I recently spoke with Stacy Coughlin and Kristina Bobrowski about Dow Corning and their experiences with business model innovation in the creation of Xiameter. The story is a great case study of how an established, successful firm can still improve their innovation efforts.
The story has been told by others pretty well already – Xiameter has been made into a Harvard Business Review case study authored by Clayton Christensen, Mark Johnson and Henning Kagermann. Kay Plantes and Jeffrey Phillips have also written excellents posts on this case after speaking with Stacy. Here is how Jeffrey describes the advent of Xiameter:
Traditionally, Dow Corning has provided silicone to a range of clients, but wrapped that product in a lot of information, service and support. It became evident to individuals within Dow Corning that a large segment of the potential customer base didn’t want or need anything except the silicone product itself, so Xiameter was launched to offer a radically different business model and distribution of the product to those customers who didn’t want, or need, the service or support associated with the sales and distribution by Dow Corning.
I won’t recap too many details of the case, but I’ll use it to make some points. This is how the introduction of Xiameter changed Dow Corning’s position on The Innovation Matrix:
Prior to Xiameter, Dow Corning was a Fit for Purpose innovator. They have been a market leader in the silicon industry since its inception – and their strategy was built around providing the best possible product. Consequently, all of their innovation efforts were put into sustaining this market-leading position. They had substantial investments in R&D, significant resources sunk into customisation for lead customers, and a high level of commitment to continuing to build market-leading products.
But at the end of the 1990s, they noticed that a large part of the market didn’t want or need this level of service and support. For many applications, silicone was becoming a commodity. The environment around Dow Corning was changing.
Xiameter was developed in response to this.
It represented an increase in Innovation Commitment in two ways. First, it had very clear support at the CEO level, and this was reinforced by the allocation of resources – people, time and money. Second, the economic investment was significant.
Xiameter also helped Dow Corning increase their Innovation Competence. In addition to their skill at product and service innovation, the development of Xiameter built a business model innovation competence as well. Also, this increased the scope of Dow Corning’s innovation portfolio – this was a clear Horizon 2 investment.
This case illustrates several important points:
- Your position on The Innovation Matrix is dynamic. I’ve made the point before in talking about Procter & Gamble – you control your position on The Innovation Matrix, and it can change over time. Shaun Coffey makes this point in a comment on that post:
The emphasis on the dynamic nature of a firms position is important, and often misunderstood. Many firms do not recognise that a business model exists at a point in time – and, like all complex systems, every time you act in the market you perturbate the system and a new configuration of the business model emerges. It is simply too easy to conceptualise this once, and then stick with a fixed model until is is so disfunctional that you are in crisis mode.
This is exactly the problem that Dow Corning avoided by undertaking this initiative.
- A new business model often requires a standalone division. This has some interesting interplay with points raised by Ralph Ohr in his last post. Big companies have some significant advantages in building new business models – in particular, they have the resources to do so. Constantinos Markides has written about this too – and he outlines the factors that lead to success in new unit spinouts designed to support new business models.
- Separate business models work best when they share resources. This is where it helps to be big. Plantes outlines one of the key issues in the success of Xiameter:
Product line managers oversee product category platforms, determining where products are in the life cycle and deciding which products fall under which brands, all with an eye to balancing capacity and brand mix to maximize overall profitability. Everything else except sales and marketing – in other words manufacturing, governance, sustainability and C-level management resources – is shared by the two brands.
“We also have a highly integrated SAP system utilized in real time, allowing us to offer two brands without adding operational costs, which also adds to efficiency” Coughlin notes.
Stacy made the point to me when I asked why the Xiameter model hadn’t been copied by competitors. Her response was that they were all running multiple instances of SAP. This is actually kind of mind-boggling. The inability to integrate back-end data is preventing them from achieving economies of scale – and this is one of the keys to successfully implementing the multiple business model strategy.
- To succeed over time, you have to risk cannabilisation. There definitely appears to have been concern internally about the potential of Xiameter to cannabilise the core Dow Corning customers. Here is how Phillips discussed this:
But there are several factors at play here. First, Xiameter was introducing a business model to serve unserved or underserved customers who had chosen not to interact with the existing business model, so they were additive to the customer base. Second, Xiameter is more than willing to co-exist with a high-touch, high service business model that Dow Corning provides. In this case, and I suspect in many cases, business model innovation expands the pie and attracts new customers. It does not have to be a zero sum game.
There are still issues here. One is that Xiameter achieves its lowest total cost position by taking advantage of resources within Dow Corning, and this can have negative impacts on incentives within the parent firm. Managing this issue is very tricky. But overall, the business model innovation undertaken by Dow Corning expanded their addressable market – it didn’t just replace existing customers with new ones.
Dynamics are critically important – even if you are just executing a currently successful business model with increasing efficiency, you are rarely standing still. And over time, this approach can be dangerous. Your market may be turning into a commodity as the silicon market was for Dow Corning.
The Innovation Matrix is a tool for you to evaluate where you currently are, but more importantly, it is there to help you figure out how to get to where you want to go. You can use it to plan the innovation moves that will transform your organisation.
Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.
I’ve been working with Alexanders Osterwalder’s approach to business model generation via the business model canvas (BMC) for a few years now. The canvas is straight forward to use, which is the beauty of it: you “get it” right away. But it does take some practice to identify and capture the various elements. It’s more of a craft than a science.
To sharpen my skills I decided to deconstruct the Xiameter business model and compare its parent, Dow Corning–just for fun. (You have the right to now say, “Get a life, Kalbach”). My starting point was an article outlining the structure of Xiameter: “Dow Corning’s Big Pricing Gamble” by Loren Gary. I combed the text for the 9 elements of the BMC, jotted them down on paper, and then entered them into the canvas.
The image below (Figure 1) shows my analysis using the iPad app for the BMC. The GREEN notes represent Dow Corning’s core business. The ORANGE notes show the Xiameter model. Interestingly, Xiameter seems to have had an effect back on the core business model, according to the article. These aspects are shown in BLUE notes.
Figure 1: Comparison of Dow Corning’s core business to Xiameter using the Business Model Canvas (Click to enlarge)
The new Xiameter channel is a textbook example of disruptive innovation. Clayton Christensen illustrates the basic dynamics of distruption in a now well-know diagram:
Figure 2: Clayton Christensens illustration of disruption
Dow Corning recognized that it was overshooting its market. Overshooting is one of the first signs of a market ready for disruption. Scott Anthony et al write about overshooting in The Innovator’s Guide to Growth:
At the heart of the disruptive innovation model is the concept of overshooting, that is, providing too much performance for a given group of customers. Remember, the model holds that companies innovate faster than people’s lives can change to take advantage of the advances those companies provide. As companies innovate, products or services that were previously not good enough become perfectly adequate; ultimately, they become too good for a given group of customers. (p. 65)
(See my full review of The Innovator’s Guide to Growth in a previous post).
As the Xiameter case study article shows, Dow Corning seems to have recognized overshooting:
In the early 1990s, however, Dow Corning noticed an emerging trend toward commoditization in some of its markets. This meant that as specific products matured, the priorities of clientele within them shifted from wanting help with innovation to wanting to keep costs low. …
This change in what some customers valued—and the consequent decline in profit margins within those market segments—led Dow Corning to conclude that the basis of competition had shifted in parts of the industry. Facing the possibility that such a shift might spread, the company realized it required a more needs-based approach to customer segmentation. Its existing business model, which emphasized selling technical assistance and product testing on top of its core products, ignored price-conscious customers. To meet their needs—and to keep them from migrating to other, less-expensive providers—Dow Corning would have to devise a radically lower cost structure that would allow it to profit solely from selling products.
Overshooting is a key sign of a market ready for disruption. But don’t confuse breakthrough innovation with disruption. A breakthrough is the next, biggest, better product or service in an existing market. It’s the fifth blade on a razor or the Airbus 380. Or, see Kohler’s numi toilets–another example of a breakthrough product design, with a heated seat, feet warming, music and a remote control. But by definition these aren’t disruptive.
Disruptive innovations are more convenient, cheaper and easier to use, generally targeting previously underserved market segments. Think: Flip video camera, eBay or Zopa (a peer-to-peer lending service), as well as Skype and Ryan Air as disruptions. Xiameter is also a disruptive innovation.
The amazing part of Xiameter, however, is that Dow Corning distrupted itself. The fear of self cannibalization is extremely difficult to overcome in most companies, particular those as large and traditional as Dow. And that fear is precisely what causes the innovator’s dilemma. Dow overcame this fear and didn’t let entrants take that piece of their pie, as the chart above (Figure 2) show what usually happens.
My big take-away from this exercise is in the power of visualizing and diagramming all of these elements. Go read the article article that I reversed engineered (Here’s the link again–opens in new window); then come back here and compare what you read to the diagram.
Which explains the big picture better? Don’t get me wrong: the author of the article writes well, and it’s a clear story he tells. But you don’t get nearly the same sense of interlocking dependencies and overall logic you get from the text as you do from the canvas.
More importantly, the BMC let’s you design your business. You can quickly “sketch” multiple directions or variations. If they don’t work out, crumple it up and go back to the drawing board. That’s the power of it: iterative prototyping. With the BMC, you can apply design thinking to the innovation of a business model. It’s a far better better way than trying to detail a model out in text-based report or description.
Visualizing abstract business concepts really helps solve problems. I’ve been beating that drum for the last year or so, ever since I gave a presentation on “Alignment Diagrams” at the Euro IA conference last year. (See also the article Paul Kahn and I co-authored on alignment diagrams: “Locating Value with Alignment Diagrams“). Alignment diagrams are a class of document that includes such things as customer journey maps, service blueprints and mental model diagrams.
In a previous post, I suggest that the BMC is a type of alignment diagram. The elements on the right side represent customer-facing aspects. Alexander Osterwalder calls this the “front stage.” The fields on the left represent business-related aspects, or the “back stage.” In the middle is the “value proposition.” It’s this type of alignment between the back stage and front stage that’s often missing in business logic. While no silver bullet, the BMC and alignment diagrams can help bring clarity.
NOTE: I’m giving two workshops this year on alignment diagrams:
1. Alignment Diagrams, Euro IA, 22 Sept 2011, Prague (1/2 day workshop)
2. Alignment Diagrams, part of UX Fest, 3 Nov, London (Full-day workshop)
.***DISCLAIMER: I have no association with or interest in either Xiameter or Dow Corning, nor do I have first-hand knowledge of their business models and thier success. The above analysis is based solely on the text in the article cited.