Companies & Industries

The Best Business Model


The secret to orchestrating your business's success is simpler than you think, according to Harvard's Umair Haque

Posted on Edge Economy: April 30, 2009 11:25 AM

"Nice content—awesome presentation! What did you use to make it?!"

That's what everyone who sees my BRITE presentation asks me. It's a new service called Prezi. And it's insanely great—the minute I saw it I had to have it, no questions asked. So, for the first time in half a decade, I found myself doing the unthinkable: paying for software.

And that made me reflect on something that I thought I'd share.

Everybody's searching desperately for business model innovation: Detroit, newspapers, record labels, banks. No market is left untouched, no value proposition sacrosanct.

Yet, the best business model in the world is also the simplest: make stuff that's insanely great. Stuff that's insanely great does what Prezi does—amazes, enriches, and inspires. That kind of stuff doesn't need a hard sell, a new market, or a convoluted product range. It just needs to be.

The converse is also—and perhaps more importantly—true.

Business model innovation is often self-defeating and self-destructive. The real problem with business model innovation is that it dilutes the incentives to make good stuff in the first place. It lets boardrooms hide from the profound challenge of making insanely great stuff in the first place.

Why?

Business model innovation creates a kind of adverse selection. It offers a kind of insurance: if we can find more efficient ways to sell stuff, we don't have to make better stuff. When we invest in selling stuff better—instead of making better stuff—unsurprisingly, the stuff we make often turns into lemons.

The 90s and 00s have been full of companies churning out the same old lame, toxic junk and trying to sell it in new ways—instead of detoxifying it. Consider Detroit: integrating into auto finance was a significant business model innovation. But it created perverse incentives. When Detroit could finance cars, it had a greater incentive to push volume and seek a purely financial cost advantage than it did to make insanely great cars in the first place. The lesson? Business model innovation dilutes the incentive to make stuff that's insanely great.

For most companies, the costs of business model innovation exceed the benefits. The victims of business model innovation? It's a long, long list. The Gap started up Old Navy—which diluted the incentives for the Gap to make better clothes in the first place. Newspapers have struggled with new services for a decade—instead of simply seeking to write more interesting, more timely, and more relevant articles.

The best example of business model adverse selection is hidden in plain sight: the financial crisis. Banks, insurance companies, and hedge funds decided that securitization was the business model innovation of the century. Why did lemons dominate the market? When everyone could remix, repackage, and resell everything, the incentives for anyone to not produce toxic junk imploded. Business model innovation diluted the incentive for goodness.

Let's summarize.

When you can make awesome stuff, you don't need to find "better" ways to sell it. The fundamental challenge of the 21st century isn't selling the same old lame, toxic junk in new ways: its detoxifying and dezombifying it, by learning how to make insanely great stuff in the first place.

Fire away in the comments with question, thoughts, or criticisms.

PS—If I was on the corp dev team at Google, I might think hard about whether Prezi is the Powerpoint-killer that will be the final nail in Microsoft's cash-lined coffin.

Provided by Harvard Business—Where Leaders Get Their Edge

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