Recently Groupon rejected an offer by Google of nearly $6 billion. Like many, you may respond with: ‘Groupon, what is that?’. If so, you will even be more surprised to hear that this company is now talking about an IPO of $25 billion. Since its start in 2008 Groupon has been the fastest growing web company ever, hitting $1 billion in sales within two years. It beats other ‘newbies’ like its main competitor LivingSocial, microblogging website Twitter and social game developer Zynga with ease.
Groupon’s business model is as simple as attractive. It links ‘brick and mortar’ shops to the power of Internet and crowdsourcing (in old language: the law of large numbers) in a unique way. Groupon, a composite of group and coupon, offers its subscribers one excellent local deal every day. These so‐called Groupons, can be anything ranging from dinners to car washes, cooking classes to a manicure with discounts amounting to even 90%.
Groupons prove to be irresistable to both subscribers and suppliers. All customers like good deals and any company wants to fill spare capacity. Last year Groupon added national deals to its offerings and smashed its young records with the sale of 441,000 Groupons in just one day for a pair of GAP jeans. Little wonder that Groupon is now present in more than 500 cities and nearly 50 countries. In Malaysia, Groupon is active since the beginning of this year when it acquired one of its many clones, Groupsmore, at that time only half a year old itself.
DIFFERENT LEGACIES AND LOGICS
Is it surprising that a 28‐year‐old music graduate called Andrew Mason instead of a major multinational started Groupon? Hardly, everybody can start a multi‐billion business from his or her garage these days. In fact, especially industries in which new business models change the rules of the game are dominated by entirely new companies, many of which are founded by young entrepreneurs. This is true for the most successful Internet companies like Google, Facebook, Amazon, YouTube, eBay and Skype but also holds for low‐cost airlines and online brokers.
The direct access that Internet offers to customers makes few industries safe for players that create entirely new and attractive market segments. Many established companies are masters in surviving competitive ‘red oceans’ through small‐step improvements aimed at increasing efficiency and lowering costs. However, when it comes down to starting up new, ‘blue ocean’ business activities they experience insuperable difficulties. Even when their start‐ups bring it to the market, the large majority is liquidated in the first few years because of lacking growth and profits or when new activities start to pinch sales from current businesses. Why do existing companies fail where many smaller and much less experienced entrepreneurs succeed?
Research offers a range of explanations that all come down to the constraining role of legacies and logics. Entrepreneurs that start from scratch may lack resources and experience but have a major advantage over running companies: they have few, if any, mental legacies that limit their thinking and acting. Mental legacies prove to be especially restrictive when rooted in past success and, over the years, consolidate in the organisation’s systems, procedures and culture that all signal ‘this is the way we do things around here’. Mental legacies even extend to entire industries through extensive benchmarking practices. Because benchmarking by definition implies imitation, it will never result in distinctive propositions and, hence, not create those unique ‘blue oceans’.
Existing mental legacies cherish and reinforce the management and strategic logics of current businesses. Starting up radically new business activities involves, however, fundamentally new and different logics in two respects. Firstly, there are important differences between managing ‘mainstream’ and ‘newstream’ businesses in general. Whereas mainstream business focuses on the exploitation of familiar business activities, newstream activities are all about exploration of business models that are still largely unknown. Secondly, as Groupon illustrates, newstream businesses bring new strategic logics to the market. Established companies experience major difficulties with understanding and facilitating these new logics as their mental and organisational infrastructures are all geared towards old logics.
Are established companies doomed to lose forever from new players or can they become adept at radical business innovation too? Of course they can! The host of struggling companies clearly shows that it will never be an easy ride. There are no innovation recipes that guarantee success. The crucial prerequisite is the willingness and determination to respect, learn and master new business logics. Winning companies have top‐managers that truly lead this process by setting the conditions that stimulate business innovation. Those managers do not hide until the success of new business activities is evident but protect them from the start.
Starting up new business activities involves a balancing act between old and new logics. Business innovation requires companies to apply double standards, which turns out to be one of its most challenging aspects in practice. Whereas current businesses are evaluated on the basis of past results, performance measures of new business activities need to estimate prospective growth potential. Financial evaluation methods, such as the discounted cash flow method, tend to underestimate this potential by undervaluing future options. This happens in part because many options are still unknown and only become visible when innovation initiatives get ample space and time to experiment and learn from failures. Leaders of innovative companies know this by heart and act accordingly.
By Dr. Robert P. Bood
The views expressed here are the personal opinion of the columnist.
Dr. Robert P. Bood is a member of The Iclif Leadership and Governance Centre’s international faculty. Robert is co-author of Communities of Practice: Sources of Inspiration and Network Learning: dealing with wicked problems. To learn more about Iclif, please visit www.iclif.org.
Photo credit: Flickr user lumaxart.