If you look at your phone’s home screen, you will see many digital business models in the form of frequently used apps: Uber, LinkedIn, Teams and Spotify to name a few. Each of these companies has a native digital business model in contrast to non-native digital companies that use digital as a sales channel (e.g., Walmart). In this article, we dive into the five archetypes of digital business models with examples to show the tradeoff decisions and investments required to be successful in each archetype. 

At Prophet, we define a business model as how a company creates, delivers and captures value with five main components: 

Two components of this model can be used to deconstruct the five archetypes of digital business models: (1) the value proposition, what you offer in the form of products and services and (2) the revenue model, how you commercialize those offerings.  

Digital Business Model Decision Tree  

Value Proposition 

The first decision when designing a digital business model is how you will create value. Will you own your own supply or aggregate third-party suppliers? Marketplaces connect suppliers with buyers for products and services. Content providers create or aggregate content that can be read, listened to or watched. Infrastructure providers’ own enablers needed to get things done. 

Revenue Model 

The next decision is how you will monetize your offering. Will it be paid for by end users or by a third party? Marketplaces are primarily monetized through transaction fees charged to both suppliers and buyers. In addition, marketplaces can charge suppliers to advertise or offer their users subscriptions to reduce transaction fees. For content providers, the decision to monetize through advertising versus subscription depends on scale. An advertising model reduces costs on end users, enabling scale and network effects. A subscription model provides more predictable revenue from each user and locks in revenue for longer cycles. For infrastructure providers, an on-demand model can provide a cost-based competitive advantage but requires a huge investment in upfront costs. Infrastructure as a subscription provides more funding for ongoing product development and innovation. 

An Example of Each Digital Business Model: 

1. Commission-based Marketplace (e.g., Uber) 

In this business model, suppliers and advertisers pay to access customers in a marketplace. The main revenue drivers are transaction fees, listing fees and advertising. This business model requires creating a flywheel between multiple parties. Uber’s business model includes a DTC service and separately a B2B and B2D (business to driver/courier/biker) marketplace. In Winning Through Platforms, Prophet Senior Partner, Ted Moser describes the advantage Uber gained through creating a unique “customer coalition edge” among multiple parties: riders and delivery recipients, ride and delivery drivers, app developers, advertisers, restaurants and regulatory bodies. By bringing together such a robust customer coalition, Uber can provide more value to each customer group, while also diversifying their revenue sources and differentiating from competitors. Uber attracts more drivers than Lyft by offering revenue from rides, deliveries and in-car advertising. By attracting more drivers, Uber can also attract more riders to their platform with greater ride availability. That, in turn, has the flywheel effect of bringing on more suppliers – including advertisers, developers and restaurants. As a result of these moves, Uber commands a 20x higher valuation than Lyft today at $128B. 

2. Content via ads (e.g., Google) 

Back in 1999, Google’s founders considered two ways of monetizing: subscription and advertising. The subscription model they considered was $20 a year paid by the end user. For that same user, the advertising market would value them at an average of $52 per year in 1999, so 2.5x more. A Wharton paper found that platforms monetized via advertising versus subscription are more likely to invest in content moderation to expand the user base to large, heterogeneous populations. A central tension in the ad-supported business model is that polarizing content is good at getting attention, but over time, it can lead users to be less satisfied and engage less. In addition, advertisers require a high level of stability to ensure that their ads do not appear next to harmful content.  

3. Content via Subscription (e.g., Netflix) 

Platforms with a subscription model must balance growth alongside increasing the willingness of the user base to pay. There is fierce competition for recurring revenue, so subscription players must continue to increase the value that they provide to end users each month. For Netflix, it became difficult to continue to show growth once almost everyone in the U.S. had access to a Netflix log-in through their family and friends. In November 2022, Netflix launched a new ad-supported tier, and a few months later, Netflix began cracking down on password sharing outside of households to force new customers into the ad-supported tier. Netflix also raised the price of the non-ad-supported tier, which forced customers to choose between paying more each month or allowing Netflix to monetize their viewing with advertisers. These moves caused Netflix to have its strongest quarterly increase in customer gains in three years.  

A note that these first three business models all fit into Ben Thompson’s definition of Aggregators: companies that have a direct relationship with users, zero marginal cost for serving those users, and decreasing acquisition cost as the user base grows. This theory explains how platforms have radically reshaped industries by making control of demand much more important than control of supply. For example, Uber has been much more successful than taxi services by focusing on the end-user relationship rather than trying to control the supply of drivers. In the digital world, attention is a scarce commodity rather than a finite resource, so it is much more important to own the end-user relationship than it is to own the supply.  

4. Subscription Access to Infrastructure (e.g., Microsoft Office).  

In this business model, customers pay per seat to access a service. This provides monthly or annual recurring revenue in the form of licensing fees. It is a capital-intensive model that requires ongoing investment in product maintenance as well as product development to retain and acquire new customers. Microsoft recently debuted Copilot, an AI-enabled enhancement to the suite of Office products to differentiate itself from workplace software competitors such as Google. Another form of competitive differentiation is being the one-stop shop for everything. Microsoft is essentially the operating system of work, with all the necessary applications and services – from communication to email to productivity and presentation tools, in one place and connected to each other. Microsoft does not have to have the best single product for anything, for example, many employees prefer Slack to Teams, but by integrating everything in the cloud, the switching costs are too high to opt out of Microsoft’s ecosystem for a single app.  

5. On-Demand Access to Infrastructure (e.g., Amazon Web Services) 

This business model requires significant upfront fixed costs to have capacity available on demand. One of the most in-demand types of digital infrastructure today is Nvidia’s H100 AI chips, which are used to power ChatGPT and other AI apps. Crusoe Energy, a digital infrastructure provider, raised $200M to buy these chips and is forecasted to make half of that investment back in just one year by charging companies for access. The biggest incumbent in the digital infrastructure model is Amazon Web Services, which Jeff Bezos has likened to the utility companies of the early 1900s. Back then, factories had to build their own power plants to generate electricity, but once the factories could buy electricity from a public utility, they no longer needed to invest in expensive private electric plants. In this analogy, electric plants are physical computing technology. By providing servers and storage in the cloud, companies can reduce their fixed investment in computing and storage and pay for what they use, and when they need to use more, it is easy to scale up the capacity. Today, the cloud platform industry is valued at $180B, with AWS controlling a third of the market. In addition, AWS is responsible for about three-quarters of Amazon’s total operating profits. 

Overview of revenue attractiveness and investment required for each business model: 

These are just a few examples of companies that fit into the five digital business model archetypes. We have partnered with a number of clients to design and launch new business models as well as to innovate existing business models in the face of change. 

Creating a new Digital Business Model: 

• We helped a hardware manufacturer create a new on-demand access to infrastructure business model by embedding smart home technology into their physical products, enabling our client to become an essential infrastructure and service provider for home security players. 
• We worked with a healthcare association to transform its business model from membership fees to a new digital learning platform that prepares healthcare workers for the jobs of the future.  

Evolving a Digital Business Model: 

• We partnered with a content provider to quantify the impact of transitioning from a subscription-only model to an ad-supported model.  
• We worked with a telecommunication provider to pivot from a usage-based model to a monthly subscription. 

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Software transforms every industry, and many have enviously observed the impressive growth and returns that software companies have amassed over the past two decades. Think of a hugely successful software company and chances are it espouses a product-led model. Naturally, traditional companies are realizing that to compete and grow, they must look, think, and act like product-led, software companies themselves. But simply hiring product management experts is not enough. Functioning as a modern software company requires building the right kind of product ecosystems and teams in order to find new ways to engage with customers around existing offerings, cross-sell opportunities and to create new channels for revenue. For many of these companies, the ambition to innovate is there, but the capabilities often aren’t. Unclear strategy, siloed functions and multiple handoffs cripple the speed and effectiveness of product releases, subsequently ruining the end customer experience. It’s an extremely challenging shift to tackle.  

We frequently encounter organizations that struggle to advance beyond one of these three critical stages of maturation. Let’s break these steps down: 

• Building cross-functional product teams – this is the first step, and is about connecting the requisite skill sets, ways of working and focus to successfully build and deliver a digital touchpoint.  
• Build and support multiple products – second, it’s time to move past those baseline capabilities and explore how to build and support multiple products in-market. Many often do this inefficiently, without connection to a strategy, capabilities or in a way that effectively delivers ROI across segments. It’s important to ensure that expansion doesn’t come at the price of the business’ reputation or quality of products or services. It requires a shared understanding of product excellence, visionary leadership and an unrelenting customer focus.   
• Scale – finally, when the capabilities are established and products are successfully sustained across a range of customer types and use cases, companies see this as the time to scale in market. However, often they are unable to build a connected approach that allows them to scale in line with the ambitions of the business and grow their customer base. 

Embracing a Software Company Mindset and Unlocking Success: Three Strategic Solutions for Product Delivery & Maturation Hurdles 

1. Embedding Product Fundamentals 

Let’s start with an example of what happens when you are learning a new capability for the first time. We were working with a physical medical device manufacturer who had deep-rooted relationships with physicians and hospital networks. They had data, clear use cases and insights aplenty. Despite some successful pilot projects that sales reps were able to bootstrap to support their doctors, the company lacked the methods and capabilities to scale these projects or monetize them consistently for realizable ROI. We worked with them to define clear strategic goals metrics and a documented strategy on what opportunities they would and wouldn’t spend time and effort on to deliver customer and business value. In support of this strategy, we set up product pods of cross-functional capabilities, enabling each pod to work without functional dependencies. Armed with our Hypothesis 2 Action methodology, the pods would work at pace to bring market-backed evidence on the critical assumptions allowing them to quickly discard concepts that weren’t viable and focus on delivering clear customer value.  

2. Developing a Product Based, Customer-Centric Organization 

Transitioning into a product-centric, agile organization requires strategic coordination of product pods and experiences to create efficiencies across people, processes, data and technology and in the important use cases across the customer journey. Organizations at this stage often have a myriad of products in market but lack the structure to manage them in a way that reduces redundancy and gains a clear ROI against strategic business goals. The challenge is twofold: internally, numerous pet-projects have emerged organically in response to market needs, while externally, there is a scattered approach to different customer requirements, often leading to confusion.  

We worked with an international digital real estate firm in Europe that had built several digital product pilots across a range of customer needs and countries. They had the upper hand in multiple European markets but operated disparately amongst the countries. The vision was clear: a consolidated European digital real estate platform, like Zillow’s dominance in North America. Using our Product Maturity Model, we worked with them on a three-pronged approach: assessing the current ability of their cross-functional product pods, strategy and products; identifying what their future ambition was for strategic use cases and ways of working; and delivering a phase-by-phase transformation plan, which led to the creation of a cohesive digital product platform, thereby maximizing economies of scale. 

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3. Scaling Product Management  

As businesses grow, scaling becomes inevitable. There’s a compelling need to deliver a consistent level of product excellence, build direct-to-consumer relationships and unlock new avenues for revenue. Yet, scalability often opens the doors to redundancies, lack of clarity in customer segmentation and the sunk cost and effort to support ‘zombie projects’ kept alive for continued customer relationships rather than for the strategic use of resources.  

Over the past few years, we’ve been working with a leading national hardware big-box retailer. With a clear aim of generating exponential new revenue in the next three years, they had acquired several e-commerce companies catering to a professional segment of their customer base. The path forward involved evaluating the existing landscape of competitors for this segment and simultaneously assessing existing operational capabilities and ways of working using our Product Maturity Model. With this grounding, we helped the retailer articulate a comprehensive North Star strategy on where to invest, where to sustain and where to exit in exponentially growing this software-led business. After doing a deep gap analysis of their capabilities internally alongside a build/partner/buy strategy, we developed a multi-year digital product transformation roadmap. This aligning of internal enablers with the desired customer experience outcomes provided clear guidance for training, resource allocation, product management, investment and metrics to track their growth strategy. 

In the evolving business landscape, the art of creating, developing and scaling products is paramount. Evolving to become more like a software company with strategic insights, well-structured approaches, empowered product management and a customer-centric mindset means organizations will be better equipped to rise to the challenge.  

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In today’s world of volatility, uncertainty, complexity and ambiguity (VUCA), businesses continue to be challenged and their resilience tested. Innovation is increasingly crucial for enhancing resilience, yet most organizations still see tension between the two instead of the potential for a more positive business outcome. In our latest global research and report, Building Business Resilience Through Innovation, we found that the most successful organizations are using innovation to drive business resilience.  

Southeast Asia (SEA), one of the world’s fastest-growing regions, faces unique challenges such as limited resources, inadequate infrastructure, and complex cultural and socio-economic contexts. Yet these constraints are also the reasons why the region is one of the most creative in problem-solving due to its frugal yet bold innovation culture. In fact, according to the Global Innovation Index 2022, SEA is one of the only regions globally closing the gap on North America and Europe in terms of innovation and has become a hotbed for tech startups and a home to a number of highly successful companies with soaring valuations.  

Leading the pack is Singapore which positions itself as a hub for innovation in the SEA region. With plans to invest SG$24 billion ($18.1 billion USD) over the next three years to help local businesses build “deep, future-ready” capabilities for innovation and transformation. The country has already attracted Google, Dyson, Visa and Hyundai which have chosen to set up their APAC headquarters and innovation labs in Singapore.  

Our research further unveils that several companies in SEA  innovate better than many global players by leveraging diverse innovation techniques across an organization. Here are four successful innovation techniques we uncovered: 

1. Embrace a Lean Startup Mentality to Drive Organization-wide Innovation 

Large enterprises today possess years of built-up legacy practices and a bureaucracy that is often hard to change. A lean startup mentality allows large enterprises to operate more nimbly and flexibly, adapting to business needs or customer feedback in real time. This is achieved by organizing traditionally large innovation teams into pod-like working squads, each with the goal of building new products, testing features, and validating ideas in an agile manner. Firms in Singapore are using this tactic well and are in fact, twice as likely to use pod-like team structures / decentralized teams than in the US and UK (27% vs 13%).  

For example, MB Bank, a leading bank in Vietnam, spun off a business unit when it embarked on its digital banking journey. To accelerate digital transformation, the digital bank operated much like a lean and agile startup to ramp up its digital product development process. The new digital banking model was then reverse-engineered across the legacy bank as part of the enterprise-wide transformation. Today, MB is highly regarded as one of the most innovative banks in Vietnam and has close to a thousand employees in its digital, IT and tech divisions working in pod-like structures to continuously deliver products ahead of its competition. It is therefore no surprise that MB digital banking has acquired close to 20 million retail customers today in a short period of just 3 years since its launch and is the only banking app in Apple’s Top 10 Apps two years in a row. Learn more about Prophet’s work with MB Bank.  

In Singapore, DBS, one of Asia’s most digitally advanced and innovative banks, set up DBS Asia X (DAX), a collaborative innovation facility where it runs all open innovation-related initiatives, supported by partners, startups, and its other innovation teams such as DBS Ventures and DBS Xchange. Separate from its headquarters in the central business district, employees and external resources in this facility work in pod-like teams with startup mentalities to design and deliver digital products that help DBS remain one of the top digital banks in the world. 

Takeaway: Large traditional organizations must break down the walls of bureaucracy, and function like startups to stay agile and ahead of the innovation curve. 

2. Leverage Open Innovation to Expand Innovation Horizons 

Open innovation is an approach that involves working with external partners to generate and implement new ideas. Instead of relying solely on internal resources, companies engage with a variety of external stakeholders, such as customers, suppliers, universities, startups, and other companies, to develop new products, services and processes. Our research shows that organizations in Singapore are more likely to have formal innovation incubation programs than in the West (35% vs 15%). 

Singapore’s government remains one of the most innovative countries in its “Smart Nation” endeavor and continues to lead by example when it comes to open innovation. The Infocomm Media Development Authority (IMDA), a part of Singapore’s Ministry of Communications and Information, promotes open innovation through its Open Innovation Platform which offers co-funding support for prototyping and deployment of ideas from the public.  

Across Singapore and Hong Kong, DBS has also been running several pre-accelerator programs, which allows them to stay connected with new, emerging fintech; resulting in new mobile features such as conversational banking, which is a combination of AI technologies from fintech startups such as Moneythor, V-Key and Kasisto.  

The Malaysia-based airline, AirAsia, established Redbeat Ventures to expand its offerings beyond flights to include other travel-related products, such as hotels and travel insurance. The company also organized hackathons to generate ideas and solutions for specific challenges, inviting employees, customers and external partners to participate and providing resources and support to help teams prototype and test their ideas. 

Takeaway: Organizations should adopt open innovation and increased collaboration as a strategic approach to tap into the expertise of external partners and stakeholders, and drive innovation, growth, and competitive advantage. 

3. Adopt Design Thinking to build and meet dynamic consumer needs 

Many innovation initiatives fail due to a lack of structure and process when developing new services and products. This is where design thinking comes in. It is a powerful tool for fostering innovation by understanding user needs, questioning existing assumptions, reframing problems, and generating pioneering solutions that can be prototyped and tested. Design thinking methods are well implemented by firms, especially in Singapore, and twice as likely to use this tactic for innovation as compared to the West (39% vs 23%). 

CP Group, a Thai conglomerate with operations in agribusiness, retail, and telecommunications, embraced design thinking boldly when they set up True Digital Academy in partnership with the US-based design thinking institute, General Assembly. The Academy doubles down on the adoption of design thinking for innovating new products and services to meet shifting consumer needs. In fact, CP group’s newly launched line of high-protein instant noodles targeted at health-conscious consumers, and a plant-based brand, MEAT-ZERO is the result of the new design thinking approach. The Group’s ambition is to make MEAT-ZERO one of the top three alternative meat brands in the world by 2026. 

Unilever is another example of a company that leverages design thinking to drive innovation in its target markets and has succeeded in being the first in market for many of its hair care products. In recent years, the proportion of Indonesian women wearing the hijab has grown significantly (~ 20% since 2018). In response, Unilever began increasing efforts to innovate hair care via design thinking frameworks to better serve this target segment, by taking into consideration the human truths such as pain points and needs of the hair care routine across various hijaber personas. By leveraging design thinking, Unilever can better serve the ever-changing needs of its target markets and customers.  

Takeaway: The use of design thinking to innovate and adapt to shifting consumer needs and market trends, coupled with a long-term commitment to innovation, is a key driver of business resilience and growth. 

4. Leverage Scenario Planning to Stay Future Proof 

In the wake of increased economic unpredictability and global instability, scenario planning has become more important than ever. Scenario planning allows organizations to prepare for potential future events or unforeseen market changes. For example, DBS Bank used scenario planning to anticipate the impact of digital disruption on the banking industry and developed a digital transformation roadmap to stay ahead of the curve. It also developed a “Future of Work” scenario to anticipate how work and workplaces may change in the future and are using the scenario to inform their HR policies and strategies. 

Elsewhere in Singapore, Keppel Corporation assessed multiple challenges such as overcapacity, low oil prices, prolonged downturn and increased competition from China. With scenario planning, Keppel developed the “2030 Energy Scenario” assessment which involved solutions such as diversifying their business into areas such as renewables and data centers to reduce their dependence on the oil and gas industry.  

Takeaway: To future-proof their business, organizations must incorporate scenario planning into their strategy development process to identify potential risks and opportunities to develop contingency plans to mitigate risks. 

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Future back planning is key to unlocking uncommon growth during times of economic uncertainty. 

In our latest global research report, Building Business Resilience Through Innovation, we found that a leading barrier to increasing innovation efforts is that the organization lacks a long-term planning process. Unfortunately for many companies, this has only worsened in the last few years as reactive thinking characterized by the pandemic era.   

As innovation leaders emerge from this reactive phase and begin to chart out the next few years of growth during a time of great economic uncertainty, it is essential to create a growth strategy that spans these three-time horizons.

Across these horizons, there is an inverse relationship between the investment in resources and the investment in strategic decisions. Running the business of today is resource intensive and requires operating with excellence with much less space for strategic exploration. In contrast, exploring the business’ target destination over the next five to ten years within a wide open divergence environment is time intensive. Due to the scarcity of resources, it often requires time-bound investment to collect data on the most relevant drivers of change, model potential scenarios that could unfold over time, and based on that, determine what new opportunities are worth further validation and investment.  

In Horizon 1, the existing value chain is used to optimize and scale the business, but in Horizon 3, the needed value chain will most likely be adjacent to today’s value chain. The inversion point of building the new value chain is challenging to manage because resources are ramping up as the ability to make strategic decisions is fading. At this point, the skills required to be successful change. It is operationally complex to get something to move through the inversion curve.   

If a business neglects Horizon 3 activities today, it sets itself up to be leapfrogged by the competition because it will not have invested in the assets and capabilities needed to act on emerging opportunities.

Future Back Helps Companies Maximize Growth Opportunities in Horizon 3  

While it is impossible to predict the future, market leaders and makers proactively anticipate preferred and disruptive future scenarios. The first step is understanding the most impactful drivers of change that will shape the future market landscape. Drivers of change come from a range of sources: the classic Porter’s Five Forces of suppliers, buyers, new entrants, substitutes and competitors that determine industry profitability, as well as macro-forces that are broader than industry boundaries, often categorized as social, technological, economic, environmental, and regulatory drivers (STEER).  

From doing future back work across industries, we have found three non-mutually exclusive factors that help us see around corners. Across these factors, emerging technology is critical in reshaping societal norms, enabling new interaction modes, and determining future profitability and competitive advantage sources. 

3 Non-MECE Factors that Shape the Future Market Landscape 

1. The Overton Window describes the range of policies that are accepted by the mainstream at a given time and can be used to identify ideas on the threshold of gaining mainstream acceptance. For example, over the last 50 years, public acceptance of in-vitro fertilization (IVF) has rapidly increased as the availability of IVF technology has also grown. In 2021, fertility support startups raised $345M, up 35% from the previous year. Health systems and payors that anticipated this shift ten years ago were able to differentiate themselves within a rapidly growing market. However, with the overturning of Roe v. Wade, societal progress regarding IVF is now under threat. Industries heavily funded by the government, such as healthcare and clean energy, are also strongly shaped by changing societal norms. 

2. Behavioral shifts often emerge due to technological advancements that make it easier to do more with less or create new modes of interaction between humans and machines. For example, Figma’s significant innovation was being browser-first, with the ability to edit files in real-time in the cloud, allowing teams of developers, designers, and product managers to collaborate in one place efficiently.  
 
Adobe was late to the game of browser-first collaboration and, as a result, paid $20 billion to acquire Figma, which had roughly $400M in revenues at the time. The steep price was considered a solid investment given the future value of Figma’s product spaces. Thinking more broadly, technological advancements across the Internet of Things, artificial intelligence, artificial and virtual reality, and autonomous machines will enormously impact behavior and interaction modes, changing how we learn, work, collaborate and entertain ourselves.  

3. Business model shifts are often required to capitalize on or meet emerging technology demands, regulation, the economic environment, and ESG agendas. For example, Fundrise was the first company to crowdfund real estate investment successfully, and the founders did it by seeking the expertise of regulators from the beginning. Working with a former regulator, Ben Miller figured out how to use Regulation A to raise money from non-accredited investors, which was the first time anyone had ever done. Eventually, the regulation changed to Regulation A+, which allowed the company to raise more equity from non-accredited investors while streamlining the filing process. Still, at that point, Fundrise was already the category leader in a new market.

Four Questions to Determine a Company’s Options within the Future Market Landscape 

Once we understand the most impactful drivers of change, the next step is modeling the most viable opportunities for a specific company to pursue. We begin with four questions:  

1. How is a company encumbered and advantaged?  

This includes understanding a company’s options based on its funding and regulatory moats. Firms funded by unregulated capital have an entirely different set of options than firms funded by regulated capital. A venture capital-funded firm can take on much higher fixed costs to stand up a new capability without a near-term path to profitability. For example, the data cloud company Snowflake raised $2.1B over eleven rounds of funding since 2012 and isn’t expected to reach profitability until 2023.    

On the other hand, an advantage of being a large, publicly traded company is that it is easier to find suppliers and partners to test and validate Horizon 3 growth hypotheses with and bring new offerings to market. Along with understanding the implications of funding sources, it’s essential to know where margins come from today – is it from hardware, software, or services? Who has the most power in the value chain to extract more margin over time? What parts of a company’s existing product line, assets, and capabilities might serve as a moat? Does it have access to a rare resource on the supply side or a lock-in effect on the consumer side? Finally, is there a regulatory moat that will make it difficult to unseat an incumbent?   

2. Who has the preferred position in the market to launch and scale this idea?  

The most critical mindset of future back work is humility. We always assume that another player is better set up to execute an idea. The big four (Alphabet/Google, Amazon, Apple, Meta/ Facebook) dominate their innovation ecosystems due to their scale, network effects, and ability to buy entire markets. Firms operating within these ecosystems are often unlikely to win share-of-wallet among end consumers and are much more likely to succeed by playing a critical infrastructure or support role. We look at the role of aggregators and integrators in the innovation ecosystem to understand how parts of the market are consolidating and where technology is being abstracted away from the end user.   

3. Who is the player that can shut this idea down? 

As Archimedes said, “The shortest distance between two points is a straight line.” In highly regulated industries such as financial services and healthcare, a significant source of Horizon 3 growth is creating new business models based on the changing regulatory landscape. Like the Fundrise example, the founder of Coinbase realized that abiding by U.S. law rather than moving offshore could act as a long-term defendable moat for the company. With the collapse of FTX, that bet has already paid off.   

4. What has prevented this idea from being launched and adopted before? 

Is the idea on the threshold of becoming mainstream? Is there a consumer experience problem or a price-to-value problem? Or does capital not think it’s worth an investment? The inevitable endpoint of markets is to solve consumer problems rather than business and technical problems. Enterprise capital is good at solving Horizon 1 business problems, such as increasing conversion in existing channels, creating efficiencies, and increasing margins.  

On the other hand, venture capital is good at investing in long-plays that create new consumer markets because it has a risk appetite and is willing to be too early. Too early might mean taking on the cost of educating the market about a problem that they should have realized could be solved. For example, Netflix was loved for eliminating late fees (a consumer problem previously considered unavoidable in a physical rental market). Still, the company was perceived as shifting to a digital-first business model too quickly. Success in bridging the gap between its Horizon 3 digital-first business and its Horizon 1 DVD rental business required subsidizing the price of the new service for end consumers.   

The Mindset We Bring to Future Back Work 

The future back process combines design methodology (outside-in and hypothesis-led) with business rigor (commercial opportunity assessment with an asset-forward view of value-chain adjacencies and potential competitive moats).   

The mindset we apply to this work draws from design and consulting. We’ve distilled it into three design principles: 

Humble 

We begin this work by assuming that another player has a better solution as well as a preferred position in the market.  

Anti-fragile 

We create a durable portfolio of growth moves in order to hedge our bets, with the understanding that it is impossible to know exactly how the market will reshape over time. 

Effective collaboration  

You need to keep running the business of today while exploring what your business might be in the future. At the same time, your hypotheses around how the market might shift and what options are most attractive for your company are the entry point into this work. We design future back engagements to extract maximum input in the most time-efficient way by starting with stakeholder hypotheses, bringing in external experts to identify new opportunities and threats quickly, and then designing workshops and executive communications that bring your team along the right way at the right time. 

The Outcomes We Achieve Through Future Back Work 

There are three main outcomes that we have consistently achieved through this work: 

1. Board-level alignment and buy-in on a future vision. For example, supporting the approval of a board-level, multi-hundred-million-dollar M&A strategy in order to create an entirely new product category. 
2. Driving capital allocation for new business building. For example, on a recent project, this work led to a $5 billion acquisition as the centerpiece of a new business unit. 
3. Updating the product roadmap to transition from now and near-term investments to decisions that will drive the next horizon of the business. 

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Investing in both innovation and organizational resilience are two essential elements of success for companies to compete in today’s rapidly changing world. Through interviews with 14 senior executives and surveying 300+ innovation experts across the globe, Prophet’s latest research explores how successful organizations use innovation to drive business resilience.  

Four Learnings for Companies in China to Build Innovative Organizations 

Our findings reveal that innovative companies are more likely to be resilient. Particularly, 60% of respondents in China agree that innovation and resilience are connected, more so than their counterparts in Singapore (48%), the U.S. (47%) and the UK (47%). However, there exists a strong tension between the two characteristics – while Chinese companies on average deploy more innovation tactics compared to companies globally, they also face more pronounced barriers. In this article, we share our key findings and explore implications for Chinese businesses seeking to drive sustainable growth through innovation. 

1. Prioritize Cross-Functional Alignment 

Incubation programs and pod-like team structures have long proven to be effective innovation tactics and are widely adopted by companies in China. According to our research, 35% of Chinese respondents report that their companies have a formal innovation incubation program compared to 21% of respondents globally. Additionally, 27% of Chinese respondents report their companies use pod-like team structures vs. just 18% of respondents globally. However, such team structures risk becoming siloed. A lack of cross-functional alignment remains a significant barrier to innovation and growth, with 44% of Chinese respondents citing it as a challenge compared to only 32% globally. 

One example of how cross-functional alignment can impact innovation comes from the fast-growing beverage brand Chi Forest. As a startup, the company found tremendous success through operational agility, running pod-like teams with product managers in each team leading individual innovation initiatives. However, as Chi Forest grew, organizational inefficiencies emerged due to a lack of streamlined workflows and cross-functional collaboration, causing an overlap of roles and processes. Chi Forest has embarked on an organization-wide transformation agenda to reimagine its operation and business model.  

Takeaway: It is important to implement innovation incubation programs and pod-like team structures, while also emphasizing cross-functional alignment. 

2. Develop Balanced Innovation Incentive Structures 

Incentives are a crucial part of driving innovation, but overly focusing on short-term financial outcomes can hinder success. Our findings show that 56% of Chinese respondents report their companies to have special incentive structures for new business opportunities compared to 30% globally. Yet this has also led to an innovation barrier, where 54% of Chinese respondents say their companies have too much emphasis on short-term financial results compared to 35% globally. 

To empower long-term growth for the company, innovation success should be measured against various objectives beyond financial ROI. For example, Xiaomi has a series of incentive programs to encourage innovation, including an Annual Technology Award that rewards $1 million to an internal engineering project every year, evaluating technology and engineering excellence as well as business impact. The 2022 winner, Xiaomi’s CyberDog team, impressed CEO Lei Jun because the project successfully integrated many of the group’s R&D results and presented new technologies that could be soon applied to other core products. This is a good example of how incentives can be used effectively to drive impactful innovation.  

On the other hand, companies like Pop Mart are facing growing pains. Although the company offers generous incentives, it measures innovation success solely on the creation of new product lines and their short-term sales volumes. As a result, the toy maker is left with a bloated portfolio and hasn’t been able to elevate its brand equity despite years of exponential growth. 

Takeaway: To avoid pitfalls, organizations must develop incentive structures to recognize results, while avoiding overly focusing on short-term financial outcomes. 

3. Guide Rapid Innovation Cycles with Long-Term Vision 

Rapid prototyping and iteration is a common innovation tactic, but past innovation failures and a lack of long-term planning processes can discourage innovation. Our findings show that 31% of respondents in China say their companies use rapid prototyping and iteration compared to just 19% of respondents globally. However, failed past attempts at innovation have limited commitment to future innovation for 40% of Chinese companies compared to 28% globally. Additionally, 40% of Chinese respondents say their companies lack a long-term planning process compared to 38% globally. 

Shiseido’s approach to innovation is a great example of how companies can balance a strong brand vision and rapid innovation cycles. “Shiseido’s ability to have lasting success is in large part due to our dedication to creating the best quality products to meet consumer needs. This dedication to ‘craftsmanship’ is why we don’t blindly follow market trends but rather think critically about how we can further refine our products,” said Carol Zhou, SVP of China Business Innovations & Investments at Shiseido, in an interview with Prophet, “Although we may not always be at the forefront of trends, we have found the right pace to create a timeless brand.”  

Takeaway: Organizations should lead innovations with a clear vision and long-term planning, while enabling rapid prototyping and iteration based on a clear strategic roadmap, to create products that meet both long-term and short-term goals. 

4. Focus on Customer Insights as a Foundation of Innovation 

Creating differentiating innovations and finding emergent subcategories are effective ways to separate yourself from competitors, but paying too much attention to competitors and too little attention to customer needs is a surprisingly common mishap, according to our research. Chinese companies tend to focus heavily on competitor activity, with 40% doing so compared to 29% globally. This is often at the expense of paying attention to the needs of their customers, with 52% of Chinese respondents reporting that a major barrier to innovation for their companies is paying too little attention to customer needs, compared to 37% globally.  

Companies must develop an organizational-wide mindset of diving into customer insights, data analysis, and user testing to identify what customers truly need and want. By doing so, they can create innovative products and services that truly differentiate them from their competitors, making them stand out in the market. Nike has been successful in this regard, with a strong focus on the athlete and understanding their needs driving their innovations. As Mark Parker, CEO of Nike, explains, “Our success has been based on our commitment to innovation and great design, which really in our case starts with our commitment to the athlete – and really understanding the athlete and the insights we get from that relationship. So, we translate those insights into real innovation.” In China, Nike actively deploys a localized digital ecosystem to engage with its customers and understand their needs. In turn, the rich data gathered from these digital platforms continuously fuels its innovation and growth. 

Takeaway: Prioritize a human-centered approach that focuses on customer needs to create truly meaningful innovations. 

Building Innovative Organizations 

Indeed, innovation is not a department, but a collective achievement of an organization, as one innovation leader has told us. Companies should lead with a vision, encourage risk-taking, experimentation, and collaboration across all levels of the organization. This will help to create an environment where innovation can thrive and become ingrained in the company’s DNA. 

What can your company do today to turbocharge innovation? 

1. Emphasize the importance of always-on consumer insights and deploy the right team and structure as enablement. 
2. Ensure a holistic view of the market demand landscape, covering both consumers and competition and strategize growth moves and innovation efforts. 
3. Build a multi-year roadmap with different chapters and cross-functional teams and land the detailed action plan in a short-term/ one-year plan. 
4. Clarify how innovation initiatives drive business purpose, develop employee value propositions and define incentives accordingly. 
5. Transform how your innovation team works within your organization to instill agility and collaboration. 

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Innovation – more and more –  is what every financial services company seeks as the primary means of driving growth. That’s true because innovation is increasingly what separates market leaders from also-rans.  

But for all the investments in innovation, most organizations struggle to generate the returns they’re looking for or produce the growth that innovation is supposed to unleash. For more on the barriers to innovation and – more importantly – how to get over them, read our recent research report, Winning the Innovation Game in Banking.) 

In the intensely competitive financial services sector, it is not enough to innovate every now and then. Rather the goal is to establish a rigorous practice of innovation and to make it a standard part of ongoing operations. The vision is to establish a high-performing innovation engine that continually identifies innovation opportunities, explores those ideas via prototyping and gated investments and efficiently moves meaningful innovations to market. Such a disciplined process is necessary to avoid the common pitfalls that make repeatable innovation an elusive target for many companies.  

Introducing… the Innovation Maturity Model 

To help banks, insurers, and investment managers industrialize their approach to innovation, Prophet created the innovation maturity model. This model helps organizations:  

• Assess their own innovation capabilities and opportunities  
• Identify the barriers – technological, process, human, cultural – inhibiting innovation 
• Establish tangible innovation goals and actionable plans to overcome those barriers  
• Define a roadmap to establishing repeatable innovation capabilities  

The innovation maturity model inspects five dimensions of the business that are critical to enabling innovation:  

1. Strategy and Vision  
2. Organization and Mechanics 
3. Insights and Measurement 
4. Culture, Behaviors and Rituals 
5. Education and Enablement 

Within each of these areas, the model defines varying levels of maturity – beginner, novice, intermediate, advanced, expert – so organizations can understand where they are today and what to aim for tomorrow. For instance, an organization with expert-level capabilities in organization and mechanics would involve the entire enterprise in using innovation portfolios to drive strategic directions and decisions, with all employees aligned to the innovation strategy and with specific responsibilities to drive that strategy forward.  

In terms of education and enablement, beginner firms will be those that provide access to and funding for external training for dedicated innovation practitioners. Intermediate firms will have innovation teams in place to help drive behavioral change across the organization and support wider education efforts. At the expert level, innovation training and education will be a mandatory part of onboarding and learning and development programs, with continuously updated curricula and regular use of outside resources for insight and inspiration.  

The innovation maturity model reflects our market experience in terms of what works in driving breakthrough innovations. Further, it’s designed to establish cultures that prize risk-taking and experimentation and instill operational discipline relative to innovation. Such organizations are capable of both acting like a startup and investing like venture capital firms. As we highlight in our report, “Winning the Innovation Game in Banking”, it’s a matter of building a portfolio of innovation ideas based on deep customer insight and then rapidly testing and refining those ideas through pilots and MVP launches into the market.  

The Many Forms of Innovation 

Because innovation can take many forms, our innovation maturity model provides the core insights that can point the organization in the right long-term direction. To put the model into context, consider how the organizations below are evaluating the different ways to set up their innovation engines and flywheels.  

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Necessity is the mother of invention as they say. And many successful companies and products were started in times of an economic downturn, from the inception of Netflix in 1997 (now valued close to $100B) to that of Airbnb in 2008 when the Great Recession saw demand for short-term, low-commitment housing increase exponentially. However, when the stakes are high, the reality often is that the bets are fewer, there is less room for error and the need for more certainty of success goes up. You can’t simply take the old corporate RND approach to “Spray and Pray”, that one of your concepts will be market driving.   

Oftentimes, businesses will have identified a new opportunity area, market, audience or digital channel that looks potentially valuable for their growth. However, they are not at the point of concept definition and design to immediately hand it to internal development and product teams to begin to build. While they will have a concept of what they think would be valuable for customers, many businesses lack the evidence and detail of where they should invest first, what they should (or more importantly shouldn’t) build and in what order to deliver customer and business value quickly.  

Across all industries, B2B/B2C/B2B2C/DTC, and phases of company maturity, Prophet’s proprietary “Hypothesis to Action” (H2A) approach enables us to take product concepts from 0-1 successfully. It helps get from idea to minimum viable product (MVP) in the most efficient way possible; cutting through ambiguity and defining where to start at the minimum possible investment, with a clear direction of what is going to build traction in the market, reduce risk and increase the likelihood of a successful digital product that meets the true needs of customers.  

The H2A Model  

Leveraging our own learnings from decades of successfully shipping net-new products, we have optimized the most successful product creation engine of the past 15 years in the approach of Silicon Valley venture capital. The H2A model was created from years of work and insight and aims to provide cross-functional teams with a minimal structure to make better-informed digital product decisions and enhance design progress. It is comprised of four key stages: Hypotheses, Findings, Conviction and Actions – and in many instances we have executed the entire H2A process within two weeks.  

In one instance, a financial services client came to us with the desire to improve lead generation among prospective customers; the company had impressive loyalty among existing customers but struggled to attract net new to the business. Thus, formed the idea for a digital product, “a predictive profiler,” through which the business could predict and offer a tailored product mix and accompanying advice to its prospective customers based on user-provided information. With the problem-to-solve and initial idea in place, we were ready to begin cycles of H2A to take this idea from a concept on a page, to a user-validated, defined and designed MVP.  

Let’s take a closer look at each of the H2A stages in turn as we put it into practice with Thrivent.

1. Generate Hypotheses

Hypotheses are critical assumptions you are making about your product or idea, articulated as a testable premise. Most often, the riskiest assumption you are betting on at the start of product innovation is simply that your idea is in fact solving a problem or addressing the needs of your target user.

Taking the example of the financial services company, we were assuming that prospects would be more likely to convert if guided to the right product mix and provided tailored advice. We took that overarching assumption and broke it into more specific hypotheses to answer specific questions, starting with what is the right “way in” to lead prospects to a recommended set of products. Our hypothesis: Rather than answering generic questions, users will prefer to self-select into different archetypes, then answer more specific questions to achieve greater levels of personalized results. We quickly designed a lightweight test to prove this, balanced by business ambitions.  

2. Extract Findings

After rapidly testing the hypotheses in real-world situations, often sourcing feedback from real customers or users, we build an evidence-filled set of findings. These findings are observed truths made in a test that repeats across more than one participant or scenario.  

In our example, we found that we were, in fact, correct. Presented with four different potential “ways in” to kick off the user flow, the majority of prospects preferred to self-select into an archetype group, then answer more specific follow-up questions to deliver tailored results, citing a desirable balance of entertainment (perusing the archetypes) with the rigor of analysis of more targeted questions. Luckily, this user-led finding coincided nicely with the business ambitions of strong data collection (questions) with minimal PII risk (leading to self-selection).  

3. Form Convictions

Our findings are swiftly synthesized into convictions that form the basis of the new product. These convictions are the “so what” – product declarations, informed by findings, that become product decisions to be taken forward into design.  

Because user feedback conveniently converged with business needs, convictions for this H2A cycle for our financial services client were clear: the optimal “way in”, from both a user experience and business POV, is to lead with archetypes followed by questions to inform the product mix recommendation.  

4. Determine Actions

All of this comes together to form the specific actions to move the team forward in designing and defining the user value proposition.  

With our client, in closing out this cycle of H2A, we determined that the next best action for the predictive financial services product was to play out a complete interaction model across archetypes and questions, exploring means to delight the user with feedback/findings along the way to encourage completion of the full experience.  

We repeated the H2A cycle across a series of six two-week sprints, through which we tested, learned, adjusted, and optimized the product until we reached a fully defined and designed MVP, backed by user data and aligned to business priorities, ready to enter development. Ultimately, when launched in the market, the product achieved 12X the conversion rate of previous lead gen campaigns within the business, evidencing the power and speed of hypotheses-led innovation in driving high-impact products at the minimum possible investment.   

The H2A approach has led to the successful launch of B2C, B2B and B2B2C products and services in everything from home goods to healthcare. At its core, the value lies in its ability to find a way to start small, learn quickly and launch successfully. By unearthing the riskiest early assumptions that might be being made – and proving or disproving those rapidly with data-driven evidence – when the product does go live its chances for success will be that much greater and the path to scalability that much clearer.  

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