To disrupt or not to disrupt?

Article tiré du magazine The Economist.

Squeezing the tube

Business theorists routinely instruct managers to look over the horizon. “Blue Ocean Strategy” is the most successful book on business master-planning in recent years. In it W. Chan Kim and Renée Mauborgne of INSEAD, a business school in France, argue that companies should trawl for profits in “blue oceans” that their rivals ignore rather than “red oceans” that they squabble over. Companies often search for ways to disrupt their industries lest a rival or new entrant does the same and pulls the rug from beneath them. But reinventing a business from the ground up, to avoid being consumed by the fires of new technology, comes with huge risks as well as a potential for great rewards.

Ships that set sail for blue oceans are often becalmed in the middle of nowhere. AOL-Time Warner’s catastrophic merger in 2000 failed to remake the media business for the internet age. News Corp’s foray into social networking ended with the sale of Myspace for a small fraction of its purchase price. Sometimes being cautious, incremental and pragmatic when others are gambling on bold and visionary thinking is more sensible. Why take the chance when there is lots of money to be made closer to home? That is the argument of “Edge Strategy”, a new book by Alan Lewis and Dan McKone from LEK Consulting. They argue that before turning themselves upside down firms should think harder about profiting from the “edges” of existing businesses.

The authors focus on three such edges. The first is products: how can you stretch merchandise so that it generates more income or appeals to more people? An obvious way is to make accessories. Apple is praised as revolutionary but one secret of its success is its tight control of the bits and pieces that adorn its main products. Once purchased, an iPhone or iPad needs a fancy leather case or fashionable headphones. Apple’s own accessories come at considerable expense to the user and give the firm a steady revenue stream.

Another is to link services to products, a tactic made easier by the internet of things. Cars are increasingly connected. Onstar is an in-car service offered by General Motors whose features include automatic calls to emergency services after a crash and over-the-air diagnosis of mechanical problems. Caterpillar can monitor the performance of its excavators, bulldozers and other equipment via sensors, in return for a monthly fee.

The second edge is the “customer journey”. This sounds nebulous but is, in fact, simple. Customers usually buy goods and services to solve a problem. They purchase pneumatic drills because they want to dig a hole in the road, not because they like the way they look. The authors argue that firms have lots of opportunities to make money if they walk in customers’ shoes and keep their eyes open. ESAB, a company that sells welding equipment, also sells general education in welding, training for specific products and engineering consulting. Whole Foods Market, a swanky grocery store, used to specialise in the raw ingredients needed for healthy eating. It now gets around a fifth of its revenue from selling ready-to-eat foods from an ever-expanding range of sushi bars, barbecue stands, Mexican-food stations and espresso bars.

The third edge is exploiting underused parts of the enterprise. One example would be farmers renting out marginal land to energy companies for wind turbines: the farmer stays in the business of agriculture but also boosts income by finding a new use for some of his acres. Many firms routinely collect data in the course of running core operations. Sensible ones use the data to provide more services (or sell them to third parties, with due protections for privacy). Cargill, a commodity-trading firm, has used its agricultural expertise and data to develop software that guides farmers on how best to plant their fields on the basis of 250 variables such as soil type, weather conditions and seed performance. Toyota, a Japanese carmaker, sells traffic information generated by its vehicles to local governments and businesses.

Many of these edge businesses started as an afterthought but have become vast sources of revenue. In the early 2000s Amazon started building servers for its own business. Today it makes $5 billion a year selling cloud-computing capacity to Netflix, Pinterest and the CIA, among many others. UnitedHealthcare sells information culled from its enormous database, OptumInsight, to various customers. OptumInsight’s revenue increased from $956m in 2006 to $6.2 billion in 2015, a much faster rate of growth than its parent company.

Living on the edge

The strategy is not new: visit the cinema and you will spend more on popcorn and Coca-Cola than on tickets. Buy a car and a wily salesman will engage in a frenzy of “upselling” leather seats or after-sales services. But that is the point. The authors say that firms risk forgetting about long-established sources of growth in the pursuit of disruption. Rather than obsessing about the new, firms need to make the most of their existing businesses.

Firms must resist the temptation merely to charge for what hitherto has come free, however. American airlines dramatically increased revenues by charging customers to put their bags in the hold. This scheme earned them $3.5 billion in baggage fees in 2014 alone but came with heaps of complaints from unhappy customers. Lots of other firms are also charging for services formerly included in the price: having paid more than $400 for a hotel room in Manhattan recently, Schumpeter was then asked for an extra $10 to store his bag for a few hours between checking out and going to the airport. What next? Extra charges for soap and sheets?

In its customer-friendly forms, however, edge strategy is a valuable corrective to the obsession with transformational ideas. Firms are right to worry that their businesses are about to be shaken up by the digital revolution or by upstarts from emerging markets. But their priority should be squeezing more money out of their existing assets, not taking a leap into the unknown.

 

From the print edition