The sharing economy: “Upending business as usual”

For traditional players, understanding sharing-based businesses requires nothing less than a paradigm shift. But what exactly is a paradigm? It is the sum of processes, operative elements and basic assumptions that make up a business. As an illustration, the “hospital paradigm” features patients, doctors and nurses functioning in fixed roles. It also includes physical spaces: beds, wards, waiting rooms, operating theatres and a reception desk.

The Sharing Economy turns many traditional paradigms on their heads. So for example, a big challenge for an incumbent may be: what do you do when your competitors don’t even want to make money? This is the question that traditional encyclopedia manufacturers faced when Wikipedia emerged. Prestigious companies such as Brockhaus in Germany, which employed dozens of Ph.Ds. to generate content, could not fathom how unpaid amateurs could ever crowdsource a credible product.

In some industries, there is also the issue of compliance. As one hotel executive pointed out, “Entrepreneurial companies just start doing something on the fringes and get away with it; it’s not easy to regulate them by law.” The perception that start-ups are not subject to the same ‘rules of the game’ is a raw point for established companies.

On a more general level, traditional businesses have achieved excellence  because they master their business paradigms: they possess the industry knowledge, the talent, the networks, the assets and the value chain that allow them to compete successfully. But in times of discontinuous change, this mastery can actually prove limiting. It can dampen the search for new ideas and reduce openness to change. It can also blind companies to the existence of untapped opportunities. On this point, one participant commented: “It’s hard to see the ‘little holes’ in the regulation fortress if you’re trying to drive through it with a tank!”

In short, it’s because of the way shared businesses challenge paradigms that incumbents tend to perceive them as confusing, unfair and irrelevant, as shown in Figure 2 below.

Figure 2: Basic model of responses to shared businesses

A new way of thinking about value

We have seen that for incumbents, paradigm-breaking innovation is both difficult to understand and tough to respond to. However – whether it is in the Sharing Economy or in other cases of discontinuous change – a useful way for established players to grapple with these sudden innovations is to adopt more structured ways of thinking about strategic change. The key is to examine how your company creates value which is unique and sustainable, as compared to competitors. This allows you to capture the extra value and translate it into profits.  

A well-known example of value capture is Apple. What allows the Cupertino giant to obtain its market capitalization of over $600 billion? The first step is to examine how its customers perceive the benefits of Apple products. These benefits include the unique ecosystem of devices, the iTunes platform, the overall brand and the ease-of-use of the operating system. Less intuitively, benefits also include the aspects that make the products “sticky” – in this case, the high switching costs incurred by consumers who wish to leave the Apple ecosystem. The second step is to add up the firm’s total costs (labor, components, marketing and so on). If we subtract the costs from the perceived benefits, this allows us to measure the value created.

The next phase is to analyze how this value can be captured by the company. The important thing to understand here is that not all value is created equal. Value that is both unique and sustainable over time is much better than value that your competitors can imitate. It is thanks to these characteristics of uniqueness and longevity that a firm can charge higher prices. In contrast, a company that produces attractive but easily available products (or has an offering that degrades over time) is hampered by a competitive discount and must therefore cut its prices. The end result is that some companies can capture more value than others and then monetize it. 

Overcoming incumbent inertia

The upheavals caused by the new Sharing Economy should not be considered only as a threat by established companies. The clash between old and new paradigms is also an opportunity for incumbents to examine more closely and more creatively the value that they currently generate. The fact is, traditional business paradigms tend to contain elements that are taken for granted. Privacy and impersonal transactions are two examples of benefits that classic hotels provide. However when we book a hotel stay, we rarely think about these advantages – instead, we tend to think of the quality of the hotel experience as a sum of its amenities, décor and prestige of location. But users of Airbnb are now realizing that privacy is not a given – it is a precious benefit. This is because Airbnb requires that its users submit a personal application to the renter, who can either accept or refuse them. After the stay, both the user and the renter must rate each other on the web platform and may also provide comments. Giving bad reviews of a stay in someone’s home can be both socially awkward and bad for one’s reputation within the online rating system. Hotels, in contrast, allow clients to preserve their privacy.

A better understanding of what unspoken paradigms undergird their businesses can help companies make sound strategic choices. These choices include making tough trade-offs between what “perceived benefits” they want to invest in, on one hand, and what costs they want to reduce, on the other. The critical endeavor for top teams is to develop an overarching perspective. This involves listening to the customer insight department, weighing costs and continually scanning the competitive landscape. Top teams must find a way to look beyond these competing goals to gain a balanced view. And above all, companies must learn to overcome incumbent inertia and engage with the innovative models that the Sharing Economy has introduced to the world.

1- PwC Analysis: “Sharing economy sector and traditional rental sector projected revenue growth.”

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