An insightful HBR article by Julian Birkinshaw, titled How Incumbents Survive and Thrive, caught my attention. It makes two crucial and thought-provoking points on industry disruption (side note: we talk about demand-side disruption, as opposed to supply-side disruption) and appropriate response strategies which greatly resonate with my view:
There has been less creative destruction than prior studies have suggested – indeed, less than most people believe.
Digital disruption is real, of course, but it has been oversold by three myths:
- Every sector is under threat
- Disruption happens quickly and is accelerating
- Established firms are struggling to adapt
The data suggests otherwise: While many believe that technological disruption has been rampant for decades, the internet has actually caused much less creative destruction than people think. Birkinshaw’s analysis of the Fortune 500 and the Global 500, in fact, reveals that most sectors have been surprisingly stable over the past 25 years. Very few firms on those lists today were launched after 1995.
Some industries, like TMT and retail, seem to have been moderately affected. In contrast, industries like industrial and consumer goods were hardly affected at all. Disruption happens over a long time frame. Retail banking, insurance, education audit and consulting industries were seen as vulnerable in the 1990s.
However, even though changes are afoot in all those sectors, incumbents have not yet surrendered their dominant positions. And while some established companies have struggled over the past few decades, the evidence shows that they are not representative of broad trends, according to Birkinshaw.
Strategies pursued by the Fortune 500 and Global 500 firms that successfully navigated the past 25 years of digital change reveal four general approaches.
The best response to disruption also seems to be misunderstood. Companies that adopt bold, offensive strategies in the face of industry digitisation improve their odds of coming out winners, argues a recent McKinsey study. Following this advice, the default response is to fight fire with fire, that is setting up a competing digital unit or pursuing a (self-disrupting) transformation. On the other hand, Birkinshaw’s analysis has distilled out four distinct viable strategies (see table above):
• Double down – playing to the own existing strengths, for example Disney.
• Fight back – trying to take on an insurgent at its own game. Examples include British Airways and Microsoft.
• Retrench – yielding ground to new arrivals and using a variety of weakness-based tactics (compared with strengths) to ensure own survival. For example many banks.
• Move away – moving into entirely new opportunities, such as Fujifilm.
Selecting a response strategy involves decision-making on
• playing offense versus defence, that is taking on an entrant directly compared with indirectly
• focusing on existing rather than new segments or markets.
Each strategy has benefits and risks. As always in the context of corporate strategy and innovation, one size does not fit all: a company’s preconditions and circumstances determine which one it should actually pursue.
No matter which option is chosen, companies must embrace digital technology to improve operational effectiveness across the organisation. What is more, each of these approaches sends a very different message to the various stakeholders, says Birkinshaw – and Retrenchment in particular is a tough story to sell. It most likely goes along with a shortened CEO tenure.
Takeaway
There are a couple of lessons Julian Birkinshaw wants to be taken from the analysis:
• Avoid making generalisations based on anecdotal and high-profile examples. Everyone knows the stories of Kodak and Blockbuster, and companies can learn from them. But they are outliers. Most industries have not seen that much disruption.
• Judgment beats paranoia: Keeping alert to the next big threat does not necessarily help to pick up on the exponential growth of a new technology or business model. Focusing on the risks of coming late may lead to ignoring the possibly greater risk of moving too quickly.
• Take the time to choose the response strategy that best fits your organisation’s needs and capabilities. The effects of new technologies are usually felt across decades, not years, and the most potentially disruptive firms end up co-existing with their established counterparts.
In a Dual Innovation approach, responding to disruptive innovation in large part entails exploratory (versus core business) activities to reposition existing business or build new business. The direction of this countering ‘Exploration’ impact may vary depending on the chosen response strategy:
• Offense / focus on existing business: Strengthening and extending the existing core business by pursuing adjacent innovation opportunities. Doubling down on existing assets and capabilities to fend off disruptors.
• Offense / focus on new business: Taking on Self-Disruption and going about emerging, unproven markets by reaching beyond the present core business. Establishing a dedicated (self-disrupting) unit and/or repositioning the core business to go head-to-head against disruptors, involving building up new assets and capabilities.
• Defence / focus on new business: Innovating beyond the present core business by venturing and diversifying into largely unrelated fields. Reapplying core assets and capabilities in new markets to give way to disruptors.
Bottom line: Do not fall prey to the misconceptions around industry disruption and disruptive innovation. Chances are better than you might think that your incumbent company will be able to survive and thrive in the face of disruptive entrants. Rather than pursuing ad-hoc strategies, incumbents are better off taking their time to observe developments, scrutinise their options and pick an adequate response that meets their individual requirements and conditions.
Once more: One size does not fit all!