Old Players, New Business Models?

We are successfully learning this lesson through Industry 4.0 projects, where smart software tools automatically run smart factories and actively help with enhancing business optimisation. But this is only one side. On the other hand, the digitalised environment creates a situation in which new players (start-ups) are established within extremely short time frames (hey, it has never been so affordable) with completely new business models that then greatly transform entire industries. Can ‘old players’ also successfully adapt and (co)create new business models?

Not long ago, it was thought that successful companies perform well because they know how to efficiently implement an existing business model (or multiple models, in the case of a diversified activity), which they perfected over many years, in which they trained their staff, invested in R&D, increased value-added and maintained differentiation (of products or services) in the market. Well, this is no longer enough in the digitalised environment. This new environment demands that old players transform extremely quickly into an amphibian of sorts - on the one hand, companies must continue to implement old business models (a key source of cash flow in the short-term), while on the other hand, they must create new models that can replace the old ones in the medium-term. If they do not do it themselves, others will – to the detriment of those lingering behind. Is it impossible or do successful practices exist? The answer to the latter question is yes.

Rolls-Royce is probably known to the wider public as a manufacturer of luxury cars, even though their core business is anything but that. They primarily manufacture engines for the aeronautical industry (the second largest manufacturer in the world) and develop other energy systems. It is perfectly understandable that, years ago, the company simply sold engines and provided proper maintenance. Their business model was challenged when strong price pressures and demands to reduce operating costs emerged in the industry. The company followed the logic that customers actually do not need an engine but need flight hours – and real-time telemetry of engine efficiency (fuel consumption) and its technical condition, including timely detection of maintenance needs - and effectively switched to a product-as-a-service business model. They no longer offered customers an engine as a product but instead as a service. 

The second example is Netflix, which was not ‘born’ as one of the leading global providers of video-on-demand content but had to evolve into this role. Initially, the company used the good old model of renting DVDs by post on the American market, with the difference that it offered customers the ability to pay a flat monthly rental fee in addition to a rental fee for one DVD. Their largest competitor on the market at the time was Blockbuster, which was betting on its extensive network of brick-and-mortar video rental stores. But as early as in 2007, Netflix began changing its business model to offer video-on-demand services and (as we see today) correctly predicted the evolution of the industry and changes in the user experience. At first, the company intended to develop both business models (under separate brands), but subsequently abandoned this strategy and, in 2011, started to exclusively focus on offering (and creating) video-on-demand content. Where is Blockbuster today? It declared bankruptcy in 2010.

How can old players learn from new players? Can large business systems learn something from start-ups and how? There are multiple aspects to the answer. 

The first answer is innovation, but the majority of innovation activities within companies are focused on the development of products and services that support the current business model. These are innovations which – as mentioned at the start – help companies to be more efficient, better and more successful in the market in the context of the ‘existing game.’ In a market where we know what type of game we play and under which rules. But what if the rules of the game change tomorrow? 

For large retailers, this does not only mean innovating when establishing an online store or enhancing the user experience, but also utilizing innovative tools and channels for communicating with consumers via two-way communication, offering quality content, developing own channels, etc.

The second approach is to actively observe and learn from start-ups and try to emulate their ecosystem. Or at least include their ideas. Start-ups, by definition, act differently than mature companies do and have a different organisational hierarchy. Their speed, when it comes to making decisions, is completely different, likewise the principles of preparing and implementing a strategy. That is why ‘copy-paste’ is out of the question, or at least will not yield the desired effects. In the context of this approach, companies organise hackathons, where different individuals come together with the aim of creating (and rewarding) the best ideas or solutions. But it is always questionable whether hackathon solutions can be implemented in a corporate environment.

This is where consultancy companies and agencies can help, especially those who, on the one hand, collaborate with large, corporate players and, on the other, offer more niche services to start-ups, which means that they understand both worlds and can assist with bringing them closer together.

The third approach, the beginnings of which we have seen in Slovenia in recent years, sees larger companies (co)investing in start-ups, wherein investments are focused on start-ups from industries in which these companies already operate. This model is strongly developed around the world and significantly helps corporations find breakthrough solutions and new business models more quickly. The model still presents the challenge of how to successfully integrate smaller groups (in the form of satellite start-ups) into a larger business system. This is impossible without simultaneously introducing significant changes to the corporate ecosystem - starting with management, recruiting processes and the organisational hierarchy. Otherwise, such attempts will (unfortunately) get stuck somewhere in the annual report of corporations, in the chapter on achievements of the year. 

In Slovenia, Petrol started to use this approach, and Kolektor began to invest in promising start-ups with its fund. Slovenia definitely needs more such approaches, which can significantly affect the long-term competitiveness of the business environment.

Corporations which already bet big on new business models of the future use an enhanced version of the aforementioned approach: they create new environments, whole ecosystems, within which new satellites, as well as big changes to corporations themselves, are born. An example of this in Slovenia is BTC (Europe’s largest shopping complex when it was built), which has been actively connecting its wide ecosystem with smaller start-ups for some time now and is actually co-creating a testing ground for new ideas and business models. Their culture moves increasingly towards the digital, while management practices differ significantly from those of a decade ago. These are ecosystems that include investing in start-ups – not only in the form of individual examples but also as so-called accelerators, where start-ups are given proper institutional support. Investments are not small and are measured in percentages of revenue generated. But there are not a lot of alternatives. 

Disruptive business models, which we encounter every day as a consequence of digitalization, cannot be stopped. When the rules of the game start to change in an industry (and tens or even hundreds of start-ups are working hard, 24/7, to make this happen as quickly as possible), there is no way back. Therefore, it is the management’s responsibility to properly manage and prepare their organisations for this moment, if they are not creating change themselves. And in doing so, it is extremely important to choose the right partners.

Originally published in Finance newspaper, October 2017