How to Defeat Disruptive Innovators by Market Strategy Group

Advisors to Management

TAKING THREATS SERIOUSLY 8/19/2013

How to Defeat Disruptive Innovators Most successful companies established themselves by innovating. But, confoundingly, these same companies are usually slow to react to innovations from others. This is a grave mistake, if not a fatal one, because Disruptive Innovators threaten every company in every industry. Companies that wish to survive, let alone prosper, must assess how these threats will affect themâ&#x20AC;&#x201D; and more importantly set a strategy for addressing each. Leaders must be brutally, uncomfortably honest with themselves. Established companies must routinely assess threats and analyze which Innovators could truly attack their core businesses, and preemptively position to address each threat. Those that do notâ&#x20AC;&#x201D;and do not do so smartlyâ&#x20AC;&#x201D;will lose shareholder value and market share, and eventually the survival of the company itself can be at risk.

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TAKING THREATS SERIOUSLY H O W T O D E F E AT D I S R U P T I V E I N N O VAT O R S

1. INTRODUCTION: THE GATHERING STORM It may be 72 degrees and sunny where you sit, but a storm is coming. This gathering storm will hit every single established company in every single industry. No matter how good your quarterly earnings are, no matter how dominant you may be in your core industry or how tightly you control market share, a potentially catastrophic threat is on its way. This is the nature of business. With only a tiny few exceptions, all industries are subject to major upheaval, and all dominant companies within those industries face threats that could put them out of business. These “disruptive innovations,” as Clayton Christensen famously called them, usually come in the form of new technologies, new efficiencies, new markets, or new ways of reaching customers. These innovations most often come to market through upstarts – Disruptive Innovators who think big, start small and can quickly become a major threat. Reputable companies that established themselves by innovating in the first place often find themselves curiously slow to react to innovations from others. The trend is clear: companies innovate early, disrupt an old market or launch a new one, come to dominate that market… and then sit there. Once established, companies large or small rarely innovate well. It’s not just the sluggish or unimaginative companies that topple. Well-managed, highly admired companies often lose market dominance when confronted by technological or market change. Companies that invest, that listen to their customers, and monitor the competition and the competitive landscape—and yet still fail. Chances are, that’s you. So what are you going to do about it?

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2. IT CAN’T HAPPEN TO OUR COMPANY Think about the market dominators that once ruled their roost—the ones that pioneered innovations so well that they were the most respected and successful companies in the world.

Every company, no how recently it was created, is threatened by Disruptive Innovators.

Think about Sony, founded in 1946, which dominated mobile music players yet was so unimaginative with its initial MP3 player offerings that it left a big opening for Apple to take over the market. Think about Kodak, founded in 1892, which was unprepared to adapt to digital photography and failed to make a dent into digital radiography. Think about IBM, which grossly mismanaged its response to the emergence of personal computing; or Xerox, which failed to understand changing market demand regarding personal and professional photocopying. New, seemingly innovative companies are not immune. EMC, founded in 1979 the world’s biggest storage seller in the $2.4 Billion Storage Hardware market is facing an upstart Chicago-Based Cleversafe Inc. In an era of Big Data Cleversafe, a holder of 40 patents, has brought new solutions to massive storage systems. Two years ago, Shutterfly Inc. was drowning in data and the cost of computer gear to hold it all. Shutterfly gambled on Cleversafe’s storage technology, a thentiny startup. Spending dropped by half. Storage went from their biggest cost to a non-issue. Others especially the Department of Defense have taken keen interest in Cleversafe solutions. Cleversafe’s CEO is not shy about his aspiration. “We want to become the de facto standard,” says Chris Gladwin, its founder. While a gnat for EMC today who knows what the future will hold. Finally look at Yahoo, founded in 1995 and once the darling of users and investors. Then came Google in 1998. No one is safe.

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3. A TATTERED SECURITY BLANKET “That’s not us!” you’re saying. “We’re different.” But are you? You have declared innovation as one of your internal priorities. Perhaps it’s on your website or featured in your Annual Report. In your board meetings, you talk about innovation and competition. But how keenly do you embrace these issues? One recent survey of company executives revealed that only 18 percent of respondents rate innovation as their top strategic priority, and more than half feel they have a sluggish innovation process.

Internal Innovation programs, while valuable may not defeat Disruptive Innovators

Maybe you think you’ve already addressed it by appointing someone to handle it. Your Chief Innovation Officer or Head of Business Development is on it. You’ve added a half-hour on the topic to your annual strategic planning meetings. Nope. That’s innovation by departmentalization—a psychological comfort, but not much more. If your internal innovation is successful, that’s terrific! But the earlier company examples demonstrate a well-known truth: It’s disruptive threats from outside your four walls that can set you on your heels! And these get only modest attention, often until it’s too late. We have bad news and good news. The bad news is your corporate demise is very possibly imminent. But the good news is: your death isn’t guaranteed. Companies can innovate and thrive. Apple did with its iPhone and iPad. GE with financing.

4. DEFEATING DISRUPTIVE INNOVATORS Our advisory work with corporations indicates the following dimensions must be addressed if your organization is going to have an effective, lean and disciplined Innovator Threat Assessment & Response capability.

Tip: Become Self-Aware Where does your threat lie? Who is developing a technology or a product that could put you out of business? Look around. If your answer is, “None exists,”

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keep looking. You haven’t looked hard enough. Most organizations face in the neighborhood of 20-25 potential disruptive threats worth considering. Because you are a successful company with a long track record of market success you have an inherent a blind spot when it comes to looking outward at threats. It’s really hard to be brutally honest. It’s easy to assume that if there is no existential threat like iTunes was to record stores that all threats can be discounted. And if your industry appears slow moving or has major barriers, it’s easy to consider yourself insulated from what others are experiencing. Unfortunately just the opposite is perhaps true. If anything, it’s time to redouble your commitment and recognize your potential vulnerability to smaller threats that can limit your potential. The result of being self-aware is that you put steps in place – small or large to routinely address disruptive threats to your business- making this as routine as reporting quarterly revenue.

Tip: Create the Process Create a simple but effective process that can work in the context of your organization. • The next section illustrates a process we have helped clients apply. If it is right for you terrific! But the odds are that you need something even more simplified and customized to your needs. • Start with a small simple process that you can act on and one that will endure. Make it simple but not simplistic. • Make sure it focuses outward and isn’t looking inward.

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• Don’t mistake your in-place tactical competitor analysis for this threat assessment process. They’re different. The former helps against tactics you are seeing from established competitors. This process helps you anticipate and prepare for important future threats to your business model.

Tip: Organize for Success Make a Threat Assessment part of your organizational cadence. Build it into your real life. It should not be a Stadium Event but normal course of business. For example, one $8 billion (revenue) online company’s CFO has a brown bag lunch monthly where team members each bring in Disruptive Threats they identify that have surfaced for discussion and Threat Assessment. The sessions last 90 minutes. A log and prioritization is created. This occurs 11 times a year eliminated for the year end close. Who does the work of risk assessment is essential to the quality of the outcome. Our experience suggests this requires a team unafraid to challenge existing norms in a constructive way, with an entrepreneurial mindset and an external perspective. It’s a small group but one that is externally oriented and able to question. In addition to management assessing threats and setting a strategic posture to address, this topic should annually reach the Board of Directors as part of the annual Risk Assessment agenda.

Tip: Act - Don’t Self Deceive It is easy to analyze threats and do nothing. Examples abound of organizations that lost their edge saw it coming, waited too long and unfortunately suffered the consequences. Not every action should or can ‘bet the ranch’. Experience suggests that forward thinking organizations that anticipate threats can make small bets early on, protecting the core business without the need to bet on high risk options.

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5. CONCLUSION: WHAT TO DO RIGHT NOW Right now the most important step you can take is to make an accurate, honest assessment of your own position.

Tips: • Benchmark other companies • Contact the authors to discuss your unique situation

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Is your company in the habit of routinely assessing disruptive threats?

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How certain are you that your threat assessment work is sufficiently external in focus?

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How many disruptive threats are you seeing? If it’s less than 15 -20 think harder.

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Do you have a workable threat assessment capability that neither overworks nor ignores the topic?

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What does your Threat Assessment Dashboard say about the current status of threat tracking or actions taken?

Answer these questions honestly. Your corporate survival depends on it.

For more information, visit mkt-strat.com or contact Joel Krauss at joel.krauss@mkt-strat.com.