7 Powers: The Foundations of Business Strategy 2/4
It’s a new and superior business model, which the incumbents can’t mimic due to anticipated damage to their existing business.
It’s an avenue for defeating an incumbent who appears unassailable.
Often incumbents can’t respond due to the incompatibility of the business models or customer positioning.
Upstarts create a lot of value for themselves at the expense of the incumbents.
New products cannibalize the sales of the products by the incumbent.
Benefit. Lower costs or the ability to charge higher prices (usually due to new features); margins can be reinvested back in the product to increase the scale and the market share.
Barrier. The incumbent’s failure to respond is not a sign of poor vision, it’s a calculated decision. And this is the strength of the new business model – when the incumbent is forced to say “no” to adjusting their own business model.
For an incumbent the new business model on a standalone basis may not be profitable. (ex: KODAK, which knew quite well what would kill it.)
Not all expertise can be developed or bought, and even then there’s an integration phase, which most firms are not ready for.
If the business model looks profitable on a standalone basis, look at the NPV. The benefits of the new product may not offset the losses in the existing product line. As a result, the firm decides to milk its existing business model until the profitability is gone – and then some longer.
After the incumbent’s business shrinks, at some stage the losses to the main business line shrink as well, so it may make theoretical sense to finally try the new business model as the benefits may finally exceed the losses.
Let’s not forget about the cognitive bias: the new business model still has higher uncertainty than the existing one, and the CEO of the incumbent may be too invested in their picture of the world, now being challenged.
The Agency Problem also exists (the interests of the CEO and investment decision makers may differ from the firm’s interests [maximizing the value]).
A smart move by the challenger would be to appear small and not dangerous to the incumbent for as long as possible. It has nothing to do with innovation, just the behaviour of the firm.
Once market erosion becomes severe, the incumbent tries to put a toe in the water, but not fully commit. [MK: and also the Board kicks out the CEO and urgently starts looking for a saviour].
Challengers don’t win with one hit: it’s a death by a thousand cuts, and the incumbent plays its best game nonetheless.