Ch,ch,ch,ch,changes…… turn and face the strange

In my recent blog and in the blog from my colleague last week, we highlighted the disruptive power of new technology companies and the importance of creating networks to organize, synthesize and expand information through social, organisational and process innovations.

I believe there are changes in three areas driving this and that in order to survive incumbent companies need to adapt their business models and culture.

Let’s look at the consumer first.

Millennials (those born between 1980-1999) now form about 25% of population in the US, according to Pew Research (source). Recently, they overtook baby boomers to become the biggest population cohort by generation. And they are forecast to remain the largest cohort for several decades to come.

Almost daily we see surveys on how tech savvy millennials are (source) and certainly they are over-represented among online shoppers, smartphone users, credit card users, and most other new technology adopters.

Millennials value convenience and experiences above owning material objects. They are more likely to bungee jump and less likely to own a car. They are also more likely to pick products based on their look and feel, or to pay for convenience. It is also not a co-incidence that these consumers entered the workforce during the great recession and are early adopters of the ‘sharing’ economy, i.e. businesses such as Airbnb and Uber.

At the same time as millennials began to enter the workforce, rapid progress was being made in three specific technologies – internet, digital, and (almost) unlimited computing power.

The internet gained significant adoption post 2000 with around 350 million users globally. By 2015 this had grown to over 3 billion (source) providing reach to nearly half of the world’s population for free (almost). Companies’ ability to grow beyond a certain size was previously often uneconomical due to customer acquisition and distribution costs. Now, with the internet, those limitations are overcome.

Being ‘Digital’ is increasingly important; it means more data, more analysis. Today, companies can collect data – in the physical and online worlds – and are able to glean insights on consumer behaviour, pricing or optimising a business’s operations.

Finally, the scalability of computing power via the cloud combined with data has enabled companies like Amazon and Google to analyse large datasets (big data) and gain insights that were not possible before. Moreover, pay-per-use for the cloud brings this computing power within easy reach of start-ups that are keen to disrupt traditional business models.

Those that have been quick to spot the ongoing changes have adopted new business models to serve consumers better and use technology to their advantage.

changes-chart

In a world where a customer values experiences, it is imperative for businesses to ‘own’ the customer relationship, i.e. integrate forward towards the consumers. This is in contrast to the world a couple of decades ago when the competitive advantage was derived from integrating backwards, i.e. owning the scarce resources such as R&D labs/scientists, or physical properties, or specialised capital equipment. Today’s disruptors, Uber and Airbnb for example, do not own capital but instead focus on making the customer experience as smooth as possible. Amazon puts customer experience first. Salesforce sees itself also as providing software for the front office – helping businesses to manage customer relationships.

In line with and leveraging the consumer preference for ‘experiences’ and not ‘things’, businesses are moving pricing models to ‘as a service’. Interestingly, consumers are often willing to pay more when paying monthly fee vs a lump sum down payment. This is visible in the subscription models that we see across music or video services where a consumer has access to a large content collection. This trend is slowly moving into physical products, from smartphones to cars.

Finally, sharing-based consumption models have appeared to serve the untapped demand in many markets, such as a taxi services (Uber) or financial services (P2P finance), or address the underemployed generation.

Why did tech companies disproportionately benefit from these changes and leave the incumbents behind? What could incumbents do to save their businesses?

A first observation is that most of these new tech businesses are based online, where it is easier to capture and analyse large amounts of data.

Then, these businesses were born alongside these changes and starting afresh provided the luxury of no baggage and no legacy profit pools to save.

Incumbents in various industries are prisoners to their existing business models and their profitability. Change is never welcome and never easy. Moreover, if this change comes at the cost of a business that seems to be running well today, it is even less likely to happen. This is the classic ‘Innovator’s Dilemma idea by Harvard business School professor Clayton Christensen.

Finally, there is a difference in culture. While technology is considered a core business enabler by tech companies, it is considered a support function by most incumbents and hence underutilised.

While path-dependent factors (the first two) are not in control of incumbents getting disrupted, perhaps they would do well to change culturally to give technology a front seat in decision making.


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