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

The last decade has seen a series of new companies who have disrupted markets and in some cases initiated the destruction of once strong incumbent players. To name just a few: 

Disrupter                                            Incumbent

Skype                                                Telcos

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.

In contrast, start-ups play a different role in investors' portfolios. Here, they are looking for the possibility of spectacular capital growth via IPO or acquisition, not dividends. I also suggest there is an element of fashion here, with people feeling the need to invest in the latest hot thing in town, even though there are not profits to base any cashflow projection on.

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          

So, are established companies all doomed to go the way of Blockbuster, watching as their business is eaten alive by ravenous start-ups playing to different business model rules?
Not necessarily. Here are some routes for established players to take. In each case the incumbent needs to take the approach that "its better to have the cannibals inside the business than outside". The current business is going to get eaten away, so you might as well get some of the benefits from this process yourself!
– The "spin in": start a separate start-up business with a completely separate team of people, a different culture and way of working and lower or zero short-term, profitability expectations. Examples: First Direct bank, started by HSBC. And Nespresso, started by Nestlé. This approach needs a lot of patience and some clever investor management, as the start-up will eat up some of the profits of the parent company, at least in the short term.
– The "buy in": be on the look out for new technology that you can buy in from the outside one you know it works and has the potential to make money. Example: P&G buying in the Crest Spinbrush, a battery powered toothbrush
– Acquisition: be on the lookout for disruptive start-ups that you can invest in, eventually buying the business outright if it becomes interesting enough. This is of course the strategy used by tech companies, such as Facebook buying Instagram to accelerate growth in mobile ad revenues. But conventional companies can also play this game. For example, Unilever Ventures is the venture capital and private equity arm of Unilever, investing in "young, promising companies, looking for tomorrow’s world-beaters in Personal Care and Digital," according to the website, here.
In conclusion, there is little point in companies trying to create disruptive innovation within established corporate structures. Rather, a different structure is needed, playing to different business model profitability rules and with some smart investor brand management.