To establish an innovative business model, disruptive start-ups use a strategy resting on two complementary processes: building a discourse which will engage clients and partners in the new ecosystem, also known as framing, and continuous adaptation of their business model in response to the needs of clients. This will be illustrated by the case of Salesforce versus Siebel in the business software industry at the start of the 2000s.
Cases of successful disruptive innovation, where a start-up manages to radically transform the functioning of an industry, remain exceptional. Among the best-known are Amazon with the distribution and sale of books or Netflix which revolutionised the film distribution industry in the United States. They have resulted in the creation of a new business model which shifts the industrial ecosystem’s centre of gravity away from the historic leader and towards the start-up, and ends up creating a new ecosystem around the start-up. Business
model innovation is characterised by new sources of value creation, the arrival of new clients and partners and the implementation of a new kind of organisation, which rivals the business model of the historic leader and gradually replaces it.
Revealing one’s intentions from the outset
Up until now, studies of disruptive innovation have been more interested in the reaction of existing businesses, and much less in the manner in which the start-up succeeded in establishing its business model. Hence, the importance of understanding the processes set
in motion by the disruptor, which starts off with slender means with which to attract clients, partners, the media and analysts, and ends up taking the lead over an established and much more powerful competitor, and in some cases, making it disappear.
This is the process that we call the disruptor strategy, whose aim is to reduce uncertainty in order to engage consumers and partners as players in the creation of the new ecosystem: from the outset, in order to get their attention and support, the start-up reveals its
intentions and ambitions through framing, ie, the construction of an effective discourse and presentation. At the same time, it must adapt its business model and its product to achieve the best possible offer for its clients and partners. The combination of these two actions
creates a virtuous circle and puts the historic leader on the horns of a dilemma: retaliate at the risk of legitimising the new business model, or do nothing and risk being overtaken.
Salesforce and the emergence of the cloud
The study of the emergence of Salesforce between 1999 and 2006 against Siebel in the management and client relation (CRM) software sector illustrates the concept of disruptor strategy. Originally, software publishers (Siebel, SAP) sold their clients CRM software and
costly products associated with maintenance and consulting services. Salesforce’s innovation consisted of coming up with a much less expensive business model, based on cloud computing, with SaaS services available by subscription. In the first instance, this product was aimed at consumers who were not part of the Siebel ecosystem.
Before Salesforce had even launched, it was already addressing the ecosystem with a discourse emphasising its unique affinity with the “no software” revolution, and then its leadership, via press releases, interviews and dramatic stunts. This framing found an echo with start-ups and small-to-medium-sized businesses lacking the means to invest in a heavy system; with partners interested in the new ecosystem; and with the media and analysts who relayed and amplified Salesforce’s discourse and took up a more critical position in relation to Siebel. At the same time as new consumers were starting to get interested in the product, Salesforce was continually improving it to reach the standards expected by the majority of existing consumers. By combining these two framing processes and adapting the business model, the start-up had started to seduce Siebel’s clients and partners within two or three years.
In the face of Salesforce’s offensive, Siebel didn’t react at first. The firm stayed with its old model without taking account of the new needs created by a competitor which it didn’t yet perceive as such. It only launched into the cloud in 2003, three years late. A vicious circle, symmetrical with Salesforce’s virtuous circle, falls into place: poor responses, mounting criticism in the media and from analysts, mass exodus of clients and partners to the new ecosystem. Finally, in 2006, Salesforce became the leading supplier of CRM services, while Siebel was bought by Oracle.
A situation that was hard to predict
The Salesforce-Siebel case is a prime example of the establishment of a new business model. It highlights the importance of these two complementary processes of framing and adaptation in the disruptor’s strategy. This is, of course, an individual case, but it shares elements with other cases of successful disruption like Amazon and Netflix. For businesses, there are a number of lessons to be learned from these results. For the disruptors, it’s about the importance of pulling on both levers at the same time, given that the temporal window is limited. That means they have to find a way to reveal themselves clearly, but without being too precise, so as not to limit their scope for adaptation. In its framing, Salesforce presented itself as the leader by stating that it was offering a better value product and that its service was cheaper, but without going into the key points of the new business model.
For the leader, it’s hard to know how to react. Siebel had logical reasons for not responding to Salesforce in a market sector in which – at first at least – it had no interest. It’s very tricky to predict whether a start-up will be successfully disruptive or not. The problem is that Salesforce gained a competitive advantage by learning faster than Siebel. Siebel didn’t ask itself the right questions for several years, and the needs of Salesforce’s start-up clients were ahead of the needs of its own clients. When the firm did finally take action, its cloud didn’t function as well as Salesforce’s one, despite an R&D budget and far greater human resources.
To avoid this, existing businesses must therefore develop a strategic vision, an understanding of what is happening in their environment, in order to try to learn more quickly than the start-ups and be attentive to the market of tomorrow. But it’s very difficult for a firm to say that in 10 years’ time its clients will want products that are completely different from those it has on offer today.
This article is a synthesis of the publication “An Ecosystem-Level Process Model of Business Model Disruption: The Disruptor’s Gambit”, published in the Journal of Management Studies. It presents the results of a longitudinal study carried out by Yuliya Snihur (Toulouse Business School), Llewellyn D.W. Thomas (Imperial College London, Universitat Ramon Llull) and Robert A. Burgelman (Stanford School of Graduate Business), from the case study of Salesforce and Siebel, combining a theoretical approach and the analysis of a documentary base of historic data.
[su_pullquote align=”right”]By Pierre-André Buigues[/su_pullquote]
Despite significant state aid, the French meat sector is losing ground against other European countries which are also in the Eurozone. Indeed, it’s the European market which has caused the deterioration of France’s position, and not globalisation, China, or other emerging economies.
No matter which sector we look at – poultry, pork or cattle – French meat farmers are in difficulties compared with their European competitors.
– The French pork market : Production is markedly down, from 25.5 million pigs a year in 2000 to 21 million in 2016. Over the same period, it went up in several other European countries. In 2000, France and Spain were producing pigs at the same rate, whereas today Spain is producing 46 million pigs a year. France is now a net importer of pork products. The sector’s competitiveness has been eroded due to high costs and lack of investment.
– The French cattle industry : France was the biggest European producer of beef in 2015: 1.49 million tons compared with Germany’s 1.12 tons and the UK’s 0.9 tons. 79% of the meat consumed in France was also produced there. Imports are essentially European. However, the average income of cattle farmers is among the lowest in the farming sector and is projected to decline steeply. In 2014, a typical cattle farmer’s earnings after tax were 22% below the average over an extended period (2000-2013).
– The French poultry sector has also seen a drop in production over the last decade. France used to be the second biggest exporter of poultry in the world, but today it imports 40% of the poultry it consumes. The country has a trade deficit with other European countries in terms of both volume and value, and this deficit continues to deepen. The majority of French imports come from other European countries, with far less coming from non-European countries like Brazil or the USA.
Why are we seeing such a serious deterioration in the French meat sector?
We will look at the two main factors behind the decline: Le refus français d’une industrialisation de la filière viande, d’où des économies d’échelle insuffisantes.
France’s resistance to the industrialisation of its meat sector, and hence insufficient economies of scale: France has always supported family farms but the international meat markets are high-volume markets where price is the determining factor. Unlike the French domestic market where quality is highlighted by labels (red label – farm quality) and constitutes a competitive advantage, on the international market, price is key. While Germany has positioned itself as a producer of cheap and standardised meat products with an “industrial” image, France has a “gourmet” image and premium products. Unfortunately, at this stage in its development, the international meat market, whose growth is being powered by emerging countries, has little interest in quality. Cost is therefore the strategic variable for success on the international markets, so the French sector is paying the price for high costs and an absence of economies of scale.
In the pork production sector, the average size of a pig farm in France is between 1,000 and 2,000 pigs, as against Denmark and Holland, whose farms average 2,000 to 5,000 pigs. Moreover, between 2000 and 2010, the average size of a pig farm has grown by 98% in Denmark, by 37% in the Netherlands, by 29% in Spain and by only 16% in France. Finally, German abattoirs often exceed 50,000 pigs slaughtered annually. In France, what is needed is far fewer abattoirs and comprehensive modernisation.
In the beef and lamb sector, France is likewise suffering from the small size of its farms. The lawsuit taken against the only French farm with 1,000 cows (ultra-modern farm with a giant facility to produce energy from cattle waste via a methanizer and fitted with solar panels), shows how hostile French public opinion is towards industrialised farming.
In poultry production, French farms are far more numerous and also far smaller than German ones: German, Dutch and British poultry farms are the biggest in Europe, with an average volume above 60,000. In France, more than half of all poultry farms have a capacity of between 1,000 and 10,000, because of the importance of quality and origin labels (Red Label, organic, Appellation d’Origine Contrôlée), whose product specifications limit the size of buildings.
With farm sizes which don’t allow for economies of scale, and with labour costs well above some of its European competitors, the French animal agriculture sector is in great difficulty and is losing market share.
An avalanche of costly production standards and over-regulation compared with European norms
Stringent regulation is an indisputable factor in the economic difficulties facing the French meat sector. (2)
Often complicated and sometimes incomprehensible, these regulations place a very heavy administrative burden on farmers. A Senate report estimated that an average farmer spends 15 hours a week on office work. There are two main reasons for the relatively high cost of these production standards in France.
First and foremost, farms in France are, as we have seen, smaller than in European competitor countries. They therefore don’t possess the human or financial means to assimilate and implement these standards. Second, regulations often change in this sector, environmental standards are more and more exacting and require significant investment.
What does the future hold for French meat farming?
European farming is no longer just a sector regulated by the Common Agricultural Policy, but a competitive sector. In order to develop French meat farming, there are two possible strategies:
– Strategic development of a quality-oriented farming sector : How can we find enough outlets for a high-end product with strong export branding to allow small farms to survive with high costs? There is a model in the French wine sector where prices are, on average, twice as high as the competition, and yet which still hold their own. This “high-end” strategy could save French farming. However, it will involve considerable investment in marketing and the international distribution chain.
– Strategic development of intensive, low-cost farming : How can production costs be reduced? By heavy restructuring, and the elimination of uncompetitive “small farms”. Massive investment would also be needed to create ultra-modern farms, with state agencies fostering fully automated mega-farms – a far cry from today’s situation.
Is there a middle way? Xavier Beulin, former president of the FNSEA (the French farmers’ union) has estimated that investment to the tune of 6 billion Euros will be needed “to develop a third way between industrial farming and diversity, high-tech and diversified farming, organic and robotic farming”.
[su_spoiler title=”Methodology”]References: Elie Cohen et Pierre-André Buigues « Le décrochage industriel », Fayard, 2014; and Pierre-André Buigues, « Refonder l’agriculture française » Journée de l’économie, Jeco , Lyon, Novembre 2016 [/su_spoiler]
[su_pullquote align=”right”]By Uche Okongwu[/su_pullquote]
Supply chain optimization essentially involves finding a compromise between striving for customer satisfaction at the same time as profitability. By adjusting the different supply-chain planning parameters, each company can achieve the performance level in line with its strategy and objectives.
The concept of the supply chain is as old as economics: from the supply of materials to production and delivery, the successive players involved in any given market represent the links in a chain, acting as customers and suppliers to each other respectively. However, increased competition and globalization have made companies realize that all the different players in their supply chain share a common goal, namely customer satisfaction. Consequently, how the supply chain is organized and how it performs are of crucial strategic importance for companies, and increasingly so. In this regard, the example of the aerospace industry is regularly covered in business news and highlights this strategic role perfectly; indeed, the industry has had to increase production rates to meet the growing demand and this has created tension throughout the chain. However, this problem actually concerns all sectors of the economy, whether in industry or in services. Over the last twenty years, researchers and managers have been looking at ways of optimizing supply-chain management to improve companies’ performances, based on the ideas of collaboration, integration and information sharing.
The difficulty in resolving this issue lies in the complexity of the supply chain itself; in addition to the number of links in the chain, we need to take into account the number of performance indicators and particularly the number of parameters that a company can adjust in order to meet its performance targets, which is infinite. Until now, the research had focused on one parameter or another, sometimes combining them, but in a limited way. For the first time, our study aims to go further by combining several parameters positioned at different stages and functions in the chain (planning, procurement, production, delivery), in order to establish which combination of key factors produces the best performance.
Performance: always a question of compromise
The first issue that needs to be addressed concerns the supply-chain performance, indicators. Many indicators are used, some of which are contradictory, since certain indicators are linked to profitability and others to customer satisfaction. For our study, we selected three: profit margin, on-time delivery and delivering the quantities requested. Ideally, an optimized supply chain should make it possible to achieve maximum scores on all these parameters, but in reality, no company can claim to be the best in every area. As such, you have to reach a compromise at some point, according to your market and objectives, by accepting to “sacrifice” part of your performance on a given indicator. With this in mind, the idea of optimum supply-chain performance depends on the objectives the company sets in terms of profitability and customer satisfaction, but also in relation to its position in the market. Consequently, the main challenge in supply chain planning is finding this compromise.
The case on which we worked was inspired by a real situation. It concerns a supply chain in the field of furniture, for the production of tables and shelves. Out of the 12 general supply-chain planning parameters we identified, we decided to alter six and to observe the result of the simulation on our performance criteria: the planning time-frame(short or long), the production capacity in terms of human resources (constant or adapted to the demand), the production sequencing (priority given to the oldest or the most recent orders), the duration of the cycle, the reliability of the forecasts and the availability or otherwise of stocks.
In the case of this supply chain, the production capacity appears to have a strong impact on margins and the ability to meet demand, whereas sequencing has a greater impact on the promptness of deliveries and the extent to which the response meets the demand.
Addressing the company’s priorities
These results confirm the initial hypothesis, namely that different combinations of planning parameters will have different impacts on the performance indicators. The different planning parameters cannot be considered independently of the performance criteria, hence the need to make choices. The ideal combination of parameters depends on the performance sought by the company.
Using the model developed in this study, managers responsible for supply-chain planning have a theoretical and practical tool to help them in their decision-making, allowing them to determine the best combination based on the company’s priorities. The framework and methodology developed, as well as the results obtained, are a genuine breakthrough in terms of research. To take things further, it would be interesting to combine even more parameters – as long as the computer-simulation tools available make this possible -, and to test the model on different supply chain structures and in other market environments.
[su_spoiler title=”Methodology”]To conduct this study, Uche Okongwu (TBS), Matthieu Lauras (TBS, Ecole des Mines Albi), Julien François and Jean-Christophe Deschamps (Bordeaux University) reviewed the available literature on the topic of supply-chain performance. Based on the following research question: “What combination of key factors in supply chain planning make it possible to optimize the performance of the supply chain?”, the authors developed equation models that they tested on a real supply-chain case in the furniture industry. The study was published in January 2016 in the Journal of Manufacturing Systems, in an article entitled: “Impact of the integration of tactical supply chain planning determinants on performance”.[/su_spoiler]
[su_note note_color=”#f8f8f8″]Uche Okongwu has been a Lecturer in Operations Management and Supply Chain Management at Toulouse Business School since 1991. He has combined his career as a researcher with that of an engineer and consultant in industrial organization. In 1990, he obtained a doctorate in Industrial Engineering at the Institut National Polytechnique de Lorraine (Nancy, France). He is currently Director of Educational Development and Innovation at TBS, having already set up the School’s industrial organization division [/su_note]