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Will RFID Disrupt Your Business?
Companies developing an RFID strategy need to understand whether the technology will support the way they do business—or change it entirely, says author Michael E. Raynor.
Financial services is a sector where RFID could have potentially disruptive applications beyond the supply chain. In the payment space, for instance, credit and debit cards dominate the industry. Conventional wisdom holds that credit cards are used for large purchases and debit cards for small ones.
But what about payments of under $20, which are still mostly made in cash? If the credit card and debit card companies were to go after these transactions, such transactions would cost the companies just as much to process as the larger payments do. Yet these transactions would generate small commissions for the credit and debit card providers, so these providers are not nearly as strongly motivated to convince customers to use their credit or debit cards for these payments. Instead, they tend to devote their energies to gaining a greater share of larger payments.
In contrast, Dexit, a Canadian payment service provider, has been rolling out a payment service based on RFID. In classic disruptive fashion, it’s targeting a slice of the market that means little to established and powerful providers of credit and debit card services—namely, small cash payments.
If it’s successful, the credit and debit card companies won’t even see Dexit’s growth because the company is taking transactions that the credit card companies never had in the first place. But if Dexit is able to execute an upmarket march, eventually it may disrupt established providers. (The sustaining or disruptive natures of these applications of RFID are summarized in the table.)
Insights for RFID vendors
Companies that use RFID technology need to understand whether they are seeking to effect sustaining or disruptive innovation, since each makes very different demands on an organization (more on this below). But the lessons of disruption theory speak to vendors of RFID technology as well.
Because the technology has a long history, there are already well-established and highly capable providers of RFID tags and readers with specific performance profiles. Incumbents such as Philips and Texas Instruments have built strong businesses that succeeded by delivering the performance characteristics their customers demanded.
Because early RFID technology was expensive, it was deployed by companies with high-value products. For example, railroad companies tracked rolling stock worth tens of thousands of dollars. Similarly, European trucking companies that had to contend with the double whammy of smaller roads (which meant smaller trucks and hence more trucks for a given volume of shipping) and higher gasoline prices were willing to spend far more than U.S. trucking companies to avoid misdirected or lost shipments.
In working to solve these customers’ problems, incumbents focused on high levels of functionality, with cost a secondary consideration. If the readers cost $50,000 and the tags were $5 each, that was OK, because the cost model fell within the needs of the only customers for the technology.
As discount retailers look to deploy RFID as a sustaining innovation in their supply chains, they will need RFID technology with a very different cost/performance trade-off. They don’t need 384 bits of memory and read-write capability—if that comes at a price of $1 per tag or more. They need 5-cent tags and will settle for little more than a product code.
Incumbent providers of RFID technology are, like all well-run companies, hostage to their existing customers. Established airlines have found it all but impossible to mimic Southwest’s business model, even as Southwest has begun to steal some of their more valuable customers. Similarly, established RFID vendors will find it difficult to shift their resources away from the sustaining innovations demanded by their existing customers in order to develop the low-cost solutions that new adopters are looking for.
As a result, among the plethora of new entrants into the RFID vendor space, companies with the best chance of success are those that exploit the asymmetry of motivation between them and their established competitors. By seeking customers with needs very different from those of the customers currently served by incumbents, new entrants have a chance to find a foothold market that, ultimately, holds out the promise of disrupting the entire industry.
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