A few weeks ago I participated in a lunch discussion in New York with a group of around 20 people from a wide range of ages and professions. The theme of the lunch was The Future of Work, but given the eclectic nature of the group we talked about a number of subjects. One of the topics discussed was how companies generally deal with major technology and market changes, - like those that have been taking place all around us for the past few decades.
Transformative change comes naturally to young companies, as it generally does to young people. But, based on my personal experiences, adapting to such disruptive changes is much more difficult for successful, well established companies. Not for nothing do we refer to the changes accompanying disruptive innovations as creative destruction, the powerful force that rejuvenates the economy in Joseph Schumpeter’s 70 year old theory. Mature companies that once led their industries are too slow to respond to the waves of startups now attacking them with innovative products and services.
Following the lunch, I kept thinking about the topic. Why are so many successful, well managed companies done in by disruptive technology and market changes? Is it that in spite of all their strategy efforts, their management is unable to anticipate the changes and is caught by surprise? Or is it that, as if actors in a kind of Greek tragedy, they see the changes coming and understand what needs to be done, but are somehow unable to make the needed strategy and cultural transformations? Let me share some of my thoughts on these questions.
Change, - the bigger the better, - is the mother’s milk of startups. It’s what gets them a foot-hold in the marketplace, from which they hopefully become The Next Big Thing that propels them to fame and riches.
Startups are generally focused on one central innovation, which enables them to devote all their energies to develop and get their product to market as quickly as possible. Focus and speed are their key competitive advantages.
It’s different in an established company. Over the years, it’s amassed valuable assets, - including products, services, business partners, an installed base, and loyal customer relationships to protect and grow. If it’s a public company, it has investors, a stock price and financial expectations to meet - quarter after quarter after quarter. It has a talented work force to keep at the leading edge, a corporate culture to nurture, and a reputable brand to protect. The more successful the company, the harder it will fight to protect these valuable assets that it’s so carefully built over the years.
Successful companies - especially market leaders being chased by hungry startups, - must achieve a delicate balance between protecting their valuable assets and embracing the new innovations necessary to propel them into the future. In his seminal book, The Innovator’s Dilemma, Clay Christensen succinctly wrote about the challenges that these successful companies face: “They pour resources into their core business. They listen to their best customers. And in doing so, industry leaders get blindsided by disruptive innovation - new products, services, or business models that initially target small, seemingly unprofitable customer segments, but eventually evolve to take over the marketplace. This is the innovator’s dilemma - and no company or industry is immune.”
For a startup, a disruptive innovation is an opportunity to take on established companies with new products that offer significantly better capabilities and/or lower costs. Not surprisingly, an established company under attack will often reject and fight anything that threatens its market dominance.
Despite their much larger assets, established companies often surrender new innovation opportunities to startups. While lacking the resources of the larger company, the entrepreneurial, more intuitive culture of the startup is more suited to dealing with new technologies and markets than the more careful, analytical approaches generally used by established companies. The very skills that helped a company grow and become successful might well prove to be its Achilles’ heel when confronting disruptive change.
Managing a new, potentially disruptive initiative is quite different from managing an established business. Operational excellent requires a highly disciplined style of management based on the detailed analysis and inspection of all processes, including product quality, customer satisfaction, sales results, costs and expenses, and so on. On the other hand, managing an initiative based on a new technology or potential market requires a more entrepreneurial management style, based on establishing an early market presence and learning in the marketplace through continuous experimentation and adjustments.
With a new initiative, there are generally no processes to analyze and inspect, so managers must play it by ear. In its early stages, it’s not clear how the market for a new product or service will develop and there is little data to analyze. A lot of executives are not able to embrace this more entrepreneurial style of management, most likely because their career advancement has been based on doing well in more operational jobs.
The support of the CEO and other top executives is essential, because the team must be empowered to break the grip of established processes when confronted with tasks requiring new management patterns. Much of what needs to be done in such an entrepreneurial initiative involves taking risks and breaking glass. Actions must be taken and decisions made where no processes may exist. The new initiative must be carefully nurtured and protected until it has enough concrete results and marketplace successes to stand on its own.
Finally, even if the company understands the changes it must embrace, the culture of the institution may not be able to stretch enough to implement the needed strategy, even when the very survival of the organization might be at stake.
In his excellent 2010 book, The Limits of Strategy: Lessons in Leadership from the Computer Industry, Ernest von Simson wrote about the struggles of some of the leading IT companies in the early 1990s as they tried to navigate the turbulent waters all around them. As co-founder and senior partner of two top IT strategy consultancy companies, von Simson had a personal ringside seat from which to observe the IT industry and its various companies and leaders.
“We saw what factors determined the winners and losers,” he writes in the preface. “Above all we learned how disruptive technology can work to destroy even those who understand it well. And why great leadership is required to escape massive upheavals in markets, technologies and business models. In essence, why there are limits of strategy.”
The book is focused on four of the then leading companies in the IT industry, - DEC, HP, Wang and IBM. They had all been dominant for the past 15 - 20 years, but by the early 1990s they couldn’t cope with the massive changes brought about by microprocessors, PCs, Unix systems and client-server computing. DEC and Wang did not survive the upheavals. IBM barely did so after going through major restructures, and new CEOs took over at both IBM and HP.
“Even when the disruptive technology and its equally disruptive business model are clearly visible, the survival strategy can be nearly impossible to implement. Incumbents can be hobbled by organizational and physical assets that quickly become boat anchors. Faced with hard choices, executives can be distracted by traditional competitors doing even worse than they are… Too often, the only prescription is massive downsizing, but that’s something sitting CEOs find very difficult, especially if they’re a founder or lifelong employee…” The leaders of DEC, Wang, HP and IBM were very smart and experienced. “But all of them were simply overwhelmed by the profound changes in technology, cost structures, business models, and markets disrupting the computer industry.”
Companies and executives are under intense pressure, as they struggle to defend their vulnerable business models, revenues and market share while pursuing new growth opportunities. The topple rate, - a measure of how rapidly companies lose their leadership position, - has increased by almost 40 percent since 1965. The tenure of companies on the S&P 500 was 61 years in 1958; it’s now 18 years. If these trends continue, 75 percent of the S&P 500 companies will have changed over the next 15 years. Dealing with disruptive change is very tough, - and getting even tougher in our fast changing digital economy.