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3 Guidelines for Managing Disruption
As the U.S. economy continues to expand, and with acquisition multiples hovering at an all-time high, business-to-business (B2B) leaders are exploring new and innovative ways to unleash organic and inorganic growth opportunities. Digital technology, marketplace demands, and other disruptors influence many B2B business environments. These changes have impacted B2B suppliers in two different ways. On one hand, some disruptions have enabled unexpected and unwelcomed competitors to enter a market with aggressively priced offers. If successful, these new entrants threaten commoditization of traditional brands, encourage price transparency, and trigger a vicious cycle of downward price competition. On the other hand, disruption can usher in new value creation opportunities. When players find a way to exploit an inefficiency in the market they can change how a customer’s problem is solved or need is met. Disruptive opportunities can:
- Enable B2B players to place their bets correctly on adjacencies
- Create new businesses
- Develop new monetization models with recurring revenue structures
- Exploit hidden situations that result in profitable, sustainable growth
These opportunities can be highly profitable and impactful, but only if harnessed properly. If B2B organizations do not chart a strategic course of action towards properly capturing value from disruptive opportunities, the opportunity costs are high and, in some cases, detrimental. Therefore, it is no surprise that disruption has become one of the most important topics for our clients. Below are a few questions that CEOs and executives have asked Blue Canyon to advise on recently:
|“What trends in B2B are you guys seeing and how can you help our companies and our future companies proactively be on the leading edge?”||“Our business world is changing and we need to better understand market dynamics. What do you see coming? What shall we guard against or take advantage of?”||“How can we rejuvenate our business to grow faster than the underlying market? What does the new holy grail look like for successful business models, and how do we know if we are navigating toward it?”|
Because questions like these have become an underlying issue for many of our clients, we would like to share 3 key guidelines for B2B executives who are beginning to think strategically about disruptive opportunities:
- Make an Impact: Avoid incremental moves; find scalable models & larger roles; make it matter to the customer
- Assure Adoption: It’s not about cool technology; it’s about compelling economics for the customer
- Place Your Bets: Know the size of the prize; make choices and prioritize scarce resources
Make an Impact
Scalable moves that make an impact are required to capture value and propel growth. As an example, for many years regulatory pressures and new technology motivated HVAC suppliers to design and develop next generation energy efficient products. As a result of this focus on energy efficiency, our client developed enhancements that helped residential customers gain 2-3% energy efficiency on their systems. However, these savings only amounted to pennies on the dollar for each household, and ultimately weren’t enough to move the needle. Even though these efficiency gains met regulatory requirements, homeowners rarely recognized the value of these minor economic benefits. There was not enough impact.
Therefore, we suggested that re-architecting the entire building was a bigger, more disruptive play. Now that our client was focused on what matters impactfully, they focused on a new design to reduce leak-prone and bulky ductwork, introduce new easy-to-interface HVAC components, and ensure better functioning airflow, lower-cost zoning solutions, and smart home connectivity.
Creating impact is not always easy. To accomplish this redesign, businesses had to take on new roles and responsibilities. An end-to-end integrator would be responsible for leading the consortium and orchestrating the integration of all systems, components, and services, and other qualified players had to be engaged to fulfill these roles.
Stepping beyond incremental moves and taking on newer, larger opportunities, even in the face of regulatory pressures or competitor responses, is highly recommended. In order to lead, shape, and impact an industry, companies need to take advantage of growth opportunities by making bold moves and thinking big.
An overabundance of new technology has resulted in a crowded field of emerging ideas, new players, and creative apps. Trend setting technology involves eCommerce, scientific advancements, internet of things (IoT), big data analytics, autonomous vehicles, smart homes, smart equipment, and other smart applications. Leaders are challenged to implement the right models that will ultimately add to, and not dilute, earnings. But how do business leaders know which models will work and which ones will fail?
Planning a new business model to yield greater profitability is not always as clear and obvious as expected. So often we have learned that this is not an easy journey. This is especially true for businesses that aspire to move from a model involving lumpy, large-win revenue patterns (such as those based on tracking project backlog and order rates) to a model that monetizes recurring revenue based on SaaS data-analytics, insights, and/or outcomes.
The golden rule remains: to capture value one must create value for the customer. Success only results if a new business model offers customers an opportunity to benefit economically. If your customer sees the value and can clearly identify their economic benefit, you will go a long way to assuring adoption. For example, one of our clients successfully launched a new business model by offering data analytics to help operators track and reduce vehicle idle time, which results in fuel savings. Equipment monitoring and predictive systems help technicians arrive on time, at the right location, and in advance of pending failure to ensure equipment uptime. The value created for the customer is clear and definable, assuring adoption.
We have learned that one of the challenges is that these types of business models are prevalent across many B2B environments. However, the most obvious and easiest applications are not necessarily ones that are valuable to customers. When an offer fails to motivate a win-win-win across the customer chain from supplier to channel partner to end customer, dysfunctional patterns will prevail.
In another example, we learned that when our client’s new technology required dealers to change their business models without a compelling economic reason, the concept became “dead on arrival.” Business models that cause significant changes to a customer’s process or require customer chain participants to add additional resources, will be challenged. To ensure adoption and growth, new business models must have value creation opportunities that will scale appropriately, reward key ecosystem players, and prevail over their next best alternative.
Place Your Bets
B2B suppliers who have the lion’s share of the market want to continue to ensure customer loyalty and discover new ways to expand their offer across the value chain lifecycle of pre- and post-sales activities. We applaud suppliers that have experimented with IoT technology or with services that prevent, sense, predict, or monitor their products—especially in environments that are undergoing change. Suppliers who risk cannibalizing their current offer with innovation do so because the risk of doing nothing is higher. Additionally, the more levers that come with your offer the more likely you will achieve greater customer loyalty.
Given the many trend setting technologies available today, it is imperative to set the right course of action, properly invest scarce capital and operating resources, and be confident that the course you are taking will result in handsome returns. Understanding the requirements of the customer and the customer’s customer, and evaluating their underlying purchase drivers is a crucial starting point.
To illustrate, during a medical device client assignment we found that customer perceptions differed dramatically when evaluating the benefits of a new technology. We learned that some hospitals were prestige-focused, and to attract the right physicians and patients they embraced a newer molecular solution. Conversely, other hospitals valued driving efficiency over prestige, and as such were more price sensitive to our client’s new alternative. The medical industry is undergoing transformation, and to add to this complex environment we learned that not all hospitals are the same in terms of what they value. This information was critical in helping us guide our client to successfully target the organizations that would buy their new technology at acceptable price points. In order to succeed, you need to know where to focus your investment, time, and attention – and where not to.