The influential theory of disruptive innovation first articulated 20 years ago by Harvard Business School Professor Clayton Christensen has come under the spotlight of late. What types of innovation are truly disruptive? Is low cost the only basis for upending established business models? Is it only outsiders who are capable of doing this?
Academics may disagree about terminology and how practice fits theory, but business leaders across sectors are keenly aware that established models are increasingly under threat from technology-led change. Innovative challengers certainly have few doubts about the ability of digital technology to give them unprecedented global reach at an affordable cost. Venture capitalists and other investors are increasingly betting that technology-driven newcomers – from emerging and rich-world markets alike – can challenge incumbents, even in industries with traditionally high entry barriers such as financial services and automotive. Incumbents are now challengers themselves when, like some technology giants, they cross traditional boundaries to enter new markets.
Real or potential disrupters, then, are numerous and energetic and can come from anywhere. Everyone else must adapt. That might mean radically improving what they do. Or it might mean becoming disrupters in their own right.
To explore the different ways in which businesses—small and established players alike—are preparing, responding and fostering disruption themselves, The Economist Group is producing a wide-ranging programme, supported by EY, exploring how key industries are undergoing transformation and how corporate leaders are preparing their organisations for disruption. It encompasses The Disrupters film documentaries, as well as The Economist Intelligence Unit (EIU) written content series that is based on in-depth interviews with corporate leaders and experts globally as well as insights from a global survey of business executives.
The disrupted fight back
Digital innovation is not the exclusive preserve of online companies. Airbnb in hospitality and Uber in ride-sharing might be well known digital challengers, while Alphabet, the parent company of Google, and Amazon are eyed with caution by incumbents in adjacent sectors. But older, long established players are actively seeking out and experimenting with technologies than can help them fortify their existing positions or establish new ones in different markets.
In financial services, BBVA, a Spanish bank, has been partnering with and purchasing “fintech” start-ups in Europe and the US in areas ranging from cash management to inter-bank settlements. In the automotive sector, Volvo Car, Renault-Nissan, Audi and other original equipment manufacturers have all joined forces with technology companies in different initiatives to develop the “connected car”. In lighting, home electronics and medical technology, GE and Philips have both fronted open innovation initiatives to develop new products and improve their existing ones.
Leaders of these companies are challenging their management teams and workforces to revisit their products and processes, and to look outside the traditional enterprise walls for innovative approaches. Mergers and acquisitions has been one method incumbents have employed to acquire potential disrupters and gain access to their technology. In 2015, BBVA acquired a stake in UK online banking challenger, Atom, and another, Helsinki-based Holvi, in early 2016. GE has reportedly set aside US$10bn to finance the purchase of smaller digital companies over the next three years.1In other cases, as in the already heavily disrupted hotel sector, established players have been acquiring rivals – to gain scale, exemplified by Marriott’s purchase of Starwood, or to establish themselves as online players in niche market segments, as in Accor’s deal for Onefinestay.
Large players have also become more open to partnerships, with organisations inside and outside of their industries, to try and stay ahead of nimble digital challengers. Car sharing is a good example. Ford, for example, has engaged app developers, car park owners, insurance providers, financial institutions and local councils in a scheme to make Ford cars available for hire around London. Its rivals BMW, Daimler, Honda and others are pursuing similar car-sharing programmes in Europe and elsewhere. Roche, the Swiss life sciences company, teamed up in 2015 with Qualcomm, a US wireless technology provider, to offer mobile patient diagnostic services. And this list of initiatives by established players only scratches the surface. (Examples of these will be explored in greater depth in subsequent articles to appear in this series.)
Equally, senior management can sometimes use acquisitions and partnerships to shake things up internally by importing desired business practices and attitudes. More often, however, the acquisition or alliance remains separate from the core business; it may prove effective at seeing off dangerous challenges, but does little to alter the prevailing culture.
Some companies respond to disruption in more radical ways – by disrupting their own business model. The Italian electricity utility Enel is attempting to do just that by forgoing any further investment in coal-powered generation and re-directing its future investment toward renewable energy sources such as wind and solar. The Chinese consumer electronics and appliances company Haier, on the other hand, is in the process of reorganising a hierarchical management structure into several smaller “micro-enterprises” that compete with each other to design, build and distribute the company’s products; they will also compete for staff and investment funding.
A friendly embrace
Only time will tell whether such internal disruption will result in organisations that are comfortable dealing with external disruption, or become generators of it themselves. It is clear from the past two decades of rapid business change that far from all digital challengers succeed, or that challenged incumbents are doomed to decline. Whether or not the responses involve acquisitions, partnerships or organisational upheaval, or something in between, adapting to disruption requires a management outlook that embraces rather than resists it. The EIU has identified four areas of particular importance:
Leadership –Transformational change of any sort must always be communicated from the top, even if driven from the bottom. The board, C-suite and other senior management must sing from the same hymn sheet. If adapting to disruption involves a strategy for change, a senior executive or leader must own it.
Culture and purpose – Employees must want to experiment and innovate, rather than be directed to do it. Changing attitudes can take a long time, but management can accelerate the process by creating incentives, and removing obvious structural barriers to team collaboration. Just as important is articulating a sense of purpose – values that employees enthusiastically buy into and make them want to innovate.
Customers – Companies tend to see competitors as the sources of disruption. But customers are often the driving force, particularly where digital technology is involved. Companies must be able to spot emerging changes in customer behaviour, model their potential impact, and be ready to change products or revenue models accordingly.
Trends – Similarly, companies must be able to see through industry noise and identify the technologies that have a real chance of winning favour among customers. There is much more involved in this than guess-work or simply hedging your bets.
The articles that follow examine the challenges businesses face, and the steps some of them are taking, in each of the above areas. Like the Disrupters films series, they will provide real examples of successful adaptation if not transformation, and perhaps some inspiration, from the targets—and drivers—of disruption.
We surveyed 1000 executives from 14 countries to get their views on how disruption is re-shaping their industries – and what they are doing in response. Read the full report HERE