“We will not understand the deep dynamics of technological ideas until we understand the dynamics of another type of idea, the rules that people follow.”

“The constraint we will face will come from neither scarce resources nor limited technological opportunities; if we falter, it will be because of our limited capacity for discovering and implementing new rules.”

Paul Romer

In 1993, Dick Sherwood invented a device that would make a cup of fresh coffee instead of a pot. He was probably not the first person to think of or build such a device, but from that beginning, Keurig eventually became the dominant force in the ‘single-cup brew’ experience, being bought by Green Mountain Coffee Roasters for $104M in 2006. The year 2010 finally saw the K-cup’s appearing in the super-market. What was Keurig doing between 1993 and 2010? Why did it take so long for this new offering to make its way into the dominant food distribution network? What new rules was Keurig creating and introducing to both the end consumer and to the coffee ecosystem? In other words, how did Keurig change the ‘rules of the game’ and create a new business model?

Examples such as Keurig’s abound. In today’s parlance, it is called business model (B-model) innovation and it is receiving a lot of attention by corporations, by academics and practitioners and by the popular business press. But what is B-model innovation really? Is there an underlying principle from which the process of B-model innovation can be organized in the same ways in which product and service innovation has been? One possibility is the concept of rules and rule sets as the ‘units’ of B-model innovation.

Paul Romer, in his work on the economics of ideas, has identified rules as coequal with technology as a driver of innovation. Changes in rules, and the adoption of new rules, has as much of an effect on adoption as changes in technologies. To quote Romer again:

Rules are ways to structure the interactions that people have with each other … and they are just as important as technologies to human advancement.… business keeps evolving as new companies introduce new rule sets. The good ideas are copied, and workers migrate from failing companies to the new and old ones where the new rules are working well.”

To reiterate, rules are the way of structuring interactions with each other. But this leaves a piece missing, In an innovation realm, rules must also include the way of structuring human interactions with artifacts (or vice versa, the rules that artifacts have of interacting with us). Rules are both the explicit, codified laws, regulations and processes that we all encounter as well as the tacit conventions, manners and common wisdom that govern the way we act.

It is interesting to listen to and remember Romer’s thesis as one is reading some of the recent literature on B-model innovation. In particular, in the literature listed below, one is struck by the idea that rules and rule sets are central to B–model innovation:

  1. Roger Martin, in his book ‘The Design of Business’, presents the concept of a hierarchy of ideas from a ‘hunch’ to a ‘heuristic’ to an ‘algorithm’. This seems like a nice model for the maturity or specificity of a rule or rule set. One can think of a hunch (a better term might be instinct or ad-hoc), a heuristic or an algorithm level of rule as an organizing principle for the innovative transformation of rules and rule sets.
  2. Mary Adams and Michael Oleksak in their book ‘Intangible Capital’ present the concepts of the Knowledge Factory and Structural Capital (part of which is process knowledge) as critical to a company’s value. What they are describing is, in essence, the ‘rules of engagement’ that the company and its partners and customers use with each other.
  3. Alex Osterwald and Yves Pigneur in the book ‘Business Model Generation’ present what is essentially a model for the categorization and organization of all the different rule sets that an enterprise needs to consider (and to change) to do B-model innovation.

Taken together, the synthesis of these concepts provides a very interesting perspective on an emerging model of human agency and innovation. Rules govern both the behavior of organizations (and the individuals working in them to create new artifacts), and the behavior of demand communities that adopt and adapt to new artifacts. In addition, rules govern the ‘ecosystem’ in which the design and demand communities operate. Understanding all sets of rules – design rules, demand rules, and ecosystem rules – is critical to a comprehensive innovation effort.

A business model innovation is nothing more or less than a change in these sets of rules governing behavior. This change can be purposeful, explicit and planned or, more often than not, ad-hoc, serendipitous and emergent. This definition of Business Model innovation, that it is a change in existing rules and rule sets, is clear, precise and differentiated from the product/service innovations that involve atoms and bits. Note that if rule sets govern organizational behavior, then Business Model innovation not only includes new ways of customers attending, adopting, accessing and adapting new offerings, it also includes new rules for organizational behavior.

Many companies, consultants, academics and authors are now starting to think about and organize the principles underlying Business Model innovation. The recognition of rules and rule sets as the raw material of B-model innovation makes explicit what is being transformed and has the potential to develop the processes, methods and tools that will put B-model innovation on a par with product and service innovation efforts that involve atoms and bits and will make the journeys of the new Dick Sherwood’s of the world less ad-hoc and more purposeful.

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