In last week’s newsletter, I alluded to writing my next book on bringing science to the art of business building. This week, I’m excited to share more.
Today’s problem with business building
The practice of business building is far from science, and the cost to society is high. Entrepreneurs and corporate intrapreneurs must sort through a cacophony of new books, frameworks, and approaches year after year. They are pitched by well-intentioned experts, but those experts operate in a system driven and rewarded by unveiling “new”—not necessarily proven—frameworks and tools.
Entrepreneurs and intrapreneurs are mostly making it up as they go along, clinging to the latest book, tool, or concept that gives them a hint of structure to follow. As a result, they fail at an unnecessarily high rate. This failure makes us disillusioned, costing us all job growth, economic growth, and the possibilities innovation promises.
Entrepreneurs and intrapreneurs are confused, and I believe there can be a better way.
“The greatest scientists are always artists as well.” – Albert Einstein
Business is an art … and a science
I believe that business building can be both an art and a science. No act of creativity is completely new. It comes about not from generating entirely new ideas, but rather from combining different ideas into something new.
Sheena Iyengar talks about this in her innovation process. Musicians can take a limited number of notes on a scale and combine them to create a never-before-heard song. Paul McCartney and Ringo Starr even did this recently to create a new song by combining their previous work with George Harrison with breakthrough AI technology to add John Lennon’s vocals.
If you watch a Star Wars movie, you’ll find unusual creatures mingling around in a bar. But look closer, and you will realize they are a combination of different parts of animals—the nose of an elephant with the wings of a bird; the face of a chipmunk with the body of a penguin.
Business can be an art form, built by people who get as much of a thrill as a cutting-edge artist does by introducing something new into the world. The book I am working on now, with my teammate Cori Dombroski, will package a set of proven tools for turning art into science.
You, as a business artist and scientist, can start by drawing upon what we call the 8Ps—eight dimensions any successful business must address—and combining them in different ways to create something new.
Many business design people will tell you that a business idea always starts with a need. My research actually shows this is not always the case, but it’s true in about 60% of successful business launches.
Others start with the product. Adobe, for example, started with a product that spun out of Xerox —a product looking for a need. Two computer scientists at Xerox developed a programming language called PostScript to describe the position and size of objects on a page so that any device or printer could generate a representation of the page. It’s still the graphics industry standard for printers.
Many of 3M’s most famous innovations—Post-it Notes, masking tape—were born out of technologies seeking needs, as Jayshree Seth explains in an upcoming Outthinkers podcast.
Yet, the majority of great businesses begin with a need, so we’ll start here. Positioning is about choosing a customer and a need you want to fill. More precisely, a job you want to help the customer get done.
Often, the business builder gets it wrong at first. Kendra Scott initially opened a hat store and displayed some of her handmade jewelry pieces between the hats. People would come in for hats and walk out with jewelry. They would call to ask, “Are you that hat store? Do you still have the tennis bracelet?” Kendra became frustrated. When she was closing the door to her hat shop for the last time, it occurred to her that maybe she should be selling jewelry instead.
Once she realized the need she should be serving, it set the foundation for what has become Kendra Scott, a jewelry business that is now worth over $1 billion.
After identifying a need, you’re already halfway along to finding that magical combination of product and market. In Silicon Valley, they call it “product-market fit,” which venture capitalist Marc Andreessen describes as: “The customers are buying the product just as fast as you can make it … Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
The story of Big Ass Fans demonstrates what can happen when you match the right product to the market need. Entrepreneur Carey Smith spotted a problem. Warehouses were too damn hot. He and his father founded Sprinkle, a company to spray water on the exterior of buildings to cool off the interior. But the business didn’t take off—the product was too complicated to explain.
Then one day, Carey saw an advertisement in a trade magazine that showed large fans being used to cool down dairy farms. He realized the fans could work just as well in warehouses. People loved it. He sold enough fans to buy the intellectual property, and his new company was born.
The HVLS Fan Company was successful despite its uninspiring name. When a customer called and, unable to remember their name, asked, “Are you the guys that make those big-ass fans,” HVLS rebranded as Big Ass Fans and growth accelerated.
In the case of Big Ass Fans, they found a natural pricing mechanism after identifying the right product. It’s hard for plant managers to get approval for additional monthly expenses, making a monthly roof sprinkler service a tough sell. But Carey knew they had an annual budget for facility improvements of about $5000, so he priced new fans just under that.
Sometimes, the pricing mechanism can be the fundamental innovation that the business is built on. Salesforce invented software-as-a-service (SaaS) pricing. Netflix disrupted by offering entertainment-as-a-service.
Rent the Runway did the same in the retail clothing industry by offering subscription plans that provide shoppers with ongoing access to the rotating closet of rentable items. Rather than one-off rental or purchase transactions, Rent the Runway created three-tiered subscription plans: Reserve (rent an individual item for a few days), Update (rent a set number of items each month for a fixed monthly price), and Unlimited (rent items and swap them as many times as you want to receive new ones throughout the month).
The company’s pricing strategy converted episodic rental revenue to sticky subscription income (see our podcast with Robbie Kellman Baxter for more on this pricing strategy). Additionally, Rent the Runway uses dynamic, demand-based pricing to charge more for popular items during peak seasonal demand. Through innovative pricing, Rent the Runway created a profitable, venture-backed business.
When you have engineered the magic mix of position, product, and pricing, the next job is to let more people know about it. We need to promote.
How does a single-product beverage company from Austria create a new category, challenge the long-held incumbent positions of Coke and Pepsi, and remain independent today? The answer is, they adopted a radical approach to promotion.
Red Bull’s story began when Dietrich Mateschitz found himself suffering from jet lag on a business trip. To gain some energy, he tried the Thai beverage Krating Daeng. Impressed with its effects, he wanted to bring a similar drink to the Western world. But after pitching the idea for Red Bull to numerous investors, he was denied over and over. The investors told him there was no market for such a product.
Dietrich refuted, “If we don’t create the market, it doesn’t exist.”
He invested his own money and partnered with the head of Krating Daeng to make it happen. Red Bull turned to a buzz marketing strategy—initiating a sponsorship deal with an Austrian football club to increase visibility. They used student brand managers and funded parties on university campuses and at local college bars. They employed vehicles to drive around with large Red Bull cans affixed to their roofs, handing out free samples of the drink. The company sold over one million cans in its first year of sales.
As Red Bull grew in popularity, its radical marketing campaigns didn’t slow down. A famous publicity stunt featured an Austrian skydiver completing a freefall from the edge of space (I actually got to work with one of the executives who was involved in the idea for the jump!). The company continued sponsoring and even purchasing sports teams. By spending almost one-third of its revenue on marketing, Red Bull remains a leader in the energy drink category.
If your promotion strategy works, the customer ends up at your front door. At that moment, it’s time to deliver an impactful experience. What experience is behind that door?
Walking into a Trader Joe’s grocery store for the first time, you might be confused. The aisles are not very tall, the refrigerators and freezers don’t have doors, the products rotate, and you might not find the same ones as last month.
In fact, every detail of the physical experience at Trader Joe’s has been considered. Take the freezer chests for example—cutting out the door removes a barrier between the buyer and the product and encourages the customer to reach in. On the shelves, products are introduced and rotated out regularly if they don’t make the cut for sales. The staff wear colorful Hawaiian shirts and local artists hand draw every price tag. Even after the founder Joe Coulombe passed away in 2020, the company has continued to set an example for innovation in physical experience.
They are also meticulously strategic about where to place their stores, choosing cheaper parts of expensive areas.
Placement considers whether you should distribute your product or service differently, through alternative channels. You can find an innovative delivery channel that opens access to new customers or allows you to partner and deliver more than you could on your own.
Taylor Swift is doing this right now by showing her concerts in movie theaters in addition to stadiums and arenas. Concert films have been around for a long time, but Taylor changed the game by making a direct deal with AMC Theatres to show her concerts. Now, fans who couldn’t travel far from home or afford expensive tickets still have the chance to see her concerts in a live-like experience with their closest friends.
In our yet-to-be-released research, we are seeing that successful placement strategies often include leveraging an ecosystem to deliver the product or service. Amazon Alexa is a channel for partners to enter customers’ homes. Red Bull chose to deliver through bars and clubs over retail. Soccer star Lionel Messi had the choice to play for Saudi Arabia for a lot of money or for Inter Miami, which offered him an ecosystem deal. Messi ultimately chose Inter Miami, which gave him access to a clothing deal and a TV partnership in addition to profit sharing and co-ownership.
Most business builders accept the channel as a given based on the business they’re in, but an innovative channel choice could shape your business and determine your success.
The engine connecting all of the other dimensions of the business model is process: the systems by which you price, place, promote, deliver the product, etc. Tesla has always taken an innovative approach to its process.
The company purchased its first plant from Toyota in Fremont, California. At first, Tesla’s insistence on vertical integration (rather than buying component parts from other manufacturers) slowed it down, but later it helped with supply chain issues when the pandemic made it difficult to get car parts.
Each day, employees list the bottlenecks and focus on one that would speed things up. When Musk wanted to build a battery factory in Nevada, he realized that building one big factory would save money, but it would take three to five years and slow things down. Instead, along with partner Panasonic, he built a Gigafactory in phases so they could begin manufacturing in the finished sections immediately—I gave a speech to a group of executives at Panasonic at the Gigafactory’s launch and they were very proud of that fact. The approach allows for continuous learning and improvements as well as speed.
At a recent Outthinker Networks Chief Strategy Officer summit, Rita McGrath pointed out that the idea flips the approach of most process designers. Instead of figuring out what they will work on and then building it, Tesla starts building to figure out what will work. It optimizes learning to do things better over optimizing costs given what we know now to do now.
But who is going to run all these processes? In our Outthinker Networks, sessions about any topic almost always come back to the same answer: People.
In research that we have not yet published, we see a very interesting common strategic mindset at high-performing companies. They don’t view customers as entirely separate from employees. Salesforce, for example, activates its customers and other users to involve them in designing, developing, and advocating for the service. They know a “workforce” might be composed of regular employees, contingent employees, partners, or even technology.
They also know your customer experience is inextricably linked to your employee experience. Airbnb, in line with its purpose, gives its employees the choice to work remotely or in an office, from anywhere in the world. Employees can move wherever they want in the country and still receive the same salary.
People are the means by which your company interacts with the world and the underlying support system by which work gets done.
By combining these eight dimensions in new ways, you can be both a business artist and scientist. Take inspiration from Isaac Asimov who wrote, “There is an art to science, and science in art; the two are not enemies, but different aspects of the whole.”
Promote like Red Bull, run processes like Tesla, and price like Rent the Runway. Construct something that’s never been constructed before but do it with the pieces that already exist. And you, being the first to combine them in this way, will have designed something beautiful, radical, and transformative.