PIVOT Step 1: Pinpoint

The goal of the Pinpoint step, which often takes up to one month, is to identify your current business model as well as your current mental model: the preferences, biases, and decisions that have gotten you where you are and keep you there. To decide whether you will join the digitally networked world and how you will get there, you must fully accept and appreciate your starting place. Once you understand your current state, whether asset builder, service provider, or technology creator, you will be able to create a new, more valuable network vision for your future.

Defining Your Current Business Model

As a reminder, the four business models are asset builders, service providers, technology creators, and network orchestrators. Each business model is based, respectively, on a different type of asset: physical capital, human capital, intellectual capital, and network capital.

• Asset builders deliver value through physical goods. These companies make, market, distribute, sell, and lease things. Examples include Ford, Walmart, and American Airlines.
• Service providers deliver value through people. These companies hire skilled workers who provide services to customers for which they charge. Examples include United Healthcare, Accenture, and JPMorgan Chase.
• Technology creators deliver value through ideas. These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include Microsoft, Oracle, and Amgen.
• Network orchestrators deliver value through connectivity. These companies create a platform where participants interact or transact with the many other members of the network. They may sell products, build relationships, share advice, give reviews, collaborate, and more. Examples include eBay, Red Hat, and Visa.

Pinpointing your business model can be surprisingly tricky. Although you and your team probably have some intuition about what your company’s primary business model is, many leaders focus on their industry designations. Our research indicates this approach isn’t very useful, given that all four business models can operate in any industry. In addition, many companies operate several business models simultaneously. But each company in the S&P 1500 had a primary business model that was the focus of its investments and efforts. Therefore, we approach this issue by considering specific questions regarding the characteristics of your organization and its economic performance.

Identifying Your Organization’s Characteristics

Companies with different business models look different in a number of ways—from capital investment to time management to metrics and reports. Let’s begin exploring your firm’s characteristics with a simple business model audit. Have each member of your Pinpoint team answer these questions, and be sure to discuss any points of disagreement. In the end, you will determine which primary business model your firm best matches.

1. Which of the following descriptions best describes your organization?
   1. Manufacturer, distributor, or retailer
   2. Professional services, care provider, or consultancy
   3. Developer or creator of technology, biotechnology, or pharmaceuticals
   4. Platform provider, facilitator, or connector
2. Where does the bulk of your allocated capital go?
   1. Property, plant, and equipment (PPE)
   2. Payroll for employees who provide services to customers
   3. Research and development for software, patents, and other IP
   4. Building and evangelizing a network or platform
3. What does top talent usually do at your firm?
   1. Plant, production, and operations
   2. Client or customer services
   3. Research and development
   4. Digital development (cloud, big data analytics, social, and mobile)
4. What risks are of greatest concern to your organization?
   1. Damage to PPE, loss of inventory
   2. Loss of key employees
   3. Inability to protect your IP (pirated software, generic drugs, etc.)
   4. Loss or declining loyalty of customers
5. Which of the following activities is most important for the competitive success of your organization?
   1. Efficient manufacturing, distribution, and operations
   2. Hiring the right talent and keeping utilization up
   3. Protecting IP and developing new technologies
   4. Creating customer interactions and tapping in to the crowd
6. What KPIs are the most important for leaders to track in your firm?
   1. Inventory turnover, production efficiency
   2. Hours billed, employee utilization
   3. R&D output, creation of new IP (patents, software, biotech)
   4. Visitors, users, subscriptions, and transactions

(You can also take this survey online at openmatters.com.) In the foregoing questions, each letter is associated with a type of business model. A responses indicate an asset builder business model; B responses, service provider; C responses, technology creator; and D responses, network orchestrator.

Look at the distribution of your lettered answers to determine the primary business model indicated by your firm’s characteristics. It’s likely your answers will not align completely with a single business model. Most firms employ a mix of models but do have one that predominates.

Reviewing Your Firm’s Economic Performance

Next, consider the financial and operational performance of your firm. Do you perform like a network orchestrator or an asset builder? Our research identified several key metrics for which companies with different business models have differentiated performance. Let’s look at the average performance, by business model, on four key metrics: sales growth, return on assets, gross profit margin, and multiplier (price-to-revenue ratio).

Gather these numbers from your finance representative, and look at where your company falls on the charts in the figure above. Which business model does your economic performance best match?

Bringing It All Together

At this point, you’ve looked at business models from two directions, and you probably have already reached a conclusion about your company’s. It’s useful to bring your team’s intuitions to this problem as well, but if the team’s intuitions go against the data in the preceding two thought exercises, the intuitions may be leading you astray. The business models of most companies are less valuable than leaders like to believe, and their multipliers betray the truth. Nearly nine out of ten companies are asset builders or service providers, which perform comparatively poorly in all four metrics.

You may feel that your organization falls within a few business models, and this can certainly be true. Perhaps you are 70 percent asset builder and 30 percent service provider. That’s fine, but it’s worth your time to decide which business model is the focus of your company.

Wherever you are—and for most firms, that will be asset builder—tackling the thinking and processes in this book will help you shift from firm-centric (which describes asset builders, service providers, and technology creators) to network-centric and to achieve a significant competitive advantage in growth, profits, and marginal costs.

Pinpoint Your Mental Model

If you want to do something about your business model, you will also need to understand why it is your business model. There are reasons your firm chooses certain assets for investments, and those reasons are based on the mental models of your leadership team.

The average CEO is fifty-six years old.³ This means that he was already an adult when ARPANET (the nascent internet) was just taking off—and well over forty when Facebook was founded.

Most business leaders were educated, trained, and began work in a time when physical assets dominated the markets and the best leaders were operational and finance experts. For most leaders, their thinking and skill sets have not changed significantly in the past twenty years, while over that same period, new technologies have proliferated, new types of assets have taken prominence, and customers and employees have become empowered. These changes create a gap in values as well as skills.

Skills are important because all of us are most comfortable working in areas where we consider ourselves capable, if not expert. Each person on the team should think about the following questions:

• What has your education and experience prepared you for?
• Which of the four asset types do you prefer (believe will deliver reward versus risk)?
• What about the team around you? Do they have similar skills and experiences? Do you reinforce or challenge each other’s mental models?

Values are even harder to change than skills. We develop values at a formative time in our lives, mostly unconsciously, and sadly we rarely revisit or change them. To consider your values, it’s helpful to start by reflecting on how you think about the four types of assets:

• Physical assets such as factories, stores, products, and inventory
• Human assets such as skilled workers and customers
• Intellectual capital assets such as R&D, patents, and software
• Network assets such as relationships and platforms

In your Pinpoint team, answer these questions:

• Which asset do you believe brings the most risk to a firm?
• Which asset is the most difficult to manage?
• Which asset generates the most value?
• What types of assets do the most valuable firms have?
• What is the most important asset for your organization?

(You can take the assessment online at openmatters.com.)

Your beliefs about these questions drive how your firm spends and makes money and how you create value—but they may be based on assumptions, biases, or outdated information. If it were your job to argue against yourself, could you provide some good counterpoints?

For example, many executives think that network assets are difficult to understand, quantify, manage, and measure. After all, these assets exist outside the organization and are not traditional assets, as measured by accounting, nor are they put into the records of the organization. On the other hand, networks may be the easiest asset to manage, because at their best they are actually self-managed by the community, as you have seen in earlier chapters. For example, when a new vacation hot spot becomes popular, Airbnb’s network of hosts begins expanding into that area on their own—in the best interests of both the network and the company.

Remember that we’re shifting from a world of tangible, physical assets to intangible, digital assets, and from owned to shared. These assets scale faster and more cost-effectively than physical, owned assets and have the ability to grow and manage themselves. However, you can’t manage them in the way you manage owned production plants, coffeepots, employees, or intellectual property. A new mental model is a necessity for success in the network world, and we will discuss adapting mental models further in part IV.

The First PIVOT Step Is the Hardest

Reflecting on your current business and mental models, with the ultimate purpose of changing them, is a difficult task. Familiar assets and familiar thinking are comfortable, and we certainly hope that you’re fond of your company just as it is. But ongoing success requires ongoing adaptation. There is enormous potential in front of you, and we hope it is inspiring and exciting.

Pinpointing your business model gives you your starting point. Let’s consider it a launching pad. As we keep going with PIVOT, we get increasingly practical about what you’re launching toward and how you’re going to get there.

The Enterprise Pinpoint Story

When we began working with Enterprise, it integrated policy, services, and finance, but it was on the left side on most of the ten principles in the from-to spectra. The team members focused on financing low- and moderate-income housing (physical, tangible assets), but they knew very little about the residents of their financed buildings, their twenty-five hundred real estate developer partners, or their supply chain of contractors and service firms. The Enterprise team members had no technology that enabled them to get input from those they served nor to understand the organization’s impact on clients’ lives either directly or indirectly (through partners), let alone co-create with them. However, the team members were willing to admit this to themselves and commit to transformation.

Pradip Sitaram, Enterprise’s chief information officer (CIO), was a key player in prompting its technology transformation—essentially seeking to disrupt its traditional beliefs and operations. Sitaram, who joined the leadership team in 2010, had begun implementing a cloud platform to improve the organization’s operations, but he also saw the potential in using digital networks to further the organization’s true mission of bringing opportunity to low-income families and children. Luckily he had a partner in Charlie Werhane, president of the organization, and Craig Mellendick, chief financial officer. Werhane, Mellendick, and Sitaram knew that technology could be a differentiator for Enterprise and that they needed to invest in it if they wanted to think and operate differently from their competitors.

Werhane knew that there was great promise in bringing digital technology to the firm, but over time he realized that the real opportunity was to turn the firm into a network orchestrator, with the partners and residents as its center. To get there, he needed the support of the board. Terri Ludwig wanted Enterprise’s impact on low- and moderate-income families and children to go far beyond housing, to include a network of services, such as health care, education, transportation, and even microfinancing, to be delivered digitally to help improve their lives.

But the organization had far to go to migrate from an asset builder and financial services firm to a digitally enabled network orchestrator. Even its aspirational goal—stated as “solving housing insecurity”—was limiting in its focus on physical assets. Enterprise had no technologists on its board, and although it was good at financing housing and providing needed services to the local community, it had little information on what its actual impact was or whom it was really serving.

To increase its impact, Ludwig called together the executive team members for an intense two-day offsite to discuss how they might pivot the business. During the meeting, the executives worked to pinpoint their individual mental models, and the resulting people, processes, and practices, that kept them focused on building assets and providing services. They reflected on how digital technologies could greatly increase their impact on the market, including public policy in Washington, DC, where they had great sway, having financed more than 340,000 housing units with $18 billion in capital.

With the starting place identified, they felt ready to start identifying all the assets (tangible and intangible) they had at their disposal. They knew it wouldn’t be an easy task, but they all agreed it was worth the effort. Next, we turn to the step of inventorying your assets.