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Signs your business model might be ripe for disruption

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Disruption is the buzzword on everyone’s lips at the moment with traditional brands in industries as diverse as telecoms, retail, transport, media and financial services facing competition from new entrants into their markets. These aggressive new players use digital technologies such as cloud computing, big data analytics, and mobile enablement to completely transform economics of age-old industries. By Nevo Hadas, partner at &Innovation.
In the process, they destroy the competitive advantages and high margins the incumbents have enjoyed for decades, while delivering lower costs and superior customer experiences than their traditional competitors are able to offer. This process started with what Amazon did to physical booksellers and Napster to the music industry nearly 20 years ago, but it is rapidly accelerating and touching industries that once imagined themselves to be safe. Here are five of the signs that may indicate that your business model is under threat.

The marginal cost of replicating your product or service is moving towards zero
Marginal cost can be defined as the cost of producing an additional unit of a good or service after you have absorbed your fixed costs. If your competitors can create more “inventory” at low or no cost while you are not able to, your business is at threat of disruption. This principle once applied mostly to goods that could be digitised, such as music and movies.
But it also increasingly applies to companies selling physical goods and services. For example, a traditional hotel chain needs to build new rooms or properties to grow its market share. AirBnB, by contrast, constantly adds room listings to its Website simply by signing up new property owners. 3D printing could have a similar disruptive effect in manufacturing. What happens if your competitors are selling blueprints for home printing the season’s hottest toy rather than a physical item?

Your access to information is no longer a competitive advantage for your business or a barrier to entry for others
Many industries exist (or used to exist) because companies have privileged access to information that is not readily available to their customers or competitors. The internet is rapidly turning this sort of asymmetrical access to information into a thing of the past and some industries that used to depend on this business model are already under severe pressure.
Travel agents, for example, once had far superior access to information about flights and hotel accommodation to their customers. Comparison shopping sites such as Expedia and Booking.com have taken this competitive advantage away from them. The same is true of estate agents and financial intermediaries. It’s no longer enough to have basic pricing and availability information – they need to add value in other ways.
Again, this trend is accelerating, thanks to innovations such as the Internet of Things (IoT). Consider, for example, how connected cars, homes and personal devices allow consumers to monitor their own behaviour and usage patterns and to share this information with trusted companies. This could enable more accurate and personalised pricing in industries such as insurance, which once depended on their arcane underwriting formulas as their edge.

Customer acquisition costs are tumbling
Among the biggest advantages big businesses used to have over smaller companies was the size of their salesforces and marketing budgets. Smaller companies could not afford to spend millions of rand on massive billboards at the airport and long TV ads with lavish production values. They also couldn’t pay hundreds of sales reps to knock on doors for them.
Now, thanks to targeted advertising and tools such as social media, companies can do personalised marketing at a large scale and pay at a cost per lead or acquisition basis. This has meant that a business doesn’t need to invest such a large amount of its cashflow or capital upfront in marketing campaigns. A disruptive business with good creative messaging, sharp targeting, and an attractive proposition can acquire customers at a much lower cost, rather than burning money on big brand campaigns. And it can focus on the higher value customers as it does so.

Service costs are declining
Who likes to go to the bank or to phone an insurance call centre? Few people do, yet traditional brands have massive sunk costs in their customer service infrastructure. In industries where incumbents have large branch networks and massive call centres, the growing trend towards self-service is a massive threat.
Most people like the convenience of managing their accounts on a PC or mobile phone, especially if this translates into lower costs. Whereas a massive infrastructure was once the only way to service a large, geographically distributed customer base, it has increasingly become a drag on the bottom line and on their ability to compete with more streamlined, online-only players.

Coordination across the value chain is becoming simpler
We’re starting to see the rise of plug-and-play business models as value chains disaggregate in industries that were once vertically integrated. For example, if you’re an online retailer, you can today source best-of-breed payments software, logistics, IT services, and customer support in an as-a-service model from specialist companies rather than building these capabilities yourself.
As such, you can focus on marketing, branding and developing your consumer offering while letting other, very capable organisations handle the back-office. This sort of business model is a threat to traditional retailers that once competed on the strength of their logistics capabilities, running warehouses and massive fleets of trucks.