We're going to turn this over to Langdon Morris to talk about business models. We talk about business models a lot but we might not know what they are.

Let's take a few moment break while we set up for this.

If you can please take your seats. You are in for a treat here. Langdon Morris and InnovationLabs has been our partner on these conferences. Langdon created that one slide that encapsulates our research. Langdon does a lot of consulting on Innovation and he is here to talk about business models.

Allen Kay says that point of view is really important.

I was working with a client last week and after we were finished they said, that's too theoretical for us. Theory is really important. We use maps to learn where we are and they help us orient ourselves. During the cold war the KGB knew this and they published bad maps on purpose to confuse us.

This is a map of reality. The exponential curve represents reality in some very important ways. This is the growth of population, this is Moore's law. This is the GDP growth. My proposition is that the red line represents reality and most organizations are not capable of dealing with exponential change. That's important because you manage based on what you perceive reality is.

You have to manage to this reality - which creates challenges for most organizations. This reality creates complexity. How do you manage in a complex world?

Creative destruction is a process of creating and destroying companies. We have seen a lot of organizations that have disappeared. Some companies disappear because they go out of business and some companies disappear because they merge. Mergers don't create shareholder value and there are a huge cost to humans as well as other costs.

It's really easy to pick on the auto industry right now because its something we are all familiar with. That is the market share of Ford Motor company and General Motors.

There is clearly something going on in the auto industry.

This is my view of when a company or an industry is about to change. The next curve is represented by a new business model. This is an example of a company struggling to make the shift. Part of the purpose of Delphi going into bankruptcy was to restructure their business and to shed their workers. This could be a prelude to a GM bankruptcy.

This reflects a larger pattern. The old way we had suppliers that had control over the marketplace. There was limited feedback. In the current environment there is an exchange of knowledge between customers and companies and between suppliers and companies. The way we operate in the economy is completely different. The exchange of knowledge is an economic activity.

Companies like Dell understood this. They created a web site with 1000s of pages of information on how to configure networks. They made this information available to everyone regardless of whether they bought a computer from them or not.

The proposition is simple but achieving it is complicated.

In summary I call this business model warfare. The competition between business models is a very important kind of competition.

What is a business model.

A business model is an attempt to state the complexity of your business in a statement or a diagram or a model. A business model creates what your customer experiences. You are talking about what experience we are going to provide.

Toyota's business success depends on delivering a certain experience.

A business model also describes how an organization is organized and operates.

Let's talk a little about businesses that you are familiar with. United has just emerged from bankruptcy. and Southwest is the only profitable airline. Home depot and Ace Hardware. Ace has repositioned themselves as the anti-home Depot. They realized the ecosystem for home improvement has changed. Nike created a new business model for sports apparel. Visa you may know is not a company you can invest in. 15 years ago American Express fired its CEO because he didn't understand how to compete with Visa. All the companies on the right created a new business model.

To stimulate your thinking about this I will make a few propositions. The car company is a phone company. Nike is doing the same thing. A clothing company is a phone company. An airline is a mobil telephone.

Here is an example from Silicon Valley where a particular venture capital company looked at their portfolio and 10 companies in their portfolio had failed. The 10 companies that succeeded changed their business model and adapted. This says it is very important to be willing to change business models. You can learn from the market and adapt.

What is important is the attempt to visualize these complex realities in order to understand what is going on and where you fit in the landscape of the industry. What kinds of relationships do they have and what kind of business models are they pursuing to be in business? Particularly looking at GM you can see they had a very clear tiered model of doing business. One of the initiatives that GM has is the finance unit. The finance unit today makes lots of money and the car business loses a lot of money in the US.

There are about 300,000 people at General Motors and about 10,000 of those people are in the finance department making a big profit. They are giving away the car in order to get the financing. Onstar is a subscription business and its an annuity business. Its not unrealistic that the Onstar revenue could be greater then the finance revenue.

IBM was in a huge amount of trouble when they fired their CEO and hired someone that used to be a customer. IBM is now a services company. They recently sold their PC business and now they are even doing less business in computers.

Here's an example of trying to visualize a company in relationship to an industry. Their market niche was getting squeezed. WalMart is continually lowering their prices. The purpose of this is to see the kind of thinking process and to see it in a way that is useful to see what is different between the past and the future.

There are four different types of innovation. There are incremental innovations. There are breakthrough innovations; there are business model innovations and their are new ventures. All four types of innovation may be important to your business at some point.

This book is available for free on Permanentinnovation.com or InnovationLabs.com

Wouldn't these just change your framework of being in a traffic jam. The challenge for us is to change your business model.

Now that we've introduced these concepts we want to find out where you are with these ideas.

Questions for Business Model Innovation

1. Prior to this meeting, have you given any thought to the issue of your organization's "business model?"

A. Yes
B. No
C. Not sure what a business model is

Most of you have been thinking about your business model already.

2. How well do you know what your customers or target population want?

A. We’ve been working with this population for years, and never guessed wrong about demand.
B. We do periodic market studies, focus groups and/or surveys to get a better handle on demand.
C. We occasionally have products or services with low demand or uptake.
D. We’re not sure what our customers want, or it seems to be changing.
E. other

Next question will look at the competitive landscape.

3. Do you have competitors that:

A. Use the same business model as your organization?
B. Use a different business model?
C. I don't know.
D. We don't have any competitors.

About 10 use the same business model and about 30 use different business models. GM has a model like Toyota they can learn from. Having competition is important for learning.

4. Do you think that your current business model will enable your organization to achieve increased scale?

A. Yes, our model can go to scale
B. No, our model cannot go to scale
C. Unsure whether our model can go to scale.

Now we're asking a question about this conference. Most of you think your model can go to scale.

5. How important an element is collaboration in your organization's business model?

A. Very important
B. Occasionally important
C. Rarely important
D. Not important
E. Important, but don’t have the resources or never found the right partner or situation.

We have time for a couple of questions.

I think there is danger for some of us. I think that some of us in the public sector think that no one else offers what we offer. We might get kind of sloppy in the way we deliver products and services. When builders were giving mortgages at advantageous rates and it forced us to look at our customers and make some adjustments.

That encapsulates what GM has had to deal with.

On the slide of the squeezing companies I was curious about ebay. Why did you have them at the bottom? The service level is low but they carry a huge range of products so they spread horizontally across the bottom. ebay is an important competitor and they have created a new market niche - online garage sales.

I wonder if you can comment on the importance of doing the financial analysis and cost models. Where are we earning money and where are we losing money when we deliver products and services? What is the difference between products and services and commoditization?

CDFIs and CDCs are often under invested in technology infrastructure and that makes it hard to know how profitable a product is. Commodity businesses are driving toward services because that is harder to compete with. The margins in the services business can be supported.

Did I hear you say that CDFI industry is in the down curve? No.

There is an implication that we have to change our business model. The market is changing and if the business model doesn't let you grow and go to scale then you have to consider other options.

What is the long term impact of a business model when wages go down? There are huge implications for our country when you have a company like WalMart that lowers wages below a living wage.

Henry Ford raised wages so that his people could buy a Ford car.

What Allan Kay envisioned was a laptop and it was a completely different model. Ken Olsen said something about why would anyone want a computer in their home.