Disruptive Technologies: Impact on Strategic Alliances, Partnerships & Channels
Disruptive TechnologiesImpact on Strategic Alliances, Partnerships & ChannelsPhil HoggVice-President, Strategic Alliances, Moneris SolutionsPresident, Association of Strategic Alliance Professionals (Toronto Chapter)Co-Author, Financial Post Series on “Successful Strategic Alliances”
AgendaI. An Introduction to Disruptive TechnologyTheory• Why Seemingly Great Companies Fail• Sustaining versus Disruptive Innovation• The Innovator’s DilemmaII. Key Disruptive Technology Enablers• Mobile Internet• Cloud Computing• The Internet of ThingsIII. Winning Partnership Strategies to ExploitDisruptive Technology• Strategic Alliances;• Partnerships & Channels.
Overview of Moneris SolutionsGlobal Rank*• Established and incorporated in 2000– Joint Venture between the Royal Bank ofCanada and the Bank of Montreal.– Over 40% Market Share in Canada.– Over 40 years of card processing experience.• Corporate Head Office– Toronto, Ontario.• US Head Office– Schaumburg, Illinois.• Number of Merchants– Process for 380,000 merchants.• Transaction Processed/Year– 3.5 Billion.1. Bank of America2. Vantiv3. First Data4. Chase Paymentech5. Citi Merchant Services6. WorldPay (EMEA)7. Cielo8. Moneris Solutions9. Barclays10. WorldPay (USA)* Source: Nilson Report, Top 150 Acquirers Worldwide 2011, November, 2012
I. An Introduction toDisruptive Technology Theory
• Background:– Founded by George Eastman in 1880 and developed the first snapshotcamera in 1888– Core products included film manufacturing, photofinishing, and cameras– Market share of 90% for film and 85% for cameras by ‘76• Sales:– $1 Billion by 1962– $10 Billion by 1981– $20 Billion by 1992• Technology Prowess:– Invented the first digital camera in ’75 (patent in ’78)– In 1986, invented the first megapixel sensor, capturing 1.4 million pixels– Invented another 50 products that were tied to the capture or conversion ofdigital imagesWhen Being Rational Kills Your Business (I)
Eastman Kodak Files for Bankruptcy (2012)• Profitability– “We’re moving into an information-based company, but it is very hard to findanything [with profit margins] like color photography that is legal”• Bureaucracy– With over 145,000 employees in a multi-layered organization, it was difficult tochange. Middle management thought they were in the film business and not theimaging business.• Too Little. Too Late– By 2000, the value of digital cameras sold exceeded the value of film camerassold.– Kodak “officially” entered the digital market in 2003.Source: Kodak
When Being Rational Kills Your Business (II)• Background:– 1985, Blockbuster was founded by David Cook in Dallas, Texas– 1987, Wayne Huizenga and two partners invested $18.5 Million for 50% of thebusiness using a similar franchise model as Waste Management (1 new storeevery 24 hours)– 1994, Viacom purchased Blockbuster for $8.4 Billion– 1999, Viacom sells off 20% of company in an IPO– 2004, Viacom sold Blockbuster to the public (Icahn buys10 million shares)• Sales:– $7.4 Million in 1987– $2.2. Billion in 1994– $6 Billion by 2005• Technology:– 2004, Blockbuster starts online business while eliminating late fees
Entering the Disruptive Technology “Perfect Storm”Captain!There’s justtoo manyof themDamn It!Get MeSpielberg onthe Radio!Mark Walhberg & George Clooney“The Perfect Storm”
Blockbuster Files for Bankruptcy (2011)• Profitability Ran Supreme– As the company changed ownership from Huizenga to Viacom to Icahn’s controlling interest,strategy changed and maintaining profitability was paramount• Misunderstood the Impact of Technology Changes (It is “Net” Flix)– All understood that technology would change the business, but none thought it would destroya $6 Billion business.• Challenges in Running a Start-Up within the Core Business– The online business was a start-up. Blockbuster could not come to grips with starting a start-up operationally or support for the fulfillment side of the business.
Disruptive Technology – The Origins• Term coined by Clayton Christensen and Joseph Bower in1995 in an article for the Harvard Business Reviewentitled “Disruptive Technologies: Catching the Wave”.• In 1997, Christensen wrote “The Innovator’s Dilemma”where he further explored cases of disruptive innovation.– The Economist, in 2011, named the Innovator’s Dilemma as one ofthe six most important business books ever written.• In 2003, Christensen wrote “The Innovator’s Solution”where he replaced the term “disruptive technology” with“disruptive innovation”
Sustaining Innovations Improvement to existingmarkets and value networks. Improvements can either beconsidered incremental orradical. Industry Leaders have a highprobability of beating newentrants in sustainingtechnologies.Influence & ShapeExisting Markets
Disruptive Innovations Help create a new market orvalue network. Eventually disrupts an existingmarket and value network overa short or long period. Very difficult for IndustryLeaders to compete againstNew Entrants as it changes thewhole market.Transform Existing MarketsAnd Create New Ones
• Lower Performance Thresholds– Lower performance metrics– Industry Leaders existing clients do notwant to use the product.• Unique Product Attributes– A disruptive innovation usually offersnew features not found in today’smarket.– A key feature in many disruptiveinnovations is moving away from acentralized business model.• Lower Cost Base– The firm establishing the disruptiveinnovation has a lower cost base thanIndustry Leaders.Canon Countertop PhotocopiersMicrosoft Operating SystemSony Portable Radios & TVsDisruptive Innovations CharacteristicsWhen first introduced…
The Disruptive Innovation ModelPerformanceTimeDisruptiveTechnologiesPerformance that customerscan utilize or absorbIndustry Leaders Nearly Always WinNew Entrants Nearly Always WinPace of TechnologicalProgressSustaining InnovationsSource: Clayton Christensen, The Innovators Solution
Two Types of Disruptive InnovationPerformanceTimeDisruptiveTechnologiesPerformance that customerscan utilize or absorbPace of TechnologicalProgressSustaining Innovations1. Low End DisruptionClayton Christensen, The Innovator’s SolutionNon-consumersorNon-consumingoccasionsDifferentMeasureOfPerformanceTime2. New Market Disruption
US Integrated Steel Mills vs. Mini MillsSteelQualityTime% of TonsRebar7% Gross Margin4%Angle Iron: Bars & Rods12% Gross Margin8%Structural Steel18% Gross Margin22%Sheet Steel25%-30% Gross Margin55%Source: Clayton Christensen, The Innovator’s Solution
The Innovator’s Dilemma• Lessons Learned from Business School– Customer• Listen to your customer to understand future demandsand requirements, especially your most valuablecustomers.– Margin and Market for Growth• Unrelenting focus on moving towards higher marginproducts (even if it requires moving resources from lowermargin products). Focus on new markets that cansupport growth for large organizations.• When Confronted with a Disruptive Technology– Customer• Customers, especially most valued customer, reject theproduct.– Margin and Market for Growth• Management rejects the project as it provides lowermargins to support the needs of large organizations andthus, not considered a market for growth.
McKinsey Global InstituteTwelve Potentially Economically Disruptive TechnologiesSource: McKinsey Global Institute, Disruptive Technologies: Advances that will transform life, business and the global economy, May 2013
Mobile Internet – When First Introduced• Lower Performance Thresholds– Slow connectivity speeds– Limited downloading of attachments(20K for Mobitex)– Few web pages had been designed formobile browsing• Unique Product Attributes– Allowed users to access e-mail,mobility calling, text messages, andaccess the internet• Lower Cost Base– Primary feature, and costs for the user,was for the voice network. Data ratesfor e-mail were reasonable.Disruptive Innovation Characteristics
The Next Disruptive Force – Mobile Internet• Global Mobile Traffic in 2012– Increased by 70% in 2012– Now represents 12x’s the size of theentire global internet in 2000– Mobile video traffic exceeded 50% forfirst time• Introduction of 4G– 4G generated 19x’s more traffic onaverage than non-4G connections– 4G connections only represent 0.9 %of the mobile connections today, butaccount for 14% of the mobile datatraffic• Offloading to Fixed Networks– 33% of total mobile traffic wasoffloaded onto fixed networks (w/ooffload, global traffic would haveincreased by 96% rather than 70%)Source: Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2012-2017
Machine-to-Machine (“M2M”) Opportunities• Machine-to-Machine* is:– The ability of machines, assetsand devices exchange data withpeople or company’smanagement systems in need ofthe information*– Derived from telemetry technology• A Disruptive Innovation Enabler**– Over 60 Billion Machines on thePlanet– 10x’s more connected machines thanpeople– 15x’s more connected machines thanhandsets• On the Cusp of Stunning Growth– Ericsson has forecasted mobileconnection growth of 50Bmachines by 2020• Transportation Government• HealthCare Manufacturing• Energy Education• Retail Financial Services• Oil & Gas* Source: Webopedia ** Source: Frost & SullivanIndustry Verticals
Potential Impact by 2025$3.7 Trillion to $10.8 Trillion per year by 2025• Developing Nations– 50% of the value derived by spreadinginternet to developing nations– Expected that 3.5 Billion citizens indeveloping nations to have internet by2025 (2 Billion via Mobile Internet)• Health Care– Potential to cut more than $2 Trillion inthe projected cost of chronic disease– Patients with heart disease anddiabetes can be monitored throughingestible or attached sensors totransmit readings• Education– Potential to increase lesson quality,improve student performance, andincrease graduation rates throughhybrid online/offline teaching models• Public Sector– Online services through mobile apps,such as information requests, licenseapplications, and tax payments) canenhance productivity• Retail Sector– Productivity gains by delivering retailgoods through a digital channel couldbe 6-15 %.– By 2025, 30%-50% of retailtransactions could take place online• Mobile Payments– Globally, cash payments represent90% of the more than 3 trilliontransaction made every year– Digital wallet technology is evolvingexponentiallySource: McKinsey Global Institute, Disruptive Technologies: Advances that will transform life, business and the global economy, May 2013
Cloud Computing• Defined:– Internet-based computingwhereby information, ITresources, and softwareapplications are provided tocomputers and mobile deviceson-demand• Essential Characteristics:– On-Demand Self Service– Broad Network Access– Resource Pooling– Rapid Elasticity– Measured Service• Service Models:– Software as a Service (“SaaS”)– Platform as a Service (“PaaS”)– Infrastructure as a Service(“IaaS”)• Deployment Models:– Private Cloud– Community Cloud– Public Cloud– Hybrid CloudNational Institute of Standards & Technology, Special Publication 800-145
Why Cloud Computing is Disruptive…• Lower Performance Thresholds– Not as Secure– Not as Fast– Not as reliable as your internalnetwork• Unique Product Attributes– Lower OPEX and CAPEXrequired to run– Rapid elasticity– Broad Network Access• Lower Cost Base– Costs are spread over many,many users
Amazon Web Services• Started in 2006 by Amazon,originally as a way to make use ofexcess computer capacity not usedfor Amazon’s own retail shoppingsite.• Revenues of $2 Billion, supporting“hundreds of thousands ofcustomers in over 190 countries”.• Morgan Stanley believes that AWSwill reach $24 Billion in Revenuesby 2022.– In a recent report they write thatAWS is making waves inconventional IT by “applying retaileconomics”.
Potential Impact by 2025$1.7 Trillion to $6.2 Trillion per year by 2025• Sale of Cloud Based Services– $1.2T to $5.5T could be in the form ofsurpluses in selling products & services– An additional 2B to 3B additionalinternet users– In developing countries, estimated thatthere will be 3.5B internet users; manyof whom will only have mobile devices• Productivity Improvements– Estimated that $500B to $700B couldcome in the form of productivityimprovements for the enterprise IT– Includes savings in:• Infrastructure (Both Capital & OperatingExpenses)• Software Development & PackagedSoftware CostsSource: McKinsey Global Institute, Disruptive Technologies: Advances that will transform life, business and the global economy, May 2013
The Internet of Things• Defined:– The Internet of Things refers to theuse of:• sensors,• actuators, and• data communications technology– built into physical objects thatenable those objects to be:• Tracked,• Coordinated, or• Controlled– Across a data network or Internet• Three Essential Steps:– Capturing data from the Object– Aggregating that data from theobject– Acting on that Information• The Technology– From simple identification tags tocomplex sensors and actuators– Radio Frequency IdentificationTags being the least expensive– Micro electromechanical Systems(MEMS) allow very sophisticatedsensors in virtually any object (andeven people)• Applications– RFID to track the flow of rawmaterials, parts, and goods throughproduction and distributions– RFID tags on containers and boxesare used to track products as theymake their way throughwarehouses and transportationhubs to store shelves and even allthe way to the consumer
Technology Roadmap – The Internet of ThingsSource: SRI Consulting Business Intelligence
Potential Impact by 2025$2.7 Trillion to $6.2 Trillion per year by 2025• Health Care– Estimated an economic impact of$1.1T to $2.5T per year by 2025– Assist with in-hospital health monitoringwhere physicians and nurses haveaccess to real-time data– Using sensors on drug bottles andpackages to reduce the $75B worth ofcounterfeit drugs sold each year• Manufacturing– Savings of $900B to $2.3T– Improvements in operational efficiency:• Tracking machinery• Supply chain tracking & management• Flow of inventory around shop floor• Oil, Metal & Mineral Extraction– Savings of $100B to $200B– Help find and map mineral depositsand increase recoverability• Smart Electrical Grid– Savings of $200B to $500B– For consumers of energy, demand-management applications that couldreduce costly peak usage– For utility operators, real-timeinformation on the state of the grid inreducing total outage times• Agriculture– Savings of $100B per year– Leaf sensors can measure stress inplants base upon moisture levels– Soil sensors can gather information onhow water moves through the soil• Urban Infrastructure– Traffic– Waste Water Systems– Garbage collection– Water ManagemetSource: McKinsey Global Institute, Disruptive Technologies: Advances that will transform life, business and the global economy, May 2013
III. Winning Partnership Strategies toExploit Disruptive Technology
Corporate StrategiesResponses to Disruptive InnovationIn the Innovator’s Dilemma, Christensen suggests the following threemethods to handle disruptive innovation in an organization:1. Acquisition 3. Spin-Off2. Internal Development
Corporate StrategiesResponses to Disruptive InnovationIn the Innovator’s Dilemma, Christensen suggests the following threemethods to handle disruptive innovation in an organization:1. Acquisition 3. Spin-Off2. Internal Development4. Strategic Alliances
Strategic Alliance StrategiesA Low Cost Corporate Strategy for Disruptive Technology1. Acquisition3. Spin-Off2. Internal DevelopmentAdvantages• Least Cost Solution• The “Borrowing” Strategy• Quick Entry into Disruptive Technology Market• Limited Integration Challenges• Usually quicker exit if disruptive innovation is notsuccessful
Moneris’ Disruptive Innovation StrategyInternal Development & Strategic Alliances• Recognizing the disruptive impact of smart phones and tablets as vehicles forpayment processing, Moneris used an internal development strategy to establish:– Low End Disruption• For its existing client base, Moneris introduced eSELECTplus Mobile– New Market Disruption• To attract non-consumers, Moneris introduced its Payd service• Being the first to market in Canada, established our technical leadership• Required Strategic Alliances strategy for Retail Distribution CapabilitiesPerformanceTimeSustaining StrategyLow-End Disruption:DifferentMeasureOfPerformanceNew-Market DisruptionTime
1 Giga Ethernet100M Ethernet10M Ethernet* Graph Source: Ericsson Canada1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201310M HSPA100M LTE1Giga LTE*A (“4G”)MobilePC10 YearsStrategic Alliance Strategies – Mobile Internet“It’s Déjà Vu All Over Again”Internet Protocol NetworksThe First Wave=Enhanced Strategic Alliance ActivityHigh Speed Mobile DataThe Second Wave=Enhanced Strategic Alliance ActivitySpeed
Recent Strategic Alliances for Mobile InternetMobile WalletIBM MobileFirstUS Department of DefenceSmart Grid InitiativeSingle, Global M2M PlatformMobile CommerceUsage Based Insurance
Strategic Alliance Strategies – Existing AlliancesAnalyse for “Strategic Fit”Strategic Fit• Must posses the following attributes:– Compelling/Competitive MarketStrategy• Supports sufficient revenue and netincome for a win/win alliance• Provides strong value add to thecustomer– Strategic Alignment• Compatible long term strategies• Complementary Strategic Drivers• Synergistic Strengths & Weaknesses• As a Disruptive Innovation matures,Strategic Alliances built on legacytechnology are at risk of no longersupporting the strategic drivers originallyconsidered in establishing the strategicalliance in the first place.X
Strategic Alliance Strategies – Existing AlliancesAnalyse for “Operational Fit”Operational Fit• The evaluation of a good operational fitinvolves evaluating:– The degree to which alliance partners’day to day business practices andpolicies are compatible;– the effectiveness of the system ofmetrics and rewards, and,– organizational support to the successof the alliance.• When an existing alliance is pressuredue to a disruptor entering theirmarket, they will retrench from existingalliances.Operational Fit ChallengesResource AllocationSurvival instincts will cause reduced staff andcapital.CommunicationsAs the party retrenches, external communicationswill lessen.Time AllocationCompany alliance responsiveness will bereduced to focus internally.Day-to-Day Problem SolvingProblems will not likely be solved early as theretrenching party has reduced resourcesCorporate CultureLikely to change due to intense pressure fromDisruptive Innovator.
Channel Partner Strategies – IT Distributors• While the technology landscape is changing,the VAR Ecosystem will remain a centralcomponent of how SME’s will adopt andprocure new technology.• VARs have been struggling with achallenging market, changes in technology,and skill gaps in key areas.– VARs require more from an IT Distributor thana partner portal and a 1-800 for service– IT Distributors must support VARs by offeringthem IT education and marketing programsdesigned to build upon their growth andexpertise in disruptive technologies• IT Distributors have to stay ahead of thecurve in understanding how disruptivetechnology will impact hardware, softwareand services sales.• Finally, the time is right for IT Distributors tostart searching out and researching strategicalliance partners to establish additionalrevenue enhancing opportunities.
Channel Partner Strategies – Value AddedResellers• Disruptive Technologies, such asCloud Computing, will acceleratethe growth of new customers inthe Small & Medium EnterpriseMarket• Given the change VARs mustfocus on providing their clientswith additional options, includingthe provision of managedservices.• VARs, and potentially with theassistance of IT Distributors,should seek out alternativechannel relationships to off-set thereduced revenue erosion fromsome disruptive technologies– e.g. partnering with paymentprocessors
In Conclusion…• Encourage you to get better acquainted with disruptive innovation theories andpractice• From a strategic management perspective, disruptive innovation can createchallenges and opportunities.– Make Use of the Alliance Health Check• Look for Disruption activity• Review Strategic Fit• Review Operational Fit– Look at Disruptors as Potential Strategic Alliance Candidates• From a Channel Management perspective, IT Distributors must provideeducational and marketing support to their VAR Community to educate themon Disruptive Technology and winning strategies to garner additional revenue• VARs should also seek out additional channel relationships based uponDisruptive Technology changes to enhance revenue opportunities.
Phil HoggVice-President, Strategic AlliancesMoneris SolutionsPhil.email@example.com/in/philhogg