Business Model Innovation
The most consistent finding about new market entry is that the majority of firms that attempt to enter a new market (by, in effect, attacking bigger established competitors) fail.
Over the last thirty years, we have accumulated a lot of academic evidence on the topic of new market entry. The most consistent finding is that the majority of firms that attempt to enter a new market (by, in effect, attacking bigger established competitors) fail. It has been estimated that almost 80% of all entrants fail within ten years.
Yet, without disputing the academic evidence, we all know of examples of companies that entered new markets with great success. In several instances, not only did the new entrant survive but often managed to emerge as one of the leaders in the industry! IKEA did it in the furniture retail business, Canon in copiers, Bright Horizons in the child care and early education market, Starbucks in coffee, Amazon in bookselling, Southwest, easyJet and Ryanair in the airline industry and Enterprise in the car-rental market. The list could go on!
What explains the success of these outliers? The evidence points to a simple enough answer: successful attackers do not try to be better than their bigger rivals. Rather, they actively adopt a different strategy (or business model) and aim to compete by changing the rules of the game in the industry. Over and over, what we see is that significant shifts in market share and company fortunes took place not by trying to play the game better than the competition but by trying to be different—in a sense, by avoiding head-on competition. This is what has come to be known as business-model innovation.
Obviously, I am not the first person to praise business model innovation and this is not the first time that managers are encouraged to actively seek and exploit a new business model in their industry. Numerous books have been written and many ideas have been proposed on how firms could innovate in this way. But here’s the problem. Despite all the advice and despite the wealth of ideas, it is very rare to find a business-model innovation that originated from an established big company.
Why—despite all the ideas and advice—do big, established firms fail to pioneer new business models in their industries? These firms have the resources, the skills and the technologies to do a much better job at innovation than the new start-up firms. Furthermore, the advice that has come their way on how to do so is good advice coming from some of the best academic minds. Yet, they continue to allow new firms to take the initiative when it comes to business-model innovation despite the obvious benefits of this type of innovation. What can explain this?
The answer is that all business model innovations display certain characteristics that make them particularly unattractive to established firms. For example, new business models often conflict with the business models of the established firms. They also attract customers that the established firm is not (initially) interested in.
This suggests that giving more and better advice to established firms on how to become more creative so as to discover new business models is pointless. The issue is not discovery. The real issue is organisational and the only advice that can prove helpful to established firms is how to overcome the organisational obstacles that prevent them from growing a new business model next to their existing one.
Costas Markides is an IMI associate who teaches on the Senior Executive Programme. Costas is Professor of Strategy and Entrepreneurship and holds the Robert P. Bauman Chair of Strategic Leadership at the London Business School. He is a researcher and widely published author on the topics of diversification, strategic innovation, business-model innovation and international acquisitions. He was named one of the Top 50 Most Influential Management Gurus by Thinkers50 in 2011.