Is Your Business Model Disruptive?

In MANAGEMENT TIPS 26, 28 and 35, we tackled the topic of the business model. In DG 39 we will deal with disruptive strategies. Let’s talk a little bit about disruptive business models.

You’ve probably heard of Nubank, Spotify, Uber, Netflix, and Airbnb in the credit card, music, passenger transportation, movies, and hosting sectors, respectively.

Nubank is a Brazilian startup that issues and manages a credit card that doesn’t charge an annual fee or transaction fees. The company is able to offer savings to its customers by using 100% digital channels.

Spotify is a digital music service that provides access to millions of songs. It invests heavily in artificial intelligence (AI) to suggest artists, songs, etc., to its users. AI interprets a customer’s profile so as to make better suggestions.

Uber is an application for mobile devices, provided by an American multinational, that puts users in direct contact with drivers of passenger vehicles. The main competitive advantage of this service is the geolocation of users’ cell phones.

Netflix is one of the largest streaming media services in the world. Currently, the service has thousands of movies and TV series in its catalogue that can be viewed on various platforms, such as laptops, tablets, smartphones, video game consoles, and of course, regular TVs.

Airbnb is a website that enables communication between travelers from around the world and home owners. The main advantage of this service is the range of options — for not much money you can get a nice place to stay.

What do these businesses have in common?

That’s right: They all have a disruptive business model.

As we saw in previous weeks, a business model describes how to deliver value to a company’s stakeholders, such as its shareholders, customers, etc. As such, the business model is related to a company’s strategy, including its market price calculus, the decision behind its market segment, and the choice of channels it will use to communicate with that segment.

A disruptive business model is one that makes a company’s competition irrelevant  by obsoleting the “tried and true” methods of that business.

Disruptive business models are, as we see in the above examples, usually anchored in innovative technologies offering financial environments that are unprecedented, more secure, more affordable, and global. They take a business that has been stagnant for decades and improve it, transform it, make it more transparent, and bring it closer to consumers.
In analyzing disruptive businesses, it is easy to see that technology companies have reconfigured traditional sectors of the economy. “Disruptive businesses” are enterprises that start with a disruptive idea that offers innovative products or services, brings benefits to the consumer, and has the capacity to transform its market.

An application that enables users to call a private driver, rent a room without relying on hotels, and do their banking without having to go to a physical branch are, as we have seen, examples of disruptive business.

Business are changing reality, whether by introducing a new way of conducting business, of completing some process, of transacting, or identifying a new market. They bring to the market something that did not exist before, but that will become part of the daily lives of market participants.

Other examples of technologies that gave rise to disruptive businesses are internet search engines and smartphones with touch screens, both of which have created new markets. They are ideas that alter the existing reality — for example, the private car app that has provoked protests of taxi drivers around the world.

If innovation adds value and brings benefits to people, such as comfort, well-being and satisfaction, the market will not wait for the appropriate legislation. If a solution exists, the market will employ it posthaste.

The disruption dynamic has been happening for a long time. There are financial service startups with the power to make banks obsolete and real estate leasing apps that interfere in the real estate market. Disruption has been around since the beginning of business. It is the speed with which disruption is occurring that has changed.

The vehicle leasing application is an example of a disruptive business. The app allows a person to rent a car with no assistance from an agency. It is a new idea and one with the potential to change the market. It is a disruptive business premised on collaborative economics.

In renting cars, out go the rental agencies and in comes a digital platform connecting vehicle owners with potential renters. Owners advertise their vehicles with photos and data and choose how much to charge.

The platform took advantage of a new reality that aids disruption, i.e., the changing of a market: Younger generations have a different relationship with consumption. In the 1970s, 1980s and 1990s the car was almost a family member, a symbol of status and power. Younger generations have come to see a car as more of a service.

Today, there are many more people willing to be part of the so-called “collaborative economy.” This is the main premise of these apps. Negotiation takes place directly between users.

And we have more news in this field. Elements with the potential for disruption include bitcoin, the digital currency transacted without the regulation of financial authorities; electric cars from Tesla and other companies with a range of 400 km (248.5 mi); autonomous vehicles, the self-guided cars that will be made available to the general public by 2020; and drones delivering purchases.

How do you develop a disruptive business model?

Two tips: Pay attention to the evolution of technology and consumer behavior.

As established companies are keen on security and are usually conservative, it’s likely that future disruptive business models will come from newcomers.

Maybe you will be one of them!

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