CORPORATE VIEW

How established firms can become disruptors

Addressing the competitive threats of new business models and technology requires incumbent companies to be braver.

Joseph Schumpeter noted in 1942 that capitalism is defined by a gale of creative destruction. However, digitisation and new business models such as platforms have created a tornado: entire industries have already upended:  witness the demise of Nokia’s mobile market dominance at the hand of Apple and Samsung; more soon will be.

Even where disruptive forces aren’t yet making themselves felt in dramatic ways, established companies need to be alert. Publically listed companies, for example, need to consider not only the long-term threat to their existence, but the potential impact on their share price in the short and medium term if they are perceived to be failing to address potential threats.

“If you look at hospitality, advertising, agriculture and agri-food and industrials – the leaders are threatened,” notes Gérard Moulin, who runs France’s Amplegest Pricing Power fund. “New actors are creating a hugely disruptive scenario.” In sectors such as advertising, some leading companies have failed to change their “state of mind in the digital age despite displaying good intentions,” adds Moulin, who avoids investing in sectors where the barriers to entry are not clearly defined.

Start thinking in a new way

For traditional pipeline companies, which produce a product and sell it to consumers or other companies, for example, the need to take action is pressing. Platform business, which have few assets and instead connect suppliers and buyers, “are capable of growing far beyond the limits of traditional, asset-based businesses” according to Alex Moazed, co-author (with Nicholas Johnson) of Modern Monopolies: What It Takes to Dominate the 21st Century Economy.

How can established companies avoid being damaged by such powerful forces? The short answer: ‘if you can’t beat ‘em, join ‘em’. Companies need to get wise to competitive threats, understand how these usurpers operate and find ways to eliminate their advantages (most likely using technology such as connectivity and data analytics or by decentralising production). The longer answer is that corporates should start thinking about their business in a whole new way – like disruptors, in fact.

Piecemeal change simply won’t work given the scale of the challenges many companies face. “In industry after industry, scenarios that once appeared improbable are becoming all too real, prompting boards and CEOs of flagging (or perhaps merely drifting) businesses to embrace transformation,” write Michael Bucy, Stephen Hall, and Doug Yakola of McKinsey. They define transformation as an intense, organisation-wide program to enhance performance (an earnings improvement of 25% or more, for example) and to boost organisational health.

Taking practical steps

To respond effectively to competitive threats, companies first need to understand their business more fully. “They must identify the parts of the business that are most vulnerable to attack by disruption from new platform-based business models,” explains Katinka Jongkind, economist at ING. “Since industry boundaries are becoming increasingly porous, they need to look out for new competition from seemingly unrelated industries.”

Deciding to create a platform is a big step. Sangeet Paul Choudary, co-author of Platform Revolution: How Networked Markets are Transforming the Economy, points out that a platform must be built with both producers and consumers in mind while “a systems view is needed to balance out subsidies and prices, and determine the traction needed on either side for the business model to work.”

However, companies don’t have to make a wholesale shift to platform strategies (or even shift at all). Some industries, such as mining, may remain essentially pipeline businesses forever. The task of companies in such sectors is to discover how to use data to create value and stand out in a commoditised world: supermarkets, for example, pioneered loyalty card to learn about their customers and grow sales; budget airlines are now following suit after resisting for years in order to differentiate their offering and gain valuable data on customer behaviour.

Moreover, mixed pipeline and platform models are likely to be commonplace. Choudary and co-authors Marshall Van Alstyne and Geoffrey Parker note that while Apple is a platform company par excellence – with 2.2 million apps available to users (few of which it created itself) – it also remains a manufacturer of mobile handsets.

However, all companies will need to consider the implications of the rise of platforms and decide how they want to fit into this new world. “They can either build their own platforms or they can join someone else’s,” says Lei Pan, senior economist at ING. Either way, they must align their platform strategy alongside existing product and marketing strategies as well as organisational and business processes to ensure they are complementary.

Who’s got it right?

There are already success stories where leading pipeline companies have exploited the power of platforms. In their book, Van Alstyne, Parker and Choudary highlight the example of Nike, which has leveraged its brand strength to build a new relationship with consumers.

In January 2012, Nike introduced a wearable device to track user fitness activities, including steps walked and calories burned, and also introduced a number of similar apps. “Nike’s FuelBand-connected shoes and mobile apps constantly interact, providing users with information and advice about their athletic performance, their fitness regime, and their health goals,” note Van Alstyne, Parker and Choudary. “Unlike a traditional sporting goods company, Nike is building an ecosystem of users using the data it captures about them. Over time, it can leverage this data to create more relevant experiences for its users and connect them with one another to enable valuable interactions.”

Another successful platform adopter is industrial machinery company GE, which operates in the industrial internet, part of the internet of things (IoT), which is seen by some as the next frontier for platform business models. “We would expect 2-3 new global platform giants emerging in the IoT in the next 5-10 years,” note Pan and her economist colleague Stefan van Woelderen in their ING report called Platforms: Bigger, Faster, Stronger.

Predix, GE’s industrial internet operating system, underpins its Digital Twin model. This uses the industrial internet to provide insights into a machine’s performance, history and potential. Predix is notable for its open-source nature: it provides a platform that enables external developers to develop intelligent applications to achieve business transformation. As Roland Teixeira de Mattos, CEO for the Benelux, who leads GE’s regional strategy and cross-business initiatives, explains, opening up was challenging: “We have had to accept that we cannot build everything ourselves and to learn to rely on external partners in order to be part of an ecosystem that facilitates our growth.”

Managing change effectively

A report on the Platform Economy by Accenture notes, “every company will need a platform strategy, even if it’s just finding the right role in ecosystems driven by other companies or simply taking a defensive position.” Such a strategy will be essential not just to grow, but also to protect the profitability of their core business from new forms of platform-driven competition.

This shift away from linear value chains to platforms will change the skills required for a company to succeed, notes Evodio Kaltenecker, who works on MBA programmes at several universities. “First, rather than controlling resources (or assets), organisations must manage communities, made up of suppliers and consumers. Second, instead of seeking to maximise the value of an individual consumer, the ruler of a platform must maximise the value of a network of transactions. Finally, rather than monitoring a value chain, the governor of a platform must expand the ecosystem by attracting more consumers and producers.”

However, the emergence of platform models is just one of dozens of new threats facing companies across a wide range of sectors: it’s important not to be blindsided by the success of firms like Airbnb. Instead, companies must think more broadly about how they can create a disruptive culture – where clever ideas gain the prominence they deserve – that can enable them to combat new entrants and dynamic existing competitors.

At the heart of any rethink must be an acknowledgement that going it alone is less feasible than in the past. The new competitive environment requires companies to build partnerships with complementary companies or in some instances acquire start-ups. Even where a platform strategy is not appropriate, corporates must consider the ecosystem of companies that they work with and how they can strengthen relationships with suppliers and customers to improve their competitiveness.

In many cases, such changes will be difficult. Bucy, Hall, and Yakola of McKinsey point out that the reported failure rate of large-scale change programmes is around 70%. “The most important starting point of a transformation, and the best predictor of success, is a CEO who recognises that only a new approach will dramatically improve the company’s performance,” they note. That CEO must put in place structures and individuals to facilitate transformation, change employee and managerial mind-sets and embed a new culture of execution throughout the business.

It’s a formidable list of challenges. But the stakes are high for many companies – continued success or even their long-term survival could be on the line. Consequently, the numbers of firms willing to start thinking and acting like disruptors is likely to continue to grow.

Responding to circular business models

While new entrants with platform business models pose perhaps the greatest immediate threat to established firms, corporates must also consider – and respond to – other emerging business strategies such as circular economy models.

Circular models focus on the reduction of waste. For incumbent companies, this may mean rethinking existing processes in order to create value. One of the most prominent adopters of a circular model among established companies is Finnish oil refiner Neste. Over the past decade it has invested €1.42bn in biorefineries in Porvoo (Finland), Singapore and Rotterdam, which process animal waste and recycled cooking fat into renewable diesel.

Neste is now the world’s biggest producer of biodiesel and is seeking new opportunities in jet fuel and from new potential feedstocks such as forestry residues and algae. Moreover, the company’s biodiesel business, which has been profitable since 2013, has proved advantageous for Neste’s share price, which has outperformed its peers in the refinery sector.

Sources

  • http://citywire.co.uk/money/the-disruption-ready-sectors-investors-should-avoid/a1031631
  • https://www.inc.com/alex-moazed/why-modern-monopolies-are-good.html
  • http://www.mckinsey.com/business-functions/mckinsey-recovery-and-transformation-services/our-insights/transformation-with-a-capital-t
  • http://platformthinkinglabs.com/the-shift-in-business-modelsfrom-pipes-to-platforms-2/
  • http://fortune.com/2016/04/10/nike-platform-business-book-excerpt/
  • https://www.accenture.com/fr-fr/_acnmedia/PDF-2/Accenture-Platform-Economy-Technology-Vision-2016-france.pdf
  • http://www.mckinsey.com/business-functions/mckinsey-recovery-and-transformation-services/our-insights/transformation-with-a-capital-t
  • https://www.economist.com/news/business/21721669-finnish-refiner-turning-slaughterhouses-oil-wells-neste-uses-animal-waste-make

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The View is the online magazine of ING Wholesale Banking