Six Design Principles for Business-Model Innovation

By: Jeff De Cagna

When you create products for your association, are you thinking only about what's sold in the past? Or do you consider how human beings actually go about associating? Focusing on the latter can help unlock surprising and innovative new ideas. Here’s how to start the process.

As we begin the second decade of the 21st century—a decade that is likely to be turbulent and uncertain for the association community—the strategic imperative for innovation in all forms is becoming ever more insistent. Among all of the possible areas of focus for our pursuit of innovation, there is an especially urgent need to devote greater attention and energy to the complicated work of business-model innovation so we can ensure our organizations are able to thrive over the next decade and beyond.

Last year I wrote for Associations Now about the profound leadership challenges of imagining, designing, and implementing new business models ("Leading the Way With Business-Model Innovation," August 2010). Since then, I have reflected on a critical question: What are the underlying principles of business-model innovation for organizations seeking new success in the business of associating? My hope is that the six principles presented here will provide association leaders with the right kind of strategic guidance to seize the initiative on business-model innovation. It is clear, however, that if associations are going be successful in this effort, they will need to embrace a genuinely different point of view on the nature of value creation in a more digital, more social, and more interconnected world.

Six Design Principles

Before we explore the six principles in greater detail, it is important to keep in mind that they are offered as principles, not absolutes. Design is at the heart of business-model innovation, and association leaders will benefit if they are able to actively experiment with these principles in ways that will create space for unexpected business-model concepts to unfold. Design principles function as both inspiration for novel possibilities and generative constraints on what is possible. It is from within this creative tension that the most powerful ideas will emerge.

In crafting these principles, I have tried to make a distinction between the association as we understand it today—a formally constituted organization with well-established ways of being, thinking, and acting—and the experience of "associating," which is itself a way of being human. As we have learned in recent years, associations can make associating possible, but not all associating occurs because of associations. Our thinking about future business models needs to focus on maximizing the value of better outcomes for our stakeholders, not preserving the traditional structures and inputs we often regard as most important.

Purpose and profit are interdependent. Associations must resolve to end the fruitless and counterproductive clash between dedication to a larger sense of purpose and the pursuit of profit. The truth is that associations cannot thrive without both of these invaluable resources. Associating must be about the purposeful creation of meaningful "thick value" in exchange for a reasonable level of profitability that, in turn, generates a consistent revenue stream for reinvestment in more value creation.

It is not an either/or choice, but we tend to make it one. We frequently struggle with placing too much emphasis on one idea over the other, sometimes out of good intentions, but just as often because we fear increased external scrutiny or do not want to alienate our most vocal stakeholders. The challenging creative work of innovating our business models can help us overcome this false dichotomy, however, by serving as a balanced and integrative framework that enables associations to pursue the goal of purposeful profitability in a more strategic way.

Intimacy drives value creation. The long-term success of purposefully profitable business models for associating will depend on our ability to build real intimacy with our current and future stakeholders. Genuine intimacy leads to a stronger sense of empathy, and when it comes to new value creation for 21st-century stakeholders, no amount of quantitative data will ever supplant the transformative potential of one penetrating empathic insight. Associations must learn who their stakeholders are and what moves them as people, not just where they work or what products and services they buy.

Former Harvard Business School professor Shoshana Zuboff argues that Apple has forever changed the way we consume music by reinventing the individual listening experience, or what she calls "I-space." When we think about associating, the business-model implications of I-space certainly pertain to the most intimate relationship any of us will ever know: the relationship we have with ourselves. It is this distinctive self-knowledge about individual identity and intentions, personal interactions and influences, and human imagination and inspiration into which our organizations must tap to connect with stakeholders in a deeper, richer, and more enduring manner.

The social layer is digital. Over the last decade, we have witnessed the creation of a robust public social layer of interaction, conversation, and sharing in the form of blogs, wikis, and most recently, near real-time information flows (Twitter) and global social networking sites (Facebook). The explosive growth of smart mobile devices over the last four years has amplified the impact of the social layer on the experience of associating, and in the decade ahead, the continued implementation of the "game layer"—the application of game dynamics to shape human behavior in every context—will take that experience to yet another level.

For as long as there have been associations, the social layer has existed almost entirely in the physical dimension. Throughout our history, creating sustained relationships required regular face-to-face contact among participants at association events. Today, relationships flourish in a fully digital form, a medium that makes them always accessible, highly portable, easily shared, and thus more valuable. It is impossible to underestimate the impact of this paradigm shift on membership-centric business models that put pay-to-play access to relationships at the heart of their value proposition. In our new business-model designs for associating, we must consider new ways to capitalize fully on the digital social platforms at our disposal to infuse greater meaning into a full spectrum of relationships between and among stakeholders, without necessarily imposing a requirement for any of those stakeholders to join the organization.

Networks are fluid. The mobility of relationships makes it ridiculously simple for our stakeholders to rapidly assemble their own networks, for whatever purpose, whenever and wherever they are needed. Networks are a primary driver of the phenomenon of "pull" that authors John Hagel III, John Seely Brown, and Lang Davison discuss in their book, The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion. According to the authors, "pull allows each of us to find and access people and resources when we need them, while attracting to us the people and resources that are relevant and valuable, even if we were not even aware before that they existed."

Associations have traditionally enjoyed a sense of ownership over the networks they have helped to create, but those networks are now fully within the control of their participants. Today's fluid networks operate at a speed much closer to the real-world pace of our stakeholders' work, and they enable the free flow of rivers of information and content filtered and curated by network participants. In this context, the presence of trust within networks is crucial. As part of new thinking about business models, association leaders should consider what unique contributions their organizations may be able to make to nurturing social capital that can bridge across and between formal and informal stakeholder networks of associating to unleash serendipity, imagination, and innovation.

Collaboration is the new content. In a world of technology-enabled knowledge work, content creation is a continuous and increasingly collaborative process. But even more critical than the specific outputs of those collaborations is the residual impact of collaboration itself as an essential outcome for our personal, organizational, and societal well-being. The ability to pursue significant and sustained collaboration makes it possible for stakeholders to unite to meet their current needs, as well as tackle the deeper problems facing the industries, professions, and fields in which they work. What makes Wikipedia a world-changing resource is not merely the content it provides but the ongoing global collaboration that sustains it.

Associations today are quite focused on figuring out how to support greater member engagement. Unfortunately, in far too many organizations, this still means "buy stuff from us or give up your valuable time to work on trivial matters." True collaboration is not about asking stakeholders to sit together while performing the make-work required to keep yesterday's bureaucratic machinery grinding, but rather it's about inspiring them to associate in order to connect with the shared intention of advancing the common good. For associations, creating platforms that constantly place our stakeholders in meaningful, comprehensive, and trusted collaboration with each other is a compelling business-model opportunity that is not yet fully realized.

Openness is the default setting. Beyond transparency, the experience of associating is situated in a context of genuine openness. Openness promotes inclusion and trust but also creates important challenges for individual privacy and choice. From a leadership point of view, of course, openness is a major source of consternation because it accelerates the flow of control away from institutions and toward individuals, groups, and networks. In response, many associations seek to impose control through planning activities and governing mechanisms, even when doing so is impossible or injurious to their long-term standing.

In a blog post last summer, Tim Leberecht, the chief marketing officer of frog design, riffed on "design for the loss of control," a concept first articulated by J.P. Raganswami, chief scientist for Salesforce.com. Leberecht argues that organizations may find value in intentionally designing their work to narrow the extent of their control. As he writes, "A deliberately designed loss of control grants companies the only remaining and arguably most critical competitive advantage: access. As long as they enable and facilitate knowledge flows, ideas, passions, skills, and experiences, they have access to them." For most association leaders, this is a hugely radical, even dangerous, idea. And yet it is quite possibly the most important design principle for all new business-model concepts of associating. In very practical terms, business models designed for the loss of control may well deliver greater value while incurring lower costs. After all, among other problems, control is expensive. In strategic terms, business models observing this design principle can help energize stakeholders with a renewed sense of purpose. Among other opportunities, the loss of control encourages new self-organized forms of associating.

These six design principles are not a panacea for associations struggling with the challenges of a world in upheaval. They do not provide easy answers and ready-made solutions. Instead, they force us to confront the limitations of association orthodoxy and hopefully inspire us to be bold in designing business models that will make it possible for our organizations to thrive over the next decade and beyond. Now is the time for all of us who care deeply about the future of associations to display the necessary courage, determination, and imagination to make it happen. Let's get started.

Jeff De Cagna, FRSA, an ASAE Fellow, is chief strategist and founder of Principled Innovation LLC, located in Reston, Virginia. Twitter: @pinnovation; Email: [email protected]

Sidebar: Six Questions for Applying the Design Principles

To help association leaders apply the design principles to the work of business-model innovation, here are six questions for reflection and inspiration. These are not the only questions, but they will get your internal conversation started and headed in the right direction.

  1. What are the key elements of a new cycle of "thick value" creation through which profitability can flow from purposeful action?
  2. How can we create a sustained conversation that builds intimacy and empathy with our current and future stakeholders?
  3. What are the different types and forms of "associating" relationships we are willing to offer to our current and future stakeholders, beyond membership?
  4. How can we intentionally nurture social capital across fluid networks to unleash serendipity and enable the phenomenon of "pull"?
  5. What will it take for us to move from narrow "member engagement" to expansive and sustained "stakeholder collaboration"?
  6. How do we deliberately design a 21st-century experience of associating for the loss of control?

Online Extra Sidebar: Business-Model Innovation FAQ

Q: What is a business model?

A: A business model describes the rationale of how an organization creates, delivers, and captures value. Organizations may have multiple layers to their business model based on different value propositions designed to serve different customer segments.

Q: What are the key elements of a business model?

A: All business models are composed of these nine building blocks:

  1. Stakeholder segments. The distinct and profitable stakeholder groups an organization consciously chooses to reach and serve. In the association context, "member" is not a stakeholder segment, but a type of relationship an association has with certain stakeholders.
  2. Value propositions. The combination of products, services, experiences that create value for specific stakeholder segments. A value proposition is not a litany of products and services, but a simple comprehensive statement (e.g., the early value proposition for the iPod and iTunes store was a "seamless music experience," not a cool new MP3 player and an online store).
  3. Channels. The methods and approaches for communicating with and reaching stakeholder segments to build awareness of and deliver a value proposition. For associations, channels can include websites, magazines, conferences, direct mail, chapters, and so on.                          
  4. Stakeholder relationships. The types of relationships an organization establishes with specific stakeholder segments. As described above, "member" is a stakeholder relationship, and other relationships include subscriber, financial supporter, exhibitor, learner, collaborator, and so forth.
  5. Revenue streams. The actual cash an organization generates from each stakeholder segment.
  6. Key resources. The most important physical, financial, intellectual, or human assets required to make a business model work. Key resources are the raw materials for which an organization occurs a cost and from which it can create new value.
  7. Key activities. The most important things an organization must do to make its business model work. Key activities are the practices and processes an organization implements to create new value and for which it incurs some cost.
  8. Key partnerships. The network of suppliers and partners that make the business model work. Key partnerships are third-party contributors who provide additional resources, extend existing resources, implement key activities, or offer other support new value creation for which an organization incurs some cost.
  9. Cost structure. The actual costs incurred to operate a business model.

Q: How is a business model different from strategy and tactics?

A: Strategy focuses on the choices an organization makes about how to use its capabilities and resources to create value, based on its best understanding of the current and future conditions of its operating environment. An organization's business model is situated in a broader strategic context and operates within the framework of an organization's strategy for value creation. Tactics are the approaches, methods, and practices an organization uses to execute its strategy and implement its business model.

Q: How does an organization get started with business model innovation?

A: Business-model innovation can begin with the identification of new stakeholder segments, the development of new value propositions, or by nurturing new stakeholder relationships. It also can flow from new organizational capabilities or resources, new partnerships, or new mechanisms for increasing prices or reducing costs. Business model innovation often occurs when new players in an industry seek to disrupt the traditional market leaders (e.g., Apple's entry into the music space in 2001 and its entry into the mobile space in 2007).

Online Extra Sidebar: The Roles of Association Leaders in Business-Model Innovation

What role should senior association leaders play in the process of innovating an organization's business model? Here are some thoughts:

The board of directors. The board of directors is the core stewardship group for every association, including stewardship of the business model. The fiduciary responsibility that comes with service on the board of directors must include a deep understanding of the existing business model, including its structural flaws and systemic weaknesses. The board must monitor the health of the current business model and, when necessary, work with the CEO and senior management to launch a business-model innovation process to prepare the organization for the inevitable erosion of its existing model.

The CEO or chief staff executive. Because the CEO or CSE will be evaluated, at least in part, on the success or failure of the association's value-creation efforts, the CEO must be the primary driver of business-model innovation. The CEO needs to work in concert with the board and the rest of the association's senior management to ensure that the business-model innovation process connects with organizational strategy and effectively integrates purposeful action with profitability. The CEO should also work with other leaders to ensure all new business model concepts that emerge from the innovation process receive a fair hearing and that the most promising ideas have the opportunity to be tested fully.

The COO or second in command. The COO, along with the CFO, is responsible for the effective implementation of the association's existing business model. Even as the business-model innovation process is underway, the COO must ensure that the current business model is well functioning, given its limitations. Of course, the COO absolutely should be a full contributor to all conversations about new business model concepts as well.

The CFO. The CFO shares responsibility with the COO for the effective implementation of the association's existing business model. The CFO's financial expertise accords to this individual a specific responsibility to build the understanding of the board and other leaders on the deeper functioning of the existing business model, especially with regard to issues of profitability. As in the case of the COO, the CFO should be a full contributor to all conversations about new business-model concepts.

Other C-Suite leaders. In the context of business-model innovation, senior executives need to play dual roles. On the one hand, they must understand how their individual functions or portfolios contribute to the strength or weakness of the association's existing business model. On the other hand, as senior leaders working for the organization's future success, they must be able to look beyond their own areas of responsibility to consider the possibilities of new business-model concepts that may not be advantageous to them.

Jeff De Cagna

Jeff De Cagna, FASAE, is chief strategist and founder of Principled Innovation, LLC, in Reston, Virginia.