Glossary

Terms and phrases used in "Seizing the White Space".

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Acceleration: The second stage in the business model implementation process. Acceleration begins by refining and standardizing processes, establishing the business rules that govern them, and determining the metrics required to chart continuing success. Imposing such controls maintains quality and customer satisfaction as the business expands.
Adjacencies: opportunities to serve existing customers or new customers in new ways using a company’s current business model.
Attacking the Cat: one of the most common ways that innovative new-growth opportunities (cat projects) meet an untimely end in many (dog-producing) companies. Promising long-run opportunities can be prematurely shut down either because of fears of cannibalization or, conversely, if the organization runs out of patience and expects the venture to grow at the pace and scale of the traditional core-growth initiatives.
Barriers to Consumption: factors that prevent potential consumers from participating in a market. For some people, all offerings that solve an important job they need done are either too expensive for them (wealth barrier), take too much time for them to use (time barrier), require expertise they don’t have (skills barrier), or are not available to them (access barrier). Companies that develop customer value propositions and new business models that break through these barriers can open up new markets and serve entirely new sets of customers.
Basis of Competition: the aspect of an offering for which a customer is willing to pay a premium price. Over time, in many markets, the basis of competition tends to shift from more functions to higher quality and greater reliability, then on to customization and convenience, and eventually to commoditization. Whenever the basis of competition shifts to customization and convenience or fully to cost, customers’ jobs-to-be-done change in fundamental ways, and so, therefore, does the needed customer value propositions. At these stages companies often find themselves at the limits of their current business models and need to embark on business model innovation.
Business Model: the blueprint that defines the way a company delivers value to a set of customers at a profit. Every successful company is already fulfilling a real customer need with an effective business model, whether that model is explicitly understood or not (see the Four-Box Business Model Framework).
Business Model Innovation: the process by which a company delivers radically new value to existing or new customers by devising dramatically new business models that deliver profits in innovative new ways. See also: Four-Box Business Model Framework
Core Operating Space: the opportunities a company is currently fulfilling to serve its existing customers in its traditional ways using its existing tried-and-true business models.
Cost Structure: one of the four elements that make up the profit formula in the Four-Box Business Model Framework, the cost structure comprises direct costs and overhead, taking into account economies of scale. Successful companies typically have well-defined cost structures, and overhead requirements in particular, are very difficult to change. So there’s a strong impulse to start with existing overhead costs when devising the cost structure of a new business model. But that order is backward; in the new model, the overhead must be determined by the requirements of the value proposition, not taken as a given.
Customer Value Proposition (CVP): an product, service, or some combination of the two that helps customers more effectively, reliably, conveniently, or affordably solve an important problem or satisfy a job-to-be-done at a given price. All things being equal, the more important the job, the better the match between the job and the offering, and, the lower the offering’s price, the greater the overall value generated for the customer.
Democratization of Products or Services: occurs when companies develop new customers value propositions delivered through new business models that break through barriers to consumption, thus enabling solutions to become available to nonconsumers.
Discovery-Driving Planning: a practical, systematic way to proceed in situations of high ambiguity and uncertainty that is particularly effective in reducing the risk of implementing new business models. First put forth by Columbia’s Rita McGrath and Wharton’s Ian MacMillan, discovery-driven planning is not, as its name might imply, a process of making up a plan as you go along. Rather it starts with a specific hypothesis about the best way to proceed. Then the goal is to find creative, quick, and inexpensive ways to test the critical assumptions underlying that hypothesis so that you find out as quickly as you can whether the plan will work as envisioned, how it might be adjusted to make it work, or whether it would be wise to abandon the approach entirely in favor of some other option before costs get too high. Thus the mantra: "test early, test cheaply, and test often."
Doctrine of Marginal Costs: a fallacy of strategic thinking by which executives compare the entire start-up cost of producing an offering using a new business model with only the variable costs of producing the offering with existing processes and resources -- without figuring in the sunk costs of the existing operations. Using existing resources to do new things will always look more economical if those sunk costs are not taken into account, but that approach will lead to an inaccurate picture of the costs and benefits of the new opportunity.
Dogging the Cat: the organizational urge to stuff a new business opportunity (like a cat) into a company’s existing business model (which, let’s say, produces dogs). Suppose, for example, you invent a cat that plays, endearingly, with balls of yarn. But your company has a state-of-the-art stick supply chain and an advanced throwing system, which the product manager believes would be more economical to use on this new project. The company saves money, to be sure, but the cat product is not well served. It no longer acts like a cat should. It doesn’t purr or pounce. Instead it becomes neurotic and starts scratching the furniture. No one wants to buy a crazy cat, so the whole idea is scrapped. Or, if it does make it to the market, the cat-that-fetches is such a strange animal no one buys it.
Enabling Technologies: technologies that make possible the formation of new industries requiring new business models -- and often make obsolete earlier technologies and associated business models. Enabling technologies have spurred six broad waves of industry transformation, starting with the machinery that gave rise to the Industrial Revolution in the 1700s. That gave way to the age of steam and railways of the early 1800s; electricity and heavy industrial production in the late 1800s; the automobile and mass production in the early 1900s; information technology in the latter half of the 1900s; and the current, dawning era of clean tech and bio tech.
Facilitated Network Business: a business model paradigm in which a backbone system is used to connect together like-minded customers so they can exchange goods and services, share information, collaborate, or socialize with little intermediation. The NYSE was an early example, but the Internet is an enabling technology that has given rise to many more, including brokerages businesses like eBay and Web 2.0 social networking sites like Facebook and Twitter. This business model archetype is particularly suited to responding to customers’ needs for customization and personalization. What’s more, by aggregating and recombining far-flung knowledge, such businesses can dramatically increase the rate at which people move along the problem-solving continuum from the unstructured problem solving to pattern recognition or rule-based decision-making, thus opening up opportunities for new business models to fulfill jobs that might not previously been economical to address.
Foothold Market: a small geographic region or customer group that serves as a low-cost laboratory in which to test out a new business model. Preferably familiar or otherwise friendly, the market nevertheless needs to be representative of the larger target market the company intends ultimately to pursue.
Four-Box Business Model Framework: the blueprint that defines the way a company delivers value to a set of customers at a profit. It is made up of four parts: the customer value proposition, which defines value to the customer; the profit formula, which defines value for the company, and the key resources and the key processes needed to deliver on the CVP at a profit. When properly integrated together these four elements form the essence of a company’s competitive advantage. Every successful company is already fulfilling a real customer need with an effective business model, whether that model is explicitly understood or not. See also: Business Model Innovation
Growth Gap: the gap between a company’s desired growth path and the growth that its existing core business and envisioned adjacencies can deliver. Commoditization, technological discontinuities, disruptive threats, changes in government policy or society’s expectations, and intensified competition can all widen the growth gap, creating market conditions that significantly diminish the core's ability to grow.
Implementation: In the context of business model innovation, implementation is an effort largely focused on testing and validating assumptions while integrating the key resources and processes required to deliver the customer value proposition and the profit formula. Implementation should be pursued in three stages: incubation, acceleration, and transition.
Incubation: The first stage of new-business-model implementation. It is the process of identifying the assumptions most critical to the success of the business proposition and then testing them in a targeted and orderly manner to quickly prove or disprove their viability, and by extension the viability of the new initiative itself. At this stage, creative problem solving and a discovery-driven approach to project planning are critical skills. The immediate goal here isn’t necessarily business success; it is new learning, both about what works and what doesn't.
Job-to-be-Done: The foundation of all successful business models, new or old, the job-to-be-done is the purpose for which a consumer buys a product or service. As Harvard Business School professor Theodore Levitt first pointed out, customers do not really buy products—they hire them to accomplish a particular task. He famously said that people don’t go to the hardware store to buy a drill, for instance; they go to buy a hole. The drill they purchase is the candidate hired to get that job done.
Key Processes: One of the four elements of the Four-Box Business Model Framework, the key processes are the means by which a company delivers the customer value proposition in a sustainable, repeatable, scalable, and manageable way. Key processes might include manufacturing, sales, service, training, development, budgeting, and planning. The number of processes employed by a company may be vast but the important ones to focus on are those that are crucial to serving the customer value proposition and profit formula.
Key Resources: One of the four elements of the Four-Box Business Model Framework, the key resources are the unique people, technology, products, facilities, equipment, and brand required to deliver the value proposition to the customer. Although the delivery of a CVP usually requires a vast array of resources, just a few key resources spell the difference between success and failure.
Non-Dog Dilemma: the propensity for company managers to seek to kill off a business opportunity (say, a cat) that requires a new business model because it’s not like the current business model (producing dogs). This most commonly occurs through benign neglect from a failure to allocate resources to the new venture. Fundamentally new customer value propositions, ideas that require different profit formulas, or projects that call for different key resources and key processes can all look like “non-dogs.” If managers could recognize them as cats, they might find potential uses for them or see untapped markets or unserved consumer needs they satisfy. But instead, all thinking stops at the conclusion non-dog. Kodak, for instance, non-dogged filmless photography when one of its own people invented it back in 1975.
Nonconsumers: Groups of people who are entirely shut out of a market because existing offerings are too expensive for them, too complicated or time-consuming for them to use, or they lack access to them. Nonconsumers represent a rich opportunity for companies seeking to open up new markets with innovative new business models.
Offering: in the context of a business model, an offering is a product, service, or some combination of the two, made available to customers at an affordable price. Included in the concept is not just what is sold, but how it is sold, used, and maintained. So, for instance, the ability to recycle a product after it was used up is often an important part of a “green” offering. As another example, Xerox, when it first offered plain-paper copying, found that it could not profitably fulfill the copying jobs of its customers at an affordable price by selling copiers, but it could if it leased them and charged on a per-copy basis.
Problem-Solving Continuum: a predictable pattern by which the way people solve problems shifts over time as they gain more knowledge. When knowledge is low, people must make do with unstructured attempts to solve a problem. As they gain more knowledge, they begin to recognize patterns and eventually to devise reliable rules to guide their problem-solving efforts. As knowledge in an industry moves along the problem-solving continuum, opportunities in a company’s white space open up, allowing it to develop new customer value propositions and new business models that democratize products and services by overcoming barriers to consumption.
Profit Formula: One of the four parts of the Four-Box Business Model Framework, the profit formula lays out how value will be delivered to the company in the course of fulfilling a customer value proposition. The profit formula defines the gross and net margins the organization much achieve, given the structure and magnitude of the fixed and variable costs inherent in its resources. It specifies how big the organization must become in order to break even, and the pattern of profit improvement, if any that comes with increasing scale. And the profit formula defines how fast the organization must turn over its assets to achieve adequate returns. Accordingly it’s most important features can be broken down into four parts:

• revenue model: price times quantity
• cost structure: direct costs and overhead, taking into account economies of scale;
• target unit margin: the operating profit per unit required to cover overhead costs and achieve the desired profit level
• resource velocity: how quickly resources need to be used to support target volume.
Resource Velocity: one of the four elements that make up the profit formula in the Four-Box Business Model Framework, resource velocity defines how quickly resources need to be used to support target volume. It specifies not just the number of widgets a business can make, but how many it can invent, design, produce, warehouse, ship, service, sell, and pay for throughout the value chain for a given amount of investment, for a given amount of time.
Revenue Model: one of the four elements that make up the profit formula in the Four-Box Business Model Framework, revenue model is simply price times quantity. In low-cost business models, price is a key starting point for determining the profit formula. In a premium businesses, the price tends to be dictated by the cost of the resources needed to deliver the CVP. Service businesses typically measure quantity as the time taken to perform a service or the number of transactions; manufacturers generally use quantity sold.
Reverse Income Statement: a tool used in devising a new profit formula for a new business model. Unlike a traditional income statement, which generally starts with a target revenue number, a reverse income statement begins with a target level of profits five years in the future. Various viable combinations of price, quantities sold, direct and indirect costs, economies of scale, target unit margins, and resource velocity are then considered that could result in that level of profit. In this way, the profit and loss sheet becomes a planning document that helps you build a set of assumptions about your new business model that can be tested in the implementation stage of the new business model adoption process.
Rules, Norms, and Metrics: business rules, related metrics of success, and behavioral norms allow a business model to be executed effectively, repeatedly, and efficiently. Rules and metrics maintain quality and customer satisfaction as the business expands, ensuring that the business can repeatedly and predictably deliver the customer value proposition and fulfill the profit formula. Over time, they become internalized as norms; people think of them as “the way things get done.” As such, they become the invisible guardians of the prevailing business model, and are essential for managing and executing operations, as well as innovation efforts focused on growing the core or pursuing adjacencies. But for the same reason, they form a barrier to developing new business models that require different rules and need to be measured using different metrics and operate under different norms.
Solution Shops: a business model archetype suited to delivering products and services when knowledge about them is still low, generally at the unstructured problem-solving and early pattern-recognition stages of the problem-solving continuum. Examples include doctors’ offices, law practices, accounting firms, and consultancies. Solution shops provide customized solutions to unique problems, and their primary resources are people and knowledge. Since neither the outcome itself nor the time invested to produce one can be clearly predicted, businesses of this type usually bill in units of time for services rendered. They tend to be high-margin, high-overhead, low resource-velocity operations.
Strategy Development Process: an approach to strategy development that goes beyond the traditional strategic-planning process in that it widens the scope of strategy formulation beyond a focus on the current business model to include a systematic consideration of opportunities that require new business models.
Target Unit Margin: one of the four elements that make up the profit formula in the Four-Box Business Model Framework, the target unit margin is the operating profit per unit required to cover overhead costs and achieve the desired profit. Many companies use target unit margins as a proxy for the entire profit formula. But that is a great mistake. Looking at margins in isolation and fear that a new business model’s margins will be too low are the chief factors preventing incumbents from developing transformational growth opportunities.
Transition: the final stage of the business model implementation process, it applies only to incumbent enterprises. In this stage, an incumbent must answer the question: Can the business be reintegrated into the core or should it remain a separate unit in order to thrive? Generally speaking, new business models can be fruitfully integrated with the core when its profit formula is substantially the same as the core’s or, conceivably, when it calls for higher margins; when the model enhances the core brand in some significant way; or when the new business will transform and improve the core business. It should remain separate when the new model calls for significantly different business rules and metrics; a distinct brand; or a profit formula that is disruptive to the core model, either because its margins are much lower or its resource velocity or overhead need to be much higher.
Value-Adding Process Business: the business model archetype suited to delivering products and services when knowledge in an industry has progressed to the pattern recognition and rule-based decision-making stages. Such businesses produce high-volume solutions at low cost; their success lies in their ability to invent, manufacture, market, and distribute their goods or services to the market at scale. Value-adding process businesses make their money on actual output (the product or service rendered) rather than on the time it takes to develop them (as a solution shop does). They tend to have lower margins and lower overhead than solution shops; they also have higher resource velocity and are more dependent on size and achieving target profitability through scale. Their ability to scale allows them to democratize knowledge and ultimately, provide greater access to products and services. Most manufacturing operations fall into this category but so do some innovative service businesses such as MinuteClinic, which seeks to provide standardized medical services in pharmacies rather than in doctors’ offices.
White Space: the range of potential opportunities or challenges not defined or addressed by a company’s current business model: that is, the opportunities that lie outside its core business and beyond any adjacencies that require a different business model to exploit. White space is a subjective valuation: one company’s white space may be another company’s core.

• White Space Within: Opportunities to fulfill important, underserved jobs-to-be done for existing and new customers in a company’s current market using a new business model.

• White Space Beyond: opportunities to reach entirely new customers in new markets. Often these opportunities involve democratizing products and services: that is, making them accessible to large groups of potential consumers who have been shut out of a market entirely because existing offerings are too expensive, too complicated, or too time-consuming

• White Space Between: Opportunities and imperatives that arise because of sudden, far-reaching, and/or unpredictable external events. Such events include dramatic market shocks (such as the 2008 financial meltdown or the 1976 Arab oil embargo); the rise of powerful enabling technologies (such as the Internet and the electric grid); and dramatic shifts in government policy (such as airline deregulation or the Chinese government’s liberalization of the Chinese economy).