Once disruption is under way, there is no stopping it. Uber is another startup disrupting the multi-billion dollar industry. Uber, as we all know, connects the people looking for a ride with the people willing to offer a ride for a small fee. This is very interesting. How come one of the large taxi companies in the US or around the world did not come up with this idea? The key is that startups like Uber do not operate as the small version of a big company. Besides, disruption in today’s world does not come just from technology. It comes from companies being able to take one part of the value chain, redefining it and on that basis rebuilding the business architecture of the entire industry. Uber started out as an app to call a taxi, but they innovated. Today, it is a way to manage the excess capacity in millions of cars around the world. In other words, they discovered new business models as opposed to executing the model of a large taxi company.
Big companies have become big because they do a good job of executing their business model. Executing the business model is not easy. You have to manage costs, improve productivity, and scale. The management science and management books have provided us with various tools, over the last century really, to help us execute business models. Budgets, score cards, operating plans, KPI, processes, etc., are tools to help us execute the business model. So in essence, big companies are good execution machines, but discovering a new business model is a whole different thing. It requires a different mindset. Executing is about optimizing the value chain, but discovering means fundamentally questioning the existing value chain, taking it apart, and putting it together in a whole different way.
Every sector in every industry is built around implicit, long-standing ideas about how to make money. In telecommunications, customer retention and average revenue per user are seen as the KPIs. In the media industry, hits drive profitability. In enterprise infrastructure sector, it is the ability to sell to small IT teams and developing the scale for a wide market distribution. These ‘best practice ideas’ reflect our shared beliefs about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered rules of the game. Many startups often try to win the game by following the same rules, i.e., they imitate the business models of large companies. Disruption happens when someone comes along to change the game. So how do successful startups change the game? The discovery begins with identifying an industry’s foremost belief about value creation and then articulating the notions that support this belief. By turning one of these underlying notions on its head—reframing it—startups can look for new forms and mechanisms to create value.
Step-by-Step Approach to Discovering New Business Models.
The key is to develop an attacker mindset. The idea is to attack the existing value chain, cut it into pieces, and examination or analysis of each piece to figure out if it could be done differently before putting all the pieces back together in a new way. The following step-by-step approach can be used to start the journey on the discovery path.
1. Outline the prevailing business model in your industry. What are the long standing ‘best practices’ in the industry and how do they create value ?
2. Inspect and Dissect the most important long held belief into its supporting notions. What are the most important core belief ? How do notions about customer needs and interactions, technology, regulation, business economics, and ways of operating underpin the core belief?
3. This is the most important part – Question the underlying long held belief and turn it on its head. This means forming new opinions that others may find radical. The new ideas often come from outside the industry. Someone else, somewhere else outside your industry is doing something that you find interesting. Here are a few examples of how companies did this.
– Palantir: What if advanced analytics could replace part of human intelligence?
– TSMC: What if you don’t need to develop your own process technology or invest in your own infrastructure?
– TaskRabbit – What if you can get stuff done in chunks by accessing a global workforce in small increments?
4. Sanity test your new ideas. Create many new ideas and most of them will fail the sanity check. Often the new ideas borrowed from another industry have a high chance of passing the sanity test because they are great and functional ideas in the industry from where you borrowed them.
5. Articulate the new business model based on reframed ideas. The imported/reframed ideas will need to be translated and aligned with the good parts of the current ‘best practices’.
Let’s apply this approach to enterprise infrastructure vendors
1. Outline the prevailing business model.
Sell Proprietary Infrastructure solutions packaged as HW appliances to 1000s of enterprise customers. Charge an acquisition price followed by maintenance service charges.
Since the customers are geographically dispersed, they all cannot be reached by the company directly. by the company. This is where VARs and distributors enter the picture by offering customer outreach and value added services. They become the intermediaries in the market distribution network.
2. Long-standing beliefs
The traditional enterprise customer IT teams tend to be small. They prefer to deploy infrastructure technologies that just work out of the box, are stable and do not require much hand holding. They prefer to buy market proven products but are willing to experiment with new products if the cost savings are significant and the new products are of equal or better quality. Product reputation spreads by word of mouth and IT publications. Cloud computing is one of the biggest trends influencing the customers’ behavior about IT infrastructure. Most enterprise customer either already have a cloud strategy or are in the process of defining one.
If you examine the S&M costs of startups, you will find an alarming trend that they spend a very high fraction of their sales on S&M activities (S&M as a % of sales). They try to repeat the same go-to-market approach as followed by large vendors. In doing so, they are acting as small versions of large companies. Large companies grew with successful execution of their business model and became profitable only after achieving a certain scale. Why should startups follow the same script? It is expensive. Cloud computing upends all this because now customers are increasingly moving to cloud for which they don’t need the services of these intermediaries.
3. Reframe the prevailing ideas.
The whole Software Defined Everything trend obviates the need to buy proprietary hardware systems or appliances. Customers are willing to deploy new software based solutions that runs on standard commodity low cost equipment. In short, software delivery models are becoming popular.
What if you delivered only the Software that runs on commodity hardware?
What if you convince the customers to buy (download!) the software directly from your website? Would you still need large S&M? Would you still need services from intermediaries ?
Harish Arora is an entrepreneur and a venture capital investor focused on Enterprise and Cloud Infrastructures with an emphasis on Storage, Cloud computing, Hybrid computing and BigData infrastructure technologies. Harish has executed over 10 investments and helped the portfolio companies in many ways. He has developed a good network within the VC and Corp Venture communities and has spent 15 years developing enterprise storage products in various large (EMC, NetApp) companies and two startups where he led the product engineering efforts. He is also an advisor at two early stage storage startups.
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