Contributing Editors: J. Boen and A. Breckenridge
How to outcompete incumbents
Most of the industrial biology start-ups face a “David versus Goliath” challenge competing with large incumbents. Established corporations have warchests of capital, an established customer base, brand awareness, a deep talent pool and a broad aptitude that makes them formidable. Conversely, they lack agility, drive for innovation and speed of execution that may make them vulnerable to ambitious start-ups. Industrial biology companies must be able to create go-to-market paths that expose the incumbents’ weaknesses to enhance their likelihood of success. We highlight a few areas as considerations of potential options for start-up founders to consider:
- Create a product/business model that shift the paradigm and changes the balance of power;
- Develop partnerships upstream and downstream along the supply chain to enable scaling;
- Tap into consumer demand to create momentum and validate the market.
Shifting the paradigm (lessons learned from other industries)
Technology innovations often create opportunities for young companies with the significant shifts in the skill sets required to operate in new spaces. This skill asymmetry gives emerging technology providers a competitive advantage to quickly develop operations and deploy products before their larger counterparts can adapt and counterposition. Many incumbents, due to their size, fail to react promptly to disruptive technologies due to inability to align their operations in a timely manner, resulting in displacement of the former market kings. For instance, Kodak dominated the film and photo industry for a majority of the 1900s. However, because they were not able to adjust their business model to embrace digitization of photos, the company filed bankruptcy in 2012¹. However, Fujifilm (a distant second to Kodak during its reign) diversified itself by creating new product offerings that were unrelated to its print business (e.g., magnetic tape optics, videotape, and office automation). In addition, Fujifilm was also able to capitalize on the new market for digital imaging². Another notable disruption came during the emergence of the smartphone. Prior to their mass adoption, Nokia and Motorola led the mobile phone industry for decades³. Nowadays, these names have become obsolete in the mobile phone market, largely because these businesses lacked the software capabilities to keep pace with smartphone evolution, led by Apple’s iPhone. In the digital payment space, Stripe has revolutionized the industry and started by using only seven lines of code⁴. The simplicity of the company’s products were designed for engineers to make them easy to integrate into existing software platforms. It’s almost certain that you (yes, you reading this) have utilized Stripe’s API to make a payment for something online. Digital payment to support eCommerce was a space where the traditional banks/payment players had not been able to offer easy integration solutions to meet the speed of eCommerce start-ups. In 2021, businesses using Stripe processed more than $640 billion in payments⁵. This demonstrates how Stripe was able to identify a market opportunity that had been neglected, create a business around it, and became the payment infrastructure for eCommerce which grew to account for a large portion of payment. They have been able to leverage their technology and experience now to extend into retail and traditional POS to compete directly with incumbents now. Today, the company is valued at roughly $75 billion and is profitable.
These examples are telling of how revolutionary and frequent displacements can be when innovations require new capabilities that incumbents are unable to adopt, let alone master. Industrial biology companies must capitalize on the opportunities analogous to those of Apple and Stripe.
Creating powerful partnerships to accelerate scaling
Young companies should form partnerships with strong players in their new market development to attract investments and derisk product commercialization. These partnerships can be upstream or downstream along the value chain, to avoid direct competition with existing incumbents. It could also entail working with competitors who have aspirations to enter new markets. For example, during the smartphone revolution, Google chose to work with Korean handset manufacturers as they launched Android OS to compete with Apple’s iPhone. Google had deep software expertise but lacked the hardware engineering and manufacturing capabilities of the Korean handset companies. Driven by the Korean manufacturers’ strong desire to compete in the smart-phone space, it became a perfect partnership, launching Korean manufacturers like Samsung and LG to become leading players in the smart-phone space today. Similarly, Apple partnered with FoxConn to manufacture iPhones instead of building its own manufacturing facilities. This allowed Apple to scale quickly without significant capital outlays. In the early days of Tesla, the company was able to attract a major equity investment from Mercedes-Benz⁶ and a meaningful partnership with Panasonic for batteries⁷. Both Mercedes and Panasonic are major players in their respective areas and have the experience and infrastructure that Tesla lacked. Inversely, Tesla had cutting edge EV technology that Mercedes and Panasonic lacked which made exploring potential partnerships or investments between the two groups a mutually beneficial endeavor.
Given the nascence of company development in the industrial biology space, there lies substantial value in the ability to move rapidly and obtain cutting edge technology that incumbents lack. A well-structured partnership will generate value mutually and accelerate the pace for the industry to develop. An example of this in the industrial biology industry is Ginkgo Bioworks, who has secured partnerships with large companies like Sumitomo Chemical⁸ and Bayer⁹ for these exact reasons. Sumitomo and Bayer have substantial experience in product manufacturing and access to infrastructure, but Ginkgo has arguably one of the most effective strain engineering platforms in the world. Meaning that Ginkgo can run the initial steps of technology R&D before passing off the resulting production optimized strain to Sumitomo and Bayer who can focus on their strengths in downstream development and manufacturing of bio-products. Offsetting each others’ weaknesses makes the partnerships between these two groups a mutually beneficial endeavor. Aligning the pursuits of industrial biology companies and corporate needs is a key to de-risking operations.
Tapping consumer demand
Consumers can serve as powerful catalysts for market change. Targeting them directly from the beginning can increase speed of product adoption across the value chain for both consumers and corporations. One thing that Apple and Tesla share in common is that they both chose to approach consumers directly to create early adoption for their products. Both the computing and automotive industries have traditionally been heavy channel distribution models. These often involve complicated logistic operations and prolonged negotiations that start-ups often lack the resources to support. Apple invested in building its own distribution channel, the “Apple Store,”, which Tesla also adopted. This approach was taken because individual consumers are much faster at making decisions than large enterprises and can be influential for mass adoption as we stated earlier. Having the ability to leverage consumer adoption to create demands quickly, and validate product concepts is powerful, and can help overcome incumbents’ unwillingness to move. In 2021 BCG published a report¹⁰ on the direct-to-consumer (DTC) model in which they claimed, “From 2016 to 2020, private-label brands, extra-small manufacturers (with less than $100 million in sales), and small manufacturers ($100 million to $999 million in sales) gained market share at the expense of large manufacturers (more than $6 billion in sales).” Further reinforcing the notion that being nimble is an innate benefit of being a small business and that this characteristic will allow small companies to outpace incumbents by diligently tracking consumer needs and integrating product or marketing changes based on them. This strategy has been used by some industrial biology companies who’ve both spun out consumer brands for their bio-derived ingredients and chemicals. For example, ingredient producer Perfect Day has commercialized four consumer brands: California Performance Co., Brave Robot, Coolhaus, and Modern Kitchen. Amyris, another major industrial biology player has commercialized more than ten separate consumer brands making personal care and artificial sweetener products. Industrial biology companies that are able to connect to the consumer directly and integrate sentiment changes into production have a major advantage over those with a strong dependence on institutional adoption.
What to expect next: Developing best practices for industrialization processes
In addition to the go-to-market difficulties, many industrial biology companies have faced the issue of developing industrialization processes for their bio-products. Largely due to a lack of infrastructure availability and a nascent biomanufacturing design principles. In our next blog, we’ll dive into the issues many technologies face with respect to industrialization and how the industry can best position itself to overcome these challenges efficiently.
References:
- HBR Kodak business case study: https://hbr.org/2016/07/kodaks-downfall-wasnt-about-technology
- HBR Fujifilm business case study: https://hbsp.harvard.edu/product/807137-PDF-ENG
- Mobile phone market over the last thirty years: https://www.modernglobe.com/animation-how-the-mobile-phone-market-has-evolved-over-30-years/
- Stripe Case Study: https://www.fintechna.com/articles/from-rural-ireland-to-silicon-valley-a-case-study-of-stripe/
- Stripe 2021 update: https://stripe.com/files/stripe-2021-update.pdf
- Mercedes-Benz equity investment in Tesla: https://www.tesla.com/pt_PT/blog/strategic-partnership-daimler-acquires-stake-tesla
- Tesla and Panasonic partnership for batteries: https://www.tesla.com/blog/panasonic-enters-supply-agreement-tesla-motors-supply-automotivegrade-battery-c
- Ginkgo Bioworks and Sumitomo Chemical partnership for personal care products: https://www.ginkgobioworks.com/2022/07/18/sumitomo/
- Ginkgo Bioworks and Bayer partnership for agriculture bioproducts: https://www.bayer.com/media/en-us/bayer-and-ginkgo-bioworks-close-deal-creating-agricultural-biologicals-powerhouse/
- DTC strategy report by BCG: https://www.bcg.com/publications/2021/direct-to-consumer-strategy-business-benefits
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