Don’t Underestimate Business Models that Don’t Look Like Yours

Don’t Underestimate Business Models that Don’t Look Like YoursI ran across a shocking quote recently. It’s from an article in the July issue of The Monthly by Malcolm Knox called The Next Chapter – which is about the current state of play with e-books. Here is the quote:

“Until this year, the argument over e-books centred on whether they would ever overtake print. Industry members surveyed at the 2009 Frankfurt Book Fair predicted digital sales would overtake print in 2018; only one-fifth of respondents thought digital would never overtake print. The argument has now gone beyond ‘if’, to ‘when’.”


Take a look at those numbers again – and remember that they’re only a year old: 20% of respondents said that e-books would never overtake print, and of the 80% that thought that they would, the average estimate of ‘when’ was 2018.

That blows my mind. Look – I love print books, as anyone that has visited my home or office can attest. I’ll probably have print books around in pretty serious numbers until I die. But then, I still have 800 records on vinyl – so I’m clearly not the average guy here. Even so, it doesn’t really stretch my imagination too much to think that e-books will outsell print books by, oh, next month or so. Maybe not exactly then, but soon enough.

When I read that, it reminded me of another story – that of Kodak (recounted very nicely in this post by Simon Waldman, and also addressed in his new book Creative Disruption. Here’s an article on the Kodak v. Fuji price wars from Fortune in 1997:

“That poses three big issues for film companies: One is the danger–still much in dispute–that film sales will soften as digital cameras made by companies like Sony, Canon, and Casio take up a bigger share of the market.”

Sounds a bit familiar, doesn’t it?

Here’s one of the issues: people are used to competing against others that have basically the same business model that they do. Film companies compete against other film companies, newspapers compete against other newspapers, and so on. They tend to have the same target markets, pretty similar value propositions, supply chains and value networks. Greg Satell explains why this is often the case in his recent post:

“The truth is that we don’t put much effort into forming our opinions. Most of our information we pick up either completely passively or at least without much reflection. We go along with the crowd much more often than most of us would like to admit.

However, what is surprising is the extent to which crowds affect our thinking on issues that are not only substantive, but for which we are professionally responsible.”

That’s what makes business model innovation so powerful. Large incumbents are set up to crush any new entrants that try to compete against them using a similar business model. But when the business model looks different, their first reaction is to say “we don’t have to worry about them, they’re completely different from us.” Thinks: Newspapers and Craigslist as a good example.

But it’s not the new competitors that look just like you that you have to worry about the most. It’s the ones that seem to be completely different. Here’s an example from a more recent article on Kodak from Business Week:

“In an era when innovation is all the rage, many CEOS, like Perez, are discovering that product innovation alone isn’t enough to save sick companies or turbocharge healthy ones. For many, their core businesses are being disrupted by globalization, technology shifts, and new competitors. They must reinvent the company. Even at healthy companies, business model innovations are essential to retaining their competitive positions. Microsoft (MSFT )Chief Executive Steve Ballmer says he no longer thinks of his competition as individual companies. Instead, “it’s alternative business models that we’ll have to compete with or embrace,” he says. His two biggest threats are the open-source phenomenon and advertising-supported software.”

The first challenge is to recognize the threat, and then the second is to get an accurate handle on what it means, and when it is likely to become important. As the publishing and film examples show here, there is danger in complacency. After saying “that’s completely different”, the next response is often “yes, that will be important – in another 10 years.”

That assessment may well be correct – but if you hear it about your market, it pays to at least do some thinking about it for yourself. It’s relatively straightforward to compete against firms using the same business model that you are – you just have to be cheaper, or better, or faster. Competing against a different business model is a lot harder. It usually means that you have to change your business model too – and this is not easy. You have to break quite a few connections to do this.

You will usually have time to react to these disruptive changes, but actually doing so is often difficult. That’s part of what makes disruptive innovation so disruptive.

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Tim KastelleTim Kastelle is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.

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Tim Kastelle




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