How technology enables business model innovation
I am a strong advocate of using technology (IT to be specific) as an enabler to business model innovation. It’s important to understand that innovation is not limited to technological innovations by high-tech companies, but also includes marketing innovation, management innovation, process innovation, and product innovation. To put it simply, regardless of what business or industry you are in, if you are trying out different way of doing things in your business and not following the conventional wisdom, then you are innovating your business model.
I had been wanting to write an article to inspire my customers and people around me on how businesses can use technology to transform their business models and enhance their business value. In the market where I am located, technology awareness is still relatively low, and there are many who are still skeptical about the wonders that the technology can do for their business. Fair enough I said, that gives me more reasons to find good examples and powerful facts to share. Recently I came across this article “Why Software Is Eating The World” by Marc Andreessen. The facts that he presented in his article really motivates me to share them here as inspiration for everyone. In his opinion, we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
More and more major businesses and industries are being run on software and delivered as online services, from movies to agriculture to national defense.
With the massive explosion of available and viable software technologies, programming tools, and Internet based services, these had created more innovative business startups without expensive infrastructure and operating costs. These innovative startups that are powered by creative use of technologies are invading the turf of traditional businesses. Below are some of the very vivid examples excerpted from Marc’s article to illustrate the point:
For example, the world’s largest bookseller, Amazon, is a software company. Its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.
Today’s largest video service by number of subscribers is a software company – Netflix. How Netflix eviscerated Blockbuster is an old story, but now other traditional entertainment providers are facing the same threat. Comcast, Time Warner and others are responding by transforming themselves into software companies with efforts such as TV Everywhere, which liberates content from the physical cable and connects it to smartphones and tablets.
Today’s dominant music companies are software companies too – Apple’s iTunes, Spotify and Pandora. Traditional record labels increasingly exist only to provide those software companies with content. Industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue from 2% in 2004.
Today’s fastest growing entertainment companies are videogame makers, again, software. With the industry growing to $60 billion from $30 billion five years ago. And the fastest growing major videogame company is Zynga (maker of games including FarmVille), which delivers its games entirely online. Zynga’s first-quarter revenues grew to $235 million this year, more than double revenues from a year earlier. Rovio, maker of Angry Birds, is expected to clear $100 million in revenue this year (the company was nearly bankrupt when it debuted the popular game on the iPhone in late 2009). Meanwhile, traditional videogame powerhouses like Electronic Arts and Nintendo have seen revenues stagnate and fall.
The best new movie production company in many decades, Pixar, was a software company. Disney had to buy Pixar, a software company, to remain relevant in animated movies.
Photography, of course, was eaten by software long ago. It’s virtually impossible to buy a mobile phone that doesn’t include a software-powered camera, and photos are uploaded automatically to the Internet for permanent archiving and global sharing. Companies like Shutterfly, Snapfish and Flickr have stepped into Kodak’s place.
Today’s largest direct marketing platform is a software company – Google. Now it’s been joined by Groupon, Living Social, Foursquare and others, which are using software to eat the retail marketing industry. Groupon generated over $700 million in revenue in 2010, after being in business for only two years.
Today’s fastest growing telecom company is Skype, a software company that was just bought by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the U.S., with a $20 billion market cap, had 15 million access lines at the end of June 30, declining at an annual rate of about 7%. Excluding the revenue from its Qwest acquisition, CenturyLink’s revenue from these legacy services declined by more than 11%. Meanwhile, the two biggest telecom companies, AT&T and Verizon, have survived by transforming themselves into software companies, partnering with Apple and other smartphone makers.
LinkedIn is today’s fastest growing recruiting company. For the first time ever, on LinkedIn, employees can maintain their own resumes for recruiters to search in real time, giving LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.
Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world. In today’s cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations and connects each car to mobile, satellite and GPS networks. The days when a car aficionado could repair his or her own car are long past, due primarily to the high software content. The trend toward hybrid and electric vehicles will only accelerate the software shift – electric cars are completely computer controlled. And the creation of software powered driverless cars is already under way at Google and the major car companies.
Logistics & Distribution
Today’s leading real-world retailer, Wal-Mart, uses software to power its logistics and distribution capabilities, which it has used to crush its competition. Likewise for FedEx, which is best thought of as a software network that happens to have trucks, planes and distribution hubs attached. And the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize routes and yields correctly with software.
Oil & Gas
Oil and gas companies were early innovators in supercomputing and data visualization and analysis, which are crucial to today’s oil and gas exploration efforts. Agriculture is increasingly powered by software as well, including satellite analysis of soils linked to per-acre seed selection software algorithms.
The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.
Health Care & Education
Health care and education, in my view, are next up for fundamental software based transformation. Both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software centric entrepreneurs.
Even national defense is increasingly software based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics and weapons guidance. Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large scale data mining with software to uncover and track potential terrorist plots.
How should you get started?
Some of these examples might seem far fetched for most of us at the moment, but one thing that is evident is the IT revolution is coming, where the increasing role of technology as an essential component of new business strategies.
Instead of seeing technology as merely a back-office support function, we should view it as a strategic weapon that can be used to drive innovation in all aspects of our business. For that, business owners should start learning to ask, “How can my organization leverage on technology as a competitive advantage” or “How can we use technology to deliver products better, faster, more cheaply” in their business planning process.
About The Author
Thomas Cheah is the Principal CTO-for-hire of Procto. He helps business owners and executives to innovate their business model thru strategic technology management so that they get 80% of the benefit for 20% of the cost. If you have innovative ideas but do not the technical expertise, he is your partner to validate and build your digital business models. Thomas believes that constant business innovation is increasingly important in today's business environment so that our business is prepare for rapid change of customer behavior, rising cost, and globalization in order to stay ahead (or away) of competition.
Learn more about Thomas Cheah.