Or, what business will look like in the 21st century.
Platform revolution: the great business model shift
The future is frictionless businesses — where labor, information, and money move easily, cheaply, and almost instantly. Frictionless businesses:
1. have new, more fluid relationships with customers, workers, and owners
2. rethink the role of capital (as traditionally defined): own less and less of it
3. create value in new ways as they reinvent R&D and marketing
4. measure their performance by new metrics because traditional gauges no longer capture what counts
In almost every business, barriers to entry are coming down…
21st century’s most valuable assets: openness to new ideas, ingenuity, and imagination.
What a 21st century business looks like: Alibaba, Airbnb, Uber
A friction-free economy also enables companies with virtually no physical capital to compete powerfully with capital-heavy incumbents.
Alibaba is the world’s most valuable retailer but holds no inventory
Airbnb is the world’s largest provider of accommodations but owns no real estate
Uber is the world’s largest car service but owns no cars
Each taken friction out of its industry, connects buyers and sellers directly and conveniently, enabling new, nearly capital-free business models.
Future of business: platform revolution makes business bigger than nations
1. Conducting billions of searches a day, Google possesses better real-time knowledge of what’s going on in the world than any government does; research shows it can predict disease outbreaks, stock market movements, and much else, and could influence elections if it wanted to.
2. With 1.5 billion users, Facebook has a bigger population than China does and can accurately describe its users’ personalities and predict their success in work and romance.
3. On any given day, Apple probably has more cash on hand than the U.S. Treasury.
4. Bharti Airtel, an Indian telecom company, has about as many customers as the U.S. has residents.
5. With 2.2 million workers, Walmart employs more people than any other organization on earth except the U.S. and Chinese defense departments.
Future of business: brighter stars, shorter lives
Corporations will on average live shorter lives than they used to.
Before: average life span of companies in the S&P 500 was 61 years in 1958
Now: about 20 years now
Source: Yale’s Richard Foster, who predicts further steady declines.
Future: the concept of companies as continuing institutions could even cease to be the norm.
Future of business: bye bye corporation, hello Hollywood model
Key question: why do companies exist?
In theory, (per English economist Ronald Coase who won a Nobel Prize in economics for answering that question) the global economy spins like a top based on price signals between individual operators, with no apparent need for big companies.
ie in the real world…
“there are negotiations to be undertaken, contracts have to be drawn up, inspections have to be made, arrangements have to be made to settle disputes, and so on.” — Ronald Coase
That is, there are transaction costs—friction—and consolidating transactions inside companies is the most efficient way of handling them.
as technology shrinks those costs, many companies are unbundling themselves, outsourcing functions to others, crowdsourcing R&D, and exchanging employees for contractors.
You could all it the Hollywood model — people and resources come together to achieve a goal and then disperse to other projects, may become common across the economy.
What a 21st century business looks like: Amazon
Growth before profits: Amazon reports little or no profit quarter after quarter. Investors agree with CEO Jeff Bezos that the money is better invested in expansion; future profits will be that much greater as a result. The stock recently hit an all-time high.
Not all 21st-century corporations are glamorous Silicon Valley startups. They can be of any age and in any industry (even cars).
What a 21st century business looks like: Apple
A company doesn’t need nearly as much as capital as it used to:
Apple, the world’s most valuable company (Unlike Google Microsoft, the second and third most valuable firms, Apple gets most of its revenue from selling physical products.) Yet the company says “substantially all” of its products are made by others. Because it can coordinate vastly complex global supply chains, it can pay those firms, mostly Foxconn, to make its products and get them where they need to be on time.
On-demand economy: Apple has even rented other companies’ servers to host its iCloud service so that it can add or remove capacity easily, paying only for what it needs.
500 brick-and-mortar stores worldwide, its total capital ($172 billion of it, according to the EVA Dimensions consulting firm) is immense. But in traditional models it would need much more.
Apple $172 billion of capital, creating a market value of $639 billion.
Exxon Mobil $304 billion of capital; market value $330 billion.
How 21st century business responds to problems: Tesla
When a Tesla Model S ran over a metal object in Kent, Wash., in October 2013 and burst into flames, owners, potential customers, investors, and company executives got worried. Happened again a few weeks later in Smyrna, Tenn., federal regulators opened an investigation.
Old world solution: massive recall, costly repairs at dealerships nationwide, and a painful financial hit to the carmaker.
That didn't happen.
The problem was: the Model S could lower its chassis at highway speed to be more aerodynamic, and if debris hit the car’s battery pack in just the wrong way, it could catch fire.
Solution: Tesla beamed a software update to the affected cars, raising ground clearance at highway speed by one inch. The problem went away. Just 4 months after opening their investigation, the regulators closed it.
Tesla doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms.
Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital.
1. GM creates about $1.85 of market value per dollar of physical assets… Tesla creates about $11.
2. GM creates $240,000 of market value per employee… Tesla creates $2.9 million.
Tesla, though in the same business as GM, is a fundamentally different idea.
How 20th century business stays relevant in 21st century: Nike
Nike: aggressively reinventing manufacturing with 3D printing and cannily using social media for marketing.
How 20th century business stays relevant in 21st century: BMW
now 100 years old, 1916-2016
exhibition on world tour: London, LA, Beijing & Munich, will examine what the next 100 years will look like for the auto industry. [but I think they mean mobility: Key topics will include corporate citizenship, sustainability and the impact of digitisation on driving.
Computer programmers will comprise half of BMW’s future R&D department, according to head of R&D Klaus Fröhlich
The car brand says Uber and TrueCar are its future competitors
BMW Vision Next 100 concept car: contains speculative future technologies, eg Boost mode, with heads-up display to improve the driver’s performance, + the fully-automated Ease mode.
BMW recently announced that its half of its future R&D department will be made up of computer programmers. Software engineers currently comprise around 20% of the brand’s 30,000 research staff.
‘For me, it is a core competence to have the most intelligent car’ — Fröhlich
How 21st century business overcomes obstacle: Apple's Liam
Apple’s latest innovation: 29-armed robot that deconstructs iPhones piece by piece.
E-waste is a growing global concern.
41.8m tonnes of e-waste were generated globally in 2014
only 6.5m tonnes were recycled
Source: United Nations Step Initiative
Most electronic waste recycling programmes involve destructive processes such as shredding
Apple's robot, Liam, in development for almost three years, is better: breaks down iPhones one piece at a time along its 29-stage disassembly line.
This avoids cross-contamination, making the components more attractive to the third-party companies that turn them back into raw materials.
Liam has a 97% success rate at removing each component, according to Apple, and can strip about 350 phones an hour; disassembles iPhones at the rate of one handset every 11 seconds
Apple sold more than 231m iPhones 2015
In 2015 Apple announced plans to:
make its supply chain more sustainable
target to eventually power all of its operations using renewable energy
"When repaired, iPhones can go on to a second owner, or a third owner, or a fourth owner, and the company’s extensive refurbishment program is excellent proof. These phones can—and should—be reborn for as long as they hold value."
The hard, intractable problem with recycling is mixed streams.
Building a machine that can recycle aluminum cans is relatively easy. Building a machine that can recycle complicated iPhones is much harder. Building a global system that brings every single iPhone back to Apple’s centralized demanufacturing line at end-of-life is impossible.
How 20th century business becomes relevant in 21st century: Kraft Heinz
created ‘biggest blind taste test in history’
went public in March with an ingredient change for its macaroni and cheese recipe, which it has been secretly trialling since December 2015.
New recipe contains no artificial flavours, preservatives or dyes
On 7 March the food brand officially launched its new macaroni and cheese recipe with an advertising campaign entitled It’s Changed. But It Hasn’t.
The new recipe is healthier strategy, as it now contains no artificial flavours, preservatives or dyes.
The company deliberately deceived its audience in what it calls the ‘biggest blind taste test ever’ to create a true marker of whether introducing the new recipe affected the flavour.
After the change, Kraft Heinz did not publicise the new recipe except for listing the ingredients on the reverse of the box. Then it monitored the brand’s social media feeds and sales figures to make sure that there was no customer outcry. After a number of weeks, all remained quiet and people continued to buy the product as usual.
How 20th century stays relevant in 21st century: McDonalds Happy Meal
Sweden – McDonald’s has given its Happy Meal box a 21st-century makeover as it looks to keep the brand relevant to digital-first Generation I.
The McDonald’s little red box is celebrating its 30th anniversary in Sweden with a makeover that will help it to appeal to smartphone-owning pre-teens
Thanks to some clever fold lines and strategically placed perforations, the Happy Meal container can be turned into a DIY virtual reality headset
What is more, the fast food brand has also created its own game to be used with the Happy Goggles. The game, Se Upp I Backen (watch out on the slopes), is a ski adventure which, according to McDonald’s, has been endorsed by the Swedish national skiing team ahead of the Swedish holiday Sportlov, when it is traditional for families to go on skiing trips.
‘It is our mission to ensure that the world’s most famous box will continue to be magical and relevant to families for another 30 years,’ says a statement on the company’s website. ‘The Happy Meal simply must move with the times.’
How 20th century business stays relevant in 21st century: Nissan
Geneva – Nissan presented a vision of a not-too-distant future in which vehicles act as portable energy sources.
The Japanese car-maker worked with architects Foster + Partners to imagine the future of Intelligent Mobility
Electric power trains in its vehicles could be used to store, use or return energy to the grid
In a short film presented at the International Motor Show in Geneva this week, the two companies showed how electric vehicles could work more efficiently with urban power grids.
Their vision of the future imagines how residential parking bays could wirelessly charge electric vehicles while their owners sleep, then connect to the home’s energy grid to power lighting and domestic appliances.
The Japanese car-maker is already trialling a vehicle-to-grid system in Europe, which could enable vehicles to operate as individual energy hubs that are able to store, use or return clean energy to the grid.
‘Integrating zero-emission technologies into the built environment is vital in creating smarter, more sustainable cities,’ says David Nelson, co-head of design at Foster + Partners.
How 20th century business stays relevant in 21st century: Coca Cola
The business has routinely been urged by health experts and anti-obesity campaign groups to do more to tackle obesity rates worldwide. Some complainants have also called on governments to impose tougher financial constraints on sugary products such as a soda tax in order to convince people not to buy them. In response, Coke has opted to launch new variants and introduce smaller cans as well as promote healthier lifestyles in both its marketing and sponsorships.
Muhtar Kent, Coca-Cola’s chief executive last month penned an article in the Wall Street Journal in which he pledged the company will “do a better job” of being transparent about its research into sugar after being accused of deceiving the public about its support of scientific research. “We will also continue our work to provide more choices, in smaller pack sizes, in more communities—waters, lower-calorie and lower-sugar drinks, diet soda and zero-calorie drinks,” he added.
How 20th century business stays relevant in 21st century: Alcoa
20th century business can succeed if they redefine success.
An intensifying source of pressure on companies of all kinds is the rise of competitors willing to sacrifice profits for growth. (Frequently they are family-owned or state-owned companies that have achieved massive scale in emerging markets.)
Alcoa affected by the cost advantage achieved by giant Chinese aluminum smelters
So, Alcoa split into two companies:
1. a high-tech materials business
2. a commodity aluminum producer (Alcoa’s commodity business was dragging down the whole company)
As emerging-market companies increase their share of global business—they’re now about 30% of the Fortune Global 500—the profit pressure will increase.
How 20th century business stays relevant in 21st century: BASF + open innovation
The platform model… BASF does have an incubator:
BASF New Business GmbH: track down long-term trends and innovative subjects in industry and society, analyze their growth potential and check whether these potential new business areas fit in well with BASF. We develop subjects we find suitable into new growth fields for the company. Growth fields is the term we use for innovation topics that we derive from the future trends for a variety of industries and that rely on chemical innovations for their sustained development.
This satisfies 2/3 of Jim Collins' Good to Great 3 Circles:
1. What we're passionate about
2. What we can be the best in the world at
3. What drives your economic engine
We expect these growth fields to show high sales potential by 2020.
In building new growth fields we cooperate with BASF Group research centers and non-BASF partners along the value chain. Focusing on chemistry-based materials, technologies and system solutions that are new to BASF, we effectively promote technological progress by developing new products.
In line with BASF’s “We create chemistry” strategy, BASF New Business GmbH is taking its cues from the market and is structured similarly to an operating division.
The "Scouting & Incubation" unit identifies, evaluates and develops new businesses.
The "Business Build up" unit is responsible for developing new growth fields.
BASF New Business GmbH is supported in its activities by BASF Venture Capital GmbH. This subsidiary invests in startup to bring innovative technologies for novel materials closer to BASF.
Developments of new materials must help to enhance the quality of life or protect our environment.
Dialog and cooperation with partners
Discussions and cooperation with in-house and third-party partners and customers help us to bring innovations to fruition faster. This is why we maintain a global dialog with a range of partners and expand our network of experts through different forms of cooperation. While a project is still in its early phases we will partner up with universities, research institutes and enterprises. BASF New Business GmbH and its partners are also working to develop new business activities in projects that are publicly subsidized.
How 20th century business stays relevant in 21st century: BASF's purpose ad
Published Sep 2015, viewed 622,000 times as of 4 April 2016.
"We look at how chemistry can benefit everyday life and some of the solutions that can help people and the environment progress and coexist symbiotically."
How 20th century business stays relevant in 21st century: Ford, GE, open innovation
Ford + "maker" movement = marriage of an iconic 20th-century industrial giant and a decidedly 21st-century approach to product design and incubation
TechShop Detroit opened 2012: a fabrication workshop and design incubator developed in partnership with Ford Global Technologies, a division of the Ford Motor Company.
TechShop launched its first workshop in Menlo Park in 2006
provide shared access to high-end industrial machines, tools and software for independent manufacturing projects.
membership model not unlike a typical health club
TechShop members use welders, milling machines, 3D scanners and printers, laser cutters, injection molders and other professional manufacturing tools to make stuff.
Ford's role in launching TechShop Detroit? Ford encourages its own employees to make use of the facility for after-hours projects or to design new features for Ford vehicles.
All Ford employees and retirees qualify for a 50 percent discount on TechShop Detroit membership, and free three-month memberships are handed out to employees who submit inventions that are deemed "worthy of patent consideration."
"Our partnership with TechShop will connect Ford to the community of local innovators, and spark imagination that could be the solution to problems that we couldn’t solve before, or develop all new ideas that are answers to questions we weren’t even asking.
In the future open innovation will play an incredibly important role in the progression of our company." — Ford Global Technologies CEO Bill Coughlin
GE + TechShop = GE Garages
initially, mobile + permanent pop-up industrial workshops
+ other GE Garages partners:
Skillshare, an online learning platform
Quirky, which brings new product ideas to market
Inventables, which supplies materials and hardware for DIY manufacturing
MAKE, publishers of MAKE Magazine and organizers of Maker Faire events
How 20th century business stays relevant in 21st century: GE's hipster ad
"Refreshingly Honest and Funny Recruiting Ads"
Founded by Thomas Edison, the manufacturing company
= biggest recruiting challenge they face at the moment.
Solution: GE Digital + new goal: to be one of the world’s 10 largest software companies by 2020they are having trouble recruiting tech talent, see them as a manufacturing company, not a tech company.
Solution: ad campaign that directly takes on that issue.
The ads are built around “Owen,” GE Digital's latest hire. And the company will continue to feature Owen beyond the commercials, including actually bringing the actor through onboarding last week.
“Owen is the embodiment of this fresh new way of thinking and exploring endless possibilities,” Amber Grewal, GE’s Head of Global Digital Technology Recruiting said. “And really passionate about doing what really matters.”
This is what theGE Digital has been running other employer branding campaigns as well through social media, although this is their biggest initiative to date. The goal is not just to raise awareness of GE’s software division, but to also brand it as an exciting place to work.
“We want to change the perception that we are this big corporate company,” Grewal said. “We are fun, we are lively, and we build software that makes a meaningful difference in people’s lives.”
The results so far have been impressive. Anecdotally, Grewal said she’s talked with candidates who applied to GE right after seeing the ads, and so far the videos have generated more than 400,000 views on YouTube.
“It’s working,” Grewal said. “There’s a buzz, there’s a vibe. People always tell me it’s their favorite commercial.”
How 20th century business stays relevant in 21st century: GE
— software, startups, thought leadership: the "industrial internet"
Goal: to transform the industrial world through software, much in the same way the consumer Internet has been transformed.
"Software will be a key center point to managing a power plant or managing an airline or managing a rail company. We believe the industrial world is going to change and look more like the consumer Internet." — Bill Ruh, vice president, GE Software
GE is partnering with venture capitalists to revamp old-school industrial products with software.
A team from GE Software and GE Ventures has launched an incubator program in partnership with venture capital firm Frost Data Capital to build 30 in-house startups during the next three years that will advance the "Industrial Internet," a term GE coined. The companies will be housed in Frost's incubator facility in Southern California.
By nurturing startups that build analytical software for machines from jet engines to wind turbines, the program, called Frost I3, aims to dramatically improve the performance of industrial products in sectors from aviation to healthcare to oil and gas.
Unlike most incubator programs, GE and Frost Data are creating the companies from scratch, providing funding and access to GE's network of 5,000 research assistants and 8,000 software professionals.
The program has already launched five startups in the past 60 days.
Example: wind turbines.
Combine weather data with operational data to analyze the efficiency of wind turbines and change the curvature of blades--a move that will yield as much as 5 percent additional electricity.
Example: jet engine.
"By making machines intelligent [and] collecting data and analytics, we can foundationally change how resources are used, like fuel burn on a jet aircraft engine. If you can get rid of 40 percent of all airline delays due to mechanical errors, that's a huge win for both the consumer and the airline."— Bill Ruh, vice president at GE Software
Stuart Frost, chief executive officer of Frost Data Capital, estimates the savings that come out of the program could over time reach into the trillions.
"In a lot of these areas you're talking about $100 billion a year in unplanned down time, like in oil and gas. In healthcare it's a trillion a year lost in unfortunate outcomes for patients." — Stuart Frost, chief executive officer of Frost Data Capital
How 20th century business stays relevant in 21st century: IBM, Wells Fargo — embrace tech, reinvention = pivot
Wells Fargo (164-year-old banking corp) solution: radical change, with the times. If hadn't created mobile app five years ago, it would be out of business, saidCEO and Chairman John Stumpf.
"Today half our customers are mobile and, not only are they only on mobile, that’s their predominant use. If we weren’t on mobile, we would be out of business. And that’s just in five years" — John Stumpf, CEO and Chairman
most important thing for their companies is to constantly be reinventing yourself.
"The companies that are most enduring and have the best opportunity in the future are those that can reinvent in a way that’s managed chaos," — Stumpf
IBM, 100+ year old company: more than $8 billion in divestitures during her tenure as CEO.
2014: IBM's systems and technology business, which sells mainframes, servers, and other hardware, fell 26 percent to $4.3 billion in the fourth quarter, while cloud-related revenue rose 69 percent to $4.4 billion.
IBM sold its PC business years to Lenovo in 2005, in its first big move away from computer hardware. Also got rid of x86 server business, not making semiconductor chips.
Getting rid of old products is not a new strategy for IBM. Over the years, the company has spun off typewriters, copiers, printers, satellite communications, networking services, and hard disk drives, as well as PCs, servers, and perhaps now chips.
"Reinvention is not about protecting your past. We did hardware for 60 years. Don't protect your past, and don't define yourself as a product." — IBM CEO
As "Lex," the influential but anonymous columnist for the Financial Times, puts it: "When IBM sees profit draining away, it sells, and its timing is usually good."
Digital not enough: all companies will be digital
Cloud, big data, mobility,
Future: cognitive is the future, esp intelligence platform Watson and its applications.
"The people who influence us the most are outside. They take complexity and make it simple. That has a huge influence. If we can’t tell a customer exactly what is in their account after a 25 year relationship with them, but they can ask Google and find out something in 3 nanoseconds, how would we look?" — Stumpf
IBM's application business behind SAP and Oracle, ahead of Microsoft (excluding sales of Office)
How 20th century business becomes relevant in 21st century: 3M
Show at Milan Design Week
Show at SXSW
21st century business models: how the Internet of Things changes everything
Internet of Things (IoT) has huge implications for business model innovation
fundamentally rethink value creation and value capture
Value creation, which involves performing activities that increase the value of a company’s offering and encourage customer willingness to pay, is the heart of any business model.
In traditional product companies, creating value meant identifying enduring customer needs and manufacturing well-engineered solutions. Competition was largely feature-versus-feature warfare. And when feature innovation eventually proved to be too incremental, price competition would ensue, and products would become obsolete. Two hundred and fifty years after the start of the Industrial Revolution, this pattern of activity plays out every day, at your local big box electronics retailer or department store.
But in a connected world, products are no longer one-and-done. Thanks to over-the-air updates, new features and functionality can be pushed to the customer on a regular basis. The ability to track products in use makes it possible to respond to customer behavior. And of course, products can now be connected with other products, leading to new analytics and new services for more effective forecasting, process optimization, and customer service experiences. A variety of consumer products and services, from Nest thermostats to Philips Hue lightbulbs to If This Then That (IFTTT), highlight these new possibilities for IoT-based value creation.
Albert Shum, Partner Director of UX Design at Microsoft, notes: “Business models are about creating experiences of value. And with the IoT, you can really look at how the customer looks at an experience—from when I’m walking through a store, buying a product, and using it—and ultimately figure out what more can I do with it and what service can renew the experience and give it new life.” To foster a conversation about the potential implications of connected experiences for designers, technologists, and business people, Albert’s team at Microsoft recently released a short film documentary called “Connecting: Makers.”
Just like value creation, connecting to the cloud forces a new mindset around value capture, the monetization of customer value. At most product companies, value capture has been as simple as setting the right price to maximize profits from discrete product sales. Sometimes this is done creatively, as with the razor-and-blades model made famous by Gillette. Margins are maximized to the extent that companies leverage core capabilities in bringing products to market, and are able to establish control of key points in the value chain, for example regarding commodity costs, patents, or brand strength. Here are some ways to shift your thinking when it comes to both value creation and capture:
However, making money in the connected space is not limited to physical product sales; other revenue streams become possible after the initial product sale, including value-added services, subscriptions, and apps, which can easily exceed the initial purchase price. In a recent conversation, Renee DiResta, a Principal at O’Reilly AlphaTech Ventures, noted: “Things that generate recurring revenue are actually more appealing to venture capitalists. Otherwise, the business model is banking on the hope that prospective customers will be loyal and be compelled enough to come back to buy the second product.”
Options for control points also expand through the IoT. Customers can become “locked in” due to personalization and context gained through information gained over time, and network effects scale as more products join a platform. Equally important, firms’ efforts to develop their core capabilities change focus to emphasize growing partnerships, not always build internal capabilities—so that understanding how others in the ecosystem make money becomes important to long-term success. Zach Supalla, the CEO of Spark (an open source IoT platform), says, “With the IoT, you can’t think of a company in a vacuum. The market stack is deeper than traditional products; you need to think about how your company will monetize your product and how your product will allow others to generate and collect value, too.”
In his classic book Competitive Strategy, Michael Porter describes three generic strategies: differentiation, cost leadership, and focus. For some industries, those basic strategies still hold true today. But in industries that are becoming connected, differentiation, cost, and focus are no longer mutually exclusive; rather, they can be mutually reinforcing in creating and capturing value. If your company is an incumbent firm that built its kingdom through a traditional product-based business model, be concerned as your competition and disruption-minded start-ups take advantage of the IoT.
Gordon Hui leads the Business Design & Strategy practice at Smart Design, a design and innovation consultancy with studios in New York, San Francisco, and London. Follow him on Twitter @gordonhui.
How 20th century business stays relevant in 21st century: play for time the Prius way
Thomas Edison’s lightbulb ushered out the gaslight era as completely as it ushered in the age of electric power.
But the gas companies didn’t fall victim to disruption immediately, and it could be argued they never entirely succumbed.
When Edison’s invention first threatened gas lighting, incumbent firms borrowed the filament technology from the electric bulb to improve the efficiency of their gas lighting fivefold, starving Edison’s new company of profits for 12 years and nearly bankrupting him. Experts in disruptive innovation point to that kind of move to bolster a doomed technology as the last gasp of a dying industry, and of course they’re right: Edison and electric lighting prevailed in the end. But by the time the disruption was complete, gas companies, having bought themselves more than a decade of breathing room with their gas-powered lightbulb, had prepared a profitable exit into the adjacent heating business.
Responding to disruptive innovation = great challenge:
1. disruption can sneak up and quickly destroy their business.
2. Yet, experience tells them that disruptions can take years, sometimes decades, to play out.
3. sometimes those that threaten—flying cars and robot maids, for example—never occur at all.
Research shows that as many companies move too early to adopt disruptive technologies as move too late. Both approaches waste resources, squandering competitive advantage and critical growth opportunities. So how can leaders manage the uncertain transition period from one technology, service, or business model to a newer, sometimes disruptive one?
About the Research
Our research into hybrids, which is ongoing, includes a quantitative, longitudinal study of the automobile industry during the emergence of electronic fuel injection technology, specifically the manufacture of all carburetors and EFI products during this period. Our qualitative research consists of mini case studies of 20 hybrids in 20 industries and a factor analysis, currently under way, of more than 300 hybrids in 75 industries.
In our research, we discovered that intergenerational hybrids are an effective but largely overlooked tool that managers can use to handle this difficult transition. Hybrids combine elements from a potentially disruptive technology with the current technology to create a new product, service, or business model that sits between competing innovation generations. Contemporary examples include hybrid electric vehicles, which combine elements from both internal combustion and electric engines (like the Toyota Prius), and hybrid cloud-computing architectures, which combine cloud and local computing (MS Office 365).
In examining companies that have successfully used hybrids to respond to disruptors, we’ve identified seven types of hybrids, each suited to a different strategic purpose. All of them can be used to help incumbents learn about the technical aspects of disruptive innovations and which customers those innovations might best serve—or perhaps never serve. (In this article, we use the term “disruptive” to describe any major, game-changing innovation.) Many hybrids can also be used to shape the development of an innovation or its adoption prospects in the market. While in the vast majority of cases a hybrid’s purpose will be to buy time for the company to adjust to the new landscape, hybrids can occasionally be used as effective sustainable defenses to stave off disruption entirely. In the pages that follow we present a framework that managers of companies facing disruption can use to determine which hybrid to use when and how to avoid the pitfalls that trip up the unwary.
timing is everything when it comes to surviving disruption
7 hybrid types across 3 broad categories, according to the immediacy of the threat of disruption. Generally, the more mature the disruption, the likelier it is that an incumbent will employ hybrids to shape how the innovation develops; the newer and more uncertain the disruption, the likelier it is that an incumbent will employ a hybrid primarily as a learning tool. To manage a hybrid effectively, you have to know why you’re using it.
When the Disruption Is Already Well Under Way
When you’re in the midst of disruption, you already understand the nature of the threat: The damage has begun, and customers have started to defect. As an incumbent, your goal is to extend the life of your current business and buy time to make competitive adjustments. You may also be seeking to retain defensible customer segments. Three types of hybrids may help with those goals.
When a new technology emerges, incumbents frequently try—unsuccessfully—to either leap to it or defeat it. There’s a third, often superior, option.
Companies can temporarily raise the barriers to entry for a threatening technology by offering customers an appealing price/performance trade-off, as gas companies did with their hybrid lightbulb. Hard disk drive (HDD) manufacturers also used this approach when solid-state drives (SSDs) started to invade the market. At the time, solid-state drives were 3.5 times faster than hard disks—but 850% more expensive. So incumbent firms created hybrids that employed standard hard drives for general storage and solid-state ones for frequently accessed files. Although not as fast as SSDs (they were 2.5 times faster than hard disks), they were only 50% more expensive. That trade-off has been so attractive that many purchasers reversed course and have switched back from SSDs to hybrid hard drives.
While hybrid versions may not hold the SSD drives at bay forever, they have clearly delayed the disruption, allowing incumbent manufacturers more time to extract value from their existing assets, learn about SSD technologies, and prepare to make the leap to an all-SSD future.
It’s important to remember that blocking hybrids are temporary and best used when the probability of disruption to your business is high, when the capabilities needed for production and the customers likely to buy the hybrid are similar to those in the existing industry, and—most important—when the hybrid offers significantly improved performance over the old technology.
In some cases, the march of a major innovation toward the mainstream depends on complementary technology. Adoption of electric cars, for example, depends on long-lasting, high-capacity batteries and the proliferation of charging stations. A disruptor can use a hybrid to get around the lack of such complements. The Chevy Volt, for example, is billed as an electric car, but it has a small gas engine to make up for the limited number of charging stations available to date.
However, two can play at that game. An incumbent can use a complementary technology to build a hybrid that temporarily extends the life of an old technology. For example, at the beginning of the digital camera disruption, it was easy to take a digital picture but much harder to turn digital files into physical prints. Kodak adapted its photo printer systems in an attempt to extend its “razor blade” business model by shifting from selling film to selling ink and paper.
Hybrids can be used to adjust to disruption or to stave it off entirely.
Bottleneck hybrids are stopgap substitutes for critical missing complementary technologies in an ongoing disruption. As such, they create value only for as long as the ecosystem bottleneck lasts. Kodak, for instance, gained only a few years before digital printing services became popular.
While many disruptive innovations eventually take over an entire market, others will never be good enough to satisfy high-end or specialized customers. This leaves the door open for hybrids that combine features of the old and new technologies to create a permanent new product category. For example, the limited capabilities of most early digital cameras did not satisfy the high performance needs of many customers. Consequently, incumbents were able to take advantage of the stack of analog components—sensors, light meters, and light-gathering lenses—to create hybrid digital SLR cameras, which have become a major, permanent category, still dominated by incumbents such as Canon and Nikon.
End-state hybrids are most appropriate when the disruptive technology leaves an important performance dimension unsatisfied for a significant group of customers. If the hybrid employs a component that has value to customers and for which there is no substitute, it is very likely to become a permanent, profitable business.
When Disruption Has Just Begun
When a disruption is in its early stages, its direction and the extent of its impact are not yet clear. At this point, incumbents should focus less on buying time to make adjustments and more on building their knowledge. Bridging or niche hybrids can help them learn not just about the technology but also about customers’ willingness to adopt the innovation, the distribution mechanisms needed to reach interested customers, and how to serve customers who might never adopt it.
Incumbents launch this type of hybrid to learn about a new technology they intend to employ themselves. The Toyota Prius, for instance, is a bridging hybrid that is helping Toyota navigate a long period of uncertainty about electric vehicles. Toyota has used the Prius to develop in-house electric technology and build a customer base that is primed to make the switch once electric engine technologies replace combustion engine technologies in the mainstream auto market. (If electric vehicles never fully come into their own, then the Prius will in fact be an end-state hybrid.) As an additional benefit, bridging hybrids also often allow incumbents to shape customer perceptions of the new technology, often in their favor, much the way Toyota has shaped perceptions of electric vehicles as reliable, fuel-efficient alternatives to combustion engine cars.
When bridging hybrids require capabilities or business models new to the incumbent, they may need to be protected in a separate business unit to avoid the well-known distortions created when new technologies compete for resources with an existing business model.
Leaders may choose to respond to long, uncertain periods of disruption by serving groups of customers whose needs are not yet met by the disruptive technology. If bridging is a way to forge a path for companies to move from the old to the new technology, niche hybrids form a path for customers to move from the old offerings to the new ones.
For example, while cloud computing has proved to be a significant disruption to enterprise computing, many companies are not comfortable with the security of the cloud. Hybrid cloud services, which combine some cloud services with local computing hardware to handle sensitive data, have become a major and enduring niche and are likely to remain so until security concerns are fully addressed.
In a similar way, the immensely successful Microsoft Surface is a hybrid tablet/PC that satisfies the needs of customers who like the small size, weight, and convenience of a tablet but require the software functionality of a personal computer.
Niche hybrids are most appropriate when neither the old nor the new technology fully meets the needs of a significant group of customers—but a combination of the two could. Niche hybrids may become end-state hybrids if they employ a technology that will not be used, or satisfy a group of customers that will remain unserved, when the innovation becomes mainstream.
When Disruption Is Still a Long Way Off
When disruptions are deeply uncertain, exploratory or optimizing hybrids are most appropriate. Companies use these hybrids to gain knowledge at a point when new technologies may combine in unforeseen ways to produce disruptive innovations—or may fizzle out—and when it’s far too early to place substantial bets on any particular possible outcome.
Choosing the Right Hybrid
If disruption is under way, the challenge is to shape your company’s position to that context. If it is further off, the goal is to learn about the new technology.
HYBRID TYPE STRATEGIC PURPOSE EXAMPLE
BLOCKING Temporarily block entry of new
technology into key niches Gas lighting with filament (between gaslights and electric lightbulbs)
BOTTLENECK Overcome a key bottleneck in complementary technologies that limits adoption Kodak’s digital photo printers (when it was easy to take a digital photo but hard to turn the file into a print)
END-STATE Create a new product category that endures beyond the disruption Digital SLR cameras (with more sophisticated lenses than ordinary digital cameras)
BRIDGING Learn about the threatening technology with intent to eventually adapt to disruption Prius automobile (between gas and electric)
NICHE Satisfy a customer group whose needs are not met by existing or disruptive technology Microsoft Surface (combines a tablet’s convenience with the sophisticated software of a PC)
EXPLORATORY Explore alternatives among competing technologies to understand viability Fotosetter (replaced slugs of a traditional typesetter with a camera)
OPTIMIZING Significantly improve existing offerings by introducing elements of emerging technology HIT solar cell (between conventional silicon technology and “thin film” alternatives)
Find this and other HBR graphics in our VISUAL LIBRARY
These hybrids are used as probes to understand a new technology, often when there are competing alternatives. They are meant to explore the future, rather than to form a bridge to it—to develop a working knowledge of how a technology operates and of how customers might respond—although as the course of a disruption becomes clearer, they may eventually evolve into bridging hybrids. In the printing industry, for example, when analog phototypesetting initially emerged as a radical alternative to “hot type” (whereby lines of type were cast as “slugs” of molten lead, covered in ink, and pressed onto paper), the new optical technology offered dramatic improvements. But at first it wasn’t clear how receptive customers would be to the lower-quality technology, which was not yet able to provide a range of fonts or to space out the words and letters at anything near professional quality. Before committing one way or the other, many hot-metal typesetters produced hybrid hot metal/photo machines, such as Intertype’s Fotosetter, which worked essentially the same way as a traditional typesetting machine except that the metal slugs were replaced by a camera that photographed each row of characters separately. As clumsy as it appears in retrospect, the hybrid, invented in 1947, allowed the incumbents to learn about the new technology while extending the dominance of hot-metal typesetting for another 25 years.
These are frequently used when it’s too early to tell whether a disruptive innovation will catch on, but some element of the new technology can be combined to significantly improve the old technology. For example, in solar energy, the dominance of crystalline silicon-based technologies has long been threatened by competing alternatives, particularly amorphous silicon, which converts a lower ratio of sunlight to electricity than crystalline silicon does but at a significantly lower cost (because it uses an ultrathin layer of semiconductor material rather than the thicker, expensive crystalline cells).
While the debate about whether the “thin film” alternatives would disrupt the industry played out, some manufacturers combined the best of both technologies into a hybrid cell consisting of a silicon wafer with a thin layer of amorphous silicon that converted a much higher percentage of light than crystalline silicon alone.
Optimizing hybrids work best not only when the threat of disruption is far off but when emerging technologies can be combined with existing ones and the hybrid is targeted at the existing customer base.
Implementing a Hybrid Strategy
On the face of it, matching up the right hybrid to your company’s particular competitive situation seems relatively straightforward, but a good deal of judgment is required. Here’s a four-step process for implementing a hybrid strategy.
Step 1. Identify the type of hybrid you need.
To determine which type of hybrid is appropriate to your situation, first assess how near or far the threat of disruption is to your business and then map out your strategic goals for launching the hybrid. Is it intended to help you learn about a new technology or develop new capabilities? To gauge customers’ willingness to adopt a potentially disruptive innovation? Is its purpose to shape the future of your industry or market, and if so, how? Is it meant to bring existing customers along the path toward acceptance of the innovation? To create new demand among new customers? To preserve profits for a time? To create and lock in an ecosystem? Answering these questions will help you match the type of hybrid to your situation and strategic goals.
The biggest mistake companies make at this stage is underestimating how imminent the disruptive threat is. As a result, we’ve found, they develop long-range bridging or exploratory hybrids rather than either shifting to the disruptive innovation itself or creating a blocking hybrid to buy more time to consider an alternate path. While it is also true that even exploratory hybrids generate learning that has value, moving too late often squanders opportunities or cedes competitive advantage.
Step 2. Analyze your capabilities.
Next, determine what capabilities you need to produce the hybrid. Of those you don’t currently possess, identify which are critical to the hybrid’s value and thus should be developed in-house and which can be acquired externally.
Consider, for example, the challenges involved in developing the digital SLR camera. The incumbent camera makers possessed many of the necessary capabilities (camera design, optics, distribution) and were missing some others, notably the SLR optics technology and the digital sensor technology. But how critical was each? Maybe digital sensors would become commodity items sold by many competitors while quality optics retained their unique value—or maybe the opposite would be true. In making the call about which to develop in-house, incumbents also needed to recognize the importance of integration. If they went outside to get components, they needed to be able to absorb them into a hybrid.
As you assess your production capabilities, you also need to determine whether you can bring the hybrid to market through existing business operations or whether a new business model is required. Hybrids that leverage existing capabilities and fit into existing business models may be easier politically and operationally to develop, but strategic goals may be better served by developing new capabilities and business models. For example, another of Kodak’s hybrids, the APS, which encoded digital information into film, was enthusiastically accepted by fellow film manufacturers Fuji, Agfa, and Konica because it preserved something close to their existing film-based business model. However, while the hybrid extended the life of the old business a short while, it did little to help those firms learn about the digital-imaging future they knew they’d have to confront.
Step 3. Allocate resources.
The appropriate allocation of resources depends on your situation: If developing the hybrid will require additional technological capabilities, you’ll need to increase R&D investment; if you’re targeting new customers, you’ll need to boost marketing funding; a new business model will require investment in a new sales force and distribution channels.
Companies can go astray by authorizing a hybrid but failing to provide the necessary resources. This can be not just unfortunate but tragic. Our research shows that half-hearted investments in hybrids can lead to false negatives about impending technological threats or untapped market potential. Companies leave themselves similarly vulnerable when they slap together a hybrid but don’t invest in the critical capabilities needed to develop high performance.
Organizing for Hybrids
A company’s existing capabilities can be both an asset and a liability when developing a hybrid. If an initiative is anchored too deeply in the existing organization, chances are that development efforts will be commandeered to protect the status quo rather than employed to adapt to a disruption. At the same time, cordoning off the initiative from the rest of the company also closes it off from a rich store of experience and knowledge. The best way to produce a hybrid is to use a hybrid organizational approach.
Start by analyzing the need for “tethers.” Ask yourself, How might different parts of the hybrid organization benefit from being tethered—or untethered—to established functions in the company?
For example, in developing the Volt, Chevy’s hybrid unit was closely tethered to the body design and aerodynamics groups, because they had skills and technology that were applicable to both hybrids and conventional vehicles. However, the carmaker chose to untether the Volt from the drivetrain group, to allow new capabilities and innovative ideas to flourish. If at some point the Volt were to require a new business model, the hybrid unit should also be untethered from sales or finance.
For example, in the transition between carburetors and electronic fuel injection, many incumbent automakers produced a hybrid that incorporated electronic fuel feedback system (FFS) controls. This was a critical component that they did not already possess. Not accurately recognizing its importance, several companies chose to purchase FFS controls and graft them onto their carburetors rather than developing the technology in-house. This short-sighted decision, in combination with the production of a lower-performing hybrid, led many of these firms to stumble in making the transition to EFI. In fact, our empirical study of the automobile industry shows that the incumbents that developed higher-performing hybrids (relative to other hybrids) not only survived the transition but outperformed their competitors after the disruption.
Step 4. Map the product life cycle.
In the fourth step, it’s essential to carefully map out the life cycle of the hybrid. Is it meant to be permanent or temporary? If temporary (as is most often the case), what business or new offering does your company eventually need to shift to in order to stay competitive, and in what time frame?
The key challenge here is to recognize that the vast majority of hybrids will be stopgaps of some sort. This may be easy to understand intellectually, but we’ve found that companies can get as attached to hybrids as they are to their original offerings. Since it’s often easier for an organization politically to accept a hybrid than to move to a disruptive innovation that destroys the existing business model, the temptation to consider only permanent alternatives is very high.
We’ve observed that this dynamic takes two forms. First, companies get so attached to temporary hybrids that they fail to use them as a stepping stone to adoption of the new technology. Second, companies choose to develop end-state or niche hybrids as a sustainable, permanent business, even though the market it serves is too small to make up the business lost to disruption. Rather than using the hybrid to buy time for a graceful adjustment to changing market conditions, firms embark on a doomed attempt to preserve the margins of their current business model. This flight upmarket to an unsustainably small niche is the classic mistake incumbents make in the face of disruptive threats.
A different problem arises with hybrids whose purpose is primarily to enable learning (optimizing and exploratory hybrids, as well as most bridging hybrids). It’s important that these hybrids be treated as experiments and not permanent new businesses.
Ultimately, our research shows that firms that try to learn about and embrace the future do better than those that try to preserve the old business model. They get the most strategic value from their hybrid efforts in the present and are well-positioned to transition successfully to the next generation.
Incumbents might revel in stories like the cautionary tale of upstart MIPS Computer Systems, which came to market in 1984 with a revolutionary new microprocessor that used something called “reduced instruction-set computing,” or RISC. A classic disruptive innovation, it was both simpler and less costly than the prevailing CISC (or complex instruction set computing) microprocessing chips made by market leader Intel. As MIPS and Sun Microsystems gathered momentum with RISC, industry pundits began to talk about imminent disruption. But rather than ignore the threat or concede the market, Intel responded in 1995 with the Pentium P6, which was essentially a CISC–RISC end-state hybrid that combined the best attributes of both technologies. Most chips in computers today are made this way.
Two points stand out about this story. The first is the timing: The gap between the introduction of the disruptive RISC technology and the success of the hybrid defense was a full nine years. While some disruptions are certainly swift and complete, many more play out over years or even decades, giving strategists, product developers, and executives time to plan a considered response.
Second, this Goliath-over-disruptive-David story is dramatic partly because it is so rare. Most hybrids will not become major new product categories. That is not their purpose. At their core, hybrids are temporary tools that offer an alternative to the binary yes/no decision to bet the farm on a disruption and help you to bridge the long, uncertain span of a discontinuity. Used well, our research suggests, they can be good sources of profit and stepping stones to survive and prosper in the next generation.
by Nathan Furr, assistant professor of strategy at INSEAD + Daniel Snow (email@example.com), associate professor of business management at Brigham Young University.
Other interesting, but not crucial data:
Fortune's World's Most Admired Companies
There's a new AAA standard in corporate America: the one-two three punch of Apple, Alphabet, and Amazon. For the fourth time, our list of the World’s Most Admired Companies Top 50 All-Stars is led by a trio of tech giants under 40 years old. They preside over a class of blue chips and even younger tech stalwarts, such as Facebook (No. 14), Salesforce (No. 34), and Netflix, which makes a return to the Top 50 at an impressive No. 19. They also are joined by newcomers Visa and Publix, which make debuts at Nos. 47 and 49. See the full list of the Top 50 below, or use the tools at left to view all 340 companies in 54 industries.
HOW WE CONDUCT THE MOST ADMIRED SURVEY
The Most Admired list is the definitive report card on corporate reputations. Our survey partners at Korn Ferry Hay Group started with approximately 1,500 companies: the Fortune 1,000—the 1,000 largest U.S. companies ranked by revenue—and non-U.S. companies in Fortune’s Global 500 database with revenues of $10 billion or more. Korn Ferry Hay Group then selected the 15 largest for each international industry and the 10 largest for each U.S. industry, surveying a total of 652 companies from 30 countries. To create the 54 industry lists, Korn Ferry Hay Group asked executives, directors, and analysts to rate companies in their own industry on nine criteria, from investment value to social responsibility. A company’s score must rank in the top half of its industry survey to be listed.
Because of the distribution of responses, only the aggregate industry scores and ranks are published in Construction and Farm Machinery; Mining, Crude-Oil Production; and Petroleum Refining. Because of an insufficient response rate, the results for companies in the Energy: U.S., Pipelines and Trading industries are not reported.
To arrive at the top 50 Most Admired Companies overall (our “All-Stars”), Korn Ferry Hay Group asked 4,000 executives, directors, and securities analysts who had responded to the industry surveys to select the 10 companies they admired most. They chose from a list made up of the companies that ranked in the top 25% in last year’s surveys, plus those that finished in the top 20% of their industry. Anyone could vote for any company in any industry. The difference in the voting rolls is why some results can seem anomalous. For example, St. Jude Medical ranks No. 40 on the overall Most Admired list, returning after a two-year hiatus. But within the medical products and equipment subgroup, St. Jude Medical, based on its peers’ responses, missed the “Industry Standouts” cut by ranking in the bottom half of the group.
Korn Ferry Hay Group, which has conducted the research for the World's Most Admired Companies list since 1997, is a global management consulting firm. For information about Korn Ferry Hay Group's services, go to haygroup.com.
Fortune is no longer publishing the list of World's Most Admired contenders online. If you are interested in obtaining your company’s industry score and ranking, please phone or e-mail your request to Douglas Elam of Fortune's List Department. Please call Douglas at 212-522-6841 or email him at: firstname.lastname@example.org
Changing shape of business
employees own most of the assets because they are most of the assets.
That reality is affecting corporate structure. The number of U.S. corporations increased only modestly and their revenues rose 150% from 1990 to 2008, says the IRS (using the most recent available data), while the number of proprietorships and partnerships, which are owned by their managers, increased far more, and their revenues rose 394%.
The 21st-century corporation isn’t always a corporation.
Most businesses will have to create value in new ways or lose out to competitors that do so, often with Internet-enabled business models. The trend is as old as the Internet’s early days, when a slew of web insurance upstarts forced term-life premiums to plunge 50% or more—and when user-friendly hotel- and airline-booking sites put some 18,000 travel agents out of business almost overnight. Now entrepreneurs are extending the trend into physical products in sophisticated ways. Warby Parker sells high-quality eyeglasses for a small fraction of what traditional retailers charge by using a low-friction online model; private investors recently valued the firm at $1.2 billion. Even an industry that seems highly resistant to online disruption, consumer packaged goods, is threatened. Harry’s and Dollar Shave Club, which make and sell men’s grooming products online, are forcing Gillette (owned by Procter & Gamble) PG 1.48% to promote its wares on value, not just quality, for the first time.
The trend is especially frightening for even established category leaders because even if they switch to new, low-friction business models, they could still end up smaller and less profitable than they were. That’s because “some tech and tech-enabled firms destroy more value for incumbents than they create for themselves, and many gains are competed away in the form of consumer surplus,” says the McKinsey Global Institute. For example, Microsoft’s Skype service brought in some $2 billion in 2013, yet McKinsey calculates that in that year Skype transferred $37 billion away from old-guard telecom firms to consumers by giving them free or low-cost calls.
Other new business models have similar stories. San Francisco’s taxi regulator reported that the number of fares per licensed cab fell 65% from March 2012 to July 2014 as Uber, Lyft, and others entered the market. Uber—read “How Uber plays the tax shell game” from this issue—is currently valued at $51 billion by its investors. Meanwhile, the cumulative market value of every New York City taxi medallion is less than $13 billion, as Fortune reported in September.
When Airbnb entered Austin, hotel revenue dropped 8% to 10%, say Boston University researchers, and “affected hotels have responded by reducing prices, an impact that benefits all consumers, not just participants in the sharing economy.” Yet the new companies causing the disruptions collect only a fraction of what the incumbent firms lose.
The 21st-century corporation will increasingly be an idea-based business, operating not just in infotech but also in media, finance, pharmaceuticals, and other industries that consume lots of brainpower.
McKinsey finds that while “asset-light, idea-intensive sectors” generated 17% of Western companies’ profits in 1999, they generate 31% today.
The losers in that shift are capital- and labor-intensive sectors like construction, transportation, utilities, and mining. That doesn’t mean companies in those industries are doomed. As Tesla shows, they may be able to prosper if they’re reimagined.