Giffgaff is a mobile phone company that seriously undercuts other service providers in the UK market. The cost per minute on Giffgaff is 60% lower than the four main operators – O2, Orange, Vodafone and T-mobile. Giffgaff also differs from conventional mobile phone operators in that the users of the service may participate in aspects of the company’s operation, e.g. sales, customer service and marketing. In return for this activity, the user receives remuneration through a system called “Payback”. For example the main method of customer service relies on members of the network providing answers to questions raised by others. The members who give support get rewarded with credits for airtime or cash payments.
Giffgaff is owned by O2 – one of the mobile operators it competes with. Why would O2 (which is owned by Telefonica) set up a rival operator with a different business model and a much lower pricing structure? Well if someone is going to disrupt your business it is better that it is you that does it. By using a completely different brand name and business model O2 has kept its main brand separate.
In the 1970s IBM dominated the computer mainframe business. It then set up a completely separate operation, General Systems Division, to develop and sell smaller business computers and mini-computers. Later it went further and established a Personal Computer operation to develop and sell PCs to home and business customers. Each of these operations could potentially offer competition for the successful mainframe business and indeed there was overlap, conflict and competition between the divisions. However, the policy was successful – it spread IBM’s coverage and market share while preventing potentially strong competitors like Digital Equipment or Wang from ever growing to a level where they seriously threatened IBM.
Amazon offers another example. Although its sales of new books were growing very healthily, Amazon introduced a service in 2002 whereby people could sell second-hand books through the company’s website. Surely each second-hand sale was a potentially larger-margin new sale lost? The move was controversial and Jeff Bezos sent out an open letter explaining Amazon’s actions. In it he argued that selling second-hand books was good for customers and therefore good for the industry. This is true. It is also the case that Bezos chose to disrupt his business before anyone else did.
Many business leaders are frightened to mess with a successful high-margin business. They do not want to experiment with anything that might sully their brand. They know that a lower-cost offering would appeal to some customers and might expand their reach but they are terrified of ‘cannibalizing’ the sales of their premium products. The examples of O2, IBM and Amazon should make them think again. If the opportunity for a different business model with lower costs and prices exists then you take a big risk by ignoring it. Don’t wait for someone else to disrupt your market, do it yourself.
Reading your interesting posting, Paul, I came to think about the extract below from a brilliant article http://hbr.org/2000/03/meeting-the-challenge-of-disruptive-change/ar/5 by Clayton Christensen and Michael Overdorf:
“Hewlett-Packard’s laser-printer division in Boise, Idaho, was hugely successful, enjoying high margins and a reputation for superior product quality. Unfortunately, its ink-jet project, which represented a disruptive innovation, languished inside the mainstream HP printer business. Although the processes for developing the two types of printers were basically the same, there was a difference in values. To thrive in the ink-jet market, HP needed to be comfortable with lower gross margins and a smaller market than its laser printers commanded, and it needed to be willing to embrace relatively lower performance standards. It was not until HP’s managers decided to transfer the unit to a separate division in Vancouver, British Columbia, with the goal of competing head-to-head with its own laser business, that the ink-jet business finally became successful.”