The Changing Business Model - How the Digital Model Spins Old Business Models
Ambidextrous Management versus Disruptive Change. This is a challenge that, for the first time, is changing at an almost alarming rate; every few months. In no time in history, have diametrically opposed types of change been so very different. To set the baseline, we must fully understand the two aforementioned terms.
Ambidextrous Management occurs when an organization executes their current plan which makes up a significant percentage of revenue while simultaneously designing and executing a new plan which cannibalizes the current plan. An excellent example is my former Employer, Walmart. In 1988, virtually 100% of revenue derived from the small Walmart stores. In that year, Walmart began building Super Centers. These Super Centers were designed to completely cannibalize the smaller Walmart stores. Another example is Apple Computer. In 2007, the hugely successful i-Pod accounted for a significant percentage of their revenue. That year, they released the i-Phone, which almost fully cannibalized the i-Pod. When asked why they made this product decision, Apple CEO Steve Jobs replied, “If we do not cannibalize the i-Pod, somebody else will.”
Disruptive change occurs when something so very unique arrives which completely cannibalizes an entire industry. An excellent example of this is the advent of wired communication; first telegraph, then the telephone. This disruptive technology completely replaced the Pony Express with a more efficient and cost-effective model. Another example is the television. With the arrival of television in every home, radio was displaced as the primary mode of home entertainment. A further example is the Internet. With the advent of the Internet, the publishing industry is in peril. Time will tell, but it is my belief most publishing will be on-line within 10 years, perhaps less.
While researching the current competitive landscape, I came across this data on an IBM deck. It is truly amazing. This data points to several obvious conclusions.
- World's’s largest taxi company owns no taxis (Uber) - World's largest accommodation provider owns no real-estate (Airbnb) - World's largest phone companies own no Telco infrastructure (Skype, WeChat) - Worlds most valuable retailer owns no inventory (Alibaba) - World's largest media owner creates no content (Facebook) - World's fastest growing banks have no actual money (SocietyOne) - Worlds largest movie houses own no cinemas (Netflix, Vudu, Prime, HULU, HBO, etc.) - World's largest software vendors don’t write the apps (Apple & Google)
The first conclusion is that the fact that, at this point in time, most analysts consider Amazon to be the 800-poind gorilla in global e-Commerce. They further conclude that Amazon is hurting Walmart, Target, Kmart, and many other retailers. My analysis is that they could not be more wrong. Amazon is still a big-box model in that they warehouse inventory. This ties up massive amounts of capital in maintaining warehouses, staffing warehouses, and filling warehouses. In this way, they are only a variation of a big-box store such as Walmart. Thus, by definition, Amazon is not disruptive. For this reason, Walmart e-Commerce (Walmart.com), is chasing the wrong model. Alibaba has completely disrupted the retail model. Their arrival has truly disrupted the global e-Commerce landscape by freeing capital others place in Warehouses and product by not requiring such investment. This frees up billions of dollars of capital for greater technology advancement and return to shareholders.
The second conclusion is that not one of these companies have any actual capital invested in building or creating product. They have none of the constraints or barriers to entry that have existed during the entire brick-and-mortar history of these industries. Imagine, Uber exists with no capital invested in vehicles in a pure cash-flow model. More films are viewed each day, week, and year via Netflix with no physical movie theaters. Airbnb exists in a pure cash-flow model as this organization does not own or lease physical property.
Third, the net-net is that times are changing. The centuries-old models of retail, hospitality, travel, and entertainment have forever been changed. Even the single, assumed barrier of entry of a data center no longer exists with the advent of Cloud Computing. Companies can self-provision their systems based on projected need at any given point in time. The hook for the consumer is that the new model saves them a significant amount of money. For instance, a family of four will spend $40 to see one film in a theater before purchasing refreshment. This same family of four can view unlimited films on Netflix for $8/month. Vudu let’s them view newer movies the day they release on Blue-Ray in 1080P and Surround Sound for as little as $3/movie. Popcorn and soda at home is obviously much less expensive, thus the hit on brick-and-mortar theaters is not just the ticket price but lost concession revenue.
What future exists in this new world? The companies listed above can easily be displaced. If the new model eliminates capital investment, thus the barrier to entry, any kid in his parent’s garage can put any of these new-model companies out of business. The wild-west is here for the greater benefit of the consumer and possibly the end of historic business models of brick & mortar retail, bricks & clicks retail, hospitality, entertainment, and travel.
What industries are next to be disrupted by new-world, digital models with no capital investment or other barriers of entry? Here is a list of industries that may soon change forever:
- Automotive rental - Automotive retail - Housing (purchase and rental) - Power (electricity, natural gas, coal, etc.) - Education