A British supermarket boss recently confessed to me that his greatest nightmare was not a domestic peer outperforming him but the prospect of ecommerce titan Amazon moving wholeheartedly into fresh groceries in the UK. As he spoke, what was evident was his lack of a plan. The tsunami was coming and it seemed he was not going to be doing much to prepare for it.
It was depressing hearing him, not least because Amazon’s rise was hardly news. If anything, food is simply among the last targets to fall. Surely, when Amazon first appeared, this seasoned UK industry chief and his executives should have asked where it could lead. Judging by his hesitant demeanour, they had not. Rather, they’d watched and waited as, one by one, markets fell. And now it was their turn.
This story is being repeated in sector after sector. As any artisanal coffee shop customer in San Francisco, Shanghai or Shoreditch will tell you, we live in the age of the disruptor. What Amazon has done to the high street, Google and Facebook have done to advertising, Netflix to film and TV distribution, Uber to minicabs, Airbnb to hotels – and that’s just the start.
It isn’t only in business. Politics and public service now have their champion disruptors: the US president, Donald Trump, has been hailed as “the disruptor in chief”; in the UK, the prime minister’s adviser Dominic Cummings clearly sees his role as tearing up the old Westminster and Whitehall order.
For every disruptor, of course, there must be someone disrupted. Officials in the US and UK remain deeply uneasy at the prospect of what Trump or Cummings could do next. Blue-chip business leaders, meanwhile, live in fear of a start-up coming along, transforming their industry, decimating their profits and wiping out their legacy.
Boris Johnson and Dominic Cummings (right).
But as the late Harvard Business School professor Clayton Christensen wrote when he introduced the world to the theory of disruptive innovation in his 1997 book The Innovator’s Dilemma, there is nothing inevitable about any of this. For Christensen, disruption wasn’t about how hotshot start-ups with breakthrough technologies or business models outcompeted much larger incumbents. It was about why the incumbents failed to defeat the newcomers while they still had the chance.
Think about the weapons in a typical big company’s arsenal. Economies of scale. Brand power. Long-term relationships with distributors and suppliers. Intellectual property jealously protected by teams of lawyers. Significant cash reserves and the facility to borrow millions from the bank at short notice. With these, it shouldn’t be too difficult to see off a new entrant by mimicking and improving its technology and then undercutting it. In fact, the question that exercised Christensen was why this didn’t always happen.
His conclusion was that sometimes the incumbents failed to recognise a market-reinventing innovation when they saw it because the innovation didn’t initially threaten them. Disruptors, Christensen wrote, enter the market at a low price point with simple products, only later competing for the high-value customers from whom the incumbents make their money.
“While I was starting to see a pattern of the low-end companies quickly rising to prominence and challenging established leaders, it wasn’t until I went out to Silicon Valley and spoke with executives in the space that I fully grasped how incapable incumbent leaders are of responding to disruptive entrants,” Christensen told the MIT Sloan Management Review shortly before his death earlier this year.
The failure of market leaders to react to disruptors with sufficient vigour and urgency isn’t always because they can’t see the threat coming, however. Nearly a quarter of a century after Christensen’s book was published, the disruptors are alive and kicking but their profile has changed, says Rita Gunther McGrath, professor at Columbia Business School.
“The critical difference is that they now enter the market with products and services that are every bit as good as those offered by legacy companies,” she wrote in an article for MIT Sloan Management Review. Increasingly disruptors like Dollar Shave Club, the California company that delivers personal grooming products to customers by post, are entering the market with high-quality offerings as barriers to entry have dropped and venture capital funding has grown. The supermarket chief executive who confided his terror of Amazon knew the threat he faced, he just didn’t know what to do about it.
Amazon's rolling out of home delivery across ever more sectors is threatening traditional retailers.
Some businesses, however, seem to be a lot more adept at dealing with the threat of a disruptor, and the tactics they employ can be quite underhand. “What we don’t understand,” a financial services disruptor told me, “is how, whenever we go to a new overseas market, the local politicians and media seem to know we’re coming and they always accuse us of being bad.”
This digital genius was perplexed. He knew how to develop a new fintech platform; he understood the interface of financial services and technology backwards; he’d come up with an industry-changing model. Yet, he did not have a clue as to who might be rubbishing his business as it grew.
The answer lay with who he was disrupting. His product was threatening the profitability of some of the world’s biggest banks. One, in particular, stood to have its £1bn profit line in the activity he was now able to provide online – more quickly, efficiently and cheaply – eroded. Perhaps completely.
In public, the banks were issuing apparently positive statements about the beauty of competition, how they always welcomed new entrants, and how innovation and rivalry were healthy. In private, it was a different matter.
Most likely they were doing some, if not all, of the following: mimicking the newcomer’s service on price and speed; trying to acquire its IP; attempting to poach its key personnel; badmouthing the entrant to potential customers; offering clients inducements not to switch providers; raising questions about the competing service with regulators and anyone else with the power to hold up its progress; talking to the disruptor’s funders and threatening to withdraw their own business from them; and, yes, spreading alarmist stories to the media, politicians, regulators and governments in countries where the disruptor was about to commence operations. And they would be doing this relentlessly and around the clock.
They would likely have a section dedicated to the task, headed by a senior executive, yet anything potentially embarrassing or illegal it did would be contracted out, thus erecting a barrier of deniability. Ultimately, if all else failed, they might try to buy the disruptor out.
Steve Faktor, author of Econovation and CEO of IdeaFaktory, a growth and innovation consultancy, calls it “the dark side”. “Individually or through lobbies, some corporations command a staggering cesspool of lawyers and cronies to threaten, retard or bankrupt innovators,” he wrote for Forbes. He cites Techforward, which won $27m in a lawsuit in 2012 against electronics retailer Best Buy over misappropriated trade secrets. The start-up may have won the legal challenge but only years after going bankrupt.
Such dark strategies, while menacing when seen from the other side, are reactive and, therefore, unlikely to succeed in the long run, especially against the larger tech disruptors. Techforward may not have survived but ultimately Best Buy took a substantial financial hit.
Consultancy Deloitte recommends a different approach, known as “disruptive jiu-jitsu” or “learning from the competition, then deliberately disrupting one’s own business model to stay ahead of it”. It’s easier said than done.
“CEOs should know their opponents. By actively looking for little-known market concepts, particularly those with apparent destructive potential, leaders can reduce the element of surprise and prepare to meet the competitive threat with an equally novel response,” write Benjamin Finzi, co-leader of Deloitte’s chief executive programme, and colleagues. “CEOs should commit their organisations to scanning the environment, identifying unusual or interesting patterns of new value creation, and being ruthlessly curious about the underlying sources of that new value. Is there anything to be learned from these ideas? Can they be seized, internalised and made better? Can potential disruptive scenarios be played out to their logical conclusion: ‘If X, then ultimately Y?’.”
Many companies are turning to a whole new breed of professional manager to help them do just that: the CDO or chief disruption officer. A study by PwC found that 19 per cent of the world’s 2,500 largest companies had moved to appoint a CDO.
In some corporations they are also referred to as the chief digital officer, given that their fundamental task is to pull back from the core business or industry to analyse what an increasingly online world might bring and to consider what would they do differently if they could start again.
It would be a mistake to confine responsibility for game-changing innovation to a single role or department, however. And it’s no good to have one person who “gets it” if they can’t bring the rest of the company along with them.
When Barry Diller and Sumner Redstone were fighting each other to acquire Paramount Pictures, Diller invested time and effort in wondering what the then new internet would mean for the Hollywood studios. He laid out for the Paramount board how one day movies could be distributed electronically to laptops and phones. His recommendation was to regard online as the means to reach a bigger audience directly, generating huge revenues through greater royalties.
The board did not buy in to his vision and opted for Redstone’s more conservative approach. Had it gone with Diller, a lot of pain could have been avoided. Costas Markides, the Robert P Bauman professor of strategic leadership at London Business School, believes big business must be prepared to play what he calls the “third game”.
“Your established business is playing the first game. The disruptor is playing the second. To survive and flourish, you need to play a third, not just fire cannonballs at them in the hope they retreat,” he says.
Markides points to the watch industry. Once, for quality and accuracy, you went Swiss. Then came Seiko and a whole host of Japanese watchmakers using quartz technology to supply accuracy and greater features at much cheaper prices. For a period, it looked as though the Swiss would disappear: their market share fell from 48 per cent to just 15 per cent.
Unable to beat the Japanese at their own game, they chose a different route, turning their watches into stylish, must-have fashion accessories. At the lower-priced end there was Swatch. Consumers could afford to own more than one and swap them according to the clothes they wore. In the top bracket, Rolex and Omega became even more luxurious.
Markides advocates a four-part stratagem for playing the third game. First: courage, agility and patience. You need courage to think the unthinkable, agility to put it into practice and enough patience to stick with it.
Take Nestlé. Before the rise of Starbucks, Costa and the like, instant coffee was king, with Nescafé the dominant brand. But freeze-dried granules lost their appeal against freshly ground coffee served in cardboard cups. So Nestlé came up with Nespresso capsules. They were made to seem sexy, coming in different brews and colours, with their own sleek machines, and latterly promoted by George Clooney. It took Nespresso 20 years to break even and turn a profit but Nestlé got there in the end.
Second: attack. Don’t just defend. In the past 20 years, many publishing companies have gone to the wall as online has become the dominant news medium. Some, however, are thriving. Look at the old trade magazine publisher Reed Elsevier, now RELX. As early as 1994, with the purchase of pioneering online legal database LexisNexis, it reimagined itself as a digital purveyor of business information and later data analytics. Two years later it had divested most of its trade titles. It’s now worth nearly £40bn. The company saw the internet as an opportunity to grow its audience, defending and attacking at the same time.
Break the rules
Third: think positive. The best results come from giving employees something positive to aim for, rather than something negative to avoid.
Fourth: act like an entrepreneur. Markides advises: “If you look at disruptors, there’s an element they all share. They think and act like new entrants. To succeed as a new entrant, you need to avoid imitating the companies that are already in that market – you need to attack them by breaking the rules.” This demands fresh thinking. “Forget the core business. If you are British Airways trying to compete with easyJet, don’t think like an airline business. Think like a start-up. It won’t guarantee success but it will provide an escape from the orthodoxies and tired mental models of established businesses.”
Some sectors are more susceptible to disruption than others. KPMG’s Technology Industry Innovation Survey lists telecoms as the most vulnerable, followed by, in order, industrial manufacturing, healthcare and life sciences, aerospace and defence, and financial services.
In truth, no sector is immune, even education. The current holder of the Spectator Economic Disruptor of the Year award is Century, a tool that uses artificial intelligence to assist teachers in not only organising what their pupils are learning but, uniquely, to identify specific points at which individual pupils need more help. Century is already used in 300 UK schools and is being exported to 10 countries.
Despite her success as a disruptor, CEO Priya Lakhani is cautious about being disrupted herself. She says: “It’s important to us that we guard against disruption. We’re constantly trying to be innovative. We’re determined to stay focused on what we’re really good at and not aim too wide.”
Lakhani is aware she remains prey to what the author Michael Lewis describes as “the new new thing”. It is this understanding – that you can’t take your market position or even continued survival for granted – that is the most powerful inoculation against the spread of the disruptors. By way of practical steps, KPMG advocates that you: constantly assess threats and opportunities; review current strategy; stress test that strategy; conduct a skills audit among existing staff; revisit the business model in the light of new technologies; adopt new technologies; and ensure the board is focused on the prospect of disruption.
The fact that the likes of Amazon and Alphabet can achieve such scale while still doing this shows there is hope for the rest of us. Think like a disruptor and, as an incumbent, you may just be the next big thing.
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