a statement about why they made it. That statement came in the form of multiple news outlets reporting that the purpose of the Apple Watch was to help rid you of the distraction of constantly looking at your phone. The story they told was quoted in Wired:

Along the way, the Apple team landed upon the Watch’s raison d’être. It came down to this: Your phone is ruining your life…Our phones have become invasive. But what if you could engineer a reverse state of being? What if you could make a device that you wouldn’t—couldn’t—use for hours at a time? What if you could create a device that could filter out all the bullshit and instead only serve you truly important information? You could change modern life. And so after three-plus decades of building devices that grab and hold our attention—the longer the better—Apple has decided that the way forward is to fight back. – Wired

And that’s all it was – one simple story about how your ideal life was possible and all you needed to get there was an Apple Watch. Sounds easy right? Well it’s definitely not easy otherwise Motorola and Samsung would have done it before Apple but with some guidance and a clear process you’ll be well on the path to telling a compelling story about your brand.

The Three Main Components of A Brand

With every brand there are three main ingredients:

1. The Story
2. The Symbols
3. The Strategy

Great Brands Tell A Story

As with the Apple Watch example, great brands tell a story about how the product or service can help your customer realize their potential self. That story becomes the foundation of your brand to everyone you interact with.

Regarding the Apple Watch specifically I wrote a post about it when it came out titled “Apple Watch: Innovation that Starts With Why.” In that post I tell the story of why Apple built the watch and share Simon Sinek’s framework called the “Golden Circle.” In that framework Sinek explains that people don’t buy what you make, they buy why you made it. Specifically, they buy the story they internalize in their minds as to who your company is and how they fit into that story. The closer your story fits the customers desired experience, the better they’ll perceive your brand and the more likely they’ll be to invest in it.

Great Brands Communicate Visually with Symbols

Most people think of branding as merely logos or typography but as discussed above the truth is that brands are the story embedded in people’s minds when they think of your business or product. So that begs the question, what exactly are the logos and typography? Well if a brand is a story then the logos and typography (and color palette and imagery) are merely symbols used to tell that story.

Great Brands Communicate Strategically

It used to be that there were a limited number of channels businesses could utilize to tell their story. You were either on TV, in print or on some banner or billboard somewhere. Typically it was a matter of random luck if your message was seen by the target audience.

These days with apps, social media and web search the number of channels you can use to tell your story is practically limitless. In addition, the ability to become laser focused on only telling your story to those who might care has dramatically improved. Because of the ability to hyper-target your audience, great brands use only those channels that will strategically position them in front of people that might care.

Great Brands Test and Evolve Over Time

One of the best marketing and branding books I’ve ever read is Lean Branding by Laura Busche. One of the most important messages from her book is that great brands are more like chameleons than dinosaurs. A chameleon knows how to adapt to its ever-changing surroundings while dinosaurs went extinct.

The reason being a chameleon is so important for a brand is because consumers idea of their best possible self is always changing. Brands need to adapt to those changes to ensure their story stays fresh and resonant with consumers. To do that entrepreneurs and brand managers must constantly test their messages with their target consumer and either validate or invalidate that the story is resonating. If the story isn’t resonating it’s time to update your story (and likely your business as well).

In the end of Laura’s book she includes a number of test plans you can implement to test your brand story with consumers. By doing those tests constantly you can be sure your brand stays fresh and never goes out of style.

How to Create A Compelling Brand – Introducing The Brand Canvas

Great companies with great brands all tend to use a similar set of tools to define and communicate their brands with. The list below is an effort to list and categorize those tools within the Story – Symbols – Strategy framework.

1. Story
   1. Name – What you want people to call your brand
   2. Positioning statement – How you want people to view your brand in comparison to competitors or substitutes
   3. Promise – Your brand’s short and sweet bumper sticker promise of what you will deliver to your target customer
   4. Personality – The 6 descriptive words that best describe the personality of your brand.
   5. Personas – A snapshot of who your typical target customer is. Note that there is a difference between customer profiles (detailed descriptions of actual customers) and personas (detailed descriptions of fictitious customers you create who represent a segment of real customers)
   6. Storyboard – A summary of the compelling story your brand should tell it’s target customer
2. Symbols
   7. Logo – The main symbol your organization uses to communicate it’s brand story
   8. Color Palette – A set of colors that convey a set of emotions regarding your brand
   9. Typography – A set of typefaces that also convey a set of emotions regarding your brand
   10. Imagery – A consistent set of rules around what type of imagery will be used in conjunction with your brand
3. Strategy –  The strategies you will use to communicate your brand story to your target customers. Every great brand has an intentionally designed approach to communicating with its target customers throughout the stages of that customer’s experience. This is where marketing channels become essential. For reference on all the channels available I like to refer to The Marketing Map.
   11. Awareness – The channels and methods you will use to help your target customers become aware of your brand in the first place.
   12. Sale – The channels and methods you will use to help your brand stand out during the sales experience.
   13. Delivery – The channels and methods you will use to help your brand stand out during the delivery experience.
   14. Post-Delivery or Use – The channels and methods you will use to help your brand stand out during the post-sale or use experience.

So with this list in mind I created the following canvas:

Below is a canvas with descriptions for each box:

How To Create A Brand

With the Innovator’s Branding Canvas, creating a great brand is a simple and straightforward process. The first step is to create and document your initial brand idea.

Step 1: Come up with a name

Coming up with a name for your brand can be a difficult process without sources of inspiration. Laura’s book does a great job of helping ease you into a name by identifying sources of inspiration and walking you through a 5 step process:

1. List names of your competitors
2. List a word or words that encompass the most important thing your brand is here to change? (verbs, nouns, adjectives or combinations)
3. Word or word combinations that could best convey what your product does
4. Of those which is the most original or recognizable?
5. Of those which can be trademarked?

Below is a worksheet that walks you through this process.

As an example I created a completed name worksheet for SolarCity. Note this is just for illustration purposes, I realize many of their competitors listed were not around back in 2006 when SolarCity started.

To find out if something can be trademarked, do a quick search on the US Patent and Trademark Office for the name you came up with.

Step 2: Create a Positioning Statement

Once you’ve got a name the next step is to figure out a positioning statement, otherwise known as an elevator pitch about your business. This is merely a fill-in-the-blank exercise:

For (target customers)

Who are dissatisfied with (current alternatives),

Our product/service is a (new product category)

That provides (key problem solving capability), Unlike (alternative)

We have assembled (key whole product features).

For SolarCity the positioning statement could be as follows:

For homeowners with high energy bills, SolarCity is the leading solar power provider in the US. Unlike fossil fuel our power is both affordable and sustainable.

 Step 3: Create a Brand Promise

Every great brand needs a promise that fits on a bumper sticker. For Disneyland it’s “Where Dreams Come True.” For Southwest it’s “From the Heart.” While Walmart’s is “Save Money. Live Better.”

The brand promise should be the concentrated version of your overall value proposition. For SolarCity it looks like they’ve gone through some iterations of their brand promise but early designs show a the phrase “Power Forever” underneath their logo.

Step 4: Define Your Brand’s Personality

Great brands also communicate in a unique and compelling personality. Typically the brand personality is an extension of the founder’s personality. For example, Southwest’s brand personality is warm-hearted, playful, fun and loving – all attributes of the famous co-founder Herb Kelleher.

To determine your brand’s personality it’s helpful to identify those words that you want people to use to describe your brand. To help with this, I’ve included a list of personality traits below:

As an example, after reviewing SolarCity’s marketing materials it seems that a few words from the list help describe their brand personality including clean, efficient, happy, modern, practical and responsible.

Step 5: Create Your Customer’s Persona

As mentioned in the beginning of this post, a brand is nothing more than the story someone tells themselves whenever they think of your company or product. To truly understand and craft a great brand you need to have a solid understanding of who your target customers are. These are represented as personas.

Below is a customer persona template:

As an example I created a persona for a SolarCity customer:

Now that you know who your typical customer is, the next step is to craft a story about how your brand will help them achieve their aspirations.

Step 6: Create a Brand Storyboard

The brand storyboard is the heart and soul of your brand concept. To create one all you do is contrast the customers current state of living with the future state your brand promises to deliver. Below is a template of how to create a brand storyboard:

Using SolarCity again as an example I created a storyboard below:

Step 7: Decide Your Brand’s Typography

The next step involves choosing the typography that will best convey the values of your brand. For most business people, typography is an afterthought – a nicety. For most designers, typography is a fundamental component of design that has a major influence on the emotional perception of the brand. Because of the importance of typography, getting it right is half the battle of coming up with compelling brand symbols.

For a crash course on typography and how to decide what type combinations are right for your brand, check out Tim Brown’s (Head of Typography at Adobe) free guide “Combining Typefaces” which can be found at this link.

In continuing the example of SolarCity I found they use a typeface called Apercu as their main font in their materials, including the logo.

Step 8: Decide Your Brand’s Color Palette

Like typography, choosing the right color palette has a substantial impact on the emotional response to your brand. When choosing colors three things are important to keep in mind:

1. Consider using colors that already have associations to your product, service or industry
2. Choose colors that help convey your brand personality
3. Choose colors that comply with modern color theory

Regarding the first point, for SolarCity their two colors happen to be yellow and green. Yellow is a color that is universally associated with the sun while green has become well associated with energy efficiency and environmental stewardship.

When trying to tie colors to your brand personality it can be helpful to use a color association map template such as below.

The idea is that each color already has an association in people’s minds (this is a U.S.-centric association map, if you’re in China the associations are vastly different) and you want to use those associations to help your brand’s personality vividly stand out. To do so simply take the words from the brand personality traits in step 4 and list them on the right side of the map above.

Using SolarCity as an example, I’ve filled one out below:

With the above framework SolarCity could have used a number of color combinations to convey their brand. These include green and blue or green and black but because of the already strong associations people have with yellow and green they made a conscious choice to pick those two colors.

Color theory is an important area to consider as well so that you choose colors that are in harmony with eachother. In SolarCity’s case, yellow and green are analogous colors that tend to go well together in general.

For a brief overview of color theory, check out this article which summarizes the concepts well.

Step 9: Create Your Brand’s Logo

Once you’ve got a compelling story with a typeface that represents your brand along with a strong color palette, designing a compelling logo becomes a fairly straightforward process.

In SolarCity’s case, the logo consists of a custom-drawn symbol for the sun along with the name SolarCity written out in their typeface Apercu.

It used to be that having a logo designed was an expensive process in custom design. Fortunately now with services like 99Designs and Fiverr, having a logo created is a simple process. If you are going through one of those services to have your logo created, it will be helpful to share the Story and Strategy portion of your brand canvas. That way they can help in finding the right combination of typefaces, colors, imagery and ultimately logo design.

Brand Strategy

The third part of the canvas is your brand strategy. The brand strategy answers the question “How will your brand get noticed and stay relevant to your target customers?”

To answer this question we’ll break down a brand’s strategy into the following four key areas:

1. Awareness – how you plan for your brand to get noticed
2. Sale – how you plan to communicate your brand in the sales process
3. Delivery – how you plan to communicate your brand in the delivery process
4. Post-Delivery – how you plan to communicate your brand and remain relevant with your target customers

To continue our list from above on how to create a great brand, we’ll go through each of these in order of the canvas:

Step 10: Create an Plan to Gain Awareness

With all the distractions of daily life for your customer, getting your brand noticed by them will not be easy. The good news though is that there are a lot of options and methods for achieving awareness everything from going door-to-door, which SolarCity does, to online ads or traditional advertising.

While there are a lot of options it’s important to note that some channels will be more efficient than others. For example SolarCity may determine that going door-to-door is not as efficient as putting up a kiosk inside The Home Depot. The only way to find out is do two things:

1. Consider using comparable channels as what your competitors or similar products use.
2. Experiment quickly and often with alternative channels and track channel performance with metrics such as cost per impression or cost per lead.

Several years ago I stumbled across something called the Marketing Map. It’s a brilliant effort at documenting and categorizing the myriad of marketing options available to businesses today. A picture of it is below. To learn more about it visit www.marketing-map.co.uk.

Reviewing the marketing map can help spark ideas of how to create awareness of your brand.

Step 11: Plan How Your Brand Will Be Communicated At Time of Sale

When it comes time to actually make the sale you’ll want to have a crystal clear plan of how your brand will be communicated at that point. Whether your product is in a box on a shelf or a service like SolarCity’s with an in-home consultation or a B2B brand that communicates primarily through presentations, each sales process needs a defined plan for how to communicate with your customers.

In the case of SolarCity, their in-home sales process lent itself to having the salesperson wear branded shirts and carry with them branded brochures and an electronic agreement that is signed with an iPad. The whole experience is designed to communicate their brand as effectively as possible during the time of sale.

Step 12: Plan How Your Brand Will Be Communicated During Delivery

The time of delivery is an essential moment for making a lasting brand impression. Delivery in this sense is defined as the moment when your your solution is delivered to your customer. For SolarCity the time of delivery is the installation. For a smartphone app the time of delivery is the installation and setup process.

In SolarCity’s case their brand strategy at the time of delivery is to have technicians and trucks that are brightly colored and designed with SolarCity branding so neighbors and others can see who is providing the service.

Step 13: Plan How Your Brand Will Be Communicated During Use or Post-Delivery

Usage or post-delivery are the ongoing moments when your customers will use or enjoy the benefits of your product or service. For example with SolarCity this stage represents the ongoing use of the solar system. Their strategy for branding those moments is to give customers a branded SolarCity app as well as a monthly bill.

Bring it All Together in A Canvas

At the end of this process you’ll have a brand canvas that defines the story, symbols and strategy of your brand.

It’s important to note that the concept you’ve put on the canvas is mostly a set of unvalidated brand assumptions. Remember that it’s your customers who decide what your brand really is, not you. To that point the second step of the process of creating a great brand is to do validation and iteration. In the next post I’ll share exactly how to do that in a few easy steps.

Since we’ve been using SolarCity as an example I went ahead and filled out a Brand Canvas example based on what I could tell about their brand.

Conclusion

Don’t let the idea of branding overwhelm you. Big and expensive marketing consulting firms will try to scare you into thinking they’re the only ones qualified to create a brand. The reality is any entrepreneur who knows the story they’re trying to tell can create a brand in a few simple steps. Like all communications, it’s the story, not the features, that sell.

The post The Brand Canvas – How To Create and Communicate A Compelling Brand appeared first on Ignition Framework.

Tesla Model 3

On August 2, 2006, Elon Musk wrote the first Tesla blog post titled “The Secret Tesla Motors Master Plan (just between you and me).” In that post Musk clearly explained his strategic plan for Tesla.

He starts off by explaining the story behind Tesla, or the why.

The overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution. – Elon Musk

At the time the only car Tesla had announced was the Tesla Roadster, a two-door sports car priced at over $100k (at launch) and designed to go head to head against Ferrari and Porsche.

Later on in the post Musk discusses why making the Roadster was essential to his master plan:

Are we really in need of another high performance sports car? Will it actually make a difference to global carbon emissions? Well, the answers are no and not much. However, that misses the point, unless you understand the secret master plan alluded to above. Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model. – Elon Musk

For Musk the issue had to do with scale. He knew he couldn’t launch a $35,000 all-electric vehicle because he wouldn’t have the scale necessary to bring costs down that much. The only way Musk could achieve his vision was to make a healthy profit on every car he made and have those profits fund the development of a successive lower cost car.

This plan is essentially the opposite of what classic disruptive innovation theory would recommend. Popularized by Clayton Christensen, disruptive innovation theory suggests that for a new invention to be disruptive it must strip out features, focus on doing one thing well and start at the bottom of a market and move upwards.

Disruptive Innovation Theory Framework – Clayton Christensen

In addition to starting at the low end, disruptive innovations often are enabled by new technologies or new business models. In my blog posts I’ve described these as innovation enablers or runways.

These new technologies or business models are what give disruptive ideas a runway to move up market and take share. A classic example I’ve used in the past is Chromebooks and how they have taken PC share by using cloud computing as the primary computing model.

The framework applied to Chromebooks and PC’s

The theory has proven to be widely applied but it breaks down in the face of examples like the iPhone and Tesla. Clayton Christensen was so convinced of his theory’s universal applicability that after the iPhone was announced he famously predicted it to fail in the market because it didn’t follow the low-end disruption theory framework.

The prediction of the theory would be that Apple won’t succeed with the iPhone…it’s not [truly] disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited. – Clayton Christensen

Since then Christensen has backpedaled by explaining the success of the iPhone as a disruptive innovation to laptop computers. While this is a logical explanation it doesn’t have as much predictive power because at the time of the iPhone’s launch they weren’t positioning it as a disruptor to laptops and very few people were comparing it to other laptops – the comparison was with other phones.

It was while studying this and the story of the iPhone that I felt a new theory was needed, one that was complimentary to disruptive innovation that would describe the iPhone and other similar success stories with reference to the base market. I called that new theory the theory of integrative innovation.

Integrative Innovation

Integrative innovation theory is essentially the opposite of classical disruptive theory. Rather than focus on one job to be done, Integrative Innovations integrate multiple jobs to be done into one solution. For customers, performing those jobs in the unified solution is as good of an experience or better than performing those jobs with dedicated solutions. Because of this integration the cost of the solution when starting out is usually quite high. Correspondingly the value of each job to be done to the customer is additive and has the effect of completely shifting a market upward. Over time the integrative innovator seeks to move down market as quickly as possible in order to reach the mass market. Below is a summary of how this theory works.

In an integrative innovation the new solution combines multiple jobs to be done into one solution. In doing so that so that solution causes a market shift upward because the value of each job is additive to the overall market.

The story of the iPhone’s success is well explained in this new theoretical framework. And it’s also exactly how Steve Jobs positioned the iPhone when he introduced it back in 2007. When he went on stage he said they were launching 3 new products that day, 1) a new iPod, 2) a phone and 3) an internet communicator. Then his punchline was that those aren’t separate products and then showed the iPhone.

When it came to pricing the first iPhone his thought process was clean and simple. He figured that at the time people were paying $299 on a 2 year contract for a new Nokia or Blackberry phone and $199 for a new iPod. With those two value references he priced the new iPhone, at launch, at $499 on a 2 year contract. A few months after launch they reduced the price but even at that price their adoption was substantial.

It’s important to point out that runways were important for the iPhone as well. In the iPhone’s case what truly enabled it to move down market and gain mass adoption was the scale that Apple achieved with production of smaller, low cost chipsets and other hardware. This eventually enabled them to launch the iPhone 5C and now the iPhone 5SE.

In addition to scale, the app store business model gave the iPhone new capabilities that allowed consumers to do even more jobs. This was a revolutionary model for selling software that prior to it was a lot like the wild west. The app store gave consumers a central, safe location to buy software for the iPhone. This ultimately sent the iPhone into new markets and created a platform for app developers to disrupt, in the classical sense, PC based software.

Tesla is an Integrative Innovation

To date I have found no better way, other than my own integrative innovation theory, to explain the success of Tesla. The following is the logic behind that analysis.

The first step to analyzing or predicting an integrative innovation is to identify the jobs that could be integrated into a unified solution. In the case of Tesla, Elon Musk set the bar high by combining what at the time seemed to be two diametrically opposed ideas in a car:

1. High performance
2. Environmental stewardship

Typically it was one or the other. You either bought a gas guzzling Ferrari to achieve high performance or you bought a Toyota Prius to be a good environmental steward. When Tesla launched the Roadster it was a breakthrough in electric vehicle performance that could out perform many of the world’s elite sports cars.

But as mentioned earlier the Roadster was only the first step in the master plan. The second step was what has come to be known as the best car ever made – the Tesla Model S. What was so revolutionary about the Model S is it inherited the performance and environmental stewardship of the Roadster while adding a third capability – family transport. The Model S’ 7 seat design made it competitive with crossovers, minivans and SUV’s for hauling around large family’s such as Musk’s (he has 5 kids).

But even with the Model S the appeal from the mass market was limited because of the steep $75,000 starting price. The pinnacle achievement of any integrative innovation is getting down into the mass market – which thanks to last week’s announcement could come as early as late 2017.

At $35,000 the Model 3 shows significant promise for being a dramatically successful innovation. Below is a diagram of Tesla in light of the integrative innovation framework.

In this framework, using the Toyota Prius as the base market offering that does one job well (as a side note the Prius was a disruptive innovation itself that achieved mass market), the theory would predict the Tesla Model 3 to be a smashing success and eventually eclipse the Prius in annual sales.

To that point, so far Tesla has announced that over 325,000 pre-orders have been placed for the Model 3 – a number that has stunned the industry because it represents the most successful 1 week car launch of all time.

When compared to the Prius’ sales, it’s easy to see that Tesla has indeed achieved mass market appeal.

Based on the data so far available it’s clear that, as the theory of Integrative Innovation predicts, the launch of the Tesla Model 3 has indeed shifted the entire auto industry!

The post Tesla Model 3: An Integrative Innovation Case Study appeared first on Ignition Framework.

“Andy Grove, who helped found Intel and then led the enterprise for years as its CEO and chairman, has taught me some extraordinary things. One of them occurred in a meeting where he and several of his direct reports were plotting the launch of their Celeron microprocessor. I was there as a consultant. The theory of disruption had identified a threat to Intel. Two companies – AMD and Cyrix – had attacked the low end of the microprocessor market, selling much lower-cost chips to companies that were making entry-level computers. They had gained a significant market share and then had begun moving up-market. Intel needed to respond.

During a break in the meeting, Grove asked me, “How do I do this?”

I readily responded that he needed to set up a different, autonomous business unit that had a different overhead structure and its own sales force.

Andy said, in his typical gruff voice, “You are such a naive academic. I asked you how to do it, and you told me what I should do.” He swore and said, “I know what I need to do. I just don’t know how to do it.”

When facing disruption Christensen’s recommendation is important. When it comes to building new businesses, especially those that could put your core business at risk, it’s important to create a new sandbox for that business to isolate it from the broader organization. That way when the forces of corporate inertia take hold, the new business will have a chance to survive and thrive.

But to Andy Grove’s point, how exactly do you do that?

Well in general there are five options.

Option 1: Internal Program

This is likely the most common structure that corporations use when trying to build new businesses. Instead of going through all the legal and organizational complexities involved with creating a new independent entity why not just build it in-house and give the new team their own space?

For the sponsoring company doing the new initiative in-house is not only simpler but also allows for the company to capture the full value of the initiative. In addition it enables the host to fully leverage their existing scale when bringing the new product or service to market.

On the downside however this structure can be fraught with challenges. The biggest challenge being still beholden to the internal forces of corporate inertia. For sustaining innovations that’s usually not a problem but for disruptive or integrative innovations, this can be a killer.

Option 2: Traditional Corporate Venture

Many organizations that reach a meaningful size will consider opening up their own venture fund. One of the more famous examples of this is Google Ventures.

Google Ventures has invested in a number of promising companies including Uber, Slack and DocuSign. For businesses like Google, creating a corporate venture fund can be highly valuable. The main benefit is the relationships created and the opportunities for collaboration between the core business and the new startup/investment. It’s also a great way to create a pipeline for M&A activity.

For a detailed guide on how to build a world-class corporate venture capital organization, see these posts from Evangelos Simoudis, a respected Silicon Valley VC investor.

• Corporate Venture Capital’s Role in Disruptive Innovation Part 1: Institutional VC Disruption
• Corporate Venture Capital’s Role in Disruptive Innovation Part 2: Will the Big Numbers Result In Big Success this Time?
• Corporate Venture Capital’s Role in Innovation Part 3: Setting Up a CVC Organization
• Corporate Venture Capital’s Role in Innovation Part 4: Setting Up a CVC Organization

Option 3: Spin-Out and Spin-In Venture

This concept, made famous by Cisco, is akin to the idea of creating a made-to-order company that is sponsored by the host organization but not controlled. In learning about this model I came across a good article by Bruce Cleveland at Rolling Thunder that explains it well. In it they define a spin-in as the following:

“A company formed with the explicit endorsement and investment – including personnel, cash and IP – by a large company and venture investors. The express purpose of the spin in is to build strategic products and/or go after new markets with the ultimate objective that the large company will acquire the spin in at some point in the future.”

The most famous examples of spin ins were done by Cisco over the last 20 years though their approach has changed somewhat recently. The classic example was when Cisco faced a disruptive new technology, software defined networking or SDN, and carved out a core team of top engineers who they gave substantial equity to build a new business with a new SDN offering. After nearly 2 years these three engineers, Mario Mazzola, Prem Jain, and Luca Cafiero, built the new SDN offering and sold their remaining equity back to Cisco and became multi-millionaires. This article in Business Insider describes it well.

The approach was hailed by Cisco’s then CEO John Chambers as a tried and true way for Cisco to address disruptive threats and retain key talent in the organization. The downside is it led to some resentment among employees who were not chosen to participate in the new venture. Several of those people did end up leaving.

For a detailed case study of the spin-in process and structure, see this case from Stanford Business School where the case pdf can be downloaded for free.

Option 4: Enterprise Hosted Accelerator

These days accelerators are all the rage. Startup founders love them because they provide access to mentors, facilities and seed money to get their idea off the ground. VC’s love them because they provide a systematic approach, often based on Lean Startup principles, to getting entrepreneurs in shape before they are pitched for a substantial investment. Some of the more prominent accelerators such as YCombinator and TechStars have produced breakthrough hits including Airbnb, Reddit, Sphero and Uber.

A more recent take on accelerators has been enterprise hosted accelerator programs. This approach is explained in the book The Lean Enterprise: How Corporations Can Innovate Like Startups. These programs can be setup by TechStars in partnership with a large organization that is seeking to foster disruptive innovations in their industry. For example, the “Powered by Techstars” program has accelerators hosted by Ford, Honda, Verizon, Sprint and McDonalds.

For the host organizations these accelerators can offer fantastic benefits such as the following:

• Access to talented and innovative entrepreneurs in their industry
• Improved corporate culture that fosters new ideas and gives star employees a chance to run with an idea
• An investment and acquisition pipeline to feed business development efforts
• A commercialization platform for R&D efforts that may not fit the traditional business model

On the flip side, the entrepreneurs who work with an enterprise-hosted accelerator get incredible benefits as well including access to deep industry know-how and a ready suitor when the time comes to raise more funds or sell the company.

As the millennial generation continues to proliferate throughout the workforce it’s likely that within 5-10 years many more corporations will have established an enterprise hosted accelerator program.

Option 5: Joint Venture

To round out the list the last option is to setup a joint venture. A joint venture is typically described as a new venture created by two or more existing firms who contribute cash, talent, IP and/or other resources in order to unlock new value. The companies that invested in the JV become the principles of that JV and usually control the board of directors.

The best example of a recent JV that has seen success is Hulu. When online streaming services such as Netflix became recognized as a real threat to the traditional network and cable channels, three of the large networks banded together to create a new online platform that they could grow with and participate in. The three networks that created Hulu were Fox, ABC and NBC.

The biggest opportunity with JV’s is the ability to reach scale quickly and be guided by industry experts from the sponsoring organizations. Often the biggest challenge with JV’s is putting a deal together in the first place and even once it’s put together it can be a challenge to properly manage the direction of the JV given the often competing interests of the partners involved.

For more on how to create a JV, see this article by London Business School professor Sikander Shaukat.

The post Five Ways Large Corporations Structure Innovation Initiatives appeared first on Ignition Framework.

With most radically new innovations two things generally occur:

1. New technology enables a long runway of technological achievement
2. New business models enable a long runway of customer adoption and superior customer experiences

New Technology Runway (Supply Side Runway)

In Tesla’s case the primary new technology runway they have going for them is the rapid decline in the cost of lithium battery technology. In a study by Nature Climate Change they reported that the cost of lithium battery storage technology has declined precipitously over the last decade and will likely continue to decline as additional production scale comes online such as the Tesla Gigafactory in Nevada.

The next several paragraphs are a deep numbers dive into the dramatic drop in prices of lithium batteries. If you are one who gets bored by numbers easily, feel free to skip this portion!

In 2008 the median $/kwh cost for a lithium ion battery was roughly $1000. That was the same year Tesla launched the Roadster at a base price of $110,000. At the time the roadster sported a 57kwh battery. The chart below shows Tesla as the battery cost market leader at around $560/kwh. It’s no stretch to conclude that the battery alone in the Tesla Roadster may well have cost $32,000 – nearly a third of the overall purchase price of the car. According to news reports replacement batteries for the Tesla Roadster cost $40,000 in 2012. This number makes sense since Tesla would make roughly $8,000 on a replacement battery at a gross profit margin of 20%.

Fast forward to 2012 and the median $/kwh cost for a lithium ion battery has dropped almost in half to roughly $550/kwh. That same year the Model S launched at a base price of $80,000 equipped with an 85kwh battery. If the chart is correct, the Model S battery costs were also market leading at roughly $325/kwh. This suggests the battery in the first 85kwh Model S would have cost roughly $28,000. According to Wikipedia, after the 8th year of ownership a replacement 85kwh battery will cost $12,000. If we assume Tesla is making the same 20% GP, $2,400 in this case, on that replacement battery as they did on the Roadster replacement battery then we can conclude that Tesla expects that by the year 2020 their costs for the 85kwh battery will be roughly $9,600 or $113/kwh. Even the predictions below don’t ever get that low. But perhaps the Gigafactory will enable them to achieve it.

Either way the point is to illustrate that thanks to lithium ion battery technology advancements, over the relatively short span of roughly 15 years the costs of producing lithium batteries will have reduced by a factor of 10. That’s the kind of technology progression that can lead to a transformational change.

Below is a chart from that report that illustrates this technology runway:

Another data point to note is the Tesla Powerwall which is designed to allow storage of solar energy for homes in order to reduce reliance on the grid. According to Tesla’s website the Powerwall will launch with a 10kwh model for $3,500 and a 7kwh model for $3,000. Taking the 10kwh model as an example, it assumes a price/kwh of $350. This is right in line when considering the lowest reported Model S battery cost to Tesla is roughly $270/kwh in 2014. If they make $70/kwh on the 10kwh battery that’s also a 20% gross profit margin. However with the 7kwh battery, at a price of $429/kwh, assuming the same costs of $270/kwh, their GP is a healthy 37%. If their cost reductions come in according to plan, the price to homeowners of the 10kwh powerwall could get as low as $1,500.

One thing to note is that these costs are one-time manufacturing costs and not to be compared with the price/kwh of the utility bill. To do those calculations we need to estimate the total number of khw the battery will provide over it’s life. According to Tesla’s website the batteries are rated for 10 year life. Quick math suggests that if the Powerwall is used every day at full capacity for 10 years then it would produce roughly 36,000 kwh’s. In today’s cost of $3,500 that comes out to a $/kwh cost of $0.095/kwh – even lower than most utility bills in America. However that’s just paying for the power coming out of the battery. You still had to pay for the power to go in using solar at roughly $0.14/kwh. So total $/kwh in todays costs are roughly $0.23/kwh.

However in the scaled example the economics become much better. If the 10kwh battery costs homeowners $1,500 and produces 36,000 kwh’s over it’s life then the cost per kwh is $0.04/kwh. Added to solar’s already roughly $0.14/kwh and the total is roughly $0.18/kwh – pretty reasonable cost for going off the grid.

End of the deep numbers dive

Solar itself is another great example of a technology runway. The prices above are really just related to recent years. Over the last 15 years though, solar has experienced a dramatic decline in cost as well.

From the above data it’s clear that when SolarCity was founded in 2006, the runway left for solar was substantial. With the benefit of scale, solar costs have reduced nearly four fold since 2000. If you view the data back far enough that number easily becomes on the order of 10X.

This analysis is easy to do when looking back with the crystal clear benefit of hindsight. But in 2006 when Elon Musk and Lyndon Rive first talked about starting SolarCity they didn’t have the benefit of hindsight to help them. So how would you determine if you still have runway left in a technology if you were looking forward from a certain point? There are a number of helpful tools and signs to look for such as:

Simple Trend Analysis

The quickest and easiest method for forecasting future runway is to look at the cost/performance trend over time. In the case of solar, the primary driver of reduced costs has been reduced manufacturing costs of solar panels themselves. Below is a chart from the Economist that shows the rapid decline in solar panel costs over time:

Suppose you were thinking about the runway for solar and you were in the year 1983. From that year’s perspective, assuming you couldn’t know anything after 1983, you could reasonably conclude that the cost of solar panels would continue to decline over time. That’s a simple way to analyze the trend.

But what if you were in the year 1991 and you saw that the cost of panels has started to go back up a little. Based on the data you would have in 1991, you might conclude that the cost runway has run it’s course. This is where simple trend analysis alone breaks down and its important to consider other factors.

Law of a Credible Expert

In some cases, such as semiconductors and solar photovoltaics, an expert in the field will have proclaimed a law that summarizes the economic runway for that particular technology. In the case of semiconductors that law is Moore’s law after Gordon Moore, a founder of Intel and prominent engineer in the field. His observation states that the performance of integrated circuits doubles every year (by doubling the number of transistors per square inch) and will continue for the foreseeable future. Since he made that observation in 1965, the performance of circuits has for the most part followed that curve.

In the case of solar, Swanson’s Law, after SunPower co-founder Richard Swanson, illustrated that the price of solar PV panels drops by roughly 20% for every doubling of cumulative shipped volume. This rule of thumb has roughly defined the economics of solar panels since the 80’s. The below chart illustrates this impact of scaling well.

Source: Investment U

Laws of credible experts are more of a luxury than a norm. Given this, how can we determine if there is still runway in a technology without such declared “laws?” Because even if the technology you are analyzing does have a credible law associated with it, at some point that law will fizzle out.

Production Volume Analysis

One way to know if the technology has run its course is to analyze its production volume relative to the possible total market you envision it could have. In the case of solar, from SolarCity’s standpoint the total available market could be every home in America having rooftop solar. It could even be much bigger than that if you include commercial buildings and utilities. Knowing the size of the market relative to the current market penetration can help you determine if the technology you’re analyzing still has room for substantial improvement. Given solar’s limited market share, additional scale could benefit solar for years into the future.

Cost Floor Analysis

Another helpful method of determining if you have a runway ahead or not is the use of cost floor analysis. This type of analysis is more helpful with hardware endeavors versus software. The reason is because hardware deals with atoms – things you can see, feel and touch, while software deals with bits – something much less tangible. At a fundamental level, costs of hardware all come down to two components:

1. The spot price of the atoms that comprise the hardware
2. The costs associated with re-arranging the atoms into a form that provides value

In the software world the same rule applies but the advantage to software, which is why it has and will continue to enjoy an almost limitless runway, is that bits are practically free and the cost of rearranging bits are significantly lower than the cost of rearranging atoms.

Take solar panels for example. In solar panels there are essentially 8 components:

1. Aluminum frame
2. Junction box
3. Plastic backing
4. Laminate (2x)
5. Solar PV cells made of mostly Polysilicon
6. Glass
7. Inverter
8. Mounting materials (rails, screws, etc.)

If we wanted to know the cost floor on solar panel technology all we would need to do is weigh the components and multiply each weight by the spot price of each component. After summing those numbers you would basically arrive at an estimate of the cost of the atoms involved.

The next step then would be to apply an estimate for the cost of re-arranging those atoms into the form factor of a finished solar system. This process can be tricky depending on the complexity involved in manufacturing but a good starting point is to assume that re-arranging those atoms will cost roughly 1X the cost of the atoms themselves. So if the total cost of atoms going into a solar panel were $100 then we could assume that the cost to re-arrange those atoms into actual solar panels was $100 bringing the total to $200.

The benefit of doing this analysis is when comparing your cost floor with the current costs available in the market. If there’s a significant difference, say 10X or $1400, then you could have a nice long technology runway ahead with cost reductions. A 10X improvement at scale is a good rough estimate of how to tell if your runway is long enough for transformational progress.

New Business Model Runway (Demand Side Runway)

The next important aspect of transformational innovation is a runway provided by new business models. New business models are important because they improve the desirability, accessibility and convenience of getting a new idea to the target customer. For example, in SolarCity’s case even though they had a good technology runway in front of them they still needed a new business model to help consumers adopt the technology. At issue was the high cost of solar panels that most consumers couldn’t afford even if over the long term the investment made sense. To address this issue SolarCity pioneered two alternative methods of purchasing solar systems 1) Solar Leases and 2) Power Purchase Agreements (or PPA’s). The benefit these provided to consumers was avoiding the high up-front cost of solar systems and immediately enjoying the cost savings thanks to long-term financing that was bundled into the agreements. Without this new business model runway, SolarCity would not have achieved significant results in selling solar systems.

Another example is Tesla’s strategy of using direct to consumer stores. The traditional auto industry sells cars through a dealer network where third parties establish large store fronts with a massive buildup of car inventory to sell in their local area. In contrast, Tesla puts up a much smaller, less expensive storefront in malls or other high traffic areas where there is no on-site inventory (cars on display are showroom only) and all orders are processed online.

This structure gives Tesla two critically important advantages:

1. Face to face customer interactions. Because the sales force at Tesla stores are Tesla employees, feedback from consumers can be much more easily funneled to the engineering and design team at Tesla. This is a stark contrast to the two step feedback that occurs in the traditional auto industry where customers give their feedback to third parties who may or may not pass it along to the manufacturers.
2. Substantially lower supply chain costs. The direct sales model eliminates the markup from wholesalers and dealers and substantially reduces the amount of inventory needed. Additionally the complexity of managing order flow from customers to manufacturers and back is substantially reduced thanks to the direct sales model.

Another example of this was the invention of the iPhone by Apple in 2007. Most phones at the time were purchased through wireless carrier stores where the carriers controlled the customer sale and service experience. Apple was fed up with this approach and created a new way: direct to consumer sales through Apple stores and activation of the devices through Apple’s iTunes software. In the beginning stages of the iPhone, only this direct to consumer business model could ensure Apple’s tight control over the customer experience – something not to be polluted by third-party carriers.

When thinking through the various business models your innovation could utilize, keep in mind that the phase your industry is transitioning to is of utmost importance when designing new business models. Study this post to know what stage your industry may be in or going into. Also it’s often helpful, if for nothing else but a thought experiment, to think through how your innovation could be enhanced by some of the business models that are trending in popularity. These include the following:

1. Freemium
2. ______ as a service
3. On demand (like Uber)
4. Marketplace or auctions
5. Crowd funding
6. Crowd sourcing
7. Etc.

One reason these business models are growing is because in many ways they provide the consumer with a 10X improvement in their experience. If you’ve ever hailed a cab the old way and tried Uber as well, you know what I’m talking about.

Conclusion

As you think about your next big idea be sure to analyze it in terms of both technology runway and business model runway. If you are confident the idea could achieve a 10X improvement in technology cost or performance and/or you think wrapping it in a new business model could provide a 10X improvement in customer experience then you probably have a massively successful idea in the making!

The post The Two Enabling Forces of Innovation: New Technologies and New Business Models appeared first on Ignition Framework.

In this post I would like to share with you the single most powerful new business planning tool I have ever created and used. It’s called the Innovator’s Canvas and it helps both entrepreneurs and intra-prenueurs systematically think through and validate or invalidate their new innovation ideas and business model assumptions. Whatever you’re new idea is, this process can help fill in the details and quickly and cheaply tell you if you’re on the right track or not. In many ways it’s the business plan of the future.

But first, a little background…

The Dreaded 100 Page Business Plan

Back in the 90’s and early 2000’s, creating huge business plans was all the rage. Endless presentation files and books of up to 100 or more pages used to be commonplace in documenting and describing a new business idea. All this effort was done to please investors who wanted to know what “the plan” was before they made a big investment in a startup.

Trouble is most of it was hogwash. Precious time and paper was wasted on trying to define every detail of a business idea that would inevitably require monthly, if not weekly, changes and course corrections as assumptions behind the business plan were destroyed by the wrath of the open market. But because so much time and thought had gone into a 100+ page business plan, entrepreneurs would become fixated on the idea that “if I just execute the plan it will all work out.” After all they did spend a lot of time on their plan, it must be right! Right?

Unfortunately no; in fact the opposite became true: the more time you spent thinking and documenting details of your plan, the less right that plan became.

But you still needed a plan. No investor worth his salt would ever invest in a startup that had no plan.  And no entrepreneur would succeed without at least a basic plan in place.

Fortunately there was a better way.

From 100 Pages To One Page

In 2008 Alexander Osterwalder, a Swiss business theorist and PhD in management information systems, published a breakthrough single page update to the process of creating a business plan and called it the “Business Model Canvas.” This document helped dramatically simplify and focus the process of creating a business plan to documenting the essential elements on to one single page. These elements were: value proposition, customers, channels, relationships, partnerships, activities, resources, costs and revenues. He proposed that creating a business plan essentially become filling out nine boxes of assumptions on a single piece of paper.

The Business Model Canvas became the answer to the 100+ page business plan.

Business Model Canvas: nine business model building blocks, Osterwalder, Pigneur & al.

Thanks to the dramatically simpler format and the categorization of the essential elements of a business plan, the Business Model Canvas was well received and has become a staple in the startup and new business development world.

Osterwalder (et al) didn’t stop there, in 2014 they released an update to the business model canvas by providing more detail about the customer and value proposition sections by creating the Value Proposition Canvas. This new canvas provided a simplified way to think through the heart of the business model.

Combined these two canvases provided a strong foundational framework for thinking through your new business opportunity.

But as great as it was, it was only helpful from a thought process/documentation perspective. In other words, by itself it was not able to answer the fundamental question of every new business: are the assumptions you have right or not?

Steve Blank and the Lean Startup Movement

To answer those hard questions, Steve Blank, a famous investor and professor at UC Berkeley had been working on a process called the Lean Startup that startups could utilize to validate or invalidate their business model assumptions. In 2004 he invested in a startup led by Eric Ries who enrolled in his course at UC Berkeley. For Ries this provided a mentoring experience that ultimately led to him writing the international best-seller “The Lean Startup.” Shortly after the book was released Steve Blank wrote an article in the Harvard Business Review titled “Why The Lean Startup Changes Everything” where he explained the concept. I highly recommend reading it if you haven’t already.

In the Lean Startup methodology a few principles are essential:

• Discover who your customer is using interviews and MVP tests before building out and executing the entire business plan (I wrote a blog post on it)
• Increase the rate of experimentation by minimizing the total time through the learning loop

These Lean Startup principles formed the foundation of a revolutionary change in the way startups create and validate new ventures. But despite the usefulness of the principles, entrepreneurs and investors still needed a way to track their progress towards building a repeatable and sustainable business model.

That’s when Steve Blank came up with what basically amounts to a business model scoreboard.

Investment Readiness Levels

Taking a page from NASA’s approach to technology readiness levels, Blank created what he calls “Investment Readiness Levels.” He wrote a blog post about it here. Below are his levels on the left and my interpretation of them on the right.

With this tool both investors and entrepreneurs could easily see what the major milestones are in the creation of a new business and where they are along that spectrum.

The combination of these tools has proven highly valuable among startups and big businesses looking to build new product lines or business models. But as I used them in my innovation efforts I found them to be lacking a couple essential elements and characteristics. I felt as if both the investment readiness levels, the business model canvas and value proposition canvas were 80% complete, almost like an MVP, and nobody had bothered to put them all together into a finished product. That’s when I decided to create The Innovators Canvas.

The Innovators Canvas

“If I have seen further, it is by standing on the shoulders of giants.” – Sir Isaac Newton

The goal of the Innovator’s Canvas is not just to provide a canvas template but to provide a systematic process by which business models can be documented, tested and iteratively created until you have achieved either fast/cheap failure or certain success. Ultimately those are the two best outcomes any entrepreneur (or intrapreneur) can expect.

The question you might have is “why did you feel the need to change the existing canvas?” Here’s my answer:

1. The first thing I didn’t like in using Osterwalder’s two canvases, the business model canvas and the value proposition canvas, is that there were two of them to begin with. From a practical standpoint I found that combining those two canvases into one was a logical first step.
2. The key activities box was unnecessary – especially when these two were combined.
3. In 2014 I was exposed to the Lean Canvas by Ash Maurya in which he made two additions that seemed helpful: 1) Unfair Advantage and 2) Key Metrics. He made other changes that I didn’t find as useful but these two additions were very helpful.
4. Even with these changes, I still found the resulting canvas to be lacking something essential. It felt like the “what” and “how” of each business idea was captured but not the “why”. In a blog post on the Apple Watch I discussed the importance of why and linked to a TED talk by Simon Sinek. If you haven’t seen that post you can check it out here. Having identified this as the missing piece of the puzzle I decided to add it as the top center item just above value proposition. No business idea should ever be seriously considered unless you have a compelling why behind it.

With these four points in mind I’d like to introduce to you what I call the Innovator’s Canvas:

With this as the template I used in developing new lines of business I quickly found that the typical format of saving this as a pdf and using sticky notes to document each cell was not going to work. Sticky notes are a great tool to use initially but I didn’t want to worry about sticky notes falling off or not being able to read the sloppy handwriting on them so I created this template from scratch in PowerPoint.

Having it in PowerPoint gave it several advantages that I later discovered were essential:

1. It could be clearly and easily used in presentations – something the printed pdf’s didn’t do very well
2. Since it is built as a table in PowerPoint, each individual cell could be colored or shaded according to the relative risk of each assumption
3. Others could easily use and modify it as they saw fit

After creating the initial blank template the next thing to do was create a thorough explanation of each cell on the canvas. The image below provides these explanations.

With the Innovator’s canvas we now have a thorough template for documenting complete business model ideas. If anyone has a business idea that they want to get serious about, the first step is documenting the idea in the form of the Innovator’s Canvas. This forces the individual or team to think through each of the essential elements of the idea and begin to “put meat on the bone” so to speak. But just having documentation of the idea is merely the first step toward true business model validation.

The Process of Business Model Validation

In my experience ideas tend to be a dime a dozen. Many people at some point have had an idea that they loved and yearned to pursue. Some even have a number of ideas jumbling around in their mind that they have always thought would make a great business. Having a lot of ideas is great but to make any progress one needs to know where to start. That’s why every new business model idea needs to be ranked and validated or invalidated as quickly and cheaply as possible.

Ranking Business Models

To help you know which business model you should pursue testing first I’ve come up with a quick set of questions to think through for each business model idea:

1. How big of an opportunity from a market size and revenue standpoint is this business model?
2. How well does it fit within the core values and capabilities of the founding team or sponsor organization?
3. How difficult will it be to build, grow and sustain this business model idea?

The answers don’t need to be exact and there are no firm thresholds to meet when doing this (unless you want to establish firm thresholds) but the idea is to create a quick relative ranking of each business model idea so you know where to focus your efforts. Once you’ve thought through those questions and arrived at a ranking of business model ideas the next step is validation of those ideas.

Business Model Validation

To help facilitate this I’ve broken up the canvas into four essential elements:

1. Problem Identification: We have verified a customer segment with a burning problem/need that they are willing to pay to fix
2. Problem/Solution Fit: We have verified a solution to their problem that they would buy right now if it were available
3. Product/Market Fit: We have verified a channel to reach customers for sale and delivery of solution
4. Scalability: We have verified that the business model can be scaled profitably and sustainably

Below is the canvas as separated by these four areas:

One other way to help facilitate validation, especially in situations when business model ideas are competing with each other, I’ve modified Steve Blanks Investment Readiness Levels by turning them on the side and adding the critical step of defining a “why.” The result is essentially a business model scoreboard.

Notice how this scoreboard also has three general phases that line up with the three general regions of the business model canvas.

Note that the steps 1-10 represent essential stages in the business model validation process. Below is a quick explanation of how to use the scoreboard:

1. Write out each business model idea your organization is considering
2. Shade the stages each business model is in by using the following as a guide:
   • Shade the cell green if you have completed the requirements for that stage (requirements for each stage are listed below)
   • Shade yellow if the stage is actively being worked on or there is risk to achieving the requirements of that stage
   • Shade red if the stage has been attempted in a serious and deliberate manner but for various reasons the criteria is not being met. This is a signal that you may need to pivot from that business model into another.
3. Track each business model’s progress and focus on what is working rather than trying to always “fit square pegs in round holes.”

Below are the criteria for each stage:

1. Canvas: You have created a business model canvas for this idea
2. Customer / Market / Competitive Analysis: You have done an initial customer, market and competitive analysis on the idea and have shown that the idea has promise of meeting customer needs, has a market size that meets or exceeds your targets and does not pose a substantial competitive threat or barrier to entry.
3. Problem / Solution Fit Test: You have discussed the idea with potential customers and at least 6-8 B2B customers or 15-20 B2C customers within a defined segment have said that the solution solves a compelling pain point and they would buy it right now if it were available.
4. The Why: You have defined a clear and emotionally compelling “Why” behind the business model idea.
5. MVP Test: You have created an MVP (defined as the smallest test you can devise to try out a specific idea or hypothesis – usually not an actual product but rather some form of simulation or prototype) and tested it with potential customers.
6. Product Market Fit: You have sold the product or service through a sustainable channel and the solution is starting to gain meaningful traction in the market.
7. Right Side of the Canvas: You have validated the value proposition, channel, customer segment with pains/gains/jobs, ongoing customer relationship model and the revenue stream. You may not have a profitable business yet but you do have a business that is generating revenue and creating value for customers.
8. Product Vision: You have clearly defined the end-state of the product work representing all target personas, vertical markets and/or geographies.
9. Left Side of the Canvas: Your business has validated its cost assumptions, developed essential partnerships, established a credible unfair advantage and leveraged your key resources. In short the business is now profitable and sustainable but may or may not yet be scaled.
10. Metric that Matters: You have identified the leading metrics that predict the outcome of the lagging metrics. You focus your efforts on moving those leading metrics in order to scale or further optimize the business.

As you get into doing this for your own startup or organization a few rules are essential to this process working properly.

1. One team must be dedicated to validating one business model at a time. It is not feasible or wise to stretch one team over multiple business models. You can call these teams “Business Model Search Teams” or “Product Discovery Teams”
2. Each team has minimum of three and maximum of five members, typically comprised of the following roles:
   1. Product Manager (founder)
   2. Lead Engineer
   3. Lead Designer
   4. User Researcher (optional)
3. Team goal: Identify 6-8 B2B or 15-20 B2C “Earlyvangelist” customers. These are customers who care disproportionately about the problem to be solved and are willing to work closely with the team throughout the discovery process to ensure the product or idea is done right.
4. The teams primary day to day duties consist of devising and running experiments.

In order to properly run an experiment the product discovery team must document the assumptions before running the experiment and document the results during and after the experiment and either validate or invalidate their assumptions. Below is an experiment card I created to help facilitate the process of documenting an experiment.

As you design and execute experiments you’ll better understand how to hone in on addressing your target customers needs. Note that the product discovery team, in ideal conditions, should be running at least 2 experiments per week. The more high quality experiments you can run the faster you’ll be at climbing the learning curve and achieving business model success.

To manage the workflow of experiments and team efforts a daily or 2-3 times per week stand-up meeting can help organize the teams efforts and ensure that the process is being followed. During that stand-up meeting the primary topic should be discussing the results of the previous days/weeks experiments and quick coordination for carrying out the next set of experiments.

Conclusion

In conclusion there are three basic steps in the process of business model innovation:

1. Customer discovery
2. Business model design
3. Business model validation

As you get more familiar with this process you’ll start to discover the power of framing it in this way. Ultimately the value of it is that it serves as a living business plan document and scoreboard that is updated frequently and shows you whether you are on track or not.

For a PowerPoint version of these documents, visit this link.

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