While companies crave big numbers and even bigger successes, Dr Anita Sands warns how a myopic race to the top can leave you blindsided by disruption.
There’s a good reason why half the companies on the Fortune 500 list in 2000 are no longer there today. But you don’t even need to go back that far to see the impact of disruption and how it can lead to the downfall of once-great organisations.
Remember BlackBerries? Or, heaven forbid, PalmPilots?
Not long ago, those handheld devices dominated. Yet it’s amazing how quickly we’ve forgotten the original personal digital assistant or how we’ve somehow managed to live without that little keyboard on the BlackBerry.
Ignoring the signs of disruption
When news broke in 2006 that Apple was developing a phone, can you guess what Palm’s CEO Ed Colligan was quoted as saying? “We’ve learned and struggled for a few years here, figuring out how to make a decent phone … PC guys are not going to just figure this out. They’re not going to just walk in.”
Poor Colligan wasn’t alone in minimising the disruptive threat Apple represented. RIM’s co-CEO Jim Balsillie saw the iPhone as “one more entrant into an already very busy space” and mistakenly went on to say, “In terms of a sort of sea change for BlackBerry, I would think that’s overstating it.”
Of course, they aren’t the first or last CEOs to get it wrong. Right on their heels in 2008, Blockbuster’s then-CEO Jim Keyes said to The Motley Fool that Netflix wasn’t “even on the radar screen in terms of competition”. Well, we all know how that ended.
The business landscape is littered with the carcasses of companies whose leaders misread the tea leaves of disruption, or those who ignored the peripheral players in their space until it was too late. Others didn’t catch the change in the prevailing winds of customer preferences, instead holding fast to their historical assumptions and relying on their market dominance and scale.
While it’s one thing to see new entrants coming and react too late, it’s another to be blindsided by entirely new business models. Recent examples abound of companies and industries that felt mistakenly secure about the moat they’d built to protect themselves from land invaders and traditional competitors when, all the while, disruptive newcomers were swooping in overhead. Just ask any taxi owner in NYC who’s lost more than 70pc of their market share to Uber and Lyft and seen the value of a permit fall 90pc in what’s felt like a New York minute.
The incumbent’s dilemma
Large incumbent firms that recognise disruption and fear its impact still face another kind of dilemma: their own scale, complexity and fixed ways of doing things become the real obstacles to change. Compared to the momentum of disrupters, the incumbent’s inertia is of little match. It may be said that where there’s a will, there’s a way, but that way is often not obvious and always uphill for large, traditional organisations.
The ‘incumbent’s dilemma’ – an increasingly prevalent phenomenon for successful companies – is the painful recognition that the assets, products, processes or business models that once made your company a success don’t guarantee success in the future and may actually hold you back. This manifests in a hesitance to go on the offensive or to disrupt your own business model, especially if it involves cannibalising current revenue streams.
I recall Doug Leone, the famed venture capitalist at Sequoia Capital, warning of this malaise. He said boards need to be vigilant about stopping successful CEOs from getting into an ‘if it ain’t broke, don’t fix it’ mindset. Instead, he believes healthy paranoia is a good thing and ‘if it ain’t broke, break it’ is the secret to inoculation against disruption.
‘The ‘incumbent’s dilemma’ is the painful recognition that what once made your company a success doesn’t guarantee success in the future and may actually hold you back’
While the nature and degree of the incumbent’s dilemma differs across industries, traditional organisations are often weighed down by some common features, including:
- Extensive physical footprints or assets in a world that’s increasingly virtual
- Well-defined processes that are efficient but not agile
- Stagnant channels and long-term established partners that become less relevant as your business ecosystem expands and new players or marketplaces emerge
- Multi-year product cycles in the age of continuous delivery
- Rigid hierarchies and conformist cultures against the growth of the gig economy
- Legacy systems and silos of information in a world of real-time response
- Industrial-era regulation
Only an objective eye by discerning leaders can decouple the return on these various ‘assets’ today versus the opportunity cost they represent tomorrow.
Ironically, another contributor to the incumbent’s dilemma is a tenured workforce. While experienced professionals certainly offer a range of benefits, an overabundance of them heightens the risk of rusting from the inside out. Diverse and innovative ideas often come from infusing new blood into an organisation. Otherwise, a form of intellectual stagnation or, worse, a collective arrogance that you know the business better than anyone can take hold.
There is no more damning internal manacle than that of a legacy mindset. It isn’t so much that these new (digital) disrupters have lower barriers to entry, although they often do. It’s that incumbents have much higher barriers to exit. Simply put, it’s really hard to change how you’ve always done things to embrace a whole new world order. However, that’s exactly what digital transformation requires.
The incumbent’s demise
Success is indeed a seductive mistress whose charms can lead companies to ignore the stealthy forces of disruption. It can also lull you into believing that you truly understand your customer’s needs and desires. The founder of ServiceNow, Fred Luddy, reminds us regularly at our board meetings how important it is to pay attention to what customers like about new competitors and to avoid sticking our heads in the sand.
Now, an almost classic example is the reimagining of the hotel as we know it. Forever the bastion of the hospitality industry, the legacy hotel giants didn’t anticipate the turning tides until Airbnb attacked them on a front they never even thought to protect. After all, hotel chains had a mass-market product, a solid customer base and consistent physical presences all across the world. Why should they have worried?
To any major hotel chain (with billions of dollars of real estate on their balance sheets), it was inconceivable that a room in someone’s house would be a threat. To Luddy’s point, what they missed is that Airbnb wasn’t selling a room; they were creating an ‘experience’ that allows people to live like a local in any corner of the globe, all while unlocking a new form of economic empowerment for homeowners worldwide.
‘The legacy hotel giants didn’t anticipate the turning tides until Airbnb attacked them on a front they never even thought to protect’
Beyond a new experience, Airbnb’s model offered customers a whole new way to access accommodation with transparency and personalisation that met changing customer expectations. Airbnb eliminated the need for third-party website bookings, the clunky check-in lines, and the sterile and often charmless experience of a beige-clad hotel room.
The concept was lost on many legacy hotel executives. “Our guests don’t want the Airbnb feel and scent,” Christopher Norton, then in his role as EVP of global product and operations at the Four Seasons, told Fast Company. His point is right for some; however, with more than 5m listings and an average of 2m people staying in an Airbnb each night, it clearly works for many.
Comparing Airbnb’s service to a traditional hotel room is like apples to oranges. Instead, what Airbnb has done is set a new bar in the ‘experience economy’ for incumbents and disrupters alike.
In large organisations, processes are formed, added to and altered over the years, which artificially inflates the difficulty of execution. When you live in a world of opaque and complex processes, it’s hard to appreciate the degree to which technology platforms have eliminated the need for middlemen and the many steps they perform.
Think about how inconvenient and clunky it was to transfer funds or wire money in the past. Now, compare that to the instantaneous and entirely self-serve process of Venmo today – a palpable difference in the customer experience.
In June 2018, Amazon beat out Walmart to purchase PillPack for nearly $1bn, its fourth-largest acquisition. PillPack allows users to buy medications online in pre-made doses. On the day of the announcement, pharmacy providers Walgreens, CVS Health and Rite Aid collectively lost $11bn in stock.
When Walgreens CEO Stefano Pessina heard of the deal, he was “not particularly worried”. He said during an earnings call, “The pharmacy world is much more complex than just delivering certain pills or certain packages.” Sounds like Stefano might do well to take a hard-learned lesson from the book of Jim Balsillie.
Don’t overestimate how complex your business is, especially when compared to how simple it could be in the hands of the ‘one-click’ Amazonians.
Incumbency comes in many forms and is as much a mindset as it is a business model. Overcoming the incumbent’s dilemma requires prying open the window of change, taking bold and daring risks, and embracing a world where assets can quickly become liabilities and power has shifted to consumers whose expectations have irrevocably changed.
Past success is only a predictor for future success when companies and their leadership are vigilant about disruptive forces and are adaptable to change. As soon as inertia or complacency sets in, vulnerability follows, especially if an aggressive disrupter is on the horizon (and they always are).
While history can be a harsh judge of leadership, there are only two real predictors of successful transformation: one, an acknowledgment that there’s a problem and, two, a desire to do something about it.
Looking back, Colligan, Balsillie and others failed to acknowledge their problem until it was too late. To avoid a similar fate you need to ask yourself what the major vulnerabilities in your business model might be. Where does the vision for your organisation fall short of the expectations of all your constituents? What are your elements of incumbency?
And, perhaps most importantly, how willing are you to bravely face the future and disrupt your own business before someone comes along and does it for you?
A version of this article originally appeared on LinkedIn Pulse.