How to Respond to Disruption
Every CEO with a digital economy mindset will be considering how best to respond to disruption, and some have the foresight required to be an outstanding fourth industrial revolution leader. Meanwhile there are those that are forced into
responding reacting by falling profits or a dark cloud above their heads.
At the most basic level, there are two ways in which a company can respond to disruption, and it’s very similar to how risk in general has been addressed long before the digital economy came along, which is to consider both the threats and opportunities that disruption presents.
With one hand, leaders need to defend any threats to their core business, and with the other they need to identify and exploit disruptive opportunities.
Everything to Lose
Unlike the rebellious style start-ups that are stealing the limelight and exciting consumers with their offerings, established companies usually have a lot more to lose. Let’s face it, many start-ups are based on new business models that display potential but don't necessarily make money yet, a relatively small workforce, and money from other companies. In some respects, the scenario is similar to what we saw in the dot-com days between 1997 and 2002 when speculation resulted in some monumental success stories such as eBay, but far more failures like Pets.com, where investor capital disappeared in not too many years.
As in the dot-com days, many incumbent firms often have a lot more to lose than some of the foot-loose and fancy free start-ups that cause excitement. Workforces consisting of tens of thousands of people (and their families) depend on established enterprises, which in turn depend upon the business models that have fed them profits for decades. But these business models are now under threat. A problem exacerbated by the fact that customer loyalty has been replaced by customer fickleness, with an increasing number of options at their fingertips.
So when the business model that made a company what it is today comes under fire, is it realistic to expect a CEO (who in most cases never created that business model) to conjure up something new to match or exceed what the old business model has achieved? Quite honestly it's a lot to ask, but CEOs are faced with the choice of giving it their best shot, not doing anything and leading their firm into the history books, or stepping down because they're just not cut out for leading a firm in the new digital economy. In fact, few firms have successfully given birth to and executed a business model different from their current one.
The Dark Side of Start-ups
While the media is filled with “threats that incumbents face from start-ups”, let's not forget the fact that there are far more start-ups that are likely to go bankrupt than established firms. Start-up founders have often put their heart, soul and money into their venture, so they too have a lot to lose. Perhaps a lot more emotionally than a CEO who has moved from one firm to the next in their executive career.
This small sample of dot-com disasters should keep us all mindful of the fact that the sexiness of start-ups is often short-lived, despite the investment they sometimes manage to attract. Because it's one thing to attract investment, but quite another to make money.
Boo.com spent $188 million in just six months in an attempt to create a global online fashion store, and went bankrupt in May 2000.
eToys.com was founded in 1997, filed for bankruptcy in February 2001 with $247 million in debt, was bought by KB Toys, which also went bankrupt.
Startups.com was founded in 1998 out of Silicon Valley, with offices in New York and Boston. The venture-backed accelerator went to the wall in 2002.
Kozmo.com began to offer one-hour local delivery of several items with no delivery fees in Spring 1998, but went bankrupt in April 2001.
GeoCities was acquired by Yahoo! for $3.57 billion in January 1999 and was shut down in 2009.
But while the survival rate for start-ups is low, it only takes one success story to disrupt an incumbent firm and an entire industry. And that one is often enough to wreak havoc for firms that have had it so good for so long.
Responding to the Threats of Disruption
Firms that have sat back complacently believing that they would never be a casualty of disruption are now being forced to respond not only to the threat, but increasingly to the very real and panful impact of disruption. In many cases they're not responding – they are reacting to something they failed to prepare for. They are effectively caught off-guard and are reacting in an unprepared manner. Right now there is no shortage of multi-million dollar transformation initiatives operating in chaos and confusion because of this. Many are witnessing budgets and timelines that are doubling or quadrupling, as well-intentioned operational leaders are unrealistically expected to become overnight masters of transformation.
In their panic-stricken reactionary mode, some have fallen prey to digital marketing hype and can been seen investing heavily in learning how to better market their outdated products and services with the hope of reversing their declining market share, and many have drifted into The Great Digital Illusion. Meanwhile the well-prepared have armed themselves with outstanding innovation and transformation capabilities to respond in a better way.
Responding to the Opportunities of Disruption
Business model experimentation, as MIT suggests, is the pursuit of growth through the methodical examination of alternative business models. At its heart, business model experimentation is a means to explore alternative value creation approaches quickly, inexpensively and, to the extent possible, through “thought experiments.” The process sheds new light on potential competitors and lowers the risk of taking the wrong or a lesser-potential road — all for an initial investment that is typically quite small relative to what can be gained.
Research conducted in the last 10 years has established a link between business model innovation and value creation, which suggests the need for firms to build their own competency in business model innovation. One that can facilitate the exploration of potential business model alternatives that can be pursued to commercialise any given idea prior to going out into the market and investing resources.
Start-up and Incumbent Collaboration
Business model innovation and experimentation isn't easy, and most leaders have little if any experience in it. So the logical approach that many are taking is to acquire start-ups and allow them to evolve – free of the bureaucracy and politics that many large firms are victims of.
Facebook bought WhatsApp, GE is said to buy more tech start-ups than Google this year (2017), and companies not usually thought of as being in the tech sector have become more aggressive, making more than $125 billion worth of acquisitions in 2016 – which is up over 600% on five years ago.
According to reports from Thomson Reuters in 2016, their most recent surveys revealed that 15 percent of acquisitions were of technology companies, which is more than any other sector. Proof that plenty of CEOs are now adopting the; “if you can't build it – buy it” mindset.
Ten Ways to Respond to Disruption
Ten ways that any CEO can consider, as they go about confronting disruption's threats and opportunities are:
- Build your competitive intelligence to identify invisible threats
- Identify fundamental disruptive opportunities you can exploit
- Establish your offensive and defensive response strategies
- Never compromise on the execution phase of transformation
- Become familiar with the tech start-up acquisition market
- Establish a business model innovation capability
- Avoid reacting to threats in an unprepared manner
- Respond with a sense of urgency
- Don't copy – adopt a digital and entrepreneurial mindset
- Embrace the six guiding principles of digital business transformation