Ride the wave of disruptive innovation

Apr 13th 2015 |

Is disruptive innovation real or is it just this generation’s throw-away theory of change? And more generally, is change different from what it was before? Is it faster, more widespread or more disruptive? In business it can certainly seem that way. The scale of human activity is now so vast and interconnected that small percentage changes have huge absolute effects – effects whose implications appear less and less predictable.

This environment of continuous disruption starts with the extreme demographic changes we have seen over the past 40 years and which are now coming to a head. Countries and cities can only double their populations so many times before infrastructure creaks, political structures are tested and economies stagger.

Dazed by disruption?

This population growth has certainly created large new markets. But they are not necessarily the same as those in which most successful corporations have thrived. New customers are plentiful but they are relatively poor. Populations are dispersed over huge, often rural areas. Infrastructure of all kinds is minimal. Risks are large and difficult to manage. And returns are on average no better than those in developed markets. Yet companies feel driven to globalise as the world’s centre of economic gravity shifts, forcing change upon themselves at every level of the organisation.

“It’s taken for granted that we all need to ‘go global’,” says one corporate treasurer who has recently been supporting his company’s rapid international growth, “But the challenges are enormous, from funding, to staffing, to systems and compliance – and that’s before we have talked about actually being able to deliver products the clients want where they want them and at a price they can pay.” In developed markets demographic, political and economic disruption is made more painful and expensive by tracts of new regulation and tax rules.

Perhaps most important of all, the continued re-regulation of banking threatens the profitability and, possibly in some cases the survival of businesses dependent upon the banks. A mishmash of national and global financial industry regulation is already affecting fundamental aspects of corporate activity, such as capital structure, cash management and risk mitigation.

“Our biggest concerns are not really specific issues like a particular tax rule or changes like Sepa,” says one treasurer. “We have to deal with that on an ongoing basis as part of our job. The biggest concern is that the global backlash against the banking industry forces banks to pull back and shrink so much that the products we rely upon are withdrawn or made prohibitively expensive. A tax hike is one thing. Not being able to borrow, or deposit money, or manage cash effectively or optimise our balance sheets – these are fundamental issues.”

The technology trap

But the poster child of disruptive innovation is technology. And technology is certainly companies’ biggest concern. Just over half of the firms questioned for Deloitte’s latest survey on ‘Exploring Strategic Risk’ said that technology disrupters could threaten their established business models. Of most concern were social media, Big Data – data mining and analytics, mobile apps, Cloud computing and cyberattacks. They could also have added nanotechnology, 3D printing and 4D (yes, the concept exists before we have even exploited 3D), robotics and machine learning (artificial intelligence).

“Technology affects everybody,” says a corporate treasurer. “It affects business models, it affects the way we manage ourselves and it has become something that we utterly depend on without it being a core competence. It also costs us a lot of money and creates as many new competitors as it delivers new opportunities.”

For a technology to be disruptive it is not enough that it is expensive to replace or that it requires constant maintenance and improvement. Truly disruptive technology overturns existing operating models and demands their replacement. It removes barriers to entry – it has never been easier to start up a business but never more difficult to succeed. Most importantly, it makes existing companies vulnerable to extinction, turning what were assets – products, brands, models, distribution and supply chains, research and development expenditure – into liabilities. It creates new business paradigms which are not simply the product of normal, incremental improvement.

Disruptive technology can make a new customer base serviceable where incumbents could or cannot. It allows start-ups to offer lowcost, lower quality products that surprise existing manufacturers by satisfying their customers, losing them margin and market share.

Technology disrupts most when it demonetises a previously paid-for product (for example Google Maps versus atlases or dedicated in-car GPS, WhatsApp versus SMS text), when it dematerialises a product and so fundamentally alters its production and distribution economics (web versus print publishing, MOOCs (Massive Open Online Courses) versus traditional universities) and, significantly, when it democratises. The real power of search, aggregation and social activation is enforced transparency.

Products and firms can no longer hide from comparisons of price, quality or comprehensiveness. Local issues of mispricing and inefficiency are exposed, forcing global best practice. Social networking upends telecommunications, the media, and the marketing departments of companies across all sectors. And, by allowing the creation of ecosystems around products and brands, technology alters the nature of competition, giving third parties a role in enhancing other firms’ offerings to the benefit of all.

Self-disruption threat

Perhaps most significant of all, disruptive innovation forces incumbents to disrupt themselves, if they can, just to survive. The apparent remedies to disruption seem to cannibalise or even destroy existing revenue or profit streams. The business models suggested appear fundamentally at odds with those currently in place. So, for example, the free – and initially revenue-free – product is unacceptable to traditional producers, even if they understand the maxim, ‘if you’re not paying for the product, you are the product.’

Taken together, all these trends contribute to the new reality of disruption and disruptive innovation, a reality that can, at least in part, be measured.

First there are the dead: Digital Equipment Corp (DEC), Wang Laboratories, Polaroid and Borders, for example. Then those for whom it could go either way, such as Eastman Kodak, Blackberry and US Steel. And there are the tough statistics. In 1958 the average lifespan of companies on the S&P 500 was 61 years. It’s now 18.

Or take the metrics collected in Deloitte’s Center for the Edge project which attempts to measure and quantify the effects of increased disruption on successful corporates. One such measure is the topple rate, the average amount of time it takes for companies to lose a leadership position. This has increased by almost 40% since 1965. At the same time indices of market concentration have fallen, suggesting dramatic increases in competition.

So what can companies do? First they must accept the persistence of change and respond. It’s all too easy to dismiss small new entrants or seemingly odd new products as irrelevant fads. Then, once change has been recognised as inevitable, firms must move quickly and be prepared to take counterintuitive decisions. Today’s cash cows may be dead tomorrow, can they be sold now? Is your business model based on an inefficiency that will be exposed? And can any response to likely change be integrated into the current business model or does it render that model obsolete? If the latter, then it is time to exit the current model for a new one.

If that sounds glib, it has been done. Apple itself had stumbled badly and was no global leviathan before iTunes and the iPhone. IBM is the classic case study of the revitalisation of a collapsing empire. And more recently Nokia and Xerox offer examples of optimism through reinvention.

And even Kodak, a seller of candles in a light bulb world, has rejected extinction. The company came out of Chapter 11 in 2013. It is using governance as a driver to position its new products and have started to move into smart packaging, a bet in part on the so-called internet- of-things.

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