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Discover What Drives Businesses into the Future

Understanding Industry Lifecycles

‘Disruption’ talk fails to disrupt the old ways of doing things? Talk about ‘New Markets’ instead

I first published an earlier version of this Article on Entrepreneur Magazine.

Read why you can’t apply the rules of legacy markets to new business models. And read why the term “disruption” is great for scaring people into buying books and courses, but fails to facilitate new perspectives.

In 1995, Clayton Christensen developed the “disruption theory.” Since then, the term has not only caught heat as a buzzword, but the theory’s core concepts have also been extended and misinterpreted.

However, the correct definition of disruption is only a subplot. The problem with thinking in terms of disruption, whether correctly applied or not, is that it locks businesses into their legacy perspective. By definition, a disruption is the interruption of something existing.

Yet, when an industry is transformed, more often than not a completely new market is created. This new market has little in common with the legacy market. This is why we should view the transformed market through a new lens.

In reality however, we unfortunately see businesses trying to apply old tools to new rules. In particular folks who talk about “disruption” tend to focus on the old market and the old rules.

An example of transformation

For the greater part of the last century, the automobile industry was a metaphor for stability. German, American and Japanese powerhouses steadily churned out huge volumes of cars offering top performance and quality, while generating attractive profits for investors and stakeholders. For decades, there was little substantial change in vehicle design and neither was there any movement on the leader board. Some had better years than others, but the key players remained the same.

Now the space has changed. Traditional car manufacturers are in the process of adoption. Ford brought on CEO Jim Hackett, who previously ran design-driven office furniture company Steelcase and who has outlined a forward thinking six-point plan for Ford’s future. Not quite the vita that automotives would have envisioned a few years ago.

In this current auto industry power struggle, Tesla is viewed as the disrupting force, the David that fights against the Goliaths. Not too long ago, former VW CEO Matthias Müller had bashed Tesla for being the champion of announcements not products, ridiculing the company for burning money and having tiny unit sales volumes compared to traditional manufacturers.

A new market

But is Tesla really the David? Can its unit sales volumes provide us with an indication of who will win this battle?

The problem is that this not about changes within the traditional market. This is a new market. Comparing the volume of Volkswagen and Tesla in the old market is like comparing apples and pears.

The automotive market of the last century has been commoditized and will decline. This is not where the competition will take place in the future. The future of transport is an emerging market, which is still tiny today, but which is set to grow rapidly. While Müller may have been quick to ridicule Tesla for its output and burn rate, in new markets innovation takes time and output is low in the early days. This is the nature of the Technology Adoption Lifecycle.

If we consider the manufacturer of “future” cars, Tesla holds the largest volume. Tesla has not been catching up. Volkswagen is the contender in this new market.

New markets, new rules

In new markets, new rules apply. For example the processes of developing and building cars is changing. The machinery required to build cars is changing dramatically, because electric cars have less mechanical complexity. While mechanical complexity is being reduced, automated driving is increasing the software complexity.

At the same time the integration of the connected car within the internet of things will require the integration of a new mobility infrastructure, the ability to analyze the user’s context information and a UX design that provides users with the best options based on that context information.

Tomorrow’s car is not a mechanical car, but a software device and an information unit. The most important part of a new car will not be its engine, or its horsepower, but its analytical and design capabilities.

This will also change the criteria by which consumers will choose between car models. Factors such as auxiliary connectivity services will play as much as a role as the user interface of the “software product.”

Aside from new purchase criteria, the future will also bring new ownership models. With the rise of the sharing economy, cars will have to find their place in the bustling, congested smart cities of the future.

Therefore, when view the automotive market as a new market early in its life cycle, it is easier to understand why Tesla has never been too much concerned about his lower production volumes. We also see why Ford has ramped up its design capabilities at the board level.

New rules, new approaches

The rules of this new market, not of the old market, determine how a company has to approach its business. They determine what type of resources the company has to build up and how it addresses and reaches customers.

If an automobile manufacturer tried to enter the aircraft business, it wouldn’t even think about hiring automotive executives to manage the transition. It would look for someone who is well versed in the industry it was moving into, not out of. Yet, as Mueller’s statement has illustrated, leading car manufacturers’ executives have long been thinking of the current mobility market as the same market they cut their teeth in.

The current shift of automotive is often compared to the evolution from horse carriage to car. Here is the problem with this comparison:

The horse carriage served the same purpose as the car: getting from A to B with a device as quickly and safely as possible. The device that gets us from A to B, the traditional car, is a commoditized market.

The car of the future has additional use cases: customers’ purchase criteria will not solely be driven by which car is more reliable or faster. More important questions will be, for example, which vehicle is smarter and has the highest processing power.

Lessons to be learned

The automotive industry is just one example. The same lessons apply to any other industry that is being “disrupted” by emerging technology.

We would not measure an online media business by the same standards as a traditional print newspaper business.

Neither would we judge iTunes and Spotify by the same standards as the traditional music industry.

Airbnb does not play by the same rules as hotel businesses.

For any industry that is being transformed, we need to shift our perspective. We have to view the transformed environment as a new market.

Step one: understand the differences between the new businesses and the legacy businesses.

Refresh your perspective. Understanding how the businesses differ helps us understand the distinctions between the new and the old market. Here is a simple trick: have a look at the recruiting websites of legacy business vs new businesses. The areas they hire in will provide you with valuable insights of what type of resources they are building up.

Step two: assess the requirements of this new market.

Before allocating resources to the new challenges, figure out what customers want and what new rules exist in this new market environment. What are the purchase criteria of customers in this new market and how do they differ from the old market? What capabilities will drive the success of businesses in this new environment? Is it mechanical engineering, software or design? Is it hotel locations and service or the reviews and trust of Airbnb’s website?

Step three: question whether any legacy operation can still compete in this new market.

Which parts of any legacy business are still suited for this new market? Which parts of traditional OEM’s are necessary to compete in the new mobility markets? The answer to this question could mean scrapping legacy production methods or processes, or simply bringing on a new leadership with experience in the new industry, as Ford did.

Simply put, if our legacy business is building furniture and we were to enter a media business, we would immediately plan to start from scratch. Yet, when companies who feel being “disrupted” enter transformed markets, they still tend to think in terms of legacy business models.

Like any architect who designs a new building for a new environment, we first need to go back to the drawing board. We need to question existing assumptions and take steps to adapt to a new environment like Ford did, rather than resting on our laurels, and risk becoming irrelevant.

The Reverse Tesla Ban. What it Tells Us About Company Lifecycles

This is an older post. Yet I have left it here, since it fits within the broader context of industry lifecylces and technology adoption lifecylces that we explore for example in the Article “Industry Transformation is not about Disruption”.

Here is the original article:

Now here is something interesting happening. The company that has been banned by regulators from selling their cars, now has banned a customer from purchasing a car from them. Yes, Elon Musk personally has cancelled the order of a customer. And this cancellation has made its way into mainstream media.

What has happened? As reported by FastCompany, a venture capitalist, who is an early customer of the soon-to-be-launched Model X felt mistreated by the company. In response to this mistreatment he has written a blog post with the attention grabbing title“Dear @ElonMusk: You should be ashamed of yourself”. In that post he criticized the company and Elon Musk for being “ insensitive” and with “poor judgement” when organizing a customer event. Together with around 3,000 other early customers, he attended a Model X launch event. At this event, the customers had to wait for 30 minutes outside the building and then for more than an hour inside the building. In his post he criticized this mistreatment, as well as other factors that disappointed his expectations in the event. But he not only criticized the event. The bad management of this event made him ask, “Should I wonder if there are other problems in managing Tesla as a company?”

In response to his post, Elon Musk personally cancelled his order of a Model X Tesla. The author then followed up with a second post, describing how he was banned by Tesla. Once his posts was picked up by mainstream media, Elon Musk tweeted:

 

So why are we discussing this? Is this another slow news day?

In analyzing companies, I follow the philosophy that any analysis should start from the perspective of a customer. Only the customer’s perspective will tell us to what extent and why a company’s products differentiate. The customer perspective also helps detect changes in a marketplace early. While the crunching of market research figures or past financial data builds the basic analysis toolkit, using a company’s product and immersing ourselves in the world of the customer truly can put us ahead of the crowd of investors.

So this philosophy leads us to answer the author’s question of whether a mismanaged event is an indication of “other problems in managing Tesla as a company”.

Does the event and the ban mean that Tesla will become the next United Airlines of customer service? Clearly not! However, on FastCompany and the original post, some commenters worried whether Tesla is trying to prevent negative reviews and whether this causes worries about the company’s customer service. And let’s face it. Who hasn’t experienced the bad aftertaste of being mistreated or disapointed as a customer? To some extent we may resonate with the author’s anger about bad customer service. And why is Elon Musk facing the risk of the negative PR that such a ban may cause?

First, if this event leads the author to conclude that there may be other problems in managing Tesla, then the logical conclusion would be that he does not want to drive a car from such a company. In fact, instead of writing the article, the logical step for the author would have been to withdraw the order himself. But instead he is  “disappointed” about the cancellation. This makes it safe to assume that Elon Musk does not have to be too “ashamed” of himself. Actually, the company seems to be doing quite alright if even customers who feel mistreated still want its products.

But there is more to this. Possibly Tesla’ event management cannot compare to that of traditional car companies. Traditional car companies like Audi excel at conducting customer events and sponsoring major sports events. As a student, I was fortunate to have had a part time job that got me to the heart of Audi’s engagement in the LeMans racing series. This left me deeply impressed with the skill set of Audi’s event teams and its brand. It’s hard to imagine Tesla running such events at this point of time. In contrast, Tesla doesn’t even seem to offer print brochures of the Model X. Does that put Tesla at a disadvantage? No. Because Tesla is not in the event business, it is in the tech business.

Let me elaborate: yes, Tesla operates in the same industry as Audi. But then it operates in a different business:

  • Classic car companies operate in a mature industry, with well developed and rather undifferentiated products. How big is the difference between an Audi and a BMW in terms of technology? Let’s face it, what are your purchase criteria when you choose one over the other? In this stage of the lifecycle, companies largely compete based on the perception of their brand. Customer events are core to building the brand experience in this stage of the lifecycle.
  • Tesla on the other hand operates at the beginning of the lifecycle. It offers a new and differentiated product. Where is the other electric car company that excels at the safety ratings? The success factors that apply to Tesla’s business differ greatly from the success factors of legacy car manufacturing. And it’s no secret on what Tesla focuses. On building revolutionary cars.

So we have established that Tesla is not in the event business. As a result, an event that may have been managed badly does not tell us much about its success as a business. But then, was it a smart move to ban the author from purchasing a Tesla, or was it a PR failure?

This question leads us back to the lifecycle. In its earlier stage of the product lifecycle, Tesla targets other customer groups than legacy car companies. These early customers have different purchase criteria when compared to legacy car company customers. Customers of an Audi may be used to being pampered at customer events. Tesla’s early customers have not even seen the car in real life at the time they order. The attendance of 3,000 customers may overwhelm their event team. But here is the thing. Early adopters may not care for customer events. Their aim is to drive a car that is cutting edge.

Apple’s first first Mac was underpowered compared to traditional PC’s. However, its focus on the user interface transformed personal computing. Customers spend their nights in front of Apple stores in order to get the new iPhones. Compare this to the time the author had to wait. Early adopters are aware that new product will not be able to deliver on all requirements at the same time. They expect only the core of the product to impress. Which both Apple and Tesla managed to achieve.

In that sense, if the author concludes from a failed event that the company faces bigger problems, he just may not be the right early customer for Tesla. If he would buy a Tesla in the expectation of perfectly stage-managed customer events, he might feel mistreated on a regular basis.

Dealing with unhappy customers, who have the reach to make themselves publicly heard in the media (the author similarly criticized BMW) can require significant resources of a company. Tesla may decide to rather allocate resources to the task of building and launching better cars for the core customers whose expectations better match with the focus of Tesla. And at it’s core, this is what is commonly called branding. What unites strong brands is that they know that they cannot please everybody. Instead they focus on those areas where they can impress their core customers.  

It’s certainly not common practice to ban a customer. And it’s hard to tell from the outside what motivates Elon Musk to ban a customer. May be the simple message was that there are no Tesla’s for Trolls. But it seems there may be a deeper strategic rationale of focusing on those customers whose expectations are aligned with what Tesla stands for.

 

For us, there is a lesson learned for analyzing companies. Yes, the satisfaction of customers is a strong indicator of how successful the company will be in the long term. But that doesn’t mean that every unhappy customer is a sign that a company faces problems. We need to consider

  • which customers the company targets
  • the purchase criteria of those customers
  • the change of those customers, as well as their purchase criteria along the lifecycle of the products.

Maybe one day, when our roads are crowded with undifferentiated electric, self-driving cars, then Telsa will have to rely on its event management skills to sell its cars. However, today that’s not the core of their business.

What does Facebook’s Experiment tell us about the Company’s Market Position?

This article was published more than 2 years ago. Much has changed since then, yet it highlights the beginning of Facebook’s path toward refining its analytics recipes.

Imagine you go to see your trusted physician for a regular check-up. Now this doctor tells you that you are ill. You go home and you are in a bad mood because of the news from the doc. After one week your doctor calls you to tell you that you have been part of an experiment. You are not ill, but part of a study which examines how you react to bad news. There is little doubt that you would never see this doctor again, right?

Facebook has been playing with users emotions in order to conduct an experiment, studying human behaviour. Close to 700.000 users were manipulated in a way that they would be exposed to either positive or negative content. Facebook and some researches wanted to investigate user’s reactions.

Clearly, we are aware that Facebook uses our personal data. We use Facebook’s services for free. In return, Facebook attracts advertiser dollars by using this data. Here is no reason to complain. However, this study went a step further. Without our knowledge Facebook used us for a study, manipulating our emotions. While the experiment was carried out as a scientific study, we should be clear about one thing. Users are Facebook’s most valuable assets, which they turn into advertising revenue. I don’t see why Facebook should run the risk of scaring users away, when there is no benefit for them. Knowing about our emotions can be very valuable to advertisers who want to address us on Facebook.

The above-mentioned doctor would know that he would loose patients if he did such an experiment. So why does Facebook run this risk? Let’s examine one possible explanation. They might have done it because they have such as strong market position that they won’t face any economic consequences.

There were some complaints here and there, however, I have not heard about users leaving Facebook. As a platform, Facebook benefits from a strong network effect. We are on Facebook, because all our friends are there. If we choose to leave, we are isolated. Another platform first needs to develop the critical mass of our connections before we will switch.

However, on the other side, new platforms like Instagram, Whatsapp or Snapchat emerge continually. In addition Facebook just acquired Whatsapp for an incredible amount of money in, what I consider a defensive move. Facebook’s user numbers amongst younger people are declining. Facebook basically ‘bought’ those younger customers who are active on Whatsapp. At the point where a company is acquiring customers instead of growing organically, it’s safe to assume that they do not have an unbeatable market position.

If we think of Facebook only as a platform, there is another question arising. What is the value that Facebook provides to users? It enables us to stay connected with friends. But to stay connected we don’t need to go online on a regular basis. Facebook offers us the experience of seeing what our friends are doing on a daily basis. In this way Facebook is not solely a platform, but a publishing business. Both LinkedIn and Medium have shown that platforms are developing from pure platforms to publishers. Users visit LinkedIn, Medium and Facebook, not only for the connection, but to consume content. If we look at Facebook from this perspective, then it is playing a dangerous game, playing with the trust of its users and reducing the quality of its content.

If it does not have this strong market position, and if content quality is important for Facebook’s users, then why is Facebook running this risk? Because, like every publisher, it serves two masters. It needs to balance providing valuable content to users and extracting value from them in order to increase advertising revenues per user. The experiment might be an indication that it is currently under pressure to become more attractive for advertisers.

 

picture credits: science photo / Shutterstock