Last week Tesla released a software update that added an autopilot mode to its cars. Earlier this year they made their cars faster – again, through a software update. GoPro doubled the frame rate of its cameras and added new picture modes. Good times, and also a good illustration of the differences between hardware- and software-driven businesses. If you work in an office, you probably have a phone on your desk. The functions may vary, but it’s essentially a piece of plastic, with 15+ buttons and a display. Each button has a function and the functionality of the phone hasn’t changed significantly since you first installed it. That’s pretty much a hardware-driven business: The product has been carefully designed, produced, shipped … and that’s it. Ship and forget. There are certain implications of this kind of business:

• You need diligence in designing and manufacturing your product. Once you ship, there is no turning back. Mistakes are expensive, which is the reason Six Sigma is so popular in manufacturing industries.
• The manufacturing process is fairly complex and involves either significant capital investment in plants or complex supplier relationships and coordination processes.
• There is little chance that the functionality changes over time. If it does, consider it a bonus and the rare exception.

Now let’s compare that with the smartphone in your pocket, which is very different. First of all, the array of services it provides is much broader. It is an alarm clock in the morning, newspaper during commute, word processor in meetings, TV on the couch. Yes, there is pretty much an app for everything. BestReview produced a video that illustrates how much gets replaced by software. The only thing missing is the move of the computer into the mobile. Second, your phone changes constantly with automatic updates of apps. You wake up in the morning and realise that your note-taking app suddenly can scan business cards and automatically import those contact details into your address book. Or your sound system at home suddenly gives you access to a wider range of music. Only software can do that. Most people think of applications like MS Office or Photoshop when they hear software. But software goes much further. It fundamentally changes the way business is done. There are several characteristics of software-driven businesses that are important to remember:

• The barriers to entry are different. Capital is no longer a major barrier. If you know how to code, have a computer and a credit card, it is very easy and inexpensive to rent infrastructure from Amazon, Microsoft or Google to get going. The barrier to entry shifts towards talent.
• As the competitive advantage of having access to capital diminishes, most incumbents struggle to compete with smaller software companies: (a) there’s just too many small companies and you don’t know who you’re competing with until it’s too late and (b) long-term access to engaged talent is not a problem to be solved by throwing money at it.
• A shipping date becomes an interim milestone, not the end of a project. Once you ship (put your app on the app store) you continue improving and adding functionality. This gives you permission to experiment. If things don’t work out, you can change it. Speed gains importance, reaching six sigma loses relevance.
• This accelerates what Clayton Christensen calls disruptive innovation: releasing a good-enough product that targets an un-served customer segment (which typically cannot afford the traditional products) and improve it until you capture not only the new market segment, but also traditional customer segments. You start small, continuously improve and in the process extend the market and take over the traditional market en passant.

A good example of a software-driven business (and probably the one that most people refer to) is Uber. However, the magic of Uber is less in its app. That is “just” the user experience – and make no mistake, it’s an excellent one. The magic is in a business model that is enabled by software. They figured out a way to create a transportation business without having to invest in vehicles. This allows them to be much more flexible and quicker to adapt than a traditional capital-based business. Again: Only software can do that. Long story short: Marc Andreessen wrote in 2011 Software is Eating the World. It is still a must-read. Companies like Tesla and GoPro, that are on the surface hardware companies, succeeded in creating platforms that allow them to run their businesses as software-driven ones. The question is now: How many incumbents will manage to successfully shift their business from a hardware- to a software-driven one? Are you hungry or are you lunch? Photo credit: Mário Tomé / Foter / CC BY-NC-SA