Steps to make your business insanely profitable

Photo courtesy of Flickr user 401K

Last year, Michael Porter and Mark Kramer wrote what may be the most important business article in a decade, detailed here. Since its publication, I've asked many executive groups to read the article, most said the authors' work is clearly groundbreaking -- but they're not sure what ground had been broken.

Here's what the authors argued, and what this blog post will show you how to do: create industry-changing innovation by enriching tribes important to your business, without any concern about how the move will benefit you. Porter and Kramer call their approach "creating shared value." My co-authors and I wrote about something similar in 2008. We now call it "tribal enriching innovation." It boils down to three steps:

Step No. 1: Find a group of people important to your business who need help, and commit to helping them, without any thought about how this action will benefit your business. If you want bonus points, commit to helping this group even before you know what you'll do. Vacation-rental website Airbnb got this right, and the results are changing the hospitality industry.

In 2009, Airbnb's situation was desperate. Like many startups, they were amassing debt while trying to get traction on their business that connects people looking for a place to stay with "hosts" who are renting out parts or all of their homes.

Paul Graham, who runs Y-Combinator, plays a key role in where the story goes next. The cofounders walked into Graham's office looking for advice. Airbnb's Joe Gebbia picks up the story:

And [Paul Graham] asked us a really simple question. He said, "Where's your market?" We said, "Out of all the cities, New York shows the most promise." And he said, "So let me understand this: So your users are in New York City, your business is happening in New York City, and you're here in California?"

We are like, "Yeah, we're here for the program [Y Combinator]." He says: "Your users are in New York City and you're here for the program in California?" And there's a long pause and he goes -- famous line -- he says, "What are you still doing here? Go to New York City!" And we are like, "What are we going to do in New York City?"

After the three cofounders and Paul Graham brainstormed, they had an idea about how to help the early adopters in New York. Gebbia told us:

One of the things we realized is that the photos that people were using [to highlight their rooms for rent] were absolutely terrible. The pictures that people were taking were from their cameras phones, or Craigslist images, or no images at all. And we said: "Well, we are design guys, we know how to take a good photo. Why don't we go and solve this problem ourselves?"

Two of the three founders landed in the New York area intent on fixing that problem. They rented a high-end camera and close to thirty pounds of lenses, other equipment and a tripod. After taking photos, they also sat and talked with the hosts, many of whom made suggestions about the website that the founders had never considered.

They made the changes to the website, uploaded the photographs, emailed thanks to the hosts, often including links to the features the New Yorkers had suggested. Then they flew back to California to assess the results. Revenue in New York doubled, from about $200 a week to $400.

They returned to Paul's office, showing him the results. Their mentor showed enthusiasm, and then asked again: "What are you still doing here?"

The two cofounders returned to New York, repeating the process, and did to the following weekend. Each time, the revenue from the area doubled. They had reached the point of "ramen profitable," which was making enough money to pay for rent and pay for ramen, all in one month.

Step No. 2: Reflect on what new assets your business is developing. Steven Johnson uses the words "spare parts" for the same idea. Spare parts, or assets, are anything from a new way to service people, to a better website, to new technical know-how, to relationships, to technology, to a new business model. In the case of Airbnb, they developed a new business model and way to build great relationships with their hosts that have been the key to the company scaling, now in 186 countries.

Innovation results from a burning need that is solved with assets that are sitting around. Often, these assets don't appear valuable until they are needed. The fact that the cofounders had an eye for design, were social people, enjoyed meeting users, could take great photographs, and were coachable, all counted as assets.

Tribal enriching innovation gets people to think differently, because now they are focused on a new burning need. Instead of Airbnb focusing on how to build web traffic, they focused on how to solve problems for their users in New York. A new burning problem calls for a new way of thinking, and you'll find yourself using assets you didn't know you had.

Imagine getting an email from a cofounder of Airbnb, who had visited your home a week earlier. The email thanks you for your hospitality, includes high-quality photographs of your home, and sends a link to a new feature, which you suggested during the meeting. It's no wonder the goodwill toward the new company spread throughout New York and beyond.

Step No. 3: Import the innovation back into your business. Airbnb now had the business model they'd use to scale. They would put people on the ground in cities with a large number of hosts, and repeat the process. The trust and loyalty for Airbnb grew, as did their bookings, and their business. As the goodwill went viral, new hosts signed up new cities, giving Airbnb a new target for their process.

There's one important point in this story that's easily missed: someone has to give business leaders permission to take these bold commitments to help people without any concern for return-on-investment. With Airbnb, it was Paul Graham. The trip to New York, on its surface, didn't scale, but Graham told them it was ok to do it anyway. Up until that point, the cofounders tried to solve problems as they understood them, through computer code.

I encourage business leaders to read the Porter and Kramer article mostly because Michael Porter is the lead author. He is the leading figure in competitive advantage and corporate strategy, and Porter is essentially giving us permission to use tribal enriching innovation in the same way Paul Graham gave permission to the Airbnb cofounders.

So here's the challenge: What would be a bold commitment you can make to help a group of people important to your business, without any thought about how the move will benefit you? Porter's assumption -- and my bet to you -- is that you'll come up with new assets that will be the key your company's growth over the next decade.

Ever make such a bold commitment? Considering making one now? If so, I hope you'll add a comment below.

Photo courtesy of Flickr user 401K.

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    View all articles by Dave Logan on CBS MoneyWatch »
    Dave Logan is a USC faculty member, management consultant, and the best-selling author of four books including Tribal Leadership and The Three Laws of Performance. He is also Senior Partner of CultureSync, a management consulting firm, which he co-founded in 1997.

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