Some time ago, Steve Blank posted on Lean Innovation Management (Blank 2015). His main focus was on finding a unified theory of innovation which allows established companies to internally innovate with the same speed of startups. Blank focused on “two big ideas of corporate innovation”: Ambidextrous Organization (O’Reilly and Tushman (2004)) and the Three Horizons of Innovation (Baghai, M. et. al. (1999)). Ambidextrous explains that an established company has to separate between efficient and innovative organizational units. The Three Horizons of Innovation suggest that a company must allocate its innovation activities across three “horizons”. Blank mentions most companies treated this framework as a simply incremental execution of the same operating business model. In contrast he suggests a new definition of the Three Horizons of Innovation, focusing on operating business model innovation:
- Horizon One (H1) represents parts of a company focused on the current competitive advantage/distinction. In H1, activities are based on the existing operating business model. In other words, the operating business model is based on the current business model canvas (elements) of a company (partners, value proposition, etc.).
- The focus of Horizon Two (H2) is on building emerging businesses. In H2, activities are focused on extending the existing operating business model by changing some selected business model canvases. In other words, a company is using the current business model but is changing some selected elements of the business model canvas.
- Horizon Three (H3) is about creating viable options for the future. In H3, a company tries to work out an unknown operating business model. Management expects that a new operating business model is needed, without knowing the elements and the combination.
We do not believe this new perspective should be the final idea. Therefore, we propose to include our concept of Business Model Prototyping (Eckert 2014) and our idea to separate between one- and multi-dimensional innovations (Eckert 2016).
- A Business Model Prototype (BMP) represents the “minimum business model canvas” that describes how some core elements of a business must be connected. In this sense a BMP contains the strategic (core) competence of a company, the strategic processes linked to the strategic competence, the brand image, the strategic resources (product- and/or customer eco-system) and the overall value creation logic. Business Model Prototype and the Vision of a company form an axis. Both go back to the founder of the company. Both elements are stable and rarely changed in a static business environment.
- Based on this definition of the Business Model Prototype, the operating business model (“Extended Business Model Prototype”) is a detailed template, which derives from the Business Model Prototype. Any changes of the Vision and/or the Business Model Prototype will have an impact on the Extended Business Model Prototype/operating business model.
- One-dimensional innovations represent the traditional perspective on innovation. In this perspective a company starts with product innovation, afterwards the focus turns more and more to process innovation and/or operating business model innovation. One-dimensional innovations are strongly linked to a sequential perspective on the innovation process.
- Multi-dimensional innovations combine two or more one-dimensional innovations. From this perspective, lean startup is a multi-dimensional innovation combining a product innovation with an operating business model innovation.
Vision, Business Model Prototype, Operating Business Model and the three Horizons of Innovation
As already mentioned Vision and Business Model Prototype form an axis. Both go back to the founder of the company. Both elements have a major impact on the operating business model and through the operating business model on structures, processes, systems, roles & responsibilities.
In H1, Vision and Business Model Prototype are static and rarely changed. The management focus is on the traditional competition on market shares and on improving the operating business performance. Management works on repeatable processes, procedures, incentives and key performance indicators. In H1 the main innovation focus is on continuous product innovation, process innovation as well as on operating business model innovation (based on a new strategic positioning). Main tools and methods are Lean Innovation/Fast Innovation and traditional innovation management tools such as “Stage Gate”.
In H2, a company extends its core business to increase the market share. With the focus on H2, the management team looks for new opportunities – this competition for opportunities starts with a strong link to the traditional competition for market shares. The Vision of the company will be changed but the Business Model Prototype is still static. There is no focus on changing the strategic competency, the strategic processes or the brand image. Due to the change of the Vision, there is a need for minor changes of the operating business model (e.g. different distribution channel, different partner network). H2-innovations cover product innovations and service innovations in combination with operating business model innovation (e.g. Lean Startup). We call these innovations multi-dimensional. Management in H2 works by experimenting on the operating business model (Extended Business Model Prototype) inside the current static Business Model Prototype.
Alibaba, the Chinese internet company, is mainly focusing on H2-innovations. Alibaba is constantly evolving and adapting to the changing market conditions (Horizon 2). The company began in 1999 as a B2B website for small manufacturing companies in China. As Alibaba began his business, only about one percent of Chinese had an internet connection. But an increase was to be expected in the future. Therefore, Alibaba worked out a new vision for (parts of) the company and began to work with an experimental Lean Startup approach (Eckert 2016). In this case, a vision is the future description of the business role of a company in the competitive environment (e.g. industry, competitive arena). Alibaba has changed its vision continuously during the last years.
H3 mainly focuses on creating something new through a new Business Model Prototype in combination with a new and disruptive vision of the future. Based on a disruptive/new vision and a new Business Model Prototype, there is also a strong need for a new operating business model. H3-innovations are multi-dimensional and based on a disruptive change of the Vision, the Business Model Prototype and the operating business model as a consequence.
The German Car2Go car leasing service provider, a subsidiary of Daimler and Europcar, is an example that shows an H3-innovation. Based on a new Vision, Car2Go represents a new Business Model Prototype unequal to the Business Model Prototype of the mother companies. Also, the operating business model (Extended Business Model Prototype) differs from the operating business models of Daimler and Europcar.
As a consequence, we have to say, that companies in hyper-dynamic environments have to focus on H2- and H3-innovation without losing control on H1. Success in the competition for market shares (H1) earns the money to increase activities in the competition for opportunity shares (H2 & H3); success in the competition for opportunity shares opens the door to remain successful in the future.
Start the journey
Now we are coming back to one of the initial ideas besides the Three Horizons on Innovation: The Ambidextrous Organization. As already mentioned, an ambidextrous organization is focusing on exploiting the present and on exploring the future. In particular this means that an Ambidextrous Organization separates the new, exploratory units from their traditional, exploitative ones with different processes, structures, and cultures.
In our perspective an Ambidextrous Organization is much more complex and has to define organizational units with a focus on H1-, H2- and H3-activities. H1-organizations are focusing on efficiency and continuous improvements. An H1-manager operates on performance goals and incentives. But this is not enough. In hyper-competition H1-managers need additional key performance indicators and incentives to support the experimental H2-activities. If “supporting H2-activities” is not part of the goals and incentives of the H1-managers, then there will be no real support.
In this situation, H2-activities are not entirely separated from the corporate structure (H1-organiation). H2-units are defined by a new vision which is different from the vision of the H1-unit. The H2-unit is an experimental organizational unit that uses the traditional Lean Startup approach and combines new product-/service-innovation with an operating business model innovation.
Compared to H2-activities H-3 activities are far away from the current (H1) and future (H2) corporate innovation activities. An H3-organizational unit works out a new (possible) vision of the future. All ideas are really disruptive in the eyes of H1-/H2-managers: a new Business Model Prototype with a new strategic competency, new strategic processes etc. and in some cases a need for a new brand image that is different from the brand image of the H1- and H2-units. H3-activities need a Business Model Prototype-focused Lean Startup-approach (Eckert, 2016).
Business Model Prototyping and multi-dimensional innovations are the future engine of an Ambidextrous Organization
A new Ambidextrous Organization has to focus on distinctive H1-, H2- and H3-activities. There is a need for a strong link between H1- and H2-organizations. H1, H2- on the one side (e.g. Alibaba) and H3-organizational units on the other side are only loosely coupled (e.g. Car2Go). H3-organizational incentive schemes and key performance indicators do not need a linkage to H1- and H2-units.
H1-innovations are based on the current innovation methods (e.g. Fast Innovation, Stage Gate). H2- and H3-innovations are run with Lean Startup methods. Based on the strategic objectives of H3-innovations, Lean Startup has to be combined with Business Model Prototype in this specific situation.
Baghai, M., Coley, St, and White, D. (1999), The Alchemy of Growth, Orion Business Books, London.
Blank, S. (2015), Lean Innovation Management – Making Corporate Innovation Work, posted on June 26, 2015, https://steveblank.com/2015/06/26/lean-innovation-management-making-corporate-innovation-work.
Eckert (2014), Business Model Prototyping. Geschäftsmodellentwicklung im Hyperwettbewerb. Strategische Überlegenheit als Ziel, Springer Gabler, Wiesbaden. (German)
Eckert (2016), Business Innovation Management. Geschäftsmodellinnovationen und multidimensionale Innovationen im digitalen Hyperwettbewerb. (German), to be published end of 2016
O’Reilly, C. A. and Tushman, M. L. (2004), The Ambidextrous Organization, in: Harvard Business Review, https://hbr.org/2004/04/the-ambidextrous-organization.