The-Best-New-Business-Models-Leverage-Disruption-&-Unlock-Success
01 23 19

Featured, ExO Orgs

The Best New Business Models Leverage Disruption & Unlock Success

Written By

Mike Lingle

9 min read

Technology, infrastructure, and governance are just some of the factors responsible for shaping any new business model. But what does it really take for an organization to leverage a new model, disrupt an industry, and find global success?

The-Best-New-Business-Models-Leverage-Disruption-&-Unlock-Success

I saw Fred Wilson on a discussion panel in 2013, and he said that most of the low-hanging fruit had already been picked by entrepreneurs. His point was that the new batch of startups (Airbnb and Uber at the time) were tackling regulated industries, and that this was a different, more difficult process.

 Fast forward to 2018 and I saw one of my colleagues at ExO Works present this slide, which is a modified version of Stewart Brand’s “Pace Layering” analysis:Layers of Change Social and Economic Systems Graphic

Graphic courtesy of http://www.grantcraft.org/takeaways/layers-of-change

 

Let’s unpack this piece by piece:

  1. The different layers move at different speeds

  2. The rate of change is increasing, at least in the outer layers

  3. Business models are disruptive (not the technologies that unlock them)

  4. Infrastructure and regulation play a major role in the adoption of new business models (if you let them)

  5. How cool is Brian Eno?

 


 

1. The different layers move at different speeds

The key insight from our "Pace Layering" chart is that the different layers move at different speeds, and that technology is evolving at the fastest rate of them all.

We get very excited—and often fearful—about new technology. Everything is changing so quickly, which creates both an opportunity and a threat. Airbnb can offer millions of rooms worldwide without owning any hotels or hiring any hotel staff! But robots will steal all of our jobs!

Moore’s Law states that computing power doubles every 18 months while the cost drops by half.

Other technologies follow similar growth curves, but at different rates.

Solar energy capacity doubles every 2 years.

Battery density doubles at a much slower rate, which is why all of our homes aren’t powered by solar. Yet.

Governments, on the other hand, still function more or less like they did in the 1900s, and at more or less the same speed.

Reid Hoffman, founder of LinkedIn and author of Blitzscaling says:

“Blitzscaling companies grow so quickly that they often become key players in society before they've had time to fully mature...the default impulse is often to call for the creation of a new regulatory agency, but government regulation alone has proven too slow to keep up with the rapid changes of blitzscaling."

Fred Wilson’s comment about regulation was an acknowledgement that the governance layer changes more slowly than the technology and business model layers. This explains Uber’s strategy of working around the regulators—either by ignoring or actively avoiding them—until governments start fighting back.

This also explains why the corporate immune system is so effective at killing innovation. Technology and new business models get all the attention, but infrastructure and governance have most of the power, despite moving more slowly.

 

2. The rate of change is increasing, at least in the outer layers

Each technology follows its own exponential curve, which means that at regular intervals it will double in capacity while halving in price. This doubling starts off small, because two times a very small number is still a very small number.

But if you double something enough times, it starts to become very large. So when our computer chips double in capacity now, we see a tremendous increase in calculations per second.

Moore’s law has been working its magic for almost a century now, meaning that each new doubling is GIGANTIC! The iPhone in my pocket today is incredibly fast, and in two years my new iPhone will be more than twice as powerful.

This is happening with every digital technology at the same time:

  • AI

  • Robotics

  • 3D Printing

  • AR / VR

  • Drones

  • Data Science

  • Digital Biology

  • Blockchain

  • Autonomous Vehicles

  • Nanotechnology

  • Quantum Computing

  • Solar Energy

  • Batteries

  • Computing

  • Network Bandwidth

  • Etc.

An amazing characteristic of digital technology is that price tend to trend toward zero as capacity climbs towards infinity.

We have multiple digital technologies all hitting the bend of this exponential curve at the same time. The rate of change is increasing—which creates both massive opportunities and tremendous threats.

Will the governance layer keep up?

Startups are able to threaten larger players because they don’t have an internal governance layer to slow them down, and they’re often willing to ignore external regulators for as long as they can. This puts big, successful companies in the position of battling a sea of smaller players—each focused on only one aspect of their business. The cumulative effect is death by a thousand small cuts.

Here’s a map of the 250 most promising fintech startups of 2018 as ranked by CB Insights. 

"We are all coming to eat your lunch!"

2018 Fintech 250 MarketCredit: https://www.cbinsights.com/research/fintech-250-startups-most-promising/ 

Will every one of these startups succeed? Of course not!

But will a few of them be wildly successful? Yes!

Are big financial services firms feeling nervous and overwhelmed? Yes!

 

3. Business models are disruptive (not the technologies that unlock them)

Advances in technology unlock new business models—and it’s these new business models which are disruptive. Technology on its own is just a tool.

Uber didn’t have to invent a new kind of taxi to decimate the industry. All they had to do was change the business model.

First, Uber dramatically improved the customer experience while making it easier for drivers to find riders. Then they figured out how to rapidly increase their global reach without having to hire drivers or purchase automobiles (Uber did try leasing cars to their drivers, but eventually closed the division because owning vehicles is too expensive).

Here’s a great overview of Uber’s business model from CB Insights if you want to learn more.

The same is true of Airbnb: They didn’t have to invent a new type of hotel. Instead, they used technology to unlock a new business model that makes empty bedrooms around the world available for a fee.

What about Amazon Web Services? Hosted servers were already popular back when Rackspace was king—but Amazon used technology to change the business model. They stopped requiring each customer to have their own server, and instead allowed customers to share servers and only use—and pay for—exactly as much capacity as they needed. Amazon used technology to improve the customer experience while dropping the price and unlocking a disruptive business model.

Large companies tend to struggle with new business models. In fact, large companies are successful precisely because of their single-minded focus on what’s already been proven successful. They just keep optimizing in order to win. This strategy works—until it doesn’t, and history is littered with companies that didn’t make the shift to new business models in time.

Compare this to Netflix, which used technology to unlock a disruptive business model for DVD rentals that skipped the late fees and eventually put Blockbuster out of business. Blockbuster collected $800 million in late fees in 2000—about 16% of total revenue—while booking a net loss of -$75.9 million for that same year. By 2010, the year that Blockbuster filed for bankruptcy, “those late fees had plunged to $134 million, or just 3 percent of the company's revenue.” Blockbuster’s company value had cratered to just $24 million, from a high of $8 billion.

This made Netflix the king of DVD rentals! At this point, most successful companies would double-down on what was clearly working. But Netflix saw the writing on the wall and was already experimenting with streaming. They successfully made the jump when the time came, and then they made another business model shift when they started producing their own content (although, to this day, they'll still ship DVDs—which is amazing to me).

If we think of Netflix’s massive transformative purpose as “Delivering world-class entertainment to our customers, wherever they may be,” we can then see how they felt comfortable making these massive changes to their business model.

 

4. Infrastructure and regulation play a major role in the adoption of new business models (if you let them)

The infrastructure and regulation layers evolve more slowly, and we see the friction increasing as the technology and business model layers start moving faster and faster. This is the new normal.

The true genius of Airbnb, Uber, Waze, and others is that they were able to change the behavior of millions of people without building any new physical infrastructure and without rewriting any laws.

It’s no accident that both Uber and Airbnb ignored—and in Uber’s case intentionally avoided—regulators. Their strategy was to spread as quickly as possible, in the expectation that their happy users would demand that the regulators cooperate. This plan has mostly worked.

Airbnb creates their inventory out of underused infrastructure. Every time Hyatt wants to add a hotel room, they have to build or buy a new hotel. The cost is immense. Airbnb figured out how to add new rooms essentially for free, simply by convincing more people to make their empty bedrooms available. Airbnb’s disruptive business model also allows them to avoid the costs of staffing and maintaining physical hotels.

I was on a team working to help Miami solve traffic. We used a modified ExO Sprint, and spent the first few weeks meeting with both public and private groups working on the problem, including the mayor of Miami-Dade County and heads of the department of transportation. I was impressed with the number of people who have been actively attacking this issue for years—but it also depressed me because traffic is getting worse rather than better. The basic problem is that the number of cars is growing faster than capacity, and population growth is projected to make the problem worse.

It’s hard to build new roads in a modern city, because all of the empty space is spoken for. It’s also very expensive. We had the backing of the local government, but they had been fighting over budgets and right-of-ways for over a decade with little progress.

We figured out pretty quickly that we couldn’t depend on new infrastructure or regulations as solutions. In fact, they would only slow us down.

We realized that the key metric is the average number of passengers per vehicle, which  currently hovers around 1.1 in Miami. The solution to the problem is to incentivize more people to share rides—and it’s doable without creating new infrastructure or changing existing laws.

We can move faster by designing our business model to intentionally avoid the governance and infrastructure layers.

 

5. How cool is Brian Eno?

If you haven’t heard of Brian Eno, he’s a musician who produced albums by Talking Heads, David Bowie, U2, Coldplay, Sinéad O'Connor, James Blake (a favorite of Kanye West), and of course, Devo.

Why am I mentioning him?

Stewart Brand says, “I first created the [pace layering] diagram with Brian Eno at his studio in London in ­­­­1996.”

So not only has Brian Eno been involved in creating decades of amazing music—he’s also a driving force in understanding how society evolves. How cool is Brian Eno?

 

Where do new business models come from?

The key takeaway is that the increasing pace of technology means that new business models are being unlocked more and more quickly. And this affects all of our lines of business.

Pascal Finette of Singularity University says it best:

 

“When it comes to future investments – the kind of investment which would allow an incumbent to leapfrog, leverage their often substantial resources and in-depth knowledge pools, and crush any startup, they tend to be held back by (1) a deep-rooted fear of the new cannibalizing the old and (2) an equally strong desire to keep leveraging the status quo instead of creating new capabilities.”

 

I would add that new business models are being developed at an increasing rate, and each has the potential to disrupt big, successful players who don’t adapt quickly enough. This is the true threat facing all of us.

It’s also the opportunity for smart companies to adapt their cultures and extend their leadership positions.

Paqui Casanueva, CEO of INTERprotección, talks about why his company chose to run an ExO Sprint in 2016:

 

“We had been 40 years in the industry, and we were market leaders. Then we started to see startups enter our space. Did we want to sit still and watch ourselves be disrupted? Or did we want to enjoy the ride and start to disrupt our own industry?”

 

The result was a 2.5x increase in revenue after running the ExO Sprint, and the ability to create and deploy a new insurance product—with a new business model—within 72 hours of the devastating Pueblo earthquake that rocked Mexico City in 2017. They helped people in need who had previously been uninsured—for free—and then they saw a 36% conversion to paid plans.

Paqui goes on to say, “Prior to the Sprint, we weren’t accustomed to being so responsive so quickly.”

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