• Big Data & Technology
  • Barry Libert
  • JUL 12, 2019

Companies Must Learn To Edit Their Business Models

The dashboard of every sports car has three gauges. They tell us when to speed up, shift gears and refuel. Companies are a bit like sports cars, except that the dashboards are actually totally inadequate for getting us where we need to go.

Companies must learn to edit their genomes in order to evolve.

Companies must learn to edit their genomes in order to evolve.GETTY

According to a recent survey, CEOs believe the greatest threats to their growth are the speed of technological change, changing consumer behavior, and the availability of key skills. In other words, they need to speed up (to keep pace with technology), shift gears (to create new business models), and refuel (to have the right skills and mindset).

Think about the myriad reports sent to your board prepared by your executive team every quarter. How many give them actually tell you whether to speed up, shift gears and refuel? Not the usual financial reports. They tell you where you are but not where you are going. Sales and marketing reports tell you about where your business is going, but not where it should be going or where your customers are headed. Operational reports tell you about incremental gains in your current business, not transformational opportunities that lie beyond your borders. And no reports tell you the board and executive about what skills they are lacking in order to shift directions.

Through the study of thousands of companies and a comprehensive review of management research, we have identified a new foundation for corporate reporting that reveals the blind spots in traditional analysis and gives clear and actionable direction on where speed up, shift gears and refuel.

A major reason for the blind spots in traditional reporting is the narrow view of assets taken by Generally Accepted Accounting Principles (GAAP). The industrial economy was built on hard, tangible assets, and this is where most of our innovation in financial reporting stopped. The information economy is built on intangible assets, which are tracked and measured haphazardly. Most reporting measures stocks and flows of financial and physical capital, but there are actually three other kinds of capital that are equally vital: intellectual, human and relationship capital.

  • Intellectual capital is the thoughts, insights and collective wisdom that individuals and organizations create. For example, trademarks, brands, patents, software and data.
  • Human capital is the labor of employees, subcontractors, partners and consultants. For example, time, labor, skills and effort are all part of human capital
  • Relationship capital includes business (customer, prospect, investor, partner) and personal (friends, family and neighbors). For example, social and business networks as well as financial exchanges like the NYSE.

We call this set of five types of capital the business genome. Just as human DNA is made up of four building blocks, from which all life arises in its remarkable variety, so the company genome is made up of these five building blocks. Each company is unique in creating and combining these building blocks in different ways.

By measuring and monitoring the value genome, companies can see exactly where they need to speed up, transform, or refuel to keep their business and mental models driving growth and value. In our research, we have analyzed thousands of publicly companies through the lens of this corporate value genome, and found that four different business models emerged – each using different proportions of these components and different economic profiles.

What we found was that leadership teams tend to have innate biases for certain asset types, and that these preferences drove business model. For example:

  • In the industrial economy, most companies focused on physical value chains – making, marketing and selling things;
  • In the Services economy, the value changes were human—labor used to service the things that the industrial economy produced (remember the Maytag Man);
  • In the Technology age, the value chain became intellectual – software and data that could be harnessed from our mind, not from our body; and
  • In the age of Platforms, based on the Internet and hyper connectivity, the value chain adapted again – this time it to leverage relationships and networks.

In each age, the marginal cost of growth shrunk while the base of opportunity grew. In the first three ages, the growth curve was linear. In the last age, due to the power of the network, growth was exponential. However, executives continue to apply thinking of prior ages into the current age and it doesn’t work. In today’s age of platforms and intangibles, exponential mindsets are critical. You can only make one car at a time, or deliver one hour of services, but in the knowledge and network age, an organization can create infinite unlimited intellectual capital and generate unbounded relationships through digital platforms.

Most companies have an area of focus, but all are hybrids to some degree—leveraging the different components in different proportions. For example, most retailers put almost 100% of their focus on physical capital. Amazon, on the other hand, complements a foundation in physical capital with extensive investment in intellectual capital and relationship capital (through their seller marketplace).

The idea of reporting on companies using this framework is very appealing, but is it practical? Luckily, machine learning and artificial intelligence make this type of analysis possible at scale. We have prototyped a machine learning system that can analyze company data and infer the mix of capital types. This enables companies to automatically and dynamically assess where they are in relation to their own journey and to their competitors.

Like a good driver, a leader needs to know when to speed up to catch the competition, when to shift investment into the right kinds of capital, and when to refuel with new skills, mental models and board members. Just as the human genome offers the prospect of personalized medicine, the value genome offers the prospect of tailored capital editing—refocusing companies on high-value, scalable assets. It is time for all leaders to know their organization’s economic genome so that they can get back in the driver’s seat and keep pace.

The Harvard Innovation Lab

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The Harvard Innovation Lab


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