Debunking the common denominator of disruptive business models
Monday, January 25, 2016
Is disruptive the buzzword among
entrepreneurs nowadays? With a fast-growing base of start-ups ranging from
FinTech to MedTech popping up in Singapore and globally, it makes one wonder
how industry incumbents defend their slice of the pie.
Today’s
corporate world tends to make conventional business models appear a lot less
durable than they used to be. While basic proposition of value creation
remains, industry’s best practices are fast revolving with innovation and
asset-light business models as centerpiece. Organisations upholding such
practices and beliefs have the flexibility to skirt constraints of the
traditional norms and exploit unseen possibilities at unprecedented speed.
Uber, AirBnB and Bitcoin for instance are some perfect examples that are fast
dislodging their respective industry incumbents.
What then is
the common denominator for these disruptive business models? It is none other
than digitisation of business that
upends the economic model, resources deployment, execution of business activities and engagement of customers.
According to
basic principles of economics, companies will always try to maximise profits
where marginal revenue matches its marginal cost. In driving down average costs
per unit of production, economies of scale (EOS) however can never drive down
cost to zero. This perspective has however changed with digitisation and the
telecommunications industry fits a classic scenario. Traditionally, it is
believed that telcos capture value through EOS as unit costs lower with more
telephone minutes sold. Today, there are no lack of VoIP and messaging services
in the market – think WhatsApp, WeChat and LINE.
Another
premise in business lies in the competition to own assets and you have the
discussion of vertical integration to secure ownership of raw materials.
Depending on industry, acquisition of assets may not always make economic
sense, especially if they are used inconsistently. The classic
“Cradle-to-Cradle” design works as it is a holistic industrial and social
framework that integrates efficient systems and eliminates waste. This brings a
renewed focus on accessibility rather than ownership as seen in global sourcing
firm, Li and Fung’s strategic push to limit risks and increase efficiencies.
Essentially, you work with partners or gain access to their offerings without
actually owning them at your sunk costs.
With
companies’ priorities on improving their bottom line, embarking on an
operational efficiency work programme certainly fits the bill, but is it
enough? The crux lies in staying relevant at an accommodative pace in order to
implement changes in time before your offering turns obsolete. Embedding intelligence
therefore becomes a ready solution as it creates a platform for companies to
learn of market trends and customers’ preferences in real-time mode. This may
be seen in a hotel-booking platform such as Agoda which not only offers a
comprehensive listing of hotels but also a feedback system to help improve
their services going forward.
Last but not
least, engagement of customers because you are not going to move sales if you
have no buyers. While companies plan and spend to capture customer loyalty,
this mechanism gets increasingly complicated in the digital world. With the
growing sophistication of customers due to the readily available information
online, switching costs are low. It is no longer relevant to try and brainwash
your customers into believing you offer the best product or service because a
Google search that returns a negative review could potentially cost you that
business. Instead of restraining customers, digitisation promotes empowerment.
Think crowdfunding or even online brokerages that offer web-based information
and decision-making tools.
As the global
community gets increasingly educated, there is a growing level of
sophistication among individuals, particularly entrepreneurs. This results in a
pressing need for industry incumbents to keep up to pace in revolutionising
their businesses to stay relevant. It is no longer impossible for a product or
service to enter the obsolete phase in months as digitisation prevails and will
continue to dominate going forward.
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