Newtork Effects

This is a short presentation that I did for a utility company on how to survive business model disruption and how to address it from within the confines of an existing business model.

I’ve included the slides and a video talk through of them (they may not be exactly the same version) as I practiced my delivery.

The big ideas on “How to Survive Business Model Disruption” are as follows:

• Business Models have a finite life span
• When disrupted the replacing business model is significantly more profitable than the existing one
• Business model ≠ Company
• changing the business model is limited by the innovatability of the people in the company and it architectural rigidity
• Companies built on network effects are massively vulnerable to business model disruption

Business Models have a Finite Life Span

This should be fairy obvious but it isn’t. For many new innovations and business models it is clear that they are new and things are changing. Look at how taxis and streaming videos have been disrupted by Uber and Netflix bringing in new business models in the last few years.

Other business models have hung around for a while and so it seems like they are here to stay forever. Google and Facebook’s advertising based business models are examples. The business models of energy companies and utilities are others.

In all cases it is not a question of whether but of how long. Kodak famously had a business model that lasted over 100 years. It was a dominant player in both the film and camera industries from 1886 to 2005 and yet it lost 97.5% of its value in less than 5 years.

The question is how long a business model will last? There will be more thoughts on that in a later post.

New Business Models are More Valuable

Existing business models have a known value. You can look at the balance sheets and profit and loss statements and get a very clear idea about how valuable they are. For example pre 1990 you could sum the P&L statements of all taxi companies and get a sense of how valuable the industry was.

Now with Uber and Lyft IPOing you can see how the market values their business model and it is about 10X more valuable. Similarly when Rockefeller changed the oil production and distribution model, or when Google changed the search business models they created 100x the existing value.

Part of this is often to do with the fact that the economy has grown and modern business models enable more users and suppliers to be connected providing both a larger pie and a larger slice of it. However there is some observation bias here as we don’t tend to think too much about business models that disrupted and then failed. Napster, Spotify and the music industry could be a counter example

Business Model ≠ Company

The longer a company has been around without significant change in its business model the more likley that it is to consider the company synonymous with the business model. For example a water utility, say Severn Trent which used to supply me with water when I lived in the UK, can easily believe that the company exists to collect water, purify it, deliver it and then treat the sewage. That’s the business model that it has used to deliver its mission for 100 years.

Is it the only possible business model to deliver that vision? No. Many companies, IBM and HP, come to mind, have changed their business models multiple times over the last 70 years as they have sought to adapt to market disruption and changes in their business model.

Innovability and Architectural Rigidity

Lots of companies see the problems in the future and attempt to innovate out of them. Some of the companies that I know that spend most on innovation and trying to find new business models include mobile phone companies, fixed line telecom companies and utilities. They see a massive amount of change coming and need to find ways to survive their cre businesses being disrupted.

In many cases they do have innovative ideas. However they are let down by 2 factors.

First there aren’t enough change makers in the company (and if this is a problem for you do reach out as change making capacity can be significantly improved). So forcing change on people who don’t want to be changed is a tough call and normally dooms the business.

The second is that most managers are rewarded for competence and that means doing what we do cheaper and better. That increasingly makes structures and systems rigid and resistant to change. Kodak made the first digital camera in 1976 and had a 40% of the digital camera market as late as 2005 but couldn’t change what it was and how it did things in order to compete with the consumer electronic giants.

Vulnerability of Network Effects

The final thought was that many of the most valuable companies of the past 100 years have been built on network effects. So have many of the leading tech companies. This allows rapid growth and decreasing unit costs as they deliver more value.

What is critical is that surviving on network effects is very fragile. As users start to move away from the company the value disintegrates faster every day as Friendster discovered. The loss of every additional customer hurts more. That then can rapidly kill a company with a bloated cost base or which is not well configured to serve a reduced user layout. Business model disruption happens slowly then quickly, to riff off Hemingway’s phrase.

Does your company need think about how to survive business model disruption?

I’m happy to deliver this talk on how to survive business model disruption live, on site or at a webinar for your leadership team or employees to help start the change process and give people an understanding of why change is important and the costs of not changing.

• A Manifesto
• Can You Measure Disruption?
• Network Effect and Business Models
• Is Your Business Being Disrupted Infographic
• Penetrating Markets with Large Network Effects