Age of the Incumbents

The Economist published an article in January this year titled “2018 will the year that big, incumbent companies take on big tech” where they observed that 11 years on after the disruption from the likes of Netflix and Amazon, the methods and technology of startups are now available for all. This will result in the established and incumbent companies adapting digital strategies of their own and exploiting their existing base of customers, markets and data to provide the new wave of disruptive digital services themselves instead of leaving it to Silicon Valley.

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So why did it take us so long to get here? What is it about corporate culture or realities that stops us from having reinvented ourselves like AirBnB, Uber, Netflix and Amazon? What is so inherently different about being a successful incumbent and being an upstart. This article by the Boston Consulting Group explains it well

“Traditional companies start with lots of built-in hurdles. Incumbents are not used to reinventing their business models; after years of industry stability, their managerial skills and talent are generally honed toward methodical and incremental improvements within the existing paradigm. Furthermore, longstanding beliefs about how the world works can blind these companies to challenges from insurgents. Because established organizations are often hardwired to deny the need for disruptive change, they resist business models that upset the status quo. In addition, economic models based on scale positions or competitive capabilities usually convey substantial advantage—­until they no longer do, and then they often actually work against a company’s ability to transform. It’s a tough combination for management to overcome.” 

I think the answer is a combination of factors;

    • Timing and not doing a Kodak – what I mean by this is being caught in a Kodak moment, whereby an addiction to an old business model can make a company miss a chance to develop and invest a new one while there was still an opportunity. Selling film was too lucrative to Kodak, that they missed the digital camera opportunity even though they had produced some of the first working technology in their R&D. Kodak would try later but the timing was wrong and so they missed the moment.
    • Confusing Innovation with R&D. Many organisations dealing with science and technology will invest in R&D, where the core assets and products continue to exploit new technology and science and get better. We call this the technology push – the push of new abilities to enrich our offerings, like using machine learning to derive patterns of user behaviour automatically. Technology push however is not always the same as market pull – or what the market actually wants. A good example of this were the Google Glasses, the technology made it possible but consumers did not want it. Innovation works best when you reinvent your offerings to meet the demands of the market, and if you can do so exploiting new technology pushes, you really break new ground. So R&D starts on what is possible but innovation starts from the perspective of the markets and users. Sometimes the best innovators are able to tell what the markets want even before the markets have that realisation.  Disruption according to this article, takes things to a greater extreme, completely pushing the boundaries and daring to try radical change to products and business models.
    • Not allocating resources to experiment and persevere – since we are trying to divine what markets want, it makes sense to experiment. To start with a small area, perhaps do a MVP experiment, or engage a really enthusiastic or passionate group of customers. This is the biggest blunder I see, organisations are so used to working on large 5-10 year blueprints and commitments, that they don’t make place and separate teams to run experiments and keep collecting data on what works and what does not.
    • Having the right mix of talent. Finally the kind of team what will do these experiments well are very different. You are probably going to be competing with the Startups for them – so prepare to engage them like the Startups while offering them better benefits for working with an incumbent.

     

    • Making the right bets and bringing investors on for the ride. The Amazon investors are legendary for having trusted Jeff Bezos and his long term vision and bets, and most organisations will have the challenge of convincing its shareholders to be patient and wait for the predicted changes to occur. As the BCG article I shared above says;

“Investors that own stable businesses with predictable earnings typically value the large cash flows that such companies generate. And these investors often don’t appreciate the need for transformation—and the investment that accompanies such change—until the disruptive threat is affecting performance. Then they sell and move on, and the company’s valuation suffers the consequences.” 

We must remember the strength of being an incumbent is the legacy of perfected processes, relationships, brand equity, data and experience. This example is being demonstrated so clearly in the struggles of Tesla, perfectly explained in this Forbes article. Therefore incumbents should not squander this opportunity to take the lessons of disruption and pave their new futures now, while there is a window of opportunity. Of course if the BCG article is true, only 1/3 will make it.

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