Understanding the factors contributing to successfully traversing business model disruption

SUMMARY:

The holy grail of business model sustainability can no longer depend on past success. Here are factors that will help in transitioning to the new normal.

success-failure-road-for-businessmanCXOs have many challenges. Understanding what makes for successful business models when they see their industry being threatened by digitization and left field business model development are two of the most puzzling…and threatening. The following analysis puts this question into the context of what is happening among software vendors but with lessons for the future that inform numerous industries.

An article in the Winter 2018 edition of MIT Sloan Management Review takes a close look at business models that the most successful companies use today. In “Building Scalable Business Models” (requires download) Christian Nielsen and Morten Lund find that:

Accelerating returns to scale are typically found in business models where new resources, capabilities, or value propositions provide completely new properties to an existing industry.

That’s easy to say but how do you accomplish needed scalability? The authors identified 5 patterns of success across industries,

Adding new distribution channels

Freeing the business from traditional capacity constraints

Outsourcing capital investments to partners who, in effect, became participants in the business model

Have customers and other partners assume multiple roles in the business model

Establish platform models in which even competitors may become customers

Very few companies adopt all five patterns but many find ways to incorporate multiple patterns in their businesses and often the flexibility of the original cloud-subscription model is an important factor. Let’s take them individually.

Distribution channels

Some businesses live by multiple channels while others avoid some, like the indirect model, for fear of cannibalizing their direct businesses. But the authors show that a business that can involve partners in limited ways and especially through adopting an additional pattern, such as by partners making capital investments. A good example is the trend toward industry specific CRM. Partners might leverage a vendor’s platform on which they build industry-specific applications. The investment in those apps keeps the partner focused on a niche preventing “poaching” elsewhere.

Capacity constraints

Cloud computing has liberated many businesses from the capacity constraints. For instance, the number of ports supported by the host computer drove licensing for many old on-premise call center solutions. Often adding a user meant checking to see if there were free ports on the controller board, if there were none, the business would have to buy a new board containing 8 ports. This all assumed there was adequate backplane space (and voltage) to run the new board. Then and only then could the business confidently purchase a new user license. I am tired just writing this. Today, with cloud computing, the business would simply increment the subscription by one user. The rest of the issues still exist but they are someone else’s problem. In practical application and with fewer capacity constraints, it’s far easier for a business to add customer service agents for busy times of year and reduce their numbers in slower periods.

Outsourcing capital investments

This might be the crown jewel of cloud computing. Vendors like Salesforce and Oracle that have three layers of platform support including infrastructure, app development tools, and applications, are attracting partners in droves. Salesforce is an especially good example: they have thousands of partners and last year downloaded their 5 millionth app to a customer. The partners happily invest in building apps for those platforms because the platform vendors attract buyers and because platform-based solutions use many of the same components and objects and are therefore far easier to integrate. So here too we see a strong scalability effect. Enabling partners to invest their capital in your solution and being able to control all aspects is a strong way to scale a business.

The next two patterns are similar but different enough to count for two patterns.

Multiple roles for customers and partners

Participants in ecosystems naturally assume the roles of customer and partner and the success of each party is mutually dependent on the others. Partners want the platform vendor to succeed because that increases the number of compatible apps in the ecosystem. But a successful OEM also attracts more customers for partners to sell to and both are important.

Competitive relationships

Perhaps the best example of competitors cooperating and competing on different levels is the ERP market. The Oracle database became the standard for IT a long time ago. Consequently when companies like SAP developed ERP their choice was Oracle though they’ve since bought Sybase and have a good working relationship with IBM and DB2. Oracle is a strong competitor for SAP in ERP so we see customers as competitors. We see a similar situation with Salesforce, which uses the Oracle DB for some of its core functions. This form of “co-opetition” is likely to continue as more technology companies build on earlier technologies that are commoditizing.

My take

There’s been some talk of a startup slump in the tech sector. A recent story in the New York Times, Where Are the Start-Ups? Loss of Dynamism Is Impeding Growth by Eduardo Porter says that

A broad sweep of statistics reveals a peculiar weariness spreading through the economy. Belying breathless headlines about the fabulous opportunities that technology is about to bestow on society, it suggests that many rich market democracies have lost much of their dynamism.

But a closer look reveals something else happening. First, there’s a lot of dynamism in the markets and the five patterns discussed in the MIT article and here show that entrepreneurs have figured out how to be vastly more efficient in building and scaling companies through strategically better business models. This directly translates to less wasted effort and capital compared to the early days of cloud computing—not a loss of dynamism. This is supported by an analysis undertaken by McKinsey which looked at the impacts of digitization impacts and then business model reimagining. (More of which will follow in another story.)

If this is happening in the rest of the economy it’s in line with the symptoms and features attendant with the later phases of a K-wave. If you look at adjacent areas like robotics and IoT, the situation is much the same. These are relatively capital efficient markets and you’d be forgiven for thinking they lack dynamism.

But look at sustainability issues such as renewable energy for example. Those industries are building out infrastructures, they’re capital intensive and they’re employing many people. Start-ups are out there and they’re ramping up but is that dynamism?

Regardless, we are aware that many CXOs are kept awake at night wondering at least two things: what will digitization mean for the business and how do we evolve our business models to cope with disruption? Neither question is easy to answer but the clues are out there.

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