Emerging Trends | SMEs/Entrepreneurship
April 4, 2018

Disrupting business models is not enough. We need tech innovation too

By Ville Satopaa and Pranav Mehrotra

We hear the word “innovation” all the time. It has become such a buzzword that we forget what it means. For some people, innovation means building the next Facebook. For others, it’s a new way to cook an omelette. For the purposes of this article, let’s break innovation down into two general categories:

Product
Often, when people are talking about innovation, they are thinking about a product innovation. This could be the development of a new product, such as a 3D TV; a new feature in an existing product, such as a watch with Bluetooth; or an improvement in a product’s performance, such as the iPhone X compared to the iPhone 6.

This type of innovation is typically driven by technological advancements, and is visible to consumers. One example is Tesla’s electric vehicle, which is a product innovation in the automobile industry.

Process
This is typically an internal operational innovation. It could involve using technology in manufacturing and supply chains, or even in sales and accounting methods. One of the best examples of process innovation is Henry Ford’s invention of the world’s first moving assembly line. This process shortened the time it took to produce a single vehicle from 12 hours to 90 minutes.

Over the last decade, one particular innovation – the shared economy – has sparked many more. This was a type of process innovation, disrupting the business models of traditional industries. Uber and Airbnb are popular examples of the shared economy. Both firms have transformed the business models of taxi companies and hotels, rejecting the asset-heavy model for one that leverages existing under-utilised assets.

E-commerce is another example of process innovation. Platforms such as Amazon and Ebay facilitate the trade of goods between suppliers and consumers without a physical retail store.

But can process innovations fuel the Fourth Industrial Revolution alone? In this article, we’ll take a look at the growth of shared economy start-ups, compare the two types of innovation and explore ways to find a balance between them.

The hype around shared economies

The shared economy, best known for crowd-based marketplaces such as Airbnb and Uber, blossomed as the recession set in. It was also a time of aggressive growth for social media. Technology platforms enabled the shared economy by providing access to idle assets such as hotel rooms and car rides. People with something to spare or share gained fresh streams of income. The international sharing economy was worth around $15 billion in 2014, and is on track to reach $335 billion by 2025, according to PwC.

There are 3 reasons for the growing number of shared economy start-ups:

Low barrier to entry

The shared economy’s business model innovation is not typically capital-intensive, as it utilises access to previously private resources, such as cars for Uber or homes for Airbnb. This lowers the overhead for young companies or any individual with basic programming skills trying to enter the market.

Disruptive growth potential

The shared economy increases the available customer base, as it enables customers who can’t afford to own an asset to access it on demand. For example, Boatbound, a US leisure boat rental firm, offers customers the chance to enjoy an afternoon on the water without the cost and burden of boat ownership.

Since these start-ups connect producers and consumers directly, and further depend on the growth of both producers and consumers for the success of the platform, they can often achieve exponential growth with network effects. Given the massive growth that shared economy start-ups have reached in the past few years, and the attention the media has given them, entrepreneurs are attracted to Uberizing the next industry.

An estimated $23 billion in venture capital funding poured into the market between 2010 and 2016. Successful start-ups, such as Airbnb, have gained immense growth and valuation. In March 2017, Airbnb was valued at about $31 billion – roughly the same as Marriott International after its acquisition of Starwood Hotels and Resorts Worldwide.

“That could be me”

With disruptive growth potential and a relatively low barrier to entry, the perceived upside seems huge. Often we hear about unicorns (start-ups valued at more than $1 billion) making immense amounts of money, and begin to think: “I could have done that if I had stumbled upon the right idea”. It’s easy to think these entrepreneurs just got lucky – that they picked the right direction at the right time, then leveraged technology to accelerate.

We tend not to attribute their success to their intelligence, as we might with, say, Tesla, and other tech innovations that require a PhD in engineering or physics. In this sense, I compare entering the shared economy to playing the lottery: you have a small chance of winning; anyone can enter; and if you do win, you will win big. Product innovation is a different scenario.

Balancing business model innovations & product innovations

While the shared economy is disrupting several traditional industries and making conventional companies rethink their business model, it’s important to consider whether innovation based on the shared economy alone is sufficient.

Business model innovation must be accompanied by technological innovation, too. If the smartphone had not been invented, we would have no ride-hailing app. It’s important that we continue to reinvent the wheel. The Fourth Industrial Revolution will be driven by both types of innovation. Product innovation has already fuelled technology-enabled shared economy businesses. Disruptions such as quantum computing, artificial intelligence and the Internet of Things will also fuel business model innovation across traditional sectors such as healthcare, law and insurance. The relationship can be symbiotic.

Creating symbiotic hype

Increasing interdependence between the two types of innovation, in an organic manner, would create balance and reduce the two key barriers to entry for product innovation – investment and talent. Here are several means of doing so:

Investment through equity crowdfunding

Crowdfunding has been a popular shared economy means to fund new ideas. It can be as simple as a Kickstarter project to raise money and interest, or as sophisticated as equity crowdfunding. The latter enables individuals to buy shares in businesses before they list on the stock exchange. It can be lucrative for both the entrepreneur and the investor, by delivering bigger profits, but it brings greater risks.

In Australia, one of the seven licensed equity crowdfunding companies, Equitise, is currently raising money for Xinja, Australia’s first independent digital bank. It has already raised more than twice its minimum target of AUD $500,000 through investment parcels as low as AUD $250. About 700 investors have each injected an average of AUD $1800.

Equitise anticipates unveiling more investment opportunities, including a gin distillery, brewery, boutique clothing company and food chain. The minimum investment will be as little as AUD $50 and will be open to anyone over 18. Equity crowdfunding provides a good foundation for generating shared value in the form of ownership, and allows anyone who wants to invest to do so.

Leveraging equity crowdfunding would reduce the barrier to entry for product innovation. It would make capital easily and efficiently available, and encourage people with ideas for tech innovation to pursue them.

Talent through crowdsourcing

Several platforms have emerged on which the shared asset is talent. They connect people looking for flexible and freelance employment with people hiring for short-term projects.

Transformation through education

Education institutes can play an important role by including practical, product innovation-based projects in their curriculum, to emphasise its importance.

So far, the shared economy has disrupted traditional sectors. But it’s time we leverage it to disrupt the way we innovate. There are more Elon Musks and Mark Zuckerbergs out there, with product ideas to fuel the Fourth Industrial Revolution. Equity crowdfunding and talent crowdsourcing could encourage the necessary “that could be me” motivation.

By Ville Satopaa, Assistant Professor of Technology and Operations Management INSEAD, and Pranav Mehrotra, MBA candidate, INSEAD

This article first appeared on the World Economic Forum Agenda, view the original article here.

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Disrupting business models is not enough. We need tech innovation too

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