Creative Disruption: why you need to shake up your business in the digital world
To be published by FT Prentice Hall in October 2010.
We are living in the era of creative disruption. It is an era of formidable threats and opportunities for businesses of all shapes and sizes, in all sectors and all countries.
The upheaval is on a par with any of the great technological upheavals of the last four hundred years: the arrival of electricity, the railways or the motor car. Joseph Schumpeter, said that after the arrival of the railways: ‘Hardly any “ways of doing things” that had been optimal before remained so afterwards’. The same is true here.
This era has seen businesses that have been successful for decades fighting for their very existence. Hundreds of thousands of jobs have gone in the newspaper industry as billions of dollars have gone from classified advertising revenues. Revenues from sales of recorded music in the US have fallen by 40% – more than $6bn. Kodak and Blockbuster have seen their share prices has fall by more than 90%. They are just the victims of the first wave.
As one set of businesses are disrupted; so another is created. We have seen a wave of powerful new businesses have emerged from nowhere within a few years, and these are no-longer dot com fly-by-nights, but massively profitable organisation that have transformed the way that sectors operate (Amazon, Netflix, Skype or Salesforce.com) or have fulfilled roles in people’s lives that simply didn’t exist in a pre-internet age (Google, Facebook, Ten Cent).
The era started in 1993 with the arrival of the first web browser, and it will continue for another decade or more until more than 60% of the world’s population is online, the majority of internet activity happens over mobile devices, and internet-connected TVs are the standard.
At the heart of creative disruption lies the internet – and a new physics of business that has been enabled by the move to a connected and digital world. But four forces have collided to turn a technological development into a profound disruptive force.
- Entrepreneurs: who have seized the opportunities the internet has brought with it.
- What people want: a set of very basic desires, that can now be exponentially satisfied
- A proliferation of connected devices: which leads to continuously escalating uptake
- Economic volatility: The dot com boom and bust, the credit crunch and recession of 2008-09 have further exacerbated the potential for both creating and disruption.
For incumbent businesses faced with the forces of creative disruption, there are no simple solutions. The results can be brutal – especially when the business is dependent on a single successful product that is shifting from physical to digital: music, newspapers, directories and photography were the first affected, books, movies and computer games will follow in the next wave.
Survival is an achievement. Returning to growth after a period of decline is a good result. Sustaining growth throughout is only possible as the result of remarkable foresightedness and courageous decision making.
Based on the experiences of major technology businesses such as Apple and IBM, for whom disruption is a fact of life, incumbents have to go through a process of re-invention at three levels.
The first of these is to Transform the Core Business, taking what you do and doing it better as a result of innovation and increased efficiency. This is the most painful part of the process – but also the most important in the short to medium term.
The next is to Find Big Adjacencies – using your capabilities and assets to move into new areas of growth, or at the very least greater resilience to disruption. This is the most risky part of the process – but the only way to ensure long term growth when your core has been disrupted.
Finally, there is a need to Innovate at the Edges – but with a very specific remit: either to test and trial processes, services and products that will become part of your core business; or to give you limited exposure to what your next Big Adjacency might be.
To be able to do this requires supportive owners, committed leaders, having the right people within the business, and often a smart-approach to dealing with cannibalization. It also means getting over the fundamental mental blocks of denial and delusion that stopped many businesses that have been most profoundly affected by creative disruption taking radical action early enough.
This process is perpetual. It is highly unlikely that these businesses will experience the level of protection they experienced before the internet. Kodak and Blockbuster, for example, are making all the right moves – but still face a long, hard road back to sustainable growth and profitability. They still have many things in their favour, but their position in the world has been altered forever.
Some of the companies featured
Encyclopedia Britannica: faced disruption from Microsoft’s Encarta and Wikipedia before getting back to profit and growth, after losing 80% of its revenues
HMV: How new chief executive Simon Fox turned round the entertainment retailer – by fixing his core business, and expanding into the big adjacency of live music
Apple: Focussing on how the company came back from the brink of collapse to deliver the iMac through a process of painful core transformation, reducing its R&D expenditure, before finding the major adjacencies offered by the iPod and iPhone.
IBM: How the company survived the ultimate disruption – the move from the mainframe to the PC and turned itself into a services business.
WPP: The global marketing services group which continuously seeks the next adjacency, at the same time as running a corporate venturing business to keep it close
Deutsche Post: Looking at the transformation from loss making nationalized postal service to the world’s largest freight carrier.
Naspers: How a South African newspaper group made the strategic leap to invest $30m in a pre-revenue digital business in China called Ten Cent. That stake alone is now worth $10bn.
Autotrader: The successful transformation from print to digital for the UK’s leading automotive classified
The Guardian: My own personal experience of developing what is acknowledged as the world’s leading digital presence for a newspaper
Nokia: Looking at the trials and tribulations at the world’s leading handset manufacturer has tried to become a software and services business.
SW 03/02/10
