Challenge of the Start-Ups: ‘A Lot of Companies, Many Industries, Are in Denial’

Singapore-based Serguei Netessine is Professor of Global Technology and Innovation at leading business school INSEAD and Research Director of the INSEAD-Wharton alliance – he was formerly a faculty member of Wharton School in the US.

He has business experience, having worked for Motorola and Lucent Technologies after receiving degrees in computer science and electrical engineering from Moscow Institute of Electronic Technology. Netessine later earned his master’s and PhD degrees in operations management from the University of Rochester in the US.

“There are industries where [disruption] hasn’t happened yet, and these industries are in denial. I believe that it’s just a matter of time. Give it a few years and they will be in a different world”

The academic spoke to CFO Innovation’s Cesar Bacani about his current research, which focuses on business innovation and operational excellence, the impact of disruptive start-ups such as Uber on established industries and companies, and other issues. Edited excerpts:

Is everyone really at risk from the Ubers and Airbnbs of the world? Or are there industries and companies that are immune to these disruptors?

I take the view that they are all at risk, but different industries are at different stages. And I think a lot of companies, many industries, are in denial, saying: Hey, we’ve been around for hundreds of years. This will blow over.

I don’t think so. It’s interesting to see different things are just at different stages of disruption. You can clearly see that in the taxi industry, that’s already happened. Nobody can deny that Uber and GrabTaxi and Didi Kuaidi have completely changed the landscape of how you get transportation.

Then there are industries which are in the advanced stages of disruption. It’s still the case that the world is dominated by major banks that are typically very old and still doing fairly very well. But if you talk to the CEOs of those banks, they all clearly understand that disruption is coming.

What is fascinating is it’s coming from places that nobody could have forecast. You look at major entrants into the financial services category and you see companies like Apple Pay and Google Wallet. Could anybody have predicted that these players that have nothing to do with finance would become major players in the financial industry?

There are industries where it hasn’t happened yet, and these industries are in denial. I believe that it’s just a matter of time. Give it a few years and they will be in a different world.

How may disruptions come to these industries in denial?

We don’t know. We have some indications. If you look at a company like P&G, they own Gillette, which has been around for many, many years. Now a tiny start-up has come, called Dollar Shave Club. They have this very simple business model, where you pay a dollar a month, and they ship you razor blades.

These guys are now like 10% of the shaving market in the United States. They’re really killing Gillette. People forget to buy razors and they have to run to the store. It’s much more convenient if the razors just come to your door every month. You don’t even need to order. It’s not Gillette razors. Dollar Shave Club has its own private-brand razors that are much cheaper and hugely popular.

These guys do not really invest anything in R&D, unlike P&G, which has invested a ton of money in trying to come up with a better shaver. This start-up’s product is very simple. There’s nothing fancy on the shaver side. It’s more of a different business model.

Just like Uber. Did Uber really invent anything? Did they invent the taxi service? No, it already existed. Did they invent any technology at all? Not quite. They piggy-backed on existing technology like mobile phones and the Internet. It’s just a different business model.

Is the 3D printer going to be a disruptor in manufacturing, which seems still largely untouched in the Age of Disruption?

Certainly. Some manufacturers will be disrupted faster, some will be disrupted slower.

Airplane engines, trains and things like that, they have a very long life cycle. Planes fly around for 50 years and you need lots of spare parts to keep them operating. Most of these spare parts are not produced anymore, so you need to keep a lot of them in the same place, which is a real pain.

When so much money is poured into all kinds of innovation companies, certainly a lot of them are going to be failures. But you don’t need 20 Ubers; two or three will do to drastically change the face of the industry

You have all these planes standing there, waiting for parts to be replaced. You see engines sitting on the shelves because it takes a couple of months to get a part from somewhere. If you can produce spare parts with 3D printing [when they are needed], that will drastically change how maintenance repair optimization works. That’s just one example.

Now, 3D printing has been around since the 1980s. But one thing that is happening is that the cost of 3D printing has come down significantly. You can buy one now for a few hundred dollars. And second is, all these start-ups are trying various applications, trying to find what’s called the product-market fit. So, okay, we have this 3D printer. What is the specific application that you can scale up and have a significant economic impact?

The same thing is happening with drones right now. Prices have come down significantly and so there are all these start-ups that are trying to find new product-market fit applications. It could be security, construction, monitoring of solar panels. It could be monitoring of cattle on huge Australian farms. All those things take some time to test, but I think disruption will be pretty imminent.  

But then you have online peer-to-peer company LendingClub having problems and you have blood-testing pioneer Theranos slowly imploding. This could be contributing to the sense among established companies that this is indeed a flash in the pan and will go away.

I think one has to realize that innovation is always associated with failure. In general, 90-95% of start-ups fail. That’s absolutely normal. One or two or even hundreds of start-ups failing, that’s not an indication of anything new. That by itself doesn’t say much.

I recently did a report on the fintech [financial technology] industry and all the disruptions happening there. If you look at how much money was invested in fintech companies last year, 2015 versus 2014, it’s been growing unbelievably. Last year, about US$20 billion worldwide went into all kinds of fintech innovations. The year before it was US$12 billion.

When so much money is poured into all kinds of innovation companies, certainly a lot of them are going to be failures. But you don’t need a lot of them to succeed. You don’t need 20 Ubers; two or three will do to drastically change the face of the industry.

But venture capitalists have lately been staying away from start-ups. And some of the unicorns, those start-ups seen as worth US$1 billion or more, are seeing their towering valuations toppling over.  

Yes, yes, there is certainly some slowdown, but it’s not a complete drying out of funding . . .  I don’t think there’s going to be a systematic crash or anything like the year 2000, 2001 [with the bursting of the tech bubble]. I don’t think we are at that stage, at least not yet.

There will be some correction. I hope it’s not a very big correction. A lot of start-ups will have to make do with less money and must try to reduce their dollar burn rates.

What’s the second approach?

The alternative approach is to say: Look, we are too big, we are too old, we are too focused on our existing business model. Why don’t we just partner with someone who can do innovation better? And those are typically start-ups.

“It would make total sense to have a separate organization with its own bottom line and completely different KPIs. You need a separate organization that, instead of fighting against the walls established by the old organization, would be a more nimble start-up”

This is what big companies are doing increasingly. I did a recent report which was written with 500 Startups, one of the biggest venture capital firms around. So what you can do, you can try to engage into all kinds of activities with start-ups which are in your industry. You can offer them co-working space, you can invest in them, you can learn from them. Send your managers to work with start-ups, to manage start-ups, and then you can decide what you want to do.

Do you want to open your customer base to these start-ups and help them grow? Do you want to actively hire from them? Normally, good innovative people don’t come to work for corporations. It’s not interesting for them. So you may want to acquire start-ups in order to acquire people.

Or maybe you want to play it like Yahoo, invest into Alibaba and then get rich because Alibaba is growing, not you.

I had a panelist in the recent CFO Innovation Indonesia Forum whose brick-and-mortar supermarket chain created a parallel and independent organization for e-commerce. They felt that the incumbent was so large and so set in its ways that they had to start from scratch with the new model. Is this a feasible approach?

I think often this makes total sense. It’s tricky to tell your physical store to also be a part of online selling. You want them to drive customers online, but that could drive down traffic to the store. As a result, nobody [in the physical store] is going to do this.

In this particular case, it would make total sense to have a separate organization with its own bottom line and completely different KPIs. You need a separate organization that, instead of fighting against the walls established by the old organization, would be a more nimble start-up.

And if the new model is more successful, you can transition to that new model and let the old model wither away.

Exactly. You decide at some point to sell the old model. You have a number of options. But now, at least you have a portfolio, so if one dies, another one survives.

SingPost is an example of the first approach, an enterprise that innovated itself into a new model. Do we have an example of the second approach in Asia and what the outcome has been?

Outcomes are a little harder, because this is a relatively recent phenomenon.

In Singapore I would highlight DBS Bank. They are experimenting with a lot of things. They have programs for start-ups, which are very entrepreneur-friendly. When you open an account with DBS, you can access their pre-accelerators, which is a three-month program where you get seed money to start and grow.

They have DBS Accelerator, which selects up to eight start-ups to come to Hong Kong to accelerate their fintech businesses. And then they have DBS Venture Debt Financing [for growth-stage start-ups]. They have DBS BusinessClass, in which I participate, which is a membership program for entrepreneurs. They have other accelerators like start-up boot camps and social venture challenges that they sponsor.

And they have cross-referral agreements with peer-to-peer lending platforms MoolahSense and Funding Societies. DBS refers smaller businesses that do not qualify to borrow from it to the P2P start-ups, which in turn refer to DBS the borrowers on their platform that have successfully raised two rounds of debt issues.

That’s right. DBS has very strict rules and KPIs that regulate who they can finance. A lot of smaller, lesser known companies would not be able to get a loan from them. Partnering with these P2P lenders allows them to get more clients [that eventually qualify].

“The beautiful thing about business model innovation, unlike innovations with new products and technologies, is that you don’t really need a lot of money. Very often, business model innovation is quite cheap”

Would you need outside consultants to do the business model audit and help with business model innovation?

What I believe is that business model innovation has to be done by people within the organization. It’s not the kind of thing that can come from outside.

Consultants – and I play this role very often – can facilitate the process. They can run the process of business model audit. I can give the tools to people and say, hey, here’s how you identify inefficiencies and here’s how you generate ideas for what the solution might look like. I can facilitate. I can help companies select the best ideas.

What comes next is experimentation. Here are the ten ideas for business model innovation, now we need to pilot them. The beautiful thing about business model innovation, unlike innovations with new products and technologies, is that you don’t really need a lot of money. Very often, business model innovation is quite cheap.

I believe that, with enough determination and enough clever change management, anybody can accomplish business model innovation. This is the job of everyone because the business model involves operations, sales, finance, marketing – it involves all lines of business. Unless all these people come together and do it, that’s not going to happen.

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