Growth strategy: Disruptive business models
“The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.” – Clayton Christensen
The successful businesses of the future will fall into two groups.
The first will be huge global corporations, capable of moving entire economies and changing sectors in pursuit of growth. The second will be small, innovative, flexible companies – aggressively pursuing growth and fuelled by ambition – these are the ones following disruptive business models.
Those stuck in the middle provide the fuel and the fat upon which both groups feed. These companies are ‘the fat in the middle’ and they may be your best route to success.
This may be an over-simplification, but almost every ‘fat in the middle’ company suffers from a lack of focus and excessive diversification. The company may be really aware of this, but it can’t fix it because every pound of sales revenue is vital and it has no funds to restructure. These companies seldom have the investment to attack new markets, to innovate and to respond to niche attack, they are too busy defending their core.
Contrast this to a new business entering the sector who is small, agile and with no baggage … and equally has no resource. The mistake the new company can make is to try and imitate the biggest company, the same company that is struggling. Instead, look at Uber – the world’s largest taxi company yet it owns no vehicles. Look at AirBNB – the world’s largest accommodation provider owns no real estate. How can an established company shackled with huge infrastructure and overheads compete with these new business models?
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Identifying the ‘fat in the middle’ in your marketplace
Study the companies who are the fat in the middle in your sector because they exist. Know and understand where they make above-average margins, recognise their highest-profit products and identify their best customers (defined by great margins and good payers). Because these are the customers you want to steal away from them.
So how do you identify them in your marketplace? If you can see most of the following characteristics in a competitor and you would be delighted with 10% of their turnover, then you have your strategic plan of attack:
- Market share of over 40%. This can be 40% of the local, regional, national or global market.
- Increasingly diverse product range as the company frantically adds products in an attempt to stop the slide, combined with repeated discount and sales messages in an attempt to create volume at the expense of margin.
- Stagnant or falling profits. Don’t look at overall sales because a fat in the middle organisation is often grasping at lower-margin sales in an attempt demonstrate growth. Look for profits as a percentage of sales between -2% and 2% because all their focus will be on break-even results!
- Reducing cash and / or increasing creditors. Cash is the real indicator of business success but sometimes the fat in the middle will cover this by not paying its suppliers. If they use invoice factoring also it is a clear sign of a company using a sticking plaster to fundamentally cover its weaknesses.
- Repeated management change or third generation family – either situation means the business is likely to be led by people who are ineffective at reacting to a changing environment.
Disruptive business models aim to seek these vulnerabilities and exploit them.
Attacking the fat in the middle
Once you have identified the fat in your marketplace, and know them better than you know yourself, you can attack at their peripheries like a shoal of piranhas, fast, sharp and exceedingly focused. Grow by winning where the big boy can’t defend. Offer services and value they either can’t deliver, or are too busy elsewhere to meet.
It’s here where the Internet and technical innovation often becomes a key tool for establishing disruptive business models. Change the game, change the route to market, change the product convention, cut out middle-men or distributors, deliver smaller volume but much higher margin.
So where are their soft spots where you can sink your piranha teeth into the easiest?
- Highest margin products. Identify their star products with the highest profitability and attack them aggressively.
- Highest margin customers. These will typically be their smaller customers who they serve least well and with higher prices. Attack these customers directly with a very personalised service.
- Best paying customers. These may be the small companies who get poorer terms – go after them with better and higher-value services and enjoy the good cash-flow they generate.
- Aftersales. Many companies make extremely high margins on spares, refills, reviews, ongoing support and services. If your target ‘fat in the middle company’ has been around a while they will have a large installed base (or service user base). Attack this aspect on service and price and you create a brilliant earnings stream in an area that will go undefended and probably unnoticed.
The actions above are the real drivers, but it’s also worth having some fun and creating distraction feints that cause the fat in the middle to defend in the wrong place. Repeatedly contact their biggest customer at every level with a price and terms offer that will lead to them to try and defend, or stalk their website and advertising with discount messages forcing them to respond with their pricing.
So … take them on. They have your sales and they have your profits and it’s time to release them of the burden!
Creating a disruptive business model is a complicated and challenging task … seek out experienced and skillful experts who can help you with your strategy, you’ll benefit from their knowledge and independence.
Thinking strategically about disruptive business models by Yorkshire Powerhouse
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