Future Business Model

https://hbr.org/2016/03/does-your-business-model-look-to-the-future-or-just-defend-the-present

Does Your Business Model Look to the Future or Just Defend the Present?

Robert C. Wolcott

MARCH 22, 2016

There’s power in being more flexible than your competition.

Established industries aren’t ripped apart overnight. That takes time, though when momentum builds, change happens fast. How can incumbents manage through the monumental changes currently under way? One answer is to take a cue from pivotal technology companies leading the change.

Many of the companies leading today’s technology-driven transformations across industries are leveraging transitional strategies, or more specifically transitional business platforms. Few old-guard players have recognized the power of transitional models, but companies such as Netflix, Uber, Apple, and Tesla know that waiting for the time to be right means waiting until it’s too late. Netflix founder Reed Hastings, for instance, always wanted to do on-demand video, but the technology infrastructure wasn’t there in 1997, the year he founded the company. Rather than giving up, he founded a DVDs-by-mail business until the time was right. Similarly, Google’s interest in Nest isn’t primarily a play to control the thermostat: it’s a Trojan Horse into the connected home.

Getting in the game helps define the game, but it’s essential to have some idea — even a vague one — of what the game might eventually be. For the next generation, that game will often be about pushing the production and provision of products and services ever closer to the moment of demand. From distributed energy generation to 3D printing to crowdfunding to the Internet of Things and data analytics, all of these technologies enable us to provide what customers want, where, how, and when they want it. Businesses able to most cost-effectively provide it will win. This dynamic will persist for many years as technology improves and businesses learn to apply it in new ways. We’re only in the early stages. Companies that focus on defending established business models will lose in the long run. Companies with foresight will pursue transitional models to be part of driving the change.

The Platform Economy

How online marketplaces are changing the face of business.

A transitional business platform such as Netflix’s DVD rental business provides a potentially profitable business opportunity that gets to market and enables, rather than hinders, transition to future business models as technologies, customer behaviors, regulations, or other factors evolve.

While Uber, the global leader in on-demand transportation, relies on thousands of independent drivers, Uber’s business platform enables the transition to self-driving cars, one of the company’s stated strategic priorities. While the eventual transition could be traumatic for Uber’s drivers (and to society in general), Uber’s business platform enables rapid evolution as technologies, consumer behaviors, and regulations change. At present, traditional auto makers’ and limo companies’ business models don’t account for this inevitable shift. By contrast, electric vehicle company Tesla’s software-based upgrades provide a superb transitional business platform, allowing the company to be a leader in the autonomous vehicle revolution.

To be clear, succeeding at transitional business platforms does not require predicting the future. Instead, a great transitional model is based on an accurate directional read of the future, providing flexibility and optionality as the future unfolds. In 2005, Netflix’s Hastings told INC Magazine, “I don’t want to get into production. There are passionate, talented filmmakers out there, and I would pollute the craft.” Yet today, as it evolves to a global media empire, Netflix is a force in content production. Whether Hastings envisioned this from the start is irrelevant. The point is that the Netflix platform has enabled the company to expand its competitive space as technology and consumer behaviors have changed.

Four characteristics distinguish transitional business platforms:

1. They substantially outperform the status quo from the customer’s perspective.

Transitional models are designed around what is best for customers, even at the expense of established value-chain participants. For new entrants, like Uber, that’s just fine. For traditional players, like limo companies, it’s the fundamental challenge. But in a world increasingly giving customers what they want, when, where, and how they want it, it’s also a necessity.

2. They tend to violate traditional constraints. This is often required to achieve radical improvements in performance. Infamously, Uber has challenged local regulators around the world. Whether they’ve gone too far in this respect is arguable. It’s uncontestable that Uber has transformed personal transportation. Tesla’s direct-to-consumer approach will continue to be contested in court by auto dealers and others, but direct consumer engagement is fundamental to the company’s flexibility in the future. Where possible, we believe it’s best to avoid violating established constraints — it’s easier — but not at the expense of serving customers.

3. They build brand presence before markets have been clearly defined. Consider drone delivery services. Amazon is experimenting with drone delivery not just to lead but also to advance drones on the regulatory agenda and to catalyze other companies to develop viable models. While drones are still experimental, expect Amazon or other players to find niche applications in the future that build presence and anticipate the day when delivery drones proliferate.

4. They enable adaptation as conditions change. Most important, transitional models must be designed to adapt as offerings move closer to the time and location of customer demands. This means anticipating the direction (not the details) of customer demands. UPS’s Strategic Enterprise Fund has invested in CloudDDM, a 3D-printing company with 100 printers located in the middle of UPS’s worldwide hub. CloudDDM can print parts on demand and send them literally across the alley to UPS for shipping, allowing a response within 24 hours for many parts. If the setup works, CloudDDM will be positioned to expand into a range of other digitally manufactured products. The investment also positions UPS to participate in and learn about a trend that will both expand and contract demand for their core shipping business. More 3D-printed parts today likely means more packages shipping. However, in the future, to the extent that 3D printers proliferate closer to the locations of demand, fewer products might be shipped. CloudDDM and UPS are building a transitional business platform for their diverse yet complementary objectives.

Great business leaders use transitional business platforms to learn and react fast, even when new directions threaten the company’s traditional core. In January 1996, individual investing pioneer Charles Schwab launched web trading not long after the introduction of the first web browser. Although new entrants such as eTrade were active, Schwab recognized the power of online trading before any of the large incumbents. Schwab offered online trades at $29.95; in-person or phone orders remained far more expensive. While online accounts soared, customers expressed increasing frustration at not being able to order through any channel at the same price. Greg Gable, Schwab’s senior vice president for public affairs, recalls, “The problem quickly became apparent. We had clients revolting….We had employees saying, ‘Hey, we need to do what is right for our customers.’ So we did.” In late 1997, Schwab offered the $29.95 price for all trades, online or otherwise. “We expected a considerable hit to revenue….We prepared for the worst but thought we’d make up for the change within two years due to increased volume. We made it up in six months.”

Ultimately, all businesses are transitional — we just can’t predict precisely when or how. Businesses focused on optimizing what has worked for years at the expense of the future will create ever-greater risk for their owners, employees, and customers. Experiment with potential transitional models so that your company is ready when the time is right. You can’t lead the way if you’re waiting for someone else to take the lead.

Robert C. Wolcott, Ph.D., is Clinical Professor of Innovation and Entrepreneurship at the Kellogg School of Management at Northwestern University and Co-Founder and Executive Director of the Kellogg Innovation Network (KIN).