Let’s face it: business models are less durable than they used to be. The basic rules of the game for creating and capturing economic value were once fixed in place for years, even decades, as companies tried to execute the same business models better than their competitors did. But now, business models are subject to rapid displacement, disruption, and, in extreme cases, outright destruction. Consider a few examples:
- Bitcoin bypasses traditional banks and clearinghouses with blockchain technology.
- Coursera and edX, among others, threaten business schools with massive open online courses (MOOCs).
- Tencent outcompetes in Internet services through microtransactions.
- Uber sidesteps the license system that protects taxicab franchises in cities around the world.
The examples are numerous—and familiar. But what’s less familiar is how, exactly, new entrants achieve their disruptive power. What enables them to skirt constraints and exploit unseen possibilities? In short, what’s the process of business-model innovation?
For incumbents, this kind of innovation is notoriously hard. Some struggle merely to recognize the possibilities. Others shrink from cannibalizing profit streams. Still others tinker and tweak—but rarely change—the rules of the game. Should it be so difficult for established companies to innovate in their business models? What approach would allow incumbents to overturn the conventions of their industries before others do? Our work with companies in telecommunications, maritime shipping, financial services, and hospitality, among other sectors, suggests that established players can disrupt traditional ways of doing business by reframing the constraining beliefs that underlie the prevailing modes of value creation.2This article shows how.
Every industry is built around long-standing, often implicit, beliefs about how to make money. In retail, for example, it’s believed that purchasing power and format determine the bottom line. In telecommunications, customer retention and average revenue per user are seen as fundamental. Success in pharmaceuticals is believed to depend on the time needed to obtain approval from the US Food and Drug Administration. Assets and regulations define returns in oil and gas. In the media industry, hits drive profitability. And so on.
These governing beliefs reflect widely shared notions about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered inviolable—until someone comes along to violate them. Almost always, it’s an attacker from outside the industry. But while new entrants capture the headlines, industry insiders, who often have a clear sense of what drives profitability, are well positioned to play this game, too.
How can incumbents do so? In a nutshell, the process begins with identifying an industry’s foremost belief about value creation and then articulating the notions that support this belief. By turning one of these underlying notions on its head—reframing it—incumbents can look for new forms and mechanisms to create value. When this approach works, it’s like toppling a stool by pulling one of the legs.
The fuller process and the questions to ask along the way look like this:
1. Outline the dominant business model in your industry. What are the long-held core beliefs about how to create value? For instance, in financial services, scale is regarded as crucial to profitability.
2. Dissect the most important long-held belief into its supporting notions. How do notions about customer needs and interactions, technology, regulation, business economics, and ways of operating underpin the core belief? For instance, financial-services players assume that customers prefer automated, low-cost interfaces requiring scale. Because the IT underpinning financial services has major scale advantages, most of a provider’s cost base is fixed. Furthermore, the appropriate level of risk management is possible only beyond a certain size of business.
3. Turn an underlying belief on its head. Formulate a radical new hypothesis, one that no one wants to believe—at least no one currently in your industry. For instance, what if a financial-services provider’s IT could be based almost entirely in the cloud, drastically reducing the minimum economic scale? Examples of companies that have turned an industry belief on its head include the following:
- Target: What if people who shopped in discount stores would pay extra for designer products?
- Apple: What if consumers want to buy electronics in stores, even after Dell educated them to prefer direct buying?
- Palantir: What if advanced analytics could replace part of human intelligence?
- Philips Lighting: What if LED technology puts an end to the lighting industry as a replacement business?
- Amazon Web Services: What if you don’t need to own infrastructure yourself?
- TSMC: What if you don’t need to develop your own process technology or invest in your own infrastructure?
- Amazon Mechanical Turk, TaskRabbit, and Wikipedia: What if you can get stuff done in chunks by accessing a global workforce in small increments?
4. Sanity-test your reframe. Many reframed beliefs will just be nonsense. Applying a reframe that has already proved itself in another industry greatly enhances your prospects of hitting on something that makes business sense. Business-model innovations, unlike product and service ones, travel well from industry to industry: Airbnb inspires Uber inspires Peerby. So look again at the reframes described in step three above. All of them have broad application across industries.
5. Translate the reframed belief into your industry’s new business model. Typically, once companies arrive at a reframe, the new mechanism for creating value suggests itself—a new way to interact with customers, organize your operating model, leverage your resources, or capture income. Of course, companies then need to transition from their existing business model to the new one, and that often requires considerable nerve and sophisticated timing.