TomTom tries to re-invent the core
TomTom is a fascinating example of a business trying to re-invent its core. TomTom grew rapidly from 2004 onwards following the launch of satnav devices for cars that helped you navigate to your destination. However, many smartphones now have built-in satellite navigation and maps at no extra cost for users. This has led to TomTom's core market is undergoing disruptive change. This week's announcement of a deal to provide mapping software for iPhones suggests they may yet succeed, unlike Kodak, Blockbuster and Clinton Cards. These companies failed to re-invent their core, and paid the ultimate price by going bust.
Here are some of the key points from the TomTom story, drawing on an interview with TomTom founder and CEO Harold Goddijn in the FT
1. Renovate before you need to
Core renovation means pro-actively upgrading and improving the core when the business is doing well. To borrow a phrase from a French rugby coach, "To stay number one, train like you're number two". However, companies are often too slow to renovate their core. And this can be fatal when there is the threat of disruptive change.
Part of the problem is the storm of change may take a while to show its full force. And for a while the company's sales will tick along nicely. You see this with TomTom. As recently as 2010 revenues were still rising, up 3% versus the year before. But then the storm hit. Smartphone sales exploded, and TomTom's business imploded:
– Revenue down from €1.67 billion in 2008 to €1.27 billion in 2011, a drop of 24%
– Share price down from €60 in October 2007 to €3 now
– Market in latest year down 1/3 in North America (2.1 to 1.4 mill units) and down 20% Europe (2.4 to 2 mill units)
2. Re-define your market
A crucial step in re-inventing the core is to re-define the market, based on consumer benefits not products. In the case of TomTom this means re-defining the market as "personal navigational services" rather than "satnavs". This helps identify threats and opportunities beyond the current products, such as smartphones. This new definition of the core helps inspire and guide re-invention of the core. For TomTom this means repositioning from being seller of satnavs to selling software and services. As CEO Goddijn comments: "It's our ambition to enable customers to use world-class applications. Whether it's on a smartphone, in a dashboard or on a website, that doesn't really matter."
3. Keep the cannibals in the family
TomTom have realized quicker than you're betting off having the cannibals inside the family. In other words, if the market is moving from satnavs to smartphone software, you may as well get more than your fair share of the new business. And here TomTom is working on several fronts to re-invent the core:
– Smartphone software: the recent announcement of a partnership with Apple for the iPhone drove TomTom's share price up 20% by itself. TomTom has also signed a deal with Research In Motion Ltd. to provide maps and real-time traffic information on its BlackBerry smart phones.
– In-car navigation: providing special software for internet-enabled phones, following the purchase of TeleAtlas in 2008 to get the necessary software, technology and content to connect cars with the Internet
– Insurance companies: providing technology for U.K. insurance broker Motaquote's Fair Pay Insurance product. This bases premiums on driving behavior, rewarding good driving with lower premiums.
4. The need for speed
The challenge with re-inventing the core is to move fast enough. TomTom's founder Harold Goddijn says "Deep at heart we are a software company. That has never changed." He calls satnavs "an expensive packaging for software." However, the transition from selling to satnavs to software is not happening fast enough to protect TomTom's total sales, as the graph below shows. Software sales are going up, but hardware sales are going down even faster. This problem is recognized by CEO Goddijn, who according to the FT article isn't happy with the speed of progress.
I believe one reason for companies like Kodak, Blockbuster and Clinton Cards failing to re-invent their core business is not being close enough to the market and the customer. The risk is to be too inwardly focused, worrying about your own business model and asset base. So, its good to see that Harold Goddijn, on the left, is trying to "keep it real" and have an outward focus, saying in the FT article: "I'm trying to stay in touch as much as I can with the basics. When I'm travelling abroad, I test all my applications for local conditions to see how we have adapted to them". He also likes to work in the TomTom shop near his Amsterdam headquarters.
In conclusion, TomTom shows the need to re-invent your core when the market you operate in is undergoing disruptive change. The challenge is to re-define your core market based on benefits as a star-point for core renovation, and then to execute this at speed, so sales of the new core offering can off-set the decline in the old business model.