How to disrupt yourself
Established incumbents can survive disruption and thrive in the digital age, but they will need to identify and implement new business models.
Digital business models is one of four areas we focus on as part of the digital enterprise cross-industry theme. The other themes we examine are digital operating models, digital talent and skills, and digital talent metrics.
Analog incumbents (large successful enterprises that predate the digital revolution) looking to become digital enterprises face two main challenges. First, the business model that served them well for decades has been disrupted by digital innovation and no longer works as desired. Second, attempts to create new, viable business models for the digital age will flounder unless a company is willing to disrupt itself. This bind has been termed ‘the innovator’s dilemma’ and was first outlined almost 20 years ago by Clayton Christensen.
Besides the fear of cannibalizing profits, other obstacles standing in the way of incumbents looking to launch new business models are a risk-averse culture, a lack of creativity to identify radically different business models, and insufficient decisiveness to commit resources to experiment with new models. Despite these difficulties, some enterprises have managed to successfully innovate and change their business models (see case studies).
New business models only accounted for a 1 to 5% share of total revenues in 2015, but are expected to be responsible for 30% of total revenues by 2020.
Michelin has leveraged the Internet of Things (IoT) to shift from a business of selling tires to selling outcomes (performance promise backed by a money‐back guarantee). EFFIFUEL™ is a comprehensive ecosystem including sophisticated telematics, training in eco-driving techniques and the EFFITIRES™ optimized tire management system. The service can lead to a reduction in fuel consumption of 2.5 liters for every 100 kilometers driven, equivalent to at least a 2.1% reduction in total cost of ownership for truck fleet operators.
While the idea for the ‘as-a-service model’ was developed internally, Michelin realized the need for partnering, especially in the field of big data analytics. Factors behind its success have been an emphasis on cultural change, coupled with a focus on an iterative approach, built around pilots.
Incumbents usually have some promising options to explore when looking to disrupt themselves. For a start, they are often sitting on a vast sea of untapped wealth: data.
Advances in technology are combining to make data monetization more affordable, with the cost of storage falling dramatically and the emergence of technologies and sensors that enable real-time data gathering, analytics and better decision making. Unicorns (startups with a valuation above $1 billion) are already extensively embedding these new technologies in their business models. Their prevalent business models are e-commerce/marketplaces, enterprise solutions, Software as a service, audience/ advertising, and consumer electronics/Internet of Things.
Incumbents should consider different revenue sources. Here we highlight nine options:
We have identified a number of initiatives that can help analog incumbents revolutionize their business model and overcome the innovator’s dilemma.
Incumbents need to fundamentally change the way they identify, develop and launch new business ventures. They have to enhance their strategic toolkit – build, buy, partner, invest and incubate are the options to be considered. Organizations have to make investment decisions much more quickly and change their internal processes to identify and evaluate investments, with greater emphasis on decisions informed by data and analytics. Incumbents can benefit from their large asset base and use excess cash to pursue their digital growth strategies.
The decision to entirely rethink an existing business model is a difficult one to take, but once it’s been made, an analog company needs to find the most effective way to disrupt itself. We have identified a three-step plan:
- Don’t mess with your core business but inspire innovation at the edge of your company. Look to projects on the periphery of your company that are focusing on new products, services or customer segments that are aligned with disruptive trends in your industry.
- Hire ‘black ops’/‘hacking’ teams. These teams work in the shadows, with a low profile in the organization. The team should ideally consist of millennials and digital natives with a sole mission to attack the mothership.
- Try to copy Google. Establish an internal accelerating technology lab to focus on big ideas (as Google does with life extension, Google Glass, self-driving vehicles and Project Loon) and create a partnering program with accelerators and hackerspaces.
The incumbent’s conundrum: Build, buy, partner, invest or incubate/accelerate?
While the quandary over whether to innovate at the risk of cannibalizing existing profits is the innovator’s dilemma, the puzzle over which option to choose to create a new business model could be termed the incumbent’s conundrum. We believe there are five options: build, buy, partner, invest or incubate/accelerate. Although specifics vary, we have developed some guidelines for business leaders to help them determine which route is most appropriate.
More detail about the build, buy, partner, invest or incubate/accelerate framework, and case studies of companies that have adopted these approaches, can be found in the digital enterprise white paper.
The importance of corporate venturing
Globally, there has been an increase in corporate venture capital (CVC) activity and, in just 12 months, the value of these investments grew by almost 95%, reaching $67 billion in September 2015. A recent survey found that enterprises primarily see CVCs as a route to strategically aligning themselves with relevant and emerging companies (79% of respondents) and to boosting financial returns (76%).
There are several critical success factors to be considered when setting up CVCs. These include:
- Think of venturing as an ecosystem play, balancing internal research with entrepreneurs to identify future areas of innovation and disruption.
- Get the right team – made up of experienced VCs, founders, etc. – and the right compensation framework in place.
- Build the right structures to source deals globally with an emphasis on a solid due diligence and creating exposure and opportunities to learn.
- Always acknowledge the politics.
- Help the portfolio companies build momentum.
- Have the right KPIs to track the value of investments.
Google Ventures is one of the most active and successful CVCs, employing 80 people with more than $2 billion under management.
While Google provides the funds to be invested, portfolio companies remain independent and don’t necessarily need to benefit Google itself. In some cases, they can even end up being acquired by competitors. In addition to providing design services, Google Ventures hosts workshops intended to hone the product management and operational skills of the founders and employees of portfolio companies.
Google Ventures’ use of data analytics and algorithms to assess deals and analyze as much data as possible before deciding where to invest differentiates it from competitors. Google’s network of employees is vital in identifying portfolio companies, rewarding employees with a $10,000 finder’s fee. Google Ventures has already completed more than 50 successful exits, with returns far above market averages.
Digital enterprise is one of four cross-industry themes (along with digital consumption, societal implications, and platform governance) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth analysis of the digital enterprise cross-industry theme is available in a white paper, which can be downloaded here.
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