Digital transformation, incumbents and the business model conundrum

Published on the 23/05/2018 | Written by Owen McCall


What Uber, Amazon and the Fosbury flop can teach us about innovation…

One of the most persistent findings in the literature on the organisational value of IT is that it is not the technology per se that adds value but technology’s ability to enable strategy and build distinctive capabilities that adds value to organisations. One of my favourite examples of this is Uber (because everyone needs an Uber case study).

When I look at the technology that Uber has deployed I can’t help but think that this isn’t very interesting. The core of the technology is GPS tracking, matching algorithm(s) to bring riders and drivers together, a pricing process for the trips based on time and distance, online payments and a community ratings process. No doubt Uber has a large number of very smart highly capable technical and design people who have worked extremely hard to pull all this together however, none of these technologies or techniques are particularly interesting and the technology itself is fairly easily replicated. I can tell because other companies have replicated large parts of it or are well on their way to replicating it. What is interesting is how these technologies have been used to enable a completely new and different business model from their competitors and while the technology is relatively easy to replicate, a whole new business model is considerably more difficult.

It’s not the technology per se that adds value it’s the business model and strategy the technology enables that adds value.

Amazon as an online only retailer (vs all the other things they do) provides another example. Most large retailers have replicated substantial parts of Amazon’s technology to allow them to trade and engage with their customers online. Many have gone past trading online and offer click and collect services by integrating their online capability with their real world stores, a service Amazon cannot currently provide at scale (although they have been trialling collection centres). Yes this took investment and time but it has been done and done successfully by many, yet, no large traditional retailer has been able to replicate Amazon’s core differentiator, retail without stores. Retailers have replicated the advances in technology, used these advances to modify and extend their existing business models but they have been unable to fundamentally change their historic business model to match Amazon.

There are many more examples I could use and it’s not news that nearly every industry is being impacted by advances in digital technology. Most organisations understand this and the standard organisational response to these changes has been to initiate a digital transformation programme. For most incumbent companies, that is those that were established and grew pre digital, the main focus of digital transformation is updating their existing analogue business model by digitising their key business processes. While this is necessary, you have to wonder is it enough to compete against the new and different business models that technology is enabling to enter their market and compete against them?

The rise of new business models enabled by advances in technology is a major feature of what we call digital disruption. The two major new business models are online and only service models (e.g. Amazon’s retail business) and the rise of platform businesses, or online marketplaces, which facilitate buyers and sellers coming together (Think Uber or Airbnb or TradeMe or Amazon’s Marketplace). In the end the question incumbents need to answer may not be how can I use technology to enable and extend my core business model but can my analogue business model compete with the new and emerging business models.

To get my head around the challenge of competing against new and emerging business models I like to think of Dick Fosbury. Fosbury was the inventor/innovator of the Fosbury flop and he successfully used this technique to win a gold medal in the high jump at the Mexico Olympics in 1968. Early in Fosbury’s career the straddle was the dominant high jumping technique. Fosbury was an okay, but not great high jumper using the straddle and he struggled to qualify for many key athletic events. In an effort to improve his jumping Fosbury began to experiment with alternative jumping styles. Over time these experiments evolved to what we now know as the Fosbury flop and as he refined the technique he began to jump higher and higher and eventually won the Olympic gold.

Today the Fosbury flop is the standard high jumping technique used around the world. Every high jumper of note uses it and since 1972 all Olympic medallists except two have used the Fosbury flop. Today if you were a high jumper who used the straddle technique it wouldn’t matter how good an athlete you are or how much work you put into refining and improving your straddle technique, it is highly unlikely you could compete and win a world class high jump competition because the Fosbury Flop is simply a better technique than the straddle and all previous high jump techniques.

So back to business models. The major risk that traditional analogue businesses have is that their core business model is like the straddle and it is about to be replaced by superior digitally enabled business models, just like the straddle has been replaced by the Fosbury Flop. If this is the case it doesn’t matter how much we work on enabling and extending our existing business model it is unlikely to ever be enough to close the gaps to the superior business model. It simply isn’t a fair fight.

As a result the answer seems to be you need to focus on changing your business model i.e. you need to learn the Fosbury Flop, so that you at least have a level playing field and maybe even have an advantage?  The problem is this is really hard to do.  Indeed according to Clayton Christensen and others it’s extremely difficult to damn near impossible to change an incumbent mature organisations business model.

The basic rationale for why it is extremely difficult for individual established businesses to recreate their business model is that as businesses evolve they create a series of interdependencies that are critical to their success and at the same time limit their ability to change.  They conclude “Business models by their very nature are designed not to change, and they become less flexible and more resistant to change as they develop over time.” ( If you’d like to know more you can find it in their article “The Hard Truth About Business Model Innovation“).

Their conclusion is not to try and pursue business model innovation at the business unit level but to pursue it at a corporate level where the corporate entity invests in multiple independent businesses or business units who develop and utilise significantly different business models.  Under this scenario the corporate entity is an investor in a portfolio of businesses rather than the executive leading the incumbent business. The corporate entity needs to invest in multiple businesses from start ups, who are forming their business model, to mature efficiency driven businesses.

Organising this way to support business model innovation is in its early days but you can see some interesting corporate models emerging that seem to be following this advice.  While they haven’t stated it publicly I think Alphabet is  a great example of this in the way that it has reorganised itself as an investing corporate overseeing multiple businesses ranging from the relatively mature Google to startups in all manner of things, which are largely managed independently and left to find their own way.  It remains to be seen how successful they will be in the long term but I like the move and I am not about to bet against Google.

Most of us are not Google of course and we are in the situation of managing an incumbent business, that while historically successful and currently profitable is under attack from disruptors, or is likely to be under attack very soon.  If this is you then consider the following actions:

  • Actively pursue updating and extending your incumbent businesses existing business model by investing in digital technologies that make sense to you and your customers.  This is “traditional” digital transformation and doesn’t seek to fundamentally change the business model, rather it seeks to update the existing business model to digital times. This may include improving online engagement with customers, digitally enriching your products, automating core business processes for improved business efficiency.
  • Establish a portfolio fund at the corporate level that is available to you to invest in new businesses with alternative business models.  Don’t worry too much about the size of the fund to begin with, there is a lot to learn and it is likely to be better to learn with a relatively small initial investment.
  • Review and understand what alternative business models may be relevant to your industry and to your customers. Consider:
    • Are these business model alternatives feasible?  Pay particular attention to platform / marketplace options and online only service models, the two big models of the digital age.
    • What constraints currently exist that would make them difficult?  How could you remove them? (remember Uber didn’t wait for regulations, would your new entrants?)
    • If they are feasible could you incubate a start-up as an independent business?
      • How would you organise this?
      • What investment would be required?
      • Would you need a pre start-up experimental phase?
      • What skills and capabilities would be required?
    • Identify the early stage companies who are in your space or could be in your space and who may be disruptive to you.  Are they worth investing in or buying outright?

Do these things on an ongoing basis and you will begin to reposition yourself, flatten the playing field and maybe be in a position to create your own competitive advantage.


Owen McCallABOUT OWEN McCALL//

Passionate about using technology to make a real difference to businesses, communities, families and individuals, Owen McCall has focused his career on understanding and answering this question: “How do you harness the power of IT to deliver value?”
An independent IT consultant, he is a former CIO of The Warehouse.

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