Business model innovation through the lens of leverage
I have been thinking a lot about business model innovation lately and trying to deconstruct existing businesses to find patterns and better understand how and why things work well, and then try to get creative with new combinations and new applications to generate new business model ideas.
If we start with the individual contributor as the unit, the ability for that person to add more value is a fairly linear, smooth progression: through education, raw intellect, new skills, and additional years of experience, a person can add more value, but they are inherently limited by the time they have in each day and the amount of information they can process. In order to create exponential value growth, that person must use leverage.
After some thinking, I identified four distinct types of leverage that a person can use in order to non-linearly scale up their ability to deliver value. There are many combinations, permutations and industry applications of these forms of leverage, but I will start by explaining some of the "pure form" examples that I was able to come up with. By going through this exercise, I have been able to deconstruct some of the most interesting business models and then think of new ways to apply leverage to other industries, and I encourage everyone to give it a try. I will also discuss some of the "second order" forms of leverage which involve the combination of two or more primary forms of leverage into something that can create an additional non-linear value creation vector on its own.
Technology Leverage: Using a machine to perform a simple task quickly, uniformly, and repetitively. A pure form of technology leverage is a calculator (i.e. a basic computer). Another option might be an iPhone app that someone designs for themselves and then sells to the rest of the world. In either case, the use of technology allows a person to move faster and reach farther with their value add.
People Leverage: Using people who are differently capable to perform specific tasks as part of a larger group. Sometimes differently capable means complementary skillsets and sometimes in means a more junior form of the same thing. One pure example would be a business person and a technology person who bring their diverse backgrounds and skillsets together to create more value than the basic sum of the two. Another example would be a senior lawyer who hires a junior lawyer who they bill out at $250 but only pay $125.
Capital Leverage: Using money (usually other people's) to further something the individual is otherwise doing themselves. A pure form would be someone trading stock in their personal account and then adding 10x the amount of other people's money and running the same strategy while taking 20% of the upside. Another very classic example would be someone loaning out money to other people and charging interest on it.
Access/Network Leverage: Using proprietary access to people or institutions that is monetized through a network. A pure play example would be a lobbyist, who leverages who they know, who they can connect you to, and the differentiated information/influence they have to deliver exponentially more value than any standalone strategic advice they could offer.
Now for some types of the second order leverage:
Brand Leverage: This is a combination of People and/or Technology leverage combined with Network/Access leverage. An example would be Nike, one of the most recognizable and valuable brands in the world, which is based on a combination of superior shoe technology (initially) combined with access to key athletes as brand representatives. Brand value tends to lead to more brand value in a positive feedback loop, but it can also be destroyed quickly.
Operational Leverage: This is a combination of People leverage and Technology leverage. Figuring out a clever way to bring together people and technology to get more value out of the combination than each form of leverage independently. An example would be a human-machine assembly line in a factory or a piece of software that is customized to a specific use case.
This is still very much a framework in progress that I am constantly thinking about and changing as I look at new businesses and investments through different lenses. Like I said, I am big on business model innovation and think that looking at unique combinations of leverage is a great place to start.
I am open to any comments or conversation as I try to push this framework forward as a way to evaluate and further business model innovation.