by Pat Bodin
Capability
Your capabilities support your value proposition—the “how” and “what” to your “why”. For LEGO, the capability of plastic blocks supports its value proposition of teaching problem-solving skills.
Capability component #1: Resources (internal)
Capabilities are built from three components, the first of which is the internal resources of your organization: intellectual capital, brick and mortar, human resources, financial capital, political capital. Here are some resources a hospital might have:
• People (administration, nurses, physicians)
• Equipment (MRI machines, beds, stethoscopes)
• Financial capital (debt, endowments)
• Political capital (community involvement, relationships with lawmakers)
Capability component #2: Partners (leverage)
You also need external resources. These resources are owned not by you but by another company. Why would you use others’ resources instead of acquiring your own? Because you want to leverage others’ expertise and equipment. Instead of expending resources to reach expert status, partner with the expert.
Technology companies may partner with a data analytics provider, a multiple development provider, a digitalization provider. Healthcare companies partner with labs, insurers, app providers for Electronic Medical Records software, equipment provides like Siemens, food service partners for the cafeteria.
Capability component #3: Activities (process and policy)
We must integrate these internal resources and external resources into an ongoing production model. Doing business ad hoc slows the process down because it demands thought every time. Instead, we must set up activities—what we might call processes or policies.
Consider the mission-based organization of a police force. One policy is that when the 911 operator dispatches officers, their body cameras turn on. That policy should quickly become routine, such that in every critical situation the higher-ups have visibility even if they are not on site.
I ask many of my speaking audiences how many applications and how many processes the average business has. Generally, they think a business has few applications and many processes. The problem is that they’re confusing process and procedures.
See, there are only a few processes in any given business. Here are some of the processes of a healthcare organization:
• Admissions
• Discharge
• Housekeeping
• Scheduling
• Data analysis
• Point of care
• Training
So, to create a capability, you need internal resources and external resources (partners) and activities: processes and policies that enable you to carry out a task repeatedly and sustainably.
Packaging
Everything above the centerline of the Business Model Canvas drives the value proposition. Everything beneath the line drives capabilities. Packaging is how you present the combination of the value proposition and the capability. For instance, one could express the iPhone’s value proposition as “One device that does everything.” The capability is the product, the phone, that fulfills the promise.
Packaging refers, literally, to the box that the iPhone comes in. That is the physical, tangible presentation of the product to the customer. However, packaging is also conceptual. Apple “packages” its value proposition and capability together by clearly explaining them to prospects via its website and advertising.15 Prospects who find the packaging easy to digest are more likely to purchase the product. So, packaging is how you present a product or service, both physically and conceptually.
How well you package value proposition and capability together affects your margins. Have you ever opened an Apple product? It’s like Christmas! Opening the iPhone box is exciting in and of itself. In fact, to “ensure that opening the box is a unique experience, Apple employs a designer whose sole job is packaging. The company also has a designer…devoted to opening hundreds of prototype boxes. That designer creates and tests endless versions of box shape, angles and tapes.”16
Packaging reinforces brand and is one reason the customer can choose you over competitors. Packaging your value proposition and capability excellently will increase your gross margin.
Cost
Of course, delivering your capabilities costs you something. These costs may be fixed, like renting a facility, or variable, like using more electricity for an extra production run. Costs offset revenue, and in a commercial company, the difference between the two is profitability.
Summary
Why think about business models? Because thinking this way helps you tie what you do into what your business needs. Technologists are often treated like short-order cooks: “Do this” and “Do that” with no sense of direction. They are given orders to do certain tasks but not told how they are relevant to the business. To become relevant, technologists must get ahead of the game and figure out why people are “ordering” such-and-such. Then, being informed, the technologist can deliver the right solution— maybe even a better one than they were asked for. That is how the business model ties into Michael Porter’s value chain: the business model helps you connect Red support to Blue enablement to Green strategy.
Chapter 11.
Risk
Risk substantially impacts the business model. If technologists are to be relevant enablers, they must grasp the perceived risks that leadership deals with daily. I have spent time in many business environments and it has been my observation that most technology leaders do not truly understand the risks of their own businesses. Why? Because technologists dwell in a place removed from other business people. The technologist only sees the macro-economic or competitive risk from an internal viewpoint, therefore many times those risk don’t resonate with them since it’s not directly impacting them. Technologists struggle to comprehend and empathize these risks.
To learn about risk, let’s return to the Form 10-K. Earlier, we found the value proposition in Section 1. Risks are enumerated after that section in Section or Item 1a. Here are a few of the risks Coca-Cola lists on its 10-K (page 10).
• “Obesity and other health-related concerns may reduce demand for some of our products.
• Water scarcity and poor quality could negatively impact the Coca-Cola system’s costs and capacity.
• If we do not address evolving consumer preferences, our business could suffer.
• Increased competition and capabilities in the marketplace could hurt our business.
• If we are not successful in our innovation activities, our financial results may be negatively affected.
• We rely on our bottling partners for a significant portion of our business. If we are unable to maintain good relationships with our bottling partners, our business could suffer.”17
Once you know the risks your leadership is worried about, you can become relevant simply by connecting your current projects to those risks. Are you trying to copy a feature your competitor beat you to? That’s competitive risk. Are you developing a new product you think the market will love? Innovation risk. Are you customizing a program to please a client? Relationship risk. I’ll bet you can connect your most significant projects to business risks quite easily. Then, next time you talk with a Green leader, share how much time you’ve spent this past month reducing the risk the business faces. To be relevant, attach the projects you work on to risks associated with your business.
Data collection and mind mapping
The need to attach projects to risks systematically demands a new data collection methodology. I recommend mind mapping. If you’ve never used mind mapping before, think about a pad of sticky notes. You take every piece of information you know about a given subject, put each one on a separate note, and place it onto a whiteboard. Next, you organize the notes by perceiving patterns and grouping related notes into categories. Finally, you step back and visually apprehend the whole topic.
Mind mapping
can also be done digitally. (Save the trees!) The program I use is XMind, which has a very shallow learning curve. You can become adept at it in about half an hour. It’s available for both Windows and Mac, and—best of all—the basic version is free!18
Now you can write and post your sticky notes electronically. Collect and collate data. You’ll begin to notice connections—like connections between the work you do every day and the business risks Green strategists can’t stop thinking about.
Macroeconomic risk: PESTLE
PESTLE is a helpful tool for analyzing the microeconomic and macroeconomic risks threatening your organization. Originally known as PEST, this tool has in more recent years been given an L and final E to represent additional risks. It categorizes risks associated with an organization so that stakeholders can systematically identify future obstacles.
The beauty of using PESTLE to analyze the outside world is that it forces you to start thinking Green. It helps you develop questions that resonate with Green people. While simple, it’s extremely effective and powerful.
PESTLE is an acronym, standing for Political, Economic, Social, Technology, Legal, and Ecological. Here are some examples of risks within each category.19
Political
• Government stability
• Freedom of speech, corruption, party in control
• Regulation trends
• Tax policy, and trade controls
• War
• Government policy
• Elections
• Terrorism
• Likely changes to the political environment
Economic
• Stage of business cycle
• Current and projected economic growth
• International trends
• Job growth
• Inflation and interest rates
• Unemployment and labor supply
• Levels of disposable income across economy and income distribution
• Globalization
• Likely changes to the economic environment
Social
• Population growth and demographics
• Health, education, and social mobility of the population
• Consumer attitudes
• Advertising and media
• National and regional culture
• Lifestyle choices and attitudes to these
• Levels of health and education
• Major events
• Socio-cultural changes
Technological
• Impact of new technologies
• Inventions and innovations
• The internet and how it affects working and business
• Licensing and patents
• Research funding and development
Legal
• Home legislation
• International legislation
• Employment law
• New laws
• Regulatory bodies
• Environmental regulation
• Industry-specific regulations
• Consumer protection
Ecological
• Ecology
• International environmental issues
• National environmental issues
• Local environmental issues
• Environmental regulations
In summary, to understand Green, you must grasp how your business works on the macro level. You must connect your projects to the specific risks your business is facing. How? By collecting data and organizing it through mind mapping. PESTLE is a tool that helps you identify risks your business is facing. After you identify the risk for Green, share with your business leaders how you can help mitigate their risk.
Once you have some experience using PESTLE, you can use it on the fly in conversations. Listen to what the Green strategist is saying, gather data from his words, and connect that data to risks. Ask questions to make latent risks visible and active. Then, offer a solution: “It sounds like you’re dealing with major political risk. We might be able to resolve that by….” The goal of mind mapping and thinking through PESTLE is recognizing risks to the Green strategies and helping enable them to mitigate those risks. Every risk is a growth opportunity.
Competitive risk: Porter’s Five Forces
The second pronounced risk in any organization is competitive risk. Michael Porter, who also developed the value chaining concepts, developed a tool called the Five Forces to evaluate competitive risk.20 This tool alone will not make you an expert at competitive threat assessment—but I don’t want you to be one. You simply need to become aware, then to understand. This tool will make you aware of competitive risks and help you understand them.
Threat of new entry
On the top of the Y-axis lies the threat of new entry into your market. A new entry is an organization that has essentially the same value proposition as you, with essentially the same business model as you.
Let’s say you are part of a New York taxi company in 2005. How much risk of new entries into your market are you exposed to? Very little. You have very little risk, because to gain the right to operate a taxi business in New York City, a person must purchase a medallion that cost (in 2005) over $1 million. The cost of entry into that market was extremely high. Every newcomer to the taxi market had a $1 million up-front expense—before even being able to buy a car!
Therefore, with that business model, there was very low competitive risk from a new entry perspective. On a scale of 1–5, with 1 being all risk and 5 being no risk, the threat of new entry for a New York taxi company in 2005 was 4.
Here’s another quick example. What do you think is the threat of new entry for a mom-and-pop grocery store in a medium-sized town, when a Big Box company just built a new store in the next town over? I’d say it’s a 2, or even a 1. The Big Box store has a wider selection at a dramatically lower cost, which makes it extremely hard to compete with.
Here are some factors influencing the threat of new entry.21
• Time and cost of entry
• Specialist knowledge
• Economies of scale
• Cost advantages
• Technology protection
• Barriers to entry
One group of researchers was curious about what company leaders fear most today. So, they conducted some studies to find out. The researchers asked business leaders, “What aspects of competition do you fear most?” Interestingly, the most common answer did not concern existing competitors. Business leaders were primarily worried about competitors who do not exist today, but will come out of nowhere and hit them in two or three years’ time.
In today’s world, new entries may successfully compete against long-established firms. Business models are replicated or improved. Business leaders cannot plan many years ahead—that luxury is gone. Staying ahead means adapting quickly, which pressures Green, Blue, and Red alike.
Innovation is difficult for many large organizations, because over the years it has ceased to be part of their DNA. Their culture is used to the status quo. The companies have been built with a command-and-control mindset; they’ve achieved success by constantly innovating on the small scale.
Think about Intel’s historical chip manufacturing process, the “tick-tock model”. Each year, Intel strove to complete a “tick” (a shrinking of the process technology) or a “tock” (a new microarchitecture). Those changes consistently improved their microchips.
So far, Intel has innovated well. Yet, think about Nokia, Xerox, and Kodak, companies that failed to embrace change and adapt quickly in the market. Nokia was one of the first companies to develop a smartphone.22 In 2007, its research and development (R&D) budget was five times larger than Apple’s, but bureaucracy and mismanagement of the R&D budget (among other issues) contributed to its downfall.23 Nokia is no longer the market leader it once was.
Uber is a classic example of disruption. It revolutionized the taxicab market and has permanently ch
anged the transportation industry. Surprisingly, our world is so volatile that the disruptor is now being disrupted in many markets. For instance, in Asia we have Grab, another ridesharing service. Uber disrupted taxi drivers in New York City—now Grab is disrupting Uber in some Asian markets.24 For example, Jakarta has bad traffic jams. Uber’s cars can get caught in traffic. So, Grab introduced GrabBike: You hitch a ride on a motorcycle. The motorcycle can weave in and out, driving around the cars in the traffic jam, helping you to cross the city much faster.25
That’s one thing I love about Asia: there are many technologies in Asia that have not yet arrived in other parts of the world. It’s just a question of time, though, before innovations there expand to other markets, just as western innovations make their way over there.
It’s all about the business model. How can it generate better value for customers? How can it provide a better, more personalized experience? IT technologists are in the middle of it all. They must embrace the willingness to change and lead innovation efforts.
As you strive to be an enabler at your company, realize that innovation is happening all around the world. The world is much smaller than you think it is. Keep your eyes moving around the globe! Learn from innovative foreign companies; apply their strategies to your own business.
Threat of substitution
A new entry is an organization that has essentially the same value proposition as you, with essentially the same business model as you. Now, other organizations have the same value proposition, but reach it in a totally different way—their business model is different. An organization like that is not a new entry, but a threat of substitution.
