By: Ignacio Barros
Today, it is not unusual for companies that have dominated their markets for decades to be surprised by new players with radically innovative business models. On the other hand, many young companies raise large sums of money and attract tens of millions of customers, but collapse when they don’t know how to defend themselves against copycats. In these situations and many others, the underlying cause is often a lack of a holistic approach to strategy.
The current strategy requires more than the classic analysis of positioning. It requires making carefully coordinated decisions about the opportunities to pursue; the business model with the greatest potential for value creation; how to capture as much of that value as possible; and the implementation processes that help the company adapt to new ways of doing things and develop capabilities that allow it to remain competitive in the long term. Neglecting any of these imperatives can derail the strategy. Let’s see below the mistakes made by established (traditional) companies in the market, and those made by new players (entrepreneurs).
The mistake of established companies.-
CEOs of established companies often pay too much attention to defining how to capture value from the sources they already know, but too little to discovering new sources of value, and even less to how the company’s activities and capabilities (processes, structure , technology) must evolve over time. One reason for this myopia is that approaches that focus on value capture, such as Porter’s 5 Forces Analysis, for example, have been very successful in long-established industries and, as a result, have become embedded in the strategy process. But the managers of these mature companies should ask themselves: when was the last time our strategy process generated a truly innovative idea, like mobile banking for example?
Take a look at the list of the most valuable companies in the world today, the vast majority of which are technology-based, and you’ll see that discovering and exploiting new business models to meet customer needs that haven’t been met before, or not even had been expressed, or even unknown, is where the bulk of the action has been in recent years. Those companies did not create billions of dollars in value by outperforming their rivals. When they were founded, they didn’t even have rivals. In fact, the type of business they started did not exist before.
The good news for leaders of established companies is that the emergence of new technologies does not need to doom their companies. On the contrary. By taking a holistic view of strategy, they may discover that compelling opportunities can be presented in their current business models by applying these disruptive technologies. Let me give you an example: would you rather make a one-time sale of your product or build a long-term relationship with your customer? As some traditional companies have discovered, the latter is the opportunity that new digital business models offer to companies that can effectively leverage data analytics. Komatsu, for example, now offers subscriptions to its Smart Construction platform, which coordinates all activities on a construction site, including drone inspections, dump truck scheduling, and the operation of autonomous earthmoving equipment. The platform reduces the total costs of construction projects by more than 15%, creating far more value than revenue from excavator sales, which was all that was available on its previous model.
We are by no means suggesting that established companies actively react to every seemingly innovative new model that hits the market. Many of them disappear in their first 12 months of life. But they should be looking at and evaluating the new technologies that appear. Using the tools available, strategists might have foreseen, for example, that video-on-demand (streaming) would replace Netflix’s mail-in DVD delivery and Blockbuster’s video stores. The value proposition for the client, which in this case was always “deliver entertainment via video”, evidences the absolute dominance of digital transmission versus the physical product. An examination of the purchasing criteria a customer might consider: convenience, ability to make an impulse purchase, access to recent best-selling videos, etc., reveals that video-on-demand serves customers much better than the old business model. And finally, if all of the above weren’t reason enough, the cost of delivering movies and TV shows over the Internet is much lower than delivering them through brick-and-mortar stores or by mail.
Unlike the previous example, where one business model completely disappears and is replaced by a new one, we can also see an example of model coexistence: Amazon’s online business scheme, which consists of a retail website, a limited number of fulfillment centers and fleets of delivery trucks, will never fully displace Walmart’s long-standing business model, which features brick-and-mortar stores, served by a national network of distribution centers. When you compare how well each one does their job, you’ll see that Amazon’s model is good for home delivery of a very wide range (hundreds of thousands) of items, while Walmart’s is better for immediate availability at a low cost of a limited number. Each business model has a different proposition that attracts different customers at different times for different products. And a comparison of the cost positions of their asset bases shows that Walmart’s logistics system is low-cost for everyday items that consumers pick up from stores in rural or suburban locations, while Amazon’s is more efficient for items long tail and home delivery in densely populated areas. No business model dominates the other. Both will survive, which is why each company is rushing to replicate the other’s asset base, with Amazon buying Whole Foods and Walmart spending billions of dollars to expand online and add distribution centers.
The mistake of the entrepreneurs.-
In their eagerness to exploit new opportunities that they saw before anyone else, many entrepreneurs fail to realize that the more value their business model creates, the more competition they are likely to face. Netflix has been copied by dozens of robust companies, including Disney. Seduced by their sudden and resounding success, new entrepreneurs often commit to such an investment that it never quite pays off. WhatsApp, for example, now faces numerous free messaging rivals, while its owner Facebook has yet to monetize its more than 2 billion users.
Consider a business model that investors are now enamored with: electric vehicles. As of early April 2021, Tesla had the highest market capitalization of any automotive company and the sixth-highest market capitalization in the United States (reaching $672 billion on April 12 of that year), more than the capitalizations of combined market of Ford, GM, Toyota, Daimler, and Volkswagen. Today its market cap is $513 billion. Tesla has certainly identified and exploited an attractive business model, but it’s unclear if it will ever get a decent return on its investment. But why not if the business model creates so much value for customers? The answer lies in the effect a promising new business model has on other parts of the strategic landscape. To capture enough value, a company must be in an industry with an attractive structure and possess a sustainable competitive advantage. Unfortunately, the electric vehicle industry of the future will look a lot like the auto industry of today. Every car manufacturer in the world and every company interested in electric motors is getting into the business (even the vacuum cleaner company Dyson invested five hundred million dollars in the design of a car and a production plant before realizing the resounding mistake of his calculations). Since the barriers to entry are relatively low for electric vehicles due to the simplicity of their design and their few (relative to an internal combustion engine) spare parts, it is likely that even more companies will participate. In fact, the faster the adoption of EVs around the world, the faster competitors will enter the race and the faster the attractiveness of the industry will erode.
It’s also not clear that Tesla has a sustainable competitive advantage. It may have a brand aura and performance edge today, but its design and engineering expertise will soon be challenged by Porsche and other performance manufacturers, such as BMW and Mercedes. In addition, it lags far behind other auto companies in cumulative production experience and scale, so its manufacturing cost position is unenviable. In fact, the need to scale led Tesla to add more models, producing seven in 2021. Today the company has rethought its portfolio and is concentrating on the production of only 4 models (S, X, 3 and Y), and it has increased its total annual production to 1.4 million vehicles a year, but generating serious inefficiencies along the way. Tesla also appears to be having a hard time realizing value through effective execution of its strategy. The automaker has had huge quality problems in the United States. (Consumer Reports no longer recommends the S and Y models.) If you can’t achieve the operational efficiencies you’re looking for, the company is doomed, no matter how exciting your business model, barring a change of rudder (or helmsman).
The secret of success is in the implementation.-
Identifying a viable business model and a differentiating competitive position that captures value does not guarantee success when companies face constant change. To gain long-term value, companies must balance agility and control, giving project teams the authority to experiment with new configurations while constantly investing in the capabilities needed for the future.
As I noted earlier, the challenge for established companies is often not to engineer an entirely new competitive position, but rather to support business activity that drives incremental but continuous improvement. It is in the development of plans to realign the company’s activities that strategy is developed every day, not in its initial grand design. As tactical or operational as they may seem, these adaptations are fundamentally strategic because they cut across functions within the company and require systemic change. However, top managers give them little attention on a day-to-day basis.
The solution for both established and young companies is a strategic approach that advocates experimentation within the boundaries set by top management. Each exploratory project must have a clear objective, a schedule, metrics, responsible parties, and milestones that trigger cutoff and review decisions. However, CEOs cannot and should not get involved in the minutiae of projects; that would just be overwhelming. Control is first maintained through adherence to a classic, well-articulated, and well-communicated strategy that clarifies how the company will outperform competitors pursuing the same business model.
Many times hidden in the day to day, there is an immense source of competitive advantage that capitalizes on the interdependence of the elements of the strategy. It’s called implementation.
Sources:
- 4 common reasons strategies fail – (Harvard Business Review, June 2022)
- Why do so many strategies fail? – (Harvard Business Review, July-August 2021)
- Building new businesses: How incumbents use their advantages to accelerate growth (McKinsey, December 2019)
- SYNERGOS internal cases
