Disrupting
beliefs: A new approach to business-model innovation
In a disruptive age, established business models
are under attack. Here’s how incumbent companies can reframe them.
Let’s face it: business models are less durable than they
used to be. The basic rules of the game for creating and capturing economic
value were once fixed in place for years, even decades, as companies tried to
execute the same business models better than their competitors did. But now,
business models are subject to rapid displacement, disruption, and, in extreme
cases, outright destruction. Consider a few examples:
·
Bitcoin bypasses
traditional banks and clearinghouses with blockchain technology.
·
Coursera and edX,
among others, threaten business schools with massive open online courses
(MOOCs).
·
Tencent outcompetes in
Internet services through microtransactions.·
Uber sidesteps the
license system that protects taxicab franchises in cities around the world.
The examples are
numerous—and familiar. But what’s less familiar is how, exactly,
new entrants achieve their disruptive power. What enables them to skirt
constraints and exploit unseen possibilities? In short, what’s the process of
business-model innovation?
For incumbents, this
kind of innovation is notoriously hard. Some struggle merely to recognize the
possibilities. Others shrink from cannibalizing profit streams. Still others
tinker and tweak—but rarely change—the rules of the game. Should it be so
difficult for established companies to innovate in their business models? What
approach would allow incumbents to overturn the conventions of their industries
before others do? Our work with companies in telecommunications, maritime
shipping, financial services, and hospitality, among other sectors, suggests
that established players can disrupt traditional ways of doing
business by reframing the constraining beliefs that underlie the prevailing
modes of value creation.2 This article shows how.
Reframing beliefs
Every industry is built around long-standing,
often implicit, beliefs about how to make money. In retail, for example, it’s
believed that purchasing power and format determine the bottom line. In
telecommunications, customer retention and average revenue per user are seen as
fundamental. Success in pharmaceuticals is believed to depend on the time
needed to obtain approval from the US Food and Drug Administration. Assets and
regulations define returns in oil and gas. In the media industry, hits drive profitability.
And so on.
These governing beliefs reflect widely shared
notions about customer preferences, the role of technology, regulation, cost
drivers, and the basis of competition and differentiation. They are often
considered inviolable—until someone comes along to violate them. Almost always,
it’s an attacker from outside the industry. But while new entrants capture the
headlines, industry insiders, who often have a clear sense of what drives
profitability, are well positioned to play this game, too.
How can incumbents do so? In a nutshell, the
process begins with identifying an industry’s foremost belief about value
creation and then articulating the notions that support this belief. By turning
one of these underlying notions on its head—reframing it—incumbents can look
for new forms and mechanisms to create value. When this approach works, it’s
like toppling a stool by pulling one of the legs.
The fuller process and the questions to ask
along the way look like this:
1. Outline the dominant
business model in your industry. What are the long-held core beliefs about how to create
value? For instance, in financial services, scale is regarded as crucial to
profitability.
2. Dissect the most
important long-held belief into its supporting notions. How do notions about customer needs and
interactions, technology, regulation, business economics, and ways of operating
underpin the core belief? For instance, financial-services players assume that
customers prefer automated, low-cost interfaces requiring scale. Because the IT
underpinning financial services has major scale advantages, most of a
provider’s cost base is fixed. Furthermore, the appropriate level of risk
management is possible only beyond a certain size of business.
3. Turn an underlying
belief on its head. Formulate a
radical new hypothesis, one that no one wants to believe—at least no one
currently in your industry. For instance, what if a financial-services
provider’s IT could be based almost entirely in the cloud, drastically reducing
the minimum economic scale? Examples of companies that have turned an industry
belief on its head include the following:
·
Target: What if people who shopped in discount
stores would pay extra for designer products?
·
Apple: What if consumers want to buy electronics
in stores, even after Dell educated them to prefer direct buying?
·
Palantir: What if advanced analytics could replace
part of human intelligence?
·
Philips
Lighting: What if LED
technology puts an end to the lighting industry as a replacement business?
·
Amazon
Web Services: What if you
don’t need to own infrastructure yourself?
·
TSMC: What if you don’t need to develop your
own process technology or invest in your own infrastructure?
·
Amazon
Mechanical Turk, TaskRabbit, and Wikipedia: What if you can get stuff done in chunks by accessing a
global workforce in small increments?
4. Sanity-test your
reframe. Many reframed
beliefs will just be nonsense. Applying a reframe that has already proved
itself in another industry greatly enhances your prospects of hitting on
something that makes business sense. Business-model innovations, unlike product
and service ones, travel well from industry to industry: Airbnb inspires Uber
inspires Peerby. So look again at the reframes described in step three above.
All of them have broad application across industries.
5. Translate the
reframed belief into your industry’s new business model. Typically, once companies arrive at a
reframe, the new mechanism for creating value suggests itself—a new way to
interact with customers, organize your operating model, leverage your
resources, or capture income. Of course, companies then need to transition from
their existing business model to the new one, and that often requires
considerable nerve and sophisticated timing.3
Four places to reframe
Executives can begin by systematically
examining each core element of their business model, which typically comprises
customer relationships, key activities, strategic resources, and the economic
model’s cost structures and revenue streams. Within each of these elements,
various business-model innovations are possible. Having analyzed hundreds of
core elements across a wide range of industries and geographies, we have found
that a reframe seems to emerge for each one, regardless of industry or
location. Moreover, these themes have one common denominator: the digitization
of business, which upends customer interactions, business activities, the
deployment of resources, and economic models.
Innovating in customer
relationships: From loyalty to empowerment
Businesses should strive for customer loyalty,
right? Loyal customers tell their friends and contacts how good a company is,
thereby lowering acquisition costs. Loyal customers stick around longer,
keeping the competition at bay. Loyal customers provide repeat business, a
bigger share of wallet, and more useful feedback about problems and opportunities.
No wonder companies in so many industries emphasize locking in customers by
winning their loyalty.
But the pursuit of loyalty has become more
complicated in the digital world. The cost of acquiring new customers has
fallen, even without loyalty programs. Customers—empowered by digital tools and
extensive peer-reviewed knowledge about products and services—now often do a
better job of choosing among buying options than companies do. Switching costs
are low. Most significant, the former passivity of customers has been
superseded by a desire to fulfill their own talents and express their own
ideas, feelings, and thoughts. As a result, they may interpret efforts to win
their loyalty as obstacles to self-actualization.
Instead of fighting that trend, why shouldn’t
companies embrace the paradox that goes with it: the best way to retain
customers is to set them free. The invention company Quirky, for example, lets
the ideas and votes of its online community guide the products it designs and
produces. MakerLabs, an interactive design–build collective, provides its
members with the tools and expertise they need to build what they want.
Established companies can also make the switch
from loyalty to empowerment. Consider the pension and insurance industry, long
governed by the belief that complex investment decisions are best made by
experts (companies or intermediary financial advisers) on behalf of account
holders. A multinational insurance and pension provider reframed that belief by
proposing the opposite: what if customers preferred to make their own
investment decisions, even if they didn’t have the credentials of investment
professionals? The company now provides customers with web-based investment
information and decision-making tools, along with appropriate risk warnings.
These enable customers to invest a percentage of their funds directly in
businesses of their choice. This effort is in its early days, but customer
pick-up and the profitability of products are promising.
Innovating in
activities: From efficient to intelligent
One of the most dominant beliefs governing
today’s big companies is that improving efficiency is the most reliable way to
increase profits. Especially if market requirements change only gradually,
companies have plenty of time to minimize the production costs of their
existing products. Today, of course, constant efficiency improvements are a
prerequisite for a healthy bottom line.
They may be necessary,
but they’re not sufficient. In today’s rapidly changing markets, many products
become obsolete before they have been “leaned out,” so managers get less time
to optimize production processes fully. Companies are therefore building
flexibility and embedded intelligence directly into the production process to
help them adapt quickly to changing needs. Embedded intelligence can, over
time, help companies to improve both the performance and the value-in-use of
products and services and thus to improve their pricing. In essence,
digitization is empowering businesses to go beyond efficiency, to create
learning systems that work harder and smarter.
Consider how a web-based global hotel-booking
platform used quick feedback cycles to reframe the focus of its business model
from efficiency to user satisfaction, thereby opening new revenue
opportunities. The hotel-booking industry’s central belief has been that
success depends on two things: negotiating power with hotels and a reliable web
interface for customers. The company reframed this dominant belief by asking if
customers booking a hotel room might look for more than convenience, speed, and
price. It tested this reframe through a series of iterations to its website.
Even minor changes—such as the use of photographs, a warmer (or sometimes
cooler) tone for the site’s text, and the inclusion of testimonials from happy
customers—raised the click-through rate. This insight confirmed the reframe: a
booking site is more than just a functional service; it can also become an
engaging customer experience.
As a result, the company has integrated
constant feedback loops and daily experiments into its key activities, creating
a true learning system. Now it improves and adjusts its site daily to boost
customer engagement and increase revenue. It may well be on its way to becoming
the industry’s global standard.
Innovating in
resources: From ownership to access
One widespread premise in business is that
companies compete by owning the assets that matter most to their strategy.
Competitive advantage, according to this belief, comes from owning valuable
assets and resources, which tend to be scarce and utilized over long time
periods, as well as firm and location specific. Thus ownership (rather than,
say, leasing) frequently appears to be the best way to ensure exclusive access.
But what if assets are used infrequently or
inconsistently? In these cases, digital technology, by increasing transparency
and reducing search and transaction costs, is enabling new and better
value-creating models of collaborative consumption. As a result, ownership may
become an inferior way to access key assets, increasingly replaced by flexible
win-win commercial arrangements with partners. On the consumer side, the
examples include Peerby, an app that allows neighbors to share tools and other
household items that would otherwise sit idle in garages, and Uber, which
allows any driver with a qualified vehicle to provide taxi service. House- and
room-sharing programs apply the same thinking to underused real estate. In
every case, consumers opt to access rather than own these assets.
Big companies are
following suit—for example, by reducing sourcing costs through
“cradle-to-cradle” approaches that collect and repurpose what they previously
considered waste.4 Instead of buying (and thus owning) the raw materials
needed for products, companies access these materials in previously sold
products and repurpose them. Similarly, the global sourcing firm Li & Fung
limits risk, increases efficiency, and enhances flexibility by using broad
networks focused on access to (rather than majority ownership of) suppliers.
The software maker Adobe Systems no longer licenses new versions of its
products to customers through one-time sales; instead it provides access to
them through monthly subscriptions. (For more on Adobe’s transition to its new
business model, see “Reborn in the cloud.”)
The move from ownership to access mirrors a
more broadly evolving societal mind-set toward open-source models. For example,
in 2014 the electric-vehicle company Tesla made all of its
intellectual-property patents freely available in an effort to encourage the
manufacture of clean vehicles.
These possibilities penetrate deeply into
traditional industries. Consider how a big European maritime port embarked on a
large-scale land-management program. The industry belief reframed by the port
was that large liquid-bulk-load ships valued private access to storage tanks.
The underlying assumption was that shipping companies wanted the ability to
deliver their bulk loads anytime and therefore required entry to their tanks at
close range.
In response to this perceived need, most
maritime ports have developed jetties to which they provide individual shipping
companies private access—essentially the equivalent of “ownership.” As a result
of each company’s varying schedules and traffic, many jetties ended up being
mostly unused, but others weren’t sufficient for peak times. Seeing this
problem, the port’s management reframed the industry belief by asking if
customers cared more about access on demand than exclusivity. The port now
intends to help all customers use any jetty to access any fuel tank, by
developing a common-carrier pipe connecting them. Just as Peerby in effect
shifts a neighborhood’s “business model” by increasing the utilization of
underused assets, so the maritime port is making more of underutilized jetties
and storage tanks by shifting the business model so that shipping companies pay
for access to jetties and storage rather than the exclusive use of them. In the
future, this model may evolve into a dynamic multiuser slot-booking system that
matches the real-time availability of jetties with demand for
liquid-bulk-carrier ships.
Innovating in costs:
From low cost to no cost
According to historian Peter Watson, humans
have been trading goods and services for more than 150,000 years. During that
time, we’ve always believed that to sell more of an offering you had to produce
more of it. The underlying notion was that a single unit of a given product or
service could be used only by one customer at a time. Any increase in
production therefore required a commensurate increase in labor, resources, and equipment.
While volume advantages did translate into lower average costs per unit,
economies of scale could never get the average cost down to zero.
Digitization is reframing this ancient belief
in powerfully disruptive ways. In fact, of all the reframes discussed here,
this one has had the most devastating effect, since it can destroy entire
industries. What’s driving prices to zero is the reframe that multiple
customers can simultaneously use digital goods, which can be replicated at zero
marginal cost. Massive open online courses, for example, provide a nearly
zero-marginal-cost education.
Consider the implications for
telecommunications, where the dominant belief has been that value is best
captured through economies of scale—the more telephone minutes sold, the lower
the unit cost. As a result, the larger the mobile-phone plan, the lower the
cost per minute. One telecommunications company is upending this belief by
making customers an “all you can eat” offer. It realized that unlimited use of
voice and texting units comes at no additional cost to itself, so it can
compete against emerging voice-over-IP competitors. As a result, the telco
started to offer unlimited texting and voice plans by focusing its economic
model on making money from data usage and from its investments in a huge data
network and storage capacity. Such plans eliminate confusion among customers
and increase their satisfaction. As soon as the network has reached its planned
return on investment, incremental data service will also be free.
Big companies have traditionally struggled to innovate in their
business models, even as digital technology has brought business-model
innovation to the forefront of the corporate agenda. Yet big companies can be
disruptive, too, if they identify and overcome common but limiting orthodoxies
about how to do business.
byMarc de Jong and Menno van Dijk
http://www.mckinsey.com/Insights/Innovation/Disrupting_beliefs_A_new_approach_to_business-model_innovation?cid=other-eml-alt-mkq-mck-oth-1507
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