Man cannot live by disruption alone, says Omar Mohout, Professor of Entrepreneurship at Antwerp Management School. Instead, he proposes the adoption of hyper-scalable thinking to succeed in winner-takes-all markets
Disruptive innovation as a concept was pioneered by Harvard Business School professor Clayton Christensen in 1997. Unlike his famous predecessor Michael Porter, who was interested in the success of companies, Christensen focused on why businesses fail.
In his bestseller, The Innovator’s Dilemma, Christensen described why big companies tended to focus on incremental rather than disruptive innovation – believing that pursuit of the latter undermines short-term profitability. His book is a distant echo of the creative destruction concept formulated in 1942 by the influential economist Joseph Schumpeter. Christensen argues that every business must be disruptive or will get disrupted.
However, disruptive innovation is a theory on how innovation impacts companies and industries, not a methodology for success. Companies that spend time pondering how to be disruptive or how to be innovative are asking the wrong question.
Instead, they should ask whether they are hyper-scalable. In computing terms, hyper-scale is the ability of an infrastructure to scale up appropriately as increased demand is added to the system. A company is hyper-scalable when it offers value at a near zero cost simultaneously to millions of customers with a disproportionately small team.
As an example: Airbnb is now worth more than some hotel chains, including the nearly 100-year-old Hilton. Where Airbnb with 3,000 employees can offer four million rooms without even stabbing one cent of investment in real estate, Hilton needs more than 160,000 employees operating 830,000 rooms.
So how can you build your own hyper-scalable business model? There are three key building blocks – the ‘hyper-scalability trinity’.
1. A hyper-scalable business model is based on intangible assets
Think not just of music, books, movies and photos, but also of patents, franchising, algorithms and data. In a digital world, the reproduction cost of intangible assets is virtually zero, while the quality remains 100 per cent. If tangible assets – atoms instead of bits – are a required part of the business model, they should be leveraged not owned as Skype, Uber and Airbnb are showing us.
If you’re a global corporate, now’s the time to identify overcapacity, unutilised or underexploited assets, and abundance within your organisation. Recognise that ‘value’ comes from more than just physical assets. How can you make the most of datasets and know-how?
Hyper-scalable companies are the future, says Omar Mohout
2. A hyper-scalable business model requires (information) technology as a lever
In medieval times, music was not scalable. A troubadour played in markets and castles and was paid for the entertainment. Only the invention of the phonograph as a carrier of sound in 1877 by Thomas Edison made music scalable. Music could be recorded, distributed and enjoyed without the required presence of the musician, effectively removing the constraints of time and space.
For global organisations, artificial intelligence (AI) is the technology enabling hyper-scalability. Embrace predictive analytics, machine learning and chatbots to help you make the most of your assets.
3. A hyper-scalable business model uses the internet as a free distribution channel
Perhaps the biggest lever in the history of humanity is the invention of the wheel. But the value of wheels is in proportion to the availability of roads. Twenty years ago, the internet – in essence a distribution and sharing technology – laid the seeds for a new kind of scalability.
A hyper-scalable company relates to the internet as wheels relate to roads – it multiplies its value gigantically. Through the internet, we can reach most of the population in all corners of the world. At zero cost. The moment we go online, we are also global. Global is the default in a world with increasingly better bandwidth and cheaper connected devices. Serving a customer digitally on the other side of the planet is as easy as serving a customer around the corner.
In the case of music (intangible asset), the combination of the MP3 format (technology) and the free distribution over the internet was a killer combination – just ask the remnants of the ‘old’ music industry, which was destroyed by the barbarians at the gate: technology-driven companies such as YouTube, Apple and Spotify. We see a similar impact on the film industry from technology companies Netflix and Amazon Prime.
For a modern corporation, the internet and mobile phones erase the distance between you and your customers. Yet the market is potentially greater still. What could you sell to your competitors? What could you sell to your customers’ customers? Think business-to-business if you’re business-to-consumer, and vice versa.
Designing tomorrow’s company
In this new world, old economy principles – such as ownership of assets – become a constraint on growth, and the notion of pursuing economies of scale now provides a rather small incentive for building large corporations. We are in what venture capital firm Andreessen-Horowitz calls the “deployment phase of the internet”. There was never a better time to build innovative digital products and services with minimal investments.
The potential for creativity has exponentially increased and the pace of just about everything continues to accelerate, creating a world of opportunities. A world where access trumps ownership.
So how can you reconceptualise your business as a hyper-scalable organisation? Born-on-the-web companies, such as Uber, Spotify, Twitter, Netflix, Kickstarter, Eventbrite, Dropbox, Evernote, BlaBlaCar, have scalability in their DNA. They’ve shown that you don’t need precious natural resources if you can mine creativity and innovation. And they don’t open a costly factory or expensive new HQ – they simply open their laptops.
Omar Mohout is the Professor of Entrepreneurship at Antwerp Management School