1/6/2016

Disruptingbeliefs:Anewapproachtobusinessmodelinnovation|McKinsey&Company

Article | McKinseyQuarterly

Disruptingbeliefs:Anewapproachtobusinessmodelinnovation
Inadisruptiveage,establishedbusinessmodelsareunderattack.Hereshowincumbentcompanies
canreframethem.
July2015 |by MarcdeJongandMennovanDijk

Letsfaceit:businessmodelsarelessdurablethantheyusedtobe.Thebasicrulesofthegameforcreatingand
capturingeconomicvaluewereoncefixedinplaceforyears,evendecades,ascompaniestriedtoexecutethesame
businessmodelsbetterthantheircompetitorsdid.Butnow,businessmodelsaresubjecttorapiddisplacement,
disruption,and,inextremecases,outrightdestruction.Considerafewexamples:
Bitcoinbypassestraditionalbanksandclearinghouseswithblockchaintechnology.
CourseraandedX,amongothers,threatenbusinessschoolswithmassiveopenonlinecourses(MOOCs).
TencentoutcompetesinInternetservicesthroughmicrotransactions.
Ubersidestepsthelicensesystemthatprotectstaxicabfranchisesincitiesaroundtheworld.
Theexamplesarenumerousandfamiliar.Butwhatslessfamiliarishow,exactly,newentrantsachievetheir
disruptivepower.Whatenablesthemtoskirtconstraintsandexploitunseenpossibilities?Inshort,whatsthe
processofbusinessmodelinnovation?
Forincumbents,thiskindofinnovationisnotoriouslyhard.Somestrugglemerelytorecognizethepossibilities.
Othersshrinkfromcannibalizingprofitstreams.Stillotherstinkerandtweakbutrarelychangetherulesofthe
game.Shoulditbesodifficultforestablishedcompaniestoinnovateintheirbusinessmodels?Whatapproach
wouldallowincumbentstooverturntheconventionsoftheirindustriesbeforeothersdo?Ourworkwith
companiesintelecommunications,maritimeshipping,financialservices,andhospitality,amongothersectors,
suggeststhatestablishedplayerscandisrupttraditionalwaysofdoingbusinessbyreframingtheconstraining
beliefsthatunderlietheprevailingmodesofvaluecreation.Thisarticleshowshow.

Reframingbeliefs
Everyindustryisbuiltaroundlongstanding,oftenimplicit,beliefsabouthowtomakemoney.Inretail,for
example,itsbelievedthatpurchasingpowerandformatdeterminethebottomline.Intelecommunications,
customerretentionandaveragerevenueperuserareseenasfundamental.Successinpharmaceuticalsisbelieved
todependonthetimeneededtoobtainapprovalfromtheUSFoodandDrugAdministration.Assetsand
regulationsdefinereturnsinoilandgas.Inthemediaindustry,hitsdriveprofitability.Andsoon.
Thesegoverningbeliefsreflectwidelysharednotionsaboutcustomerpreferences,theroleoftechnology,
regulation,costdrivers,andthebasisofcompetitionanddifferentiation.Theyareoftenconsideredinviolable
untilsomeonecomesalongtoviolatethem.Almostalways,itsanattackerfromoutsidetheindustry.Butwhile
newentrantscapturetheheadlines,industryinsiders,whooftenhaveaclearsenseofwhatdrivesprofitability,are
wellpositionedtoplaythisgame,too.
Howcanincumbentsdoso?Inanutshell,theprocessbeginswithidentifyinganindustrysforemostbeliefabout
valuecreationandthenarticulatingthenotionsthatsupportthisbelief.Byturningoneoftheseunderlyingnotions
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onitsheadreframingitincumbentscanlookfornewformsandmechanismstocreatevalue.Whenthis
approachworks,itsliketopplingastoolbypullingoneofthelegs.
Exhibit

Thefullerprocessandthequestionstoaskalongthewaylooklikethis:
1.Outlinethedominantbusinessmodelinyourindustry.Whatarethelongheldcorebeliefsabouthowtocreate
value?Forinstance,infinancialservices,scaleisregardedascrucialtoprofitability.
2.Dissectthemostimportantlongheldbeliefintoitssupportingnotions.Howdonotionsaboutcustomerneeds
andinteractions,technology,regulation,businesseconomics,andwaysofoperatingunderpinthecorebelief?For
instance,financialservicesplayersassumethatcustomerspreferautomated,lowcostinterfacesrequiringscale.
BecausetheITunderpinningfinancialserviceshasmajorscaleadvantages,mostofaproviderscostbaseisfixed.
Furthermore,theappropriatelevelofriskmanagementispossibleonlybeyondacertainsizeofbusiness.
3.Turnanunderlyingbeliefonitshead.Formulatearadicalnewhypothesis,onethatnoonewantstobelieveat
leastnoonecurrentlyinyourindustry.Forinstance,whatifafinancialservicesprovidersITcouldbebased
almostentirelyinthecloud,drasticallyreducingtheminimumeconomicscale?Examplesofcompaniesthathave
turnedanindustrybeliefonitsheadincludethefollowing:
Target:Whatifpeoplewhoshoppedindiscountstoreswouldpayextrafordesignerproducts?
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Apple:Whatifconsumerswanttobuyelectronicsinstores,evenafterDelleducatedthemtopreferdirectbuying?
Palantir:Whatifadvancedanalyticscouldreplacepartofhumanintelligence?
PhilipsLighting:WhatifLEDtechnologyputsanendtothelightingindustryasareplacementbusiness?
AmazonWebServices:Whatifyoudontneedtoowninfrastructureyourself?
TSMC:Whatifyoudontneedtodevelopyourownprocesstechnologyorinvestinyourowninfrastructure?
AmazonMechanicalTurk,TaskRabbit,andWikipedia:Whatifyoucangetstuffdoneinchunksby
accessingaglobalworkforceinsmallincrements?
4.Sanitytestyourreframe.Manyreframedbeliefswilljustbenonsense.Applyingareframethathasalready
proveditselfinanotherindustrygreatlyenhancesyourprospectsofhittingonsomethingthatmakesbusiness
sense.Businessmodelinnovations,unlikeproductandserviceones,travelwellfromindustrytoindustry:Airbnb
inspiresUberinspiresPeerby.Solookagainatthereframesdescribedinstepthreeabove.Allofthemhavebroad
applicationacrossindustries.
5.Translatethereframedbeliefintoyourindustrysnewbusinessmodel.Typically,oncecompaniesarriveata
reframe,thenewmechanismforcreatingvaluesuggestsitselfanewwaytointeractwithcustomers,organize
youroperatingmodel,leverageyourresources,orcaptureincome.Ofcourse,companiesthenneedtotransition
fromtheirexistingbusinessmodeltothenewone,andthatoftenrequiresconsiderablenerveandsophisticated
timing.

Fourplacestoreframe
Executivescanbeginbysystematicallyexaminingeachcoreelementoftheirbusinessmodel,whichtypically
comprisescustomerrelationships,keyactivities,strategicresources,andtheeconomicmodelscoststructuresand
revenuestreams.Withineachoftheseelements,variousbusinessmodelinnovationsarepossible.Having
analyzedhundredsofcoreelementsacrossawiderangeofindustriesandgeographies,wehavefoundthata
reframeseemstoemergeforeachone,regardlessofindustryorlocation.Moreover,thesethemeshaveone
commondenominator:thedigitizationofbusiness,whichupendscustomerinteractions,businessactivities,the
deploymentofresources,andeconomicmodels.
Innovatingincustomerrelationships:Fromloyaltytoempowerment

Businessesshouldstriveforcustomerloyalty,right?Loyalcustomerstelltheirfriendsandcontactshowgooda
companyis,therebyloweringacquisitioncosts.Loyalcustomersstickaroundlonger,keepingthecompetitionat
bay.Loyalcustomersproviderepeatbusiness,abiggershareofwallet,andmoreusefulfeedbackaboutproblems
andopportunities.Nowondercompaniesinsomanyindustriesemphasizelockingincustomersbywinningtheir
loyalty.
Butthepursuitofloyaltyhasbecomemorecomplicatedinthedigitalworld.Thecostofacquiringnewcustomers
hasfallen,evenwithoutloyaltyprograms.Customersempoweredbydigitaltoolsandextensivepeerreviewed
knowledgeaboutproductsandservicesnowoftendoabetterjobofchoosingamongbuyingoptionsthan
companiesdo.Switchingcostsarelow.Mostsignificant,theformerpassivityofcustomershasbeensupersededby
adesiretofulfilltheirowntalentsandexpresstheirownideas,feelings,andthoughts.Asaresult,theymay
interpreteffortstowintheirloyaltyasobstaclestoselfactualization.
Insteadoffightingthattrend,whyshouldntcompaniesembracetheparadoxthatgoeswithit:thebestwayto
retaincustomersistosetthemfree.TheinventioncompanyQuirky,forexample,letstheideasandvotesofits
onlinecommunityguidetheproductsitdesignsandproduces.MakerLabs,aninteractivedesignbuildcollective,
providesitsmemberswiththetoolsandexpertisetheyneedtobuildwhattheywant.

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Establishedcompaniescanalsomaketheswitchfromloyaltytoempowerment.Considerthepensionand
insuranceindustry,longgovernedbythebeliefthatcomplexinvestmentdecisionsarebestmadebyexperts
(companiesorintermediaryfinancialadvisers)onbehalfofaccountholders.Amultinationalinsuranceand
pensionproviderreframedthatbeliefbyproposingtheopposite:whatifcustomerspreferredtomaketheirown
investmentdecisions,eveniftheydidnthavethecredentialsofinvestmentprofessionals?Thecompanynow
providescustomerswithwebbasedinvestmentinformationanddecisionmakingtools,alongwithappropriate
riskwarnings.Theseenablecustomerstoinvestapercentageoftheirfundsdirectlyinbusinessesoftheirchoice.
Thiseffortisinitsearlydays,butcustomerpickupandtheprofitabilityofproductsarepromising.
Innovatinginactivities:Fromefficienttointelligent

Oneofthemostdominantbeliefsgoverningtodaysbigcompaniesisthatimprovingefficiencyisthemostreliable
waytoincreaseprofits.Especiallyifmarketrequirementschangeonlygradually,companieshaveplentyoftimeto
minimizetheproductioncostsoftheirexistingproducts.Today,ofcourse,constantefficiencyimprovementsarea
prerequisiteforahealthybottomline.
Theymaybenecessary,buttheyrenotsufficient.Intodaysrapidlychangingmarkets,manyproductsbecome
obsoletebeforetheyhavebeenleanedout,somanagersgetlesstimetooptimizeproductionprocessesfully.
Companiesarethereforebuildingflexibilityandembeddedintelligencedirectlyintotheproductionprocesstohelp
themadaptquicklytochangingneeds.Embeddedintelligencecan,overtime,helpcompaniestoimproveboththe
performanceandthevalueinuseofproductsandservicesandthustoimprovetheirpricing.Inessence,
digitizationisempoweringbusinessestogobeyondefficiency,tocreatelearningsystemsthatworkharderand
smarter.
Considerhowawebbasedglobalhotelbookingplatformusedquickfeedbackcyclestoreframethefocusofits
businessmodelfromefficiencytousersatisfaction,therebyopeningnewrevenueopportunities.Thehotelbooking
industryscentralbeliefhasbeenthatsuccessdependsontwothings:negotiatingpowerwithhotelsandareliable
webinterfaceforcustomers.Thecompanyreframedthisdominantbeliefbyaskingifcustomersbookingahotel
roommightlookformorethanconvenience,speed,andprice.Ittestedthisreframethroughaseriesofiterations
toitswebsite.Evenminorchangessuchastheuseofphotographs,awarmer(orsometimescooler)toneforthe
sitestext,andtheinclusionoftestimonialsfromhappycustomersraisedtheclickthroughrate.Thisinsight
confirmedthereframe:abookingsiteismorethanjustafunctionalserviceitcanalsobecomeanengaging
customerexperience.
Asaresult,thecompanyhasintegratedconstantfeedbackloopsanddailyexperimentsintoitskeyactivities,
creatingatruelearningsystem.Nowitimprovesandadjustsitssitedailytoboostcustomerengagementand
increaserevenue.Itmaywellbeonitswaytobecomingtheindustrysglobalstandard.
Innovatinginresources:Fromownershiptoaccess

Onewidespreadpremiseinbusinessisthatcompaniescompetebyowningtheassetsthatmattermosttotheir
strategy.Competitiveadvantage,accordingtothisbelief,comesfromowningvaluableassetsandresources,which
tendtobescarceandutilizedoverlongtimeperiods,aswellasfirmandlocationspecific.Thusownership(rather
than,say,leasing)frequentlyappearstobethebestwaytoensureexclusiveaccess.
Butwhatifassetsareusedinfrequentlyorinconsistently?Inthesecases,digitaltechnology,byincreasing
transparencyandreducingsearchandtransactioncosts,isenablingnewandbettervaluecreatingmodelsof
collaborativeconsumption.Asaresult,ownershipmaybecomeaninferiorwaytoaccesskeyassets,increasingly
replacedbyflexiblewinwincommercialarrangementswithpartners.Ontheconsumerside,theexamplesinclude
Peerby,anappthatallowsneighborstosharetoolsandotherhouseholditemsthatwouldotherwisesitidlein
garages,andUber,whichallowsanydriverwithaqualifiedvehicletoprovidetaxiservice.Houseandroom
sharingprogramsapplythesamethinkingtounderusedrealestate.Ineverycase,consumersopttoaccessrather
thanowntheseassets.
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Bigcompaniesarefollowingsuitforexample,byreducingsourcingcoststhroughcradletocradleapproaches
thatcollectandrepurposewhattheypreviouslyconsideredwaste.Insteadofbuying(andthusowning)theraw
materialsneededforproducts,companiesaccessthesematerialsinpreviouslysoldproductsandrepurposethem.
Similarly,theglobalsourcingfirmLi&Funglimitsrisk,increasesefficiency,andenhancesflexibilitybyusing
broadnetworksfocusedonaccessto(ratherthanmajorityownershipof)suppliers.ThesoftwaremakerAdobe
Systemsnolongerlicensesnewversionsofitsproductstocustomersthroughonetimesalesinsteaditprovides
accesstothemthroughmonthlysubscriptions.(FormoreonAdobestransitiontoitsnewbusinessmodel,see
Reborninthecloud.)
Themovefromownershiptoaccessmirrorsamorebroadlyevolvingsocietalmindsettowardopensource
models.Forexample,in2014theelectricvehiclecompanyTeslamadeallofitsintellectualpropertypatentsfreely
availableinanefforttoencouragethemanufactureofcleanvehicles.
Thesepossibilitiespenetratedeeplyintotraditionalindustries.ConsiderhowabigEuropeanmaritimeport
embarkedonalargescalelandmanagementprogram.Theindustrybeliefreframedbytheportwasthatlarge
liquidbulkloadshipsvaluedprivateaccesstostoragetanks.Theunderlyingassumptionwasthatshipping
companieswantedtheabilitytodelivertheirbulkloadsanytimeandthereforerequiredentrytotheirtanksat
closerange.
Inresponsetothisperceivedneed,mostmaritimeportshavedevelopedjettiestowhichtheyprovideindividual
shippingcompaniesprivateaccessessentiallytheequivalentofownership.Asaresultofeachcompanys
varyingschedulesandtraffic,manyjettiesendedupbeingmostlyunused,butotherswerentsufficientforpeak
times.Seeingthisproblem,theportsmanagementreframedtheindustrybeliefbyaskingifcustomerscaredmore
aboutaccessondemandthanexclusivity.Theportnowintendstohelpallcustomersuseanyjettytoaccessany
fueltank,bydevelopingacommoncarrierpipeconnectingthem.JustasPeerbyineffectshiftsaneighborhoods
businessmodelbyincreasingtheutilizationofunderusedassets,sothemaritimeportismakingmoreof
underutilizedjettiesandstoragetanksbyshiftingthebusinessmodelsothatshippingcompaniespayforaccessto
jettiesandstorageratherthantheexclusiveuseofthem.Inthefuture,thismodelmayevolveintoadynamic
multiuserslotbookingsystemthatmatchestherealtimeavailabilityofjettieswithdemandforliquidbulkcarrier
ships.
Innovatingincosts:Fromlowcosttonocost

AccordingtohistorianPeterWatson,humanshavebeentradinggoodsandservicesformorethan150,000years.
Duringthattime,wevealwaysbelievedthattosellmoreofanofferingyouhadtoproducemoreofit.The
underlyingnotionwasthatasingleunitofagivenproductorservicecouldbeusedonlybyonecustomeratatime.
Anyincreaseinproductionthereforerequiredacommensurateincreaseinlabor,resources,andequipment.While
volumeadvantagesdidtranslateintoloweraveragecostsperunit,economiesofscalecouldnevergettheaverage
costdowntozero.
Digitizationisreframingthisancientbeliefinpowerfullydisruptiveways.Infact,ofallthereframesdiscussed
here,thisonehashadthemostdevastatingeffect,sinceitcandestroyentireindustries.Whatsdrivingpricesto
zeroisthereframethatmultiplecustomerscansimultaneouslyusedigitalgoods,whichcanbereplicatedatzero
marginalcost.Massiveopenonlinecourses,forexample,provideanearlyzeromarginalcosteducation.
Considertheimplicationsfortelecommunications,wherethedominantbeliefhasbeenthatvalueisbestcaptured
througheconomiesofscalethemoretelephoneminutessold,thelowertheunitcost.Asaresult,thelargerthe
mobilephoneplan,thelowerthecostperminute.Onetelecommunicationscompanyisupendingthisbeliefby
makingcustomersanallyoucaneatoffer.Itrealizedthatunlimiteduseofvoiceandtextingunitscomesatno
additionalcosttoitself,soitcancompeteagainstemergingvoiceoverIPcompetitors.Asaresult,thetelcostarted
toofferunlimitedtextingandvoiceplansbyfocusingitseconomicmodelonmakingmoneyfromdatausageand
fromitsinvestmentsinahugedatanetworkandstoragecapacity.Suchplanseliminateconfusionamong
customersandincreasetheirsatisfaction.Assoonasthenetworkhasreacheditsplannedreturnoninvestment,
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incrementaldataservicewillalsobefree.
Bigcompanieshavetraditionallystruggledtoinnovateintheirbusinessmodels,evenasdigitaltechnologyhas
broughtbusinessmodelinnovationtotheforefrontofthecorporateagenda.Yetbigcompaniescanbedisruptive,
too,iftheyidentifyandovercomecommonbutlimitingorthodoxiesabouthowtodobusiness.
Abouttheauthors
MarcdeJongisaprincipalinMcKinseysAmsterdamoffice,andMennovanDijkisthecofounderandmanagingdirectoroftheTHNK
SchoolofCreativeLeadershipandaformerdirectorintheAmsterdamoffice.

TheauthorswishtothankKarimBenammar,BerendJanHilberts,andSaskiaRotshuizenfortheircontributionstothisarticle.

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