Can established companies really create disruptive business models?
Companies today should improve their current business model AND innovate to create radically new business models, according to a training workshop I attended last week. The trainers from Strategyzer called this sort of company "ambidextrous". However, when I asked for examples of established companies who had launched radically new business models, they struggled to answer, naming only the usual suspects of Apple and Amazon.
Thinking about this some more, I suggest that to create new business models established big businesses need to break "the curse of the incumbent".
1. The market-destroying disruptors
Spotify (+illegal download sites) Record labels
Netflix Blockbuster (bankrupt)
Airbnb Bed & breakfasts
Snapchat Blackberry Messenger, telcos
Funding Circle/Zopa Banks
Wikipedia Microsoft Encarta
Uber Taxi firms
All of the above were start-ups, rather than new business models launched by established companies.
Why? Is is because in reality the incumbents were blind to change? Or could they sense the change but lacked innovative capacity? The leading companies in question probably claimed to have innovation high up their corporate agendas and had teams of people working on "the next big thing".
I suggest that there is another explanation for the lack of disruptive business model innovation by established companies, to do with the role a business plays in the portfolio of investors.
2. Different "investor brand" rules
Investors want established companies to deliver steady growth in volume, profits and cash flow. They tend to expect a dividend at the end of the year. If revenue and profit start to dip investors get nervous and this can lead to a drop in share price and vulnerability to take over.
For example, Instagram was bought for $1billion by Facebook despite having zero revenue. As The Wall Street Journal observed here, "All this growth hasn't yet translated to revenue. But in today's social-media industry that doesn't matter as much as user engagement and the ability to access those users' personal data."
Uber is valued at c.$50 billion, and yet it is "wildly unprofitable", according to Tech Insider, here.
Netflix has enjoyed an annual growth in share price of +47% over the last 10 years, despite only having a 10% annual growth in profits, according to this analysis.
Skype made a loss of $80million after interest payments. in the year it was bought by Microsoft for $8.5 billion.
Amazon's cumulative profit margin is a meagre 0.5%, with a non-stop investment program to launch new business after new business.
In other words, these disruptive start-ups manage to get mind-boggling valuations not with a better business model, but rather without a conventional (profit generating) business model at all.
3. Breaking the curse of the incumbent