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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