book.chapter White space in business: the four-box model

White space emerges when a corporation identifies a potential commercial venture that lies outside its primary area of expertise, extending beyond the markets adjacent to its core business. This represents an opportunity to cater to a new customer base in ways that are fundamentally different from the past. The secret to capitalizing on a white space lies not in attempting to serve this new market with the existing business model. Rather, it necessitates the creation of a novel business model, a fresh and customized amalgamation of elements such as the customer value proposition, the formula for profit, essential processes, and crucial resources. Achieving the correct new business model enables the conquering of the white space opportunity. Companies that are well-established often have markets where they feel comfortable and achieve success. These markets typically align well with the company's strongest capabilities, honed over years of matching their offerings to customer needs. Many companies excel at gradually enhancing and expanding their core businesses over time. They might even venture into adjacent markets successfully, perhaps by offering similar products to different market segments. However, a white space commercial opportunity represents a distinct challenge. It invites the company to venture into unexplored territories. To thrive in this new domain, the company must determine its ability and willingness to embrace a new business model—a different approach to generating revenue, leveraging diverse expertise, and coordinating resources and activities in new ways. For instance, Apple Computer's journey exemplifies the successful exploitation of a white space opportunity. Initially, Apple was a dominant force in the personal computer industry, but its market share plummeted from 20 percent to less than 3 percent during the 1990s. Upon Steve Jobs' return as interim CEO, he introduced upgraded computers. However, the game-changer came in 2001 with the launch of the iPod, which Apple hailed as “the world’s first digital music player,” despite Diamond Media having released a similar MP3 player in 1998. The iPod's success was not solely due to its technology; rather, it was Apple's innovative business model that made the difference. The introduction of the iTunes store eighteen months later, offering legally downloadable music at competitive prices, was a strategic move. Apple priced the music nearly at cost, focusing instead on profiting from the sales of the iPod device. Within three years, the iPod/iTunes combination evolved into a $10 billion product, accounting for 50 percent of Apple's revenue. This success significantly increased Apple's market capitalization from $2.6 billion in 2002 to $133 billion in 2007. This strategic move also transformed Apple's identity from a computer manufacturer to a leader in lifestyle media. Apple's triumph was not merely due to the iPod's quality as a product, as other media players offered similar functionalities. The key to Apple's success lay in its business model innovation, with the iPod/iTunes combination serving as a novel and innovative approach to the market. This underscores why business model innovation has become a buzzword among executives. A 2008 survey by IBM revealed that nearly all of the over eleven hundred corporate CEOs surveyed acknowledged the need to adapt their business models, with more than two-thirds indicating that extensive changes were necessary. Despite widespread recognition of its importance, only a small fraction of innovation investments at global companies are directed towards developing new business models. Moreover, attempts at business model innovation by established companies often fail, despite their abundant talent and resources. Start-ups are typically the ones to forge most successful innovative business models. The challenge for many companies lies in the lack of a clear understanding of what a business model entails, the model under which their organization operates, and how to go about creating a new one, including the reasons for doing so. A successful business model comprises four interconnected components. First, a compelling customer value proposition that clearly articulates the company's goals for its customers. Customers purchase products or services to address significant problems, so the initial step involves specifying the job-to-be-done and how the company's offerings resolve that issue. This involves not only the product or service itself but also the manner in which it is sold and any additional elements involved. Developing an effective customer value proposition typically involves a two-step process: identifying a crucial job-to-be-done that is currently underserved and creating an offering that performs this job better than existing alternatives at an appealing price. Second, a sustainable profit formula that outlines how the company will create value. This formula considers the assets required to deliver the offering and the fixed cost structures to ensure reasonable profit margins. It includes the revenue model, which quantifies the expected income (price multiplied by quantity), and may also encompass sales of related products or services. The cost structure details the fixed direct costs and overheads incurred in delivering the new customer value proposition. The target unit margin calculates the net profit per transaction needed to cover overheads and achieve the desired profit level. Resource velocity indicates the speed at which resources must be utilized to reach target volumes, including lead times, throughput, inventory turns, etc. The faster the resource velocity, the more units can be produced and sold, allowing for lower margins per unit while still achieving acceptable profits. Third, key resources refer to the unique combination of people, technology, equipment, funding, and so forth, required to deliver the value proposition to the customer in a scalable and systematic manner. While a broad range of resources may be involved, often only a few key resources are critical to success or failure in the market. For Apple's iPod, the availability of the iTunes store was a decisive factor distinguishing it from other MP3 players. Resources might include the personal involvement of key individuals, essential technology, equipment or products, established distribution channels, readily available information, specific partnerships or alliances, funding sources or established brands, and patents or other intellectual property rights. Fourth, key processes involve the recurring tasks that must be consistently performed to make delivering the customer value proposition repeatable. Like resources, there are likely only a few processes critical to successfully serving customers and generating profits. These processes typically include the design of next-generation products, sourcing of suppliers and supply arrangements, manufacturing and marketing, and human resources and training. Key processes and resources work together to repeatedly and consistently deliver the customer value proposition and achieve the target profit formula. Often, the synergy generated by processes and resources is central to the new business model's success. The cohesion of the entire business model is maintained by business rules, behavioral norms, and success metrics. Business rules define acceptable profit margins, credit terms, lead times, supplier relationships, etc. Behavioral norms dictate factors such as the minimum opportunity size for investment and preferred channels, guiding decision-making and ensuring consistency. Success metrics translate these norms into measurable criteria for systematically evaluating ongoing performance. For established businesses, the origins of specific aspects of the business model may become obscured over time, with the rules, cultural norms, and metrics that continue to be applied serving as the only remnants of these early decisions. Venturing into white space without a clear framework for business model innovation is akin to a contractor attempting to build a house without a blueprint. While a spreadsheet may indicate profitability and resources may be gathered, the absence of a plan leads to aimless work. Without a clear blueprint, any resulting structure is likely to resemble previous projects, relying more on luck than foresight for originality. The business model framework introduces architectural discipline to business model innovation, allowing for the diagramming of existing core business models and the design of new models to seize white space opportunities. This framework provides a structure for a manageable and more predictable innovation process, unlocking creativity in pursuit of transformational growth and renewal.