Two broke students take on the world
Two students in San Francisco were broke. They were so broke, they couldn’t even pay their rent. As there is a severe shortage of accommodation in the Bay area, they decided to rent out their lounge area by means of an air mattress for extra cash.
The idea grew, and today $ 31 Billion.
It’s taking on the likes of Booking.com and flight centre for booking accommodation.
The company is Airbnb.
This story is not new – it happens in this era of disruption where big corporates are busy doing what they do best – try to move the company forward.
The innovator's dilema
A cost cutting consultant is called in to analyse the spending and financial landscape of a big corporate company. He looks at at all the projects including those aimed at expanding the company’s reach. He writes a 600 page report on why the business needs to scrap the projects that aren’t bringing in enough cash.
In a corporate job, a developer does a demo to his boss about an innovative solution that will outperform the current product. The profitability on the solution is slightly less than the existing one, and thus the manager blocks the innovation and new product.
This is sound business – right?
Interestingly enough, studies by Clayton Christensen shows that these innovations often lead to the demise of big industries and corporates.
These type of innovations are called disruptive innovation. Personally, I like to think about disruptive innovation as something new that’s not yet 100% ready for corporate use, but will grow into something bigger.
Disruptive innovation can often canibalise another product or service – take for example how AirBnB canibalised huge chunks of market share from other booking websites.
There is a world of other examples – from floppy disks to Uber and the tax industry.
Small businesses advantages
Corporates spend a lot of money to stifle innovation. They have to, as the goal is to make more money.
It is for this reason that many small business owners left their formal jobs to start a side hustle or small business.
Small businesses have great advantages compared to their corporate counterparts that few confess to being true. This include agility, lower profit margins required and lower input costs.
Financial impact and timelines
As with the image below of the product lifecycle, we know that a product is not always profitable for big businesses until late in the growth stage.
To illustrate this, let’s look at the process of getting a new product/service idea approved before work on it starts.
In a corporate setting, it would make sense that the idea, product and service would need to travel through various cost centres before a decision is made on whether to pursue it. In most cases, this would include:
- human resources (or an ethics department)
- project management
- the financial department (for costing and viability studies)
Various (costed) meetings between staff and management would also need to be conducted.
For this reason, a manager would often just say no.
This causes the cost (both monetary and timewise) to be exponentially more than the profit would justify.
On the other hand, when a small business owner has a service or product to move people forward, they can sell it without the overhead.
Agility and learning
Another advantage is the ability to learn. Eric Ries explains in his book The Lean Startup how the currency of success is measured in learning. When you learn, you can make better decisions for you and your business.
It is recommended as a small business owner to have a document with everything that you’ve learnt, you will be able to refer back and not make the same errors over and over.
The ability to learn creates an agile environment where owners can change direction quickly and capitalise on opportunities that may arise.
For example, as a software developer, you can decide to pivot your company to cater for business to business services. This can be done with very little effort. It is however exceedingly difficult for a company with a name as a B2C expert to suddenly change direction.
Big companies are like shops that take a long time to turn. It can take many years to change direction and adapt to the changing environment.
As a small business, you can learn about what your customers really need and adjust how and what you offer to clients.
Be effectively simple.