Despite what a number of highly persistent myths would have us believe, the digital revolution will not inevitably lead to the demise of traditional incumbents, those longstanding “analog” companies that predate the revolution. On the contrary, it’s perfectly possible for established incumbents to not just survive, but thrive in the digital age. To do so, however, they must be willing to embrace the challenging task of disrupting themselves, before someone else does it for them.
One of the most important aspects of self-disruption is identifying and implementing new business models, but for many incumbents who have been well served by traditional, unchanging business models for decades, this is easier said than done. How can companies know what alternative business models would best suit them, and how can they ensure that the new model is implemented successfully? These questions have been asked so often by incumbent leaders that it’s given rise to a new term: “the incumbent’s conundrum,” coined by the World Economic Forum’s Digital Transformation Initiative.
For incumbents struggling with this puzzle, a white paper from the Digital Transformation Initiative offers a helpful guide to five of the most common and useful approaches to business model disruption for incumbents. These include:
For incumbents who are willing and able to take on the challenge, building a brand new business model can be the best way to ensure maximum control and minimum cost in key strategic markets. This approach is best for companies who can demonstrate clear links between digital transformation opportunities and their core business, who have the opportunity and resources to hire the necessary talent to design and implement the business model, and who operate in markets where the inflection point has not yet been reached. In choosing the build approach, incumbents can leverage critical tools like algorithms and machine learning to create new products and services, and can drive innovation through incentive competitions or gaming mechanisms.
An excellent example of an incumbent that achieved a successful digital transformation by building a new business model is General Electric (GE). Once focused on selling industrial hardware and associated repair services, GE radically overhauled its business model in 2011, moving away from pure sales to an outcome-based business model that uses big data and analytics to optimize asset performance and operations. The company has come so far in terms of its digital capabilities that it recently announced the goal of becoming a top 10 software company by 2020.
When incumbents are unable to build new business models themselves—whether because the market inflection point is too close, the right talent is not available, or the digital transformation opportunity is too different from the company’s core activities—the next-best option is often to buy another company. Acquiring a digitally disruptive startup, particularly at the moment when it is about to gain significant market traction, helps incumbents minimize the investment needed, gain an edge on the competition, and maintain their strategic ownership of a particular market.
After such an acquisition, large companies often choose to maintain the entrepreneurial spirit of the startup by not insisting on its full integration into the acquiring company, but rather keeping it somewhat independent from core operations. For example, when the IT company Cisco bought Meraki, which now constitutes its cloud network business, the acquisition was successful due to the strong separation that Cisco maintained between the innovative young company and the core activities of the “mother ship.”
It’s not always strategically important for incumbents to own the digitally disruptive startups they are seeking to leverage. Sometimes, a partnership provides the best opportunity for incumbents to learn more about the market, the partner’s business model, and emerging opportunities, while keeping open the possibility of a deeper partnership or an acquisition in the future. However, to see successful results from this approach, incumbents must be ready to have a flexible and open mindset about what the partnership will look like and how it will function. Digitally native disruptors are often interested in non-traditional partnerships such as “coopetition,” which conventional companies may be less familiar with.
If all that an incumbent requires at the moment is to connect more closely with the right skills and capabilities, investing in promising startups is an entirely appropriate option. This allows the incumbent to have an eye on the future by maintaining a stake in the startup, while not undermining the startup’s agility, velocity, and willingness to experiment. These qualities can sometimes be hindered in partnerships or other relationships where the setup is too focused on internal governance and reporting.
This approach may seem at first to be similar to investment, but incubation and acceleration typically represent a closer relationship between the startup and the funding company, while investment involves more external innovation and corporate independence. In an incubation scenario, more corporate internal capabilities, resources, and infrastructure are deployed to the startup. This approach also allows incumbents to disrupt themselves from within via internal incubators, which encourage and facilitate “intrapreneurship” on the part of existing employees. But whether the incubator or accelerator is internal or external, it’s important for benefits, incentives, and the strategy and vision to be clearly outlined.