Nintendo developed the
Wii specifically to target
families, a strategy that
caught the disrupters (Sony
and Microsoft) by surprise.
requires its own dedicated business model.
Companies are being asked to make similar decisions in other industries. Consider the emergence of
price-sensitive customers in the auto industry. To
tap into the low end of the market, established carmakers are weighing whether to sell new brands to
the low end using their existing business model or
develop a separate business model. With the exception of India’s Tata Motors Ltd., most car companies
have chosen to stay with the existing business model.
Airlines are weighing a similar issue: Should they
develop separate business models to serve price-conscious consumers (as Southwest Airlines and
easyJet have done), or can they cater to this market
segment by offering cheap seats and no frills on their
existing planes? Many airlines (including Continental, BA, KLM and United) began with the former,
but now most are shifting to the latter.
In making this decision, the question is: Do the
new customers represent an entirely different market requiring a different set of value chain activities,
or are they just another segment that can be served
with the existing business model? The way most
banks approached Internet banking suggests that
they looked at the new customers as just another
segment that could be served with their existing
business models. On the other hand, banks like
ING (with ING Direct) and HSBC (with First Direct); airlines like Singapore Airlines (with SilkAir)
and Qantas (with Jetstar); and various companies
including Tata Motors (with the Nano) and Dow
Corning (with Xiameter) have all looked at price-conscious customers not just as another segment
but as a fundamentally different market that required a dedicated business model.
Obviously, there is no “right” way to look at the
new customers — a lot depends on how aggressive
a company wants to be. Consider Nestlé S.A. To
reach affluent coffee drinkers, Nestlé created a new
unit called Nespresso and gave it the freedom to develop its own business model. Nespresso operates
more like a luxury-goods manufacturer than a
high-volume consumer goods company. Nestlé has
since developed a new line of coffee makers for discerning coffee drinkers at the low end of the
spectrum. But rather than create another business
model, it manages the new line (called Dolce Gusto)
as part of the established Nescafé division. Same
company, similar products, different organizational
decisions on the same challenge!
The issue of whether a new set of customers is
another segment or a different market is so subjective that some companies treat it both ways. In the
United Kingdom, Waitrose Ltd. treats home distribution of groceries as both a segment and a market.
On the one hand, it offers home delivery through
its existing supermarkets. On the other hand, a new
unit called Ocado Ltd. caters to the needs of online
customers using a targeted business model.
Why does a company decide to treat new customers as a totally different market rather than as another
segment of the existing market? Two important considerations are the size of the new market and its
growth potential. The bigger the new market, the
more likely the company is to be aggressive and to attack it as a separate market. Another compelling
reason to approach it as a different market is that the
new market is so strategically distinct from the existing market that the business model doesn’t apply. Still
another reason may be that serving both established
and new customers with one business model may be
so difficult that another solution is necessary. 12
However, the most important factor is top management’s attitude toward the newly created market.
A recent academic study found that new markets
are made up of two types of customers: customers
of the established companies that desert it for the
new value proposition, and new customers entering
the market for the first time. 13 Therefore, the question that all established companies need to answer
is: Is my goal to limit the cannibalization of my
existing market or to exploit the new one? If the goal is
to pursue the new opportunity aggressively (rather
than defend against the threat), the company will
likely choose to approach it as a new market that requires its own business model. 14
Question #3: If I need a new business model to
exploit the new market, should I simply adopt
the invading business model that’s disrupting
my market?
Once a corporation decides to enter a new market
using a new business model, it faces a make-or-break
issue: exactly what business model to adopt. The
temptation is to mimic the business model of the
disrupters — after all, if that business model worked
