Choosing not to disrupt (Embedding in a value chain)

This post is a continuing part of an on-going series on entrepreneurial strategy. The previous posts in the series involved disruptive strategy and are here and here. Recall that the notion of entrepreneurial strategy is based on the foundation that once you have an idea the business model that is matched to commercialise that idea is a choice. And there are many options available. In previous posts, I suggested that a good way to assist yourself in searching for the right business model is to consider two dimensions of choice: (a) whether to compete or cooperate with established firms and (b) whether to focus on execution as opposed to focusing on controlling your idea more directly. A disruptive strategy involved one particular set of choices whereby you chose to compete with established firms and chose to focus on execution.

Today, I want to explore the differences between competing and cooperating with established firms while still have a focus on execution. Recall that when you try and add value in a market by executing what you are doing is trying to establish and continually re-invest in capabilities that put you ahead of potential competitors: either by lower costs, higher quality or some combination of the two. Under a disruptive strategy, these capabilities have to be such that you are able to out-compete established firms — at least in some market segments and perhaps because those established firms face an innovator’s dilemma. That is, you pursue your start-up in the hope that established firms won’t be able to cotton on to what is happening until you have established some capabilities that put you amongst the leaders in the market. This is the strategy Amazon has pursued with respect to retailing.

When you choose to cooperate with established firms, you reduce your reliance on the innovator’s dilemma as a shield against quick incumbent reaction. For Peapod, for example, they were able to embed themselves within the existing value chain of incumbent supermarkets by supplanting a function previously carried out by their own consumers — shopping and delivery. Even if Peapod were so stunningly successful that all their consumers eventually wanted to use this method, the incumbent supermarkets would not notice this in their sales. For this reason, we will give this the suitably ordinary but accurate name: a value chain strategy.

The name reflects an accurate picture of what is going on here. Whereas a disruptive strategy often seeks to replace existing value chains, a value chain strategy seeks to work within existing value chains. The case of Webvan versus Peapod illustrates this distinction nicely. Likewise Amazon’s initial online book competitors were sourcing from existing bookstores. But think about Uber versus Hailo in taxi services. Uber has entered clearly with a disruptive strategy and is seeking to supplant existing taxi companies. By contrast, from the get-go, Hailo has worked with existing taxi companies to provide a means of hailing a cab from a mobile phone. Here, for instance, is what Hailo’s CEO said:

“Well, we think you don’t have to destroy an industry to be disruptive,” he says.

It sums up the difference between the two services quite well. Whereas Uber is provoking riots and city shutdowns across Europe, Hailo has quietly built an army of registered, licensed drivers who see the service as a totally compliant step into a digital future.

But does the level of kickback that Uber is getting – together with a whopping $1bn funding round – mean that Uber is the true disruptor, with Hailo being the new ‘disrupted’?

“I don’t agree with that,” says Barr, a former Starbucks global boss. “What we’ve done is to show that we can work well with drivers and regulators. We value that all of our drivers are properly licensed. That means there are no concerns with regard to our drivers’ safety records or anything like that. We think it gives comfort to people as well as our drivers.”

Unlike Uber, Hailo largely uses existing taxi drivers for its services. The company that was founded in London by a couple of taxi drivers is now expanding across Europe and the US, with over €50m in funding behind it.

That can’t be clearer. The difference between disruption and not is built into each company’s identity. And the market has made its bets. Uber has attracted $1.5 billion in funding whereas Hailo has $77 million. That is quite a difference. And, to be clear, orders of magnitude differences in funding are not uncommon based on various in entrepreneurial strategy alone. Moreover, at the moment, it is not possible to predict which model will win out.

In this type of situation, it is not very useful to ask precisely which strategy is the right one. We don’t really know precisely because the learning process is being conducted by the start-ups choosing different strategies right now. The better question is: what does a start-up expect to learn from a value chain strategy?

The first thing is to see whether the start-up actually can develop capabilities that are of value within existing value chains. For instance, it may have turned out that for Peapod, no one really wanted to pay a premium to have someone shop for them. The second thing has to do with the reaction of established firms. In particular, you are hypothesising that what you develop as capabilities will be such that established firms will not be able to crush you later on via vertical integration or sponsoring the development of equally capable firms as developers. That is, can you maintain some sort of priority as the preferred supplier in the value chain?

For Peapod, the answer turned out to be ‘yes’ but it was qualified. One reason was that prior to being acquired, Peapod was successful enough that it started to explore bypassing supermarkets with its own distribution lines. That is, it went disruptive in a small way. That may have been foolish but it also may have signalled to established firms that Peapod had other options. Of course, Peapod was acquired and became the exclusive provider to one large supermarket chain. In that respect, its trajectory moved away from a focus on execution and built in some control elements. This is not uncommon. I am trying to simplify the space of strategies here to give entrepreneurs a picture of their choices but it is necessarily over-simplified relative to the realities of a more dynamic environment.

To those who think that value chain is someone of a ‘cop out’ relative to the more heroic disruptive counterpart, you should think about just how courageous it is. You are ceding some competitive options in the hope of a good and profitable working relationship with incumbent firms who didn’t come up with your innovation. That is a bold move and may also be a bad one. My point here is that it is an option and that, in some circumstances, it can mean the difference between having a successful venture versus not.