In the history of human progress, there are moments when our creativity reshapes the world as we know it. The advent of the internet, for instance, bridged continents and brought the world to our fingertips. Once a fledging network of interconnected computers that began as a solution to share research data among scientists, internet went on to rewrite the rules of communication, commerce, and culture. It was the birth of a new life-system that would fundamentally redefine how we live our lives.
By now, innovations fueled by internet technologies have ‘eaten’ (read- disrupted) media, telecom, professional services, retail, and continue to increasingly ‘eat’ banking, health care, education, energy, transportation, and practically everything imaginable. Disruptions of such magnitude don’t stem from innovating within existing systems, neither do they come from focusing on consumer grievances alone. They emerge when we challenge the very life-systems that dominate our present-day interactions with the world.
In this article, we explore the philosophy of 21st century startups that challenge existing life-systems, which underpin our economic and societal structures, architect paradigm shifts in the world. And why they often outshine their larger counterparts in propensity to catalyze change that transforms industries, reshapes markets, and rewrites narratives of our age.
Underpinnings of status-quo
Before we talk of disruption, it’s pertinent to explore the underpinnings of status-quo. Our interactions with the world that we live in are guided through established and generally-accepted systems. In order to shop for physical products, we visit retail stores or explore online marketplaces. In order to avail a cab, we’d go to a taxi stand in the past. Today, we tap apps such as Uber or Lyft to do the same. In case of a sickness or discomfort, we visit a hospital. We have a system for our daily commute – whether that’s using our own vehicles or taking a bus or taking a train. These systems are an integral part of our daily experiences. We will refer to these as life-systems. They make our lives less chaotic. They guide our personal budgets and finances. They determine our mood on occasions. Life-systems are important facet of our daily experiences.
Life-systems span across various domains, from the monetary systems that dictate our economic transactions to the cultural norms that influence our social behavior. These systems ensure that our lives are not merely a collection of isolated moments or individual experiences. It’s not that these systems are perfect by any means, and that consumers don’t experience challenges and frustrations. Yet, consumers yearn to keep their life-systems intact. Consumers desist constant changes. These systems give them a sense of certainty and comfort.
Prevalent consumer issues, however, are windows to realizing the constrains and limitations of dominant life-systems. Most innovations happen within these life-systems, tending to address the prevalent consumer issues and concerns. Disruptions happen when present day life-systems are challenged, often with alternatives that are qualitatively superior to those on more than one count of value.
Simple, isn’t it? Hardly, of course. Unless due to an extremely rare stroke of genius, qualitatively superior alternatives only come into existence when multiple flags fall in favor – invention of a new technology, maturing of an emerging science, falling cost of technology adoption, social, political, and world events, sweeping changes in consumer values and beliefs, and/or drastic changes to existing regulatory environments.
But, if and when these conditions do become ripe for inventing alternate superior life-systems, how does one recognize the moment and who is in a position to do so?
The Approach of Enterprises
Enterprises excel at incremental innovation and problem solving. They meticulously analyze consumer grievances and strive to provide solutions that optimize existing processes. Most, if not all, large enterprises operate within the framework of accepted life-systems. They build their business and their operations around the prevalent structures of these systems. They scale with the consumers who subscribe to these life-systems. The stability of these life-systems matters to enterprises because most of their capital is locked into it. An established order also allows enterprises to focus on adding consumer value within the confines, for instance, enchaining consumer experience while delivery services.
Consider the automotive industry, a classic example of enterprises operating within established life-systems. Traditional automakers have, over the years, focused on a number of innovations within well-defined parameters and constraints – that automobiles need to be powered by gas. They improved fuel efficiency, safety features, and user experience while adhering to the prevailing norms of internal combustion vehicles.
There is, after all, strong economic rationale behind enterprises’ tendency to focus on innovating within existing life-systems. Imagine a well-established automobile manufacturer, AutoEnt, operating within the traditional combustion engine life-system. AutoEnt has invested heavily in its production facilities, supply chain logistics, and workforce, totaling an investment of $2 billion dollars. The company has a loyal customer base accustomed to gasoline-powered vehicles.
Let’s say, AutoEnt is contemplating innovation. It has two paths to choose from – innovating within the combustion engine life-system, and radical disruption by transitioning to electric vehicles.
Say, AutoEnt decides to pursue the first path. This path demands an investment of $100 million. Given the familiarity of consumers with gasoline-powered cars, market adoption is high at 80%. The profit margin is 15%. Expected Profit = (Market Adoption x Profit Margin) – Investment = (80% x 15%) – $100 million = $12million – $100million = -$88million. AutoEnt faces a short-term loss of $88million due to the substantial investment and relatively modest profit margin of incremental innovation. However, this strategy minimizes risk, leverages existing infrastructure, and ensures regulatory compliance.
Alternatively, let’s say AutoEnt decides to pursue a radical innovation by transitioning to electric vehicles, thereby creating a new product life-system. This necessitates a significant investment of $1billion, as it requires retooling factories, establishing new supply chains, and retraining the workforce. However, it offers the potential for a higher profit margin of 25%. The expected market adoption is 20%, reflecting the uncertainty and resistance associated with such a dramatic shift. The expected profit in this case would be: Expected Profit = (20% x 25%) – $1billion = $5million – $1billion = -$995million. In this case, AutoEnt faces a substantial short-term loss of $995million. Despite the promising margin, the high initial investment and uncertain market adoption this approach economically challenging.
In this thought experiment, the enterprise’s focus on innovating within the prevalent life-system, despite the lower profit margin, appears economically favorable. It not only minimizes the risk of significant losses associated with radical disruptions but also capitalizes on existing investments, consumer loyalty, and regulatory compliance. These considerations underscore why enterprises often opt for innovations within prevalent life-systems rather than pursuing disruptive innovations that challenge the life-system.
Not all alternatives are capital intensive of course. In fact, many digital-led aren’t, enabling swifter entries of new players and startups inventing new systems of value. Enterprises, however, continue to face similar challenges to even pursue those opportunities. Enterprises have finite resources and must allocate them judiciously. Incremental innovation is often perceived as a more efficient allocation of resources compared to pursuing radical innovations that may have uncertain outcomes. Many enterprises are part of broader industry ecosystems. Innovating within well established life-systems ensures compatibility and synergy with other ecosystem participants, such as suppliers, distributors, and partners. Publicly traded enterprises are accountable to shareholders who expect consistent returns on investments. Incremental innovations helps meet shareholder expectations for stability and growth, and also allow enterprises to defend their market positions by innovating within established life-systems.
But focusing entirely on innovating within prevalent life-systems also presents new challenges to enterprises over time. Take the example of the auto industry again – most people probably assume that today’s cars, crammed with high tech and nifty built-in computers that monitor performance, are more reliable than in the past. Yet, it appears that the opposite is the case. According to J.D. Power’s Vehicle Dependability Study from a few years back, late-model used cars are getting less dependable over time. As new technologies emerge, enterprises find it increasingly challenging to bring those into existing life-systems, without compromising the reliability of the prevalent models.
The Spirit of Startups
Startups, or even companies that operate with the spirit of startups, adopt a different philosophy than enterprises. Startups, generally speaking, have no lock-ins into the existing life-systems. And therefore, are free to pursue a path to offer alternatives to existing life-systems. While enterprises look at profitability in investments, startups look at the potential to scale. Startups, thereby, focus on an opt-out proposition – that of creating a life-system alternative for consumers.
The business rationale comes from the acknowledgement that there already is scale-of-access to an existing life-system, but that space is occupied by the industry behemoths or is riddled with competition. Startups bank on creating a pull through the alternate life-system that they offer and eat into the existing scale-of-access, across players within the prevalent life-system. The stronger the pull, the faster the growth. The pull, however, is a complex phenomenon and just because an alternate life-system gets created does not mean that it will garner a meaningful pull. That’s the uncertainty that the startups embrace.
These alternate life-system as viewed from the eyes of consumers, appear as business model innovations when viwfrom the eyes of the industry.
There are four ways in which startups create their opt-out strategies for consumers – system-of -products opt-out, system-of-services opt-out, system-of-consumption opt-out, and system-of regulations & policies opt-out.
A prevalent life-system of products is the consideration set of established and generally-accepted product capabilities that are available to consumers within common categories; including our expectations about what those products can’t do. Startups, or companies with a similar innovation DNA, disrupt the life-system of accepted products by offering opt-out with a new product with capability or capabilities significantly more or different that the current set of products have to offer. And they do so at a price-quality point that makes their products a superior but acceptable alternative to the current set.
Take the iPhone, for instance, that was introduced by Apple in 2007. It was the first phone that offered a full, un-watered-down version of the internet. The very first iPhone gave consumers the ability to browse the web just as they would on a desktop computer. Apple had no presence in telecom space before its launch of the iPhone. At the year close of 2022, iPhone had a shipments market share of over 55% in the United States and over 18% globally. With the introduction of the iPhone, Apple was able to create a pull to an alternate product-system that disrupted the industry.
We can look at the success of Open AI’s ChatGPT in a similar sense. It offered a product with a unique set of capabilities when compared to the existing search life-systems of Google, Microsoft, and others. It offered capabilities that addresses information needs of consumers in a way that’s perceivably richer, even if not entirely accurate, giving consumers an alternative to the likes of Wikipedia. The pull towards this search and information consumption alternative was so strong that it took just 5 days for ChatGPT to reach 1 million users. There are many reasons because of which such product opt-outs succeed or fail. You can read more about the patterns in success and failures of digital consumer products in my other article here.
A prevalent system-of-services is a well-established array of services or solutions offered within an industry or domain. Startups aiming to challenge this life-system adopt an opt-out strategy by introducing new service life-systems that stand out in terms of quality, convenience, or cost-effectiveness. These new services provide consumers with a compelling alternative to the existing options available.
Consider the case of Airbnb, a prime example of a startup that disrupted the traditional hospitality industry’s system-of-services. Before Airbnb’s emergence, travelers primarily relied on hotels for accommodation. Airbnb introduced a platform where individuals could offer their homes or spare rooms as lodging options. Airbnb was able to exercise a pull over the current subscribers of prevalent system-of-lodging, by providing travelers with an alternate system-of-lodging, one that was more personalized, cost-effective, and unique alternative to traditional hotels. Amazon is a similar example that disrupted the traditional fixed-point servicing through brick & mortar system-of-retail by introducing an alternate retail-system of ordering anytime, anywhere, and at your convenience. Startups disrupt prevalent system-of-services by unlocking demand, un-constraining supply, or by reimagining value flows.
Moving to system-of-consumption opt-outs, these startups focus on altering the way consumers access or utilize products and services. They aim to provide a more efficient, affordable, or sustainable approach to consumption compared to the prevailing norms.
A noteworthy example is the emergence of ride-sharing services like Uber and Lyft. These startups disrupted the traditional system of car ownership and taxi services. By gaining access to convenient, on-demand transportation through mobile apps, consumers have the option to opt-out of owning a vehicle or relying solely on taxis. These startups successfully challenged the established system-of-consumption in the transportation industry.
Lastly, system-of-regulations & policies opt-outs are startups that identify opportunities to reshape industries by challenging existing policy frameworks and regulations. Such startups introduce new solutions that comply with or seek to change regulatory requirements, offering consumers an opt-out from regulation and policy constraints and bottlenecks.
Look at, for instance, the rise of fintech companies challenging conventional banking and financial services. Startups in this space have leveraged technology to offer digital banking, peer-to-peer lending, and cryptocurrency innovations that often advocate for regulatory changes to accommodate new approaches. These disruptions create an opt-out for consumers seeking more accessible and modern financial solutions.
Shaping the Future
In conclusion, the journey of startups and enterprises reveals two distinct paths of innovation. Startups, fueled by bold ideas, challenge existing life-systems to offer alternatives. Enterprises adopt an approach that combines improvement with the stability of current frameworks. This coexistence is the driving force behind progress, allowing life-systems to evolve, adapt, and, in some cases, be replaced. The responsibility lies with both startups and enterprises to determine which aspects of our world they will shape and redefine for the future.
Originally published on “Data Driven Investor“. Primary author of this article is Sumedh Ranadive. If this article had useful insights for you, comment, share, and/or add a like on the article. All views expressed are personal to the author.
