Digital disruption has seen innovations such as artificial intelligence, the Internet of things, analytics, mobile solutions, and social media change the face of how business is won and done in every industry. We all read about what was said to be coming but many leaders complacently played down the warnings and continued to go about their business as usual – unprepared for what was hurtling towards them.
The warnings have been printed onto the pages of executive reading material since 1995, when Clay Christensen and Joe Bower published their HBR article “Disruptive Technologies: Catching the Wave”. Now that 32 year old notion of disruptive technology has become a harsh reality with painful consequences for the bottom line of many established firms. Those consequences being disappointing numbers in their annual reports, and as a result, some CEO’s have been sent packing and replaced, while others have been granted “time to turn things around” – but the clock is ticking for them, and the boards and shareholders to whom they’re accountable are becoming restless.
The problem for victims of disruption is that they tend to balance precariously on their back foot, as they are forced into a defensive mode. As they bleed profits, they desperately defend their corner as best they can with defensive tactics, but they often lack an offensive strategy. One where innovation is at the core. So responses are often lacklustre.
Meanwhile, as if in a parallel universe of carefree fun, digital economy insurgents are the entrepreneurs that continue to imagine a better world. One that pales incumbent offerings into antiquated obsolescence. They engineer new ways of doing things – unconstrained by dusty old processes, policies, hierarchy, politics, and limiting beliefs.
These entrepreneurs duck and dive, muck around with 20 crazy new ideas and arrive at “the one” – all in their own good time. They respond to new possibilities overnight, without the need for endless committee meetings. They move at lightening speed and they don’t care what anyone thinks.
They focus on micro-niches. Ones they learn to deeply understand and empathise with. Niches with customers they care passionately about and which they understand the psychology of. Meaning they know exactly where the incumbents are failing, why they are failing and exactly where and how customers want relief.
When that happens, customer expectations get raised by disruptive insurgents and because incumbents fail to meet those expectations with their old business models, modern fickle customers defect in their droves and profits evaporate in front of the eyes of CFOs. These disruptors are incredibly dangerous to incumbents because they quickly grow huge audiences and are agile enough to leverage their audience into business models that threaten incumbents in more than one market.
Dollar Shave Club is just one example. In just a few short years, the maverick style start-up sliced off a serious share of the shaving market for themselves, while Gillette was left red-faced and on the defensive. Court action and copy-cat tactics were the early responses from the P&G subsidiary – confident that their antiquated Goliath style tactics would win the day.
Then in 2016 Unilever acquired Dollar Shave Club in a deal said to be worth about $1 billion, and so Gillette and its parent company P&G were no longer facing off with a start-up. Suddenly they’re up against a powerful, which has vast resources to plough into the Dollar Shave Club business model.
This is happening over and over, and no industry or business is immune to digital disruption as innovative digital use-cases make the headlines on a daily basis.
Digital disruptors are able to innovate rapidly, first appealing to low-end or unserved customers, then go on to capture market share and scale far faster than larger more established organisations that tend to hold on to business models that worked well for them in the past. Some like Facebook never sell out, while others like DollarShave Club do. Either way, disrupted firms bleed profits and the noise kicks off inside those firms as the blame-game begins. Heads role, desperate leaders scramble unprepared to defend their market, often in a panic-stricken mode and very unprepared.
Large established, oligopolistic corporations are slow moving, stuck in the old ways of working, with an air of arrogance about their historic position in the market.
Their success depends on having a broad base of support to which they can play. They favour their loyal customer base while trying to expand it with some digital marketing, but often what they’re marketing is their antiquated business model. A business model that is one of rent-taking, where they capitalise on their dominant market position as their main advantage.
The problem is that the world is now awash with large firms proudly announcing to their people and boards that digital is now core to their business strategy and that they have embarked on a journey to transform their business. But are they disrupting or just defending? And are they transforming or just changing? Because let’s not forget that transformation creates the future, while change fixes the past. So a better, faster or cheaper version of the past is change at best – but hardly transformational for the business or enough to combat disruption.
Workforces gets sucked in by the digital hype and boards are often so disconnected from all but lofty notions of disruption and transformation that they’re an easy sell for new and shiny initiatives being hailed as disruptive and transformational with forecasts of ROI not based on hope instead of data.
When you look at the starting point of many so-called transformations, you won’t find a hint of serious innovation in sight. While some operational leaders will argue that they innovated, their idea of innovation is a world away from what characterises real innovation. And so a few good ideas and copycat tactics is as good as it gets for many a so-called digital transformation.
If being the disruptor is the best protection against disruption, why are incumbents not innovating? Because in order to be able to turn the threat of disruption into an opportunity, businesses need to consistently strive for innovation. But the true extent of many a so-called transformation is incremental change and tech upgrades.
Many large and established companies are good at the process of adding-to or building-on the things that already exist. They hold on to their past success and just squeeze harder on what they’re already doing. This is Change. This is not Transformation. Change fixes the past, while Transformation creates the future.
While leaders are becoming increasingly aware of the fact that small companies have the opportunity to overturn incumbents and reshape markets faster and easier than ever before, not all of them are responding well. They’re like rabbits caught in headlights – aware of the digital threat, but motionless – waiting for the impact. While many are responding, some of these responses consist of simply playing catch-up and being on the back foot.
By the time their so-called transformations come to life, their competition has innovated further and new players have entered the market. So the incumbent attempts to catch up again. All the time losing market share, and losing the ability to invest in the resources they need to innovate, digitise and transform. How many years will it take them to get transformation right? Do they have the time and money to wait that long?
It’s a slippery slope to a place that no firm wants to go, but unless incumbents invest in innovation, they will always be on the defensive and running change initiatives wrongly labeled as transformation, and lacklustre digital projects.
While the digitisation of operations, marketing and the workforce is good, it does nothing disruptive to the market because only a new business model is likely to do that.
Most of the executives I talk to are still very much focused on digital largely as a way to do “more of the same,” just more efficiently, quickly, cost effectively. But I don’t see a lot of evidence of fundamentally stepping back and rethinking, at a basic level, “What business are we really in?”
– John Hagel III at Deloitte
Insurgents and Incumbents Join Forces
Instead of incumbents trying to beat down the start-ups, smart leaders have embraced collaboration, and the number of large corporations setting up incubators, accelerators or innovation labs for start-ups is soaring.
Early perceptions of start-ups are shifting. Once seen only as a threat to incumbents, the emphasis of forward thinking CEOs has been shifting to collaboration. While it has taken some time for start-ups and incumbents to find ways to work together, an increase in cooperation is taking shape.
As you read earlier, Unilever acquired Dollar Shave Club in a deal said to be worth about $1 billion. And in the FinTech space for example, PwC explains here that as the relationship matures between the old and new, the atmosphere of collaboration and mutual understanding between incumbents and start-ups is positive and expected to accelerate.
The link-up between BMW and Mobileye is another the model that broad-minded executives aspire to replicate.
10 Steps Incumbents Can Take
Disruption means using completely new approaches with new technologies, new combinations, and new innovative business models. Clearly, this is a major challenge for large established companies, but it’s a challenge they need to confront head-on.
It’s not rocket science, but neither is it the stuff that operational leaders have cut their teeth on, so often they don’t know what they don’t know about transformation. Incumbents need to innovate, digitise and transform, but they need to innovate and transform legitimately, and not lull themselves and their stakeholders into a transformation illusion.
Here are ten steps firms can take as they tackle the threat of disruption:
1. Adopt the six guiding principles of digital business transformation (THRIVE)
2. Be honest about what is truly innovative and disruptive in what your firm is doing
3. Assess your transformation readiness and fill the transformation management capability gaps
4. Assess your organisational structure, culture, processes, products and services
5. Create a digital business strategy
6. Engineer and implement a new digital business model
7. Innovate strategically
8. Engage transformation leaders to lead transformation (operational and transformation are very different)
9. Invest in competitive intelligence (remove the blind spots because there’s more disruption coming!)
10. Consider collaborating with start-ups, or buying them