A lot of companies that come up with new technologies do not go ahead and commercialise it, primarily because the new technology does not fit into their existing business model, says  Mark Johnson, cofounder and chairman of Innosight, a strategic innovation consulting company. Johnson has most recently written Seizing the White Space – Business Model Innovation for Growth and Renewal. In this interview, he speaks to DNA.“Businesses have often let go in the past of opportunities that did not fit with what they already have,” you write in your book. Why does that happen?Lockheed Martin came up with this new technology called a hybrid airship which is a cross between a lighter-than-air dirigible and an airplane. It was a pretty amazing invention in that it could take off from short, rough areas. Also, it could lift very heavy cargo and an unlike a helicopter it could lift much more. The opportunity was such that a lot of commercial companies, mining companies, transportation companies — even the Government of India — could have used it given the poor road infrastructure here. But it didn’t fit into the Lockheed Martin business model — as a defence contractor for the US government. So it chose not to go ahead with the hybrid airship.

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Any other examples?The example fairly well known for a while is Xerox and the Paulo Alto Research Centre. Their R&D labs came up with the graphical user interface and the mouse which became Apple. Then ethernet technology, which became 3Com, and Postscript graphical technology, which became Adobe. And that was all because Xerox was a copier company and they could not figure out how these technologies fit within their copier business model. If they would have done some sort of R&D on the business system, they could have actually enjoyed revenues in some form instead of having them go to somebody else.What exactly is white space?People have been using this term in business for long, about an area of opportunity, an area where there is no competition, an area where this is an untapped market, an area that is somewhere a place outside the company which hasn’t been pursued before: like a new geography. But as I thought more about what truly is a company’s white space, which means really what truly is a company’s unchartered territory. It is not necessarily a whole new market because a company could go into that market with its existing business model and do okay. Really, white space is when you have to change the fundamentals of the business. When you have change the essential business model in a real way, in terms of the way it makes money, the way you have to organise people, the way you have to measure the process, change the metrics etc. It is when there is an area of untapped opportunity where you have to change the business model to seize it, that’s the white space.

Can you give us an example?  Lockheed Martin’s hybrid airship was its white space. Not just because if it went to the Government of India there would be a new opportunity there, but because to seize that opportunity it would have to change its business model. Xerox’s white space was being able to come up with a computer business model when it had a copier business model. Apple iPod went into the white space to come up with iTunes when it was a computer company but it went into the music world. It’s white space not only in terms of coming up with the technology but in terms of integrating a whole new system to be able to deliver a whole new way to listen to music.

Do you see companies tapping their white space?  I don’t. Companies tend to build a strength in terms of the way they run the core business. They come up with rules, norms and metrics to control and operate a business again and again and refine it to beat competition. They tend to improve what they already have. It is very difficult for a company to say we are going to change, and do something totally different. The other reason it is very difficult is management discipline has said for a while now to stick to your core.

Can companies successfully come up with new business models all the time?It is hard to find a company that is successfully doing it over and over again.

A few times?  A good example would be Apple. The other one is Amazon. Again Amazon is a common example. But Amazon has done a number of business-model innovations. It went from basically selling books online and opened up a whole different way of making money. And that it was able to sell the books before it had to pay for them (As Johnson points out in his book, Amazon held a book in inventory for just 17 days, instead of 168 days which was the industry norm. At the same time, Amazon paid its publishers in about 58 days – its profit formula created a float that kept the customer’s money in its hands for an average of 41 days). This was a whole different way of sort of having your cash flow go as well as just the benefits of not having to keep books in inventory the same way in a book store. After this, it moved to selling its powerful back-engine in terms of web services to entrepreneurs who could actually use a back-end type of model to do their own web based commerce. And then it went to the Kindle, which is their book reader. You can order books right on to the Kindle. Amazon with the Kindle became a hardware manufacturer and does things a wholly different way.

When do companies need to re-examine their business model?Technology is one reason. The engineers and the scientists come up with a brilliant idea that just doesn’t seem to fit in the way they normally do business. So it will just get put onto a bench. Like Kodak came up with digital imaging which was a big threat to its photo film business…

Can you explain this Kodak example?Steve Sasson was an engineer at Kodak and he invented digital imaging in 1975. Can you imagine you are a company like Kodak which makes photographic film and here is an inventor that comes up with digital imaging that will completely do away with film, if it really took off. So they didn’t really do anything with it until 15 years later they came up with the DCS-100 camera, which cost $30,000 when it first came out because they made it very complicated to ensure that the digital imaging is as good as what comes out of a normal 35mm camera — instead of trying to put it in a game or a phone, something where it need not be as good. And then it took years, until the early 2000, when they finally came out with a camera that was competitive. The reality is that their existing business model did not have any room for digital imaging. But in hindsight they could have said, well this technology has been discovered, it doesn’t fit into the film business, so maybe we need to set up a separate unit for digital imaging. That way at least we cannabalise ourselves, instead of letting somebody else do it to us. So sometimes these technologies get discovered and it requires a new business model to make it happen.

What are the other reasons?The other reason is to reach untapped markets. The example I use in the book is from Hindustan Unilever (HUL) and its Shakti Amma model. HUL decided the best way they could reach the villages where there consumer products couldn’t go through the conventional business model was through Shakti Ammas. They were now selling a business proposition as opposed to products. They were trying to set these women as entrepreneurs. HUL gave them training. They helped them with micro financing and marketing. They had go through these entrepreneurs and deal directly with the customer. It was the only way to access these small villages. That’s an example how you change a business model to create access and enable people that would not really have it (As Johnson points out in his book, Shakti Ammas bought the equivalent of almost $100 million worth of consumer goods from Hindustan Unilever in 2008).

Any other reason?The third reason is the evolution of business. Businesses eventually commoditise. They end up being a price game over time. Just like we have seen with personal computers.

For a start-up, a business model needs to be flexible….One thing we know about a business model is that it is going to be wrong the first time you try to do it. It has to evolve. Any company starts off small and iterates till it becomes what it needs to become. You know eBay. Do you know how it started?

No…Pam, the wife of Pierre Omidyar, the founder, traded these little candy toys (called dispensers). They had all these little animals and things. She was a collector. Pierre was interested in the internet and how you could do an exchange on the internet. So he set up a business so that she could trade these dispensers. And that was the initial business. And where it is today? Selling cars and everything – it’s nothing like when it started. In fact, 90% of successful new businesses have changed the model four times before they really settled on the ultimate one.

Let us talk about disruptive innovations a little, given that you have worked very closely with Clayton Christensen, the professor at Harvard Business School, who first noticed this phenomenon. What are disruptive innovations?Disruptive innovation was the idea of looking at the market and realising that there are some products that have ended up overshooting what customers need — terms of performance or features or functions. This opens up an opportunity for something to come in below that, which is not as expensive, lower cost, maybe more convenient or easier to use. That entry creates a new market that ultimately disrupts  the incumbents. It is like Toyota coming to the US with a very low-end car in the 1960s. It gets rooted in a set of people that don’t want expensive cars. It works its way up market with a lower cost business model to ultimately disrupt existing players. The other example is Digital Equipment Corporation (DEC), the mini-computer manufacturer being disrupted by the personal computer. The reason for the disruption was that the PC to a mini-computer manufacturer seemed like an unproven market. Mini-computers were selling at $500,000 at 60% gross margins, whereas PCs were selling at $4,000 and they were only at 40% gross margins going to 20%. So it was very hard to be able to think about as to why would be want to priortise something like this when are our best computers were telling us to make better mini-computers. It is not about technology. DEC, in fact, made a PC and invested a fair amount of money in it. They could just never prioritise it because it did not fit into what their best customers wanted.

Any recent examples?Sony is the other side of the Apple iPod. Sony was disrupted by iPod because they were providing their Walkmans, Discmans and selling CDs. So they had become a music company. They were providing CDs and high-end artists, expensive music. iPod was a disruption for them because from an engineer’s point of view it wasn’t as good-sounding as a Walkman and from the executive point of view, it was a threat to all of its artists and everything.

Why didn’t Sony come out with a great MP3 player?When the MP3 technology was coming up in the late 90s and early 2000s, CD shipments were rising 25% globally. It was a healthy and successful business. Why would they want to invest in MP3 technology that would disrupt their CD shipments? It took until 2002, after CD shipments started to fall (for them to react).

MP3 encouraged piracy?The piracy was in the Napster model where people were exchanging music for free. So Apple took advantage of that and said, I know you are not going to make as much money as in a CD, but with the iTunes store you will make some money. In fact, whatever money they made out of iTunes they gave it to the music artists. Apple wasn’t making any money on the iTunes. They kind of gave that away because they wanted to draw money onto the iPods.

How do companies tackle disruptive innovation? How can they become disruptive innovators themselves?Companies need have the core group — even 95% of its people — manage the core business. But take 5% of the dollars and people that are in innovation and get them working to think about the future, coming up with where are there opportunities for disruption, where are the overshot markets or non-consumers that aren’t getting access to products or services and how can we serve them. They key is to think about it, separate it out and keep it small, at least initially.

Final question: will Google disrupt Microsoft? Let me put it in another way, I think cloud computing will upset Microsoft and Google will have a role to play in it. The idea that computing will be centralised kind of like electricity is centralised these days, will have a role to play. Initially individual companies had their own power plants and then through AC current it went to centralised power distribution plants. I think that will inevitably happen with computing.

We will figure out the security concerns and we will have these centralised places, like Google can do, to conduct search, to have storage, to have applications, to do virtualisation etc. So we won’t need proprietary operating systems like Microsoft and they don’t need to be sitting on individual computers, they can be centralised, and we can use them as a service. Google will play a role in that. Microsoft is really going to run into some real headwinds.