This was intially published to the #thinkdifferent newsletter. If you would like to get advance insights, well you need to be smart enough to know what to do...
Business Model Disruption in Real Estate
In many ways, this section goes to the heart of explaining HOW the business model of shopping centres will be disrupted. Rather than speculate or theorise about it, I looked at disruption in other industries and identified to key elements of disruption. There are many to choose from (Taxis, Media, Movies and even Retail). I considered all of them and I found a patterns of disruption that (a) conforms to the way we think as revealed in our dialectical cycles of system change and (b) it reveals a set of consistent principles.
It is worth noting that entrepreneurs who disrupt industries, rarely can articulate with foresight a list of dimensions that they aim to ‘disrupt’. It is a result of opportunistic thinking - simply doing the opposite of the incumbent’s strategy.
It is only with hindsight, once the disruption has occurred that we can sit back and see what actually happened, and more importantly what worked. We have had sufficient examples of effective , technology-led disruption in multiple industries to start seeing the patterns.
Like Uber, not like Tesla
I don’t consider, for instance, that Tesla is a ‘disruptor’. Their business model is at its core quite similar to the rest of the auto industry. Electric-powered cars are more disruptive than say the inflection that occurred when the industry went from normally-aspirated vehicles (with carburetors) to fuel-injected vehicles, but the nature of the disruption is relatively similar. EV will fundamentally disrupt the oil exploration and fuel distribution business, but not so much the automobile manufacturing industry.
As will be explained below, one of the characteristics is that it is a case of winner-takes-all post disruption. With Tesla other manufactures can (have) follow suite and do it relatively quickly.
The principles below are simply the key strategic elements of any business - brand, value, price etc. By comparing the industry sector before and after the disruption provides a powerful insight into what the future is for industries yet to be disrupted.
The criteria considered are:
- Determinants of Supply
- Nature of Supply Chain
- Marketing Characteristics
- Roles of the physical location (Real Estate
- Nature of Service
- Nature of Value
- Determining the Experience
The question is simply this: how did these criteria change in the NEW business models? Given the opportunistic nature of business evolution (go where the opportunity is); the hypothesis is that the disruption will occur in the direction of the opposite (from thesis to antithesis).The disruption that AirBnB brought to the holiday/short-term accommodation sector seems to be an appropriate case study as hotels function very much like shopping centres on many levels. What happened?
The idea of a ‘brand’ was traditionally used to identify the nature of the product; that is communicate essential features of the actual product. In the new model, the actual product can be anything anywhere - from a six star experience, to a tent on a farm. The brand is a platform that attracts people to it and is not determined or influenced by the actual product. No one associates AirBnB with a certain type of product, a certain type of experience.
Supply and Demand
In the old model the winner was the brand that owned the supply. In the new model, the winner owns the demand (the market) and suppliers follow. There are challenges in creating these ‘marketplace’ business models initially, but once the tipping point is reached, it becomes self-fulfilling.
As much as traditional businesses claim and aim to be ‘market-led’, the reality is that they are very much in charge of their own destiny, deciding what the strategy, execution and so forth are. Traditional marketing is top down, from the inside out. In the new format, the marketing becomes outside in and bottom up. Other than 'founder ego', there is no reason for AIrBnB to advertise - the participants advertise their participation as they wish.
Roles of the physical location (Real Estate)
At the dawn of commerce, the production of goods and the consumption of goods were co-located. In time, as distribution expanded, the importance of owning locations mattered a lot. Trade routes determined marketplaces. The one with the best real estate won. Hotels that opened prime locations on the ‘trade route’ of holiday destinations owned the real estate to differentiate themselves. This created high barriers to entry.
AirBnB owns no real estate and the barriers to entry come from owning the market, not owning the supply of rooms.
Nature of Service
Businesses choose to differentiate on the level of service they offer, usually adding services = adding value and adding margin. In the new model, there is typically only the essential services.
AirBnB does not facilitate insurance, does not help its suppliers to procure cheap soap. Not additional services.
Nature of Value
The value procured can range on a scale of tangible to intangible. (Pure product to pure service). In all major instances, the disruption has been in one direction - towards intangibility. (There is currently the emergence of the Internet-of-Things, which has a distinct tangibility to it; again the ‘antithesis of the thesis offered by the internet.)
I have spoken and written at length about ‘ephemeralization’ - the idea the the things we buy seem to be increasingly ephemeral - even for digital products. The storage disk becomes the Cloud and the CD becomes a ‘stream’.
Consumers always wanted unlimited choice (but it must be easy to choose and be frictionless to transact) and so the ephemeralization has enabled that to the extent that consumers now have practically unlimited choice. In the old model, there are obvious constraints and limitations in the offer.
Curation: Determining the Experience
The brand owner determined the experience. In fact, the brand ‘promised’ the experience. The hotel operator determined the level of ‘stars’ of the experience. AirBnB has very little control over the quality of the offer, relying on consumer rating mechanisms to communicate the nature of the experience. (As aside: AirBnB is attempting to enforce social justice agenda by setting rules as to who the operator may or may not decline to host. This runs counter to the core premise, and it will be interesting see how it plays out.)
Capacity & Scale
In traditional business there is often a capacity constraint that limits the operational capacity. Only so many locations, only so many customers. In the new marketplace model, there are virtually no capacity constraints to limit growth. AirBnB is not even limited by the number of houses on Earth - they can keep adding ‘experiences’ or they could even colonise the moon.
The old model of pricing was quite structured, with each member of a the supply chain carving out a margin that kept the whole system alive. Each stage of the chain was carefully and formally negotiated. In the AirBnB world pricing is variable. There is a ‘clip-the-ticket’ mentality that operators adopt - often taking a relatively small portion of the price, relying on scale to provide the returns by keeping resistance for newcomers low.
The Dialectical Meta-Pattern
The dialectical pattern always seems to emerge doesn’t it? When you carefully analyse all the changes articulated above (or summarised below) you will notice that there is a dialectical pattern. The full process is explained in THE BEAT OF THE MALL - so you will just have to stay tuned for more on that.
The table below summarises how the traditional model of hotels compares to the business model of AIRBnB. Both industry sectors aggregate and sell rooms to visitors and derives a profit from the amount spent by the guest.
The key takeaway is quite simple, and quite self-evident: whatever the features are of a currently successful business model (the THESIS), the future lies in doing the opposite (the ANTITHESIS). Ovder ttime, these differences get SYNTHESISED.
And then a NEW ANTHITESIS emerges.
THESE ARE THE QUESTIONS TO ASK:
What are you doing now?
What is the opposite?
Is that possibly the future?