How can I disrupt disruption?

Over the past four weeks I’ve reviewed Clayton Christensen’s disruptive innovation theory, identified other factors involved in disruption, looked at how damaging this can be to certain industries,  and using Apple as a case study shown that depending on your industry and your business strategy you could become a victim or a victor in the disruption wars.

So how in this uncertain and complex business environment can I avoid being disrupted, beyond sticking to my strategy?

Today, I’d like to look at three capabilities that if utilized well will enable you to predict and disrupt the disruption process and avoid the pitfalls facing other business leaders.

Here’s my model of the typical disruption process, no matter the industry… You are blue… the disruptor is red, danger ahead.

typical disruption process

In the first phase, you are a successful business, serving your customers well, looking to innovate for margin growth, growing performance steadily.

Often successful companies become increasingly competitor and customer focused in their drive for better performance. So much so, that they can become myopic. Successful incumbents can have a tendency not to look at the fringes of their industry; don’t look at what non-competitors are doing around the edges of their market; avoid investigating what non-customers may want in their market. They avoid thinking about new industries, don’t spend time with external R&D experts, or suppliers or partners identifying the faint signals that may become a future disruption in their industry. An example of this is Nokia and Blackberry myopia in ignoring the mobile phone potential of Apple and the iPod (the iPhone prototype without being a phone) to disrupt their core business. They also didn’t see the potential of a more customer focused Android OS to be a key disruptive force if linked with a low cost manufacturer.

Your key problem early on is myopia, inability to see the faint signals of future disruption.

ipod_ipad
Apple was able to turn a music holding device into a super-portable mini computer, via a mobile phone.

The next stage of disruption is when the potentially disruptive technology has started to develop- but is yet too clunky or poorly performing to cause any major problems to your business. Astute companies can now see the potential in these new, but poorly performing, tech. Most avoid doing any thing about it, thinking about it is painful. There would be some pain in addressing this disruption- pain from extra investment in machines, or people or new skills, pain from loss of profits as customers may like a lower priced opportunity, pain from changing what they have been doing, pain from taking valuable time exploring how to address these new businesses. When Nokia and Blackberry saw the initial ideas for the iPhone I’m sure they felt that a clunky bar, without a dedicated keyboard, that was big and thick (couldn’t fit in a pocket), that didn’t have a replaceable battery (and the battery life was not so good) … wasn’t much of a threat to their businesses.

Your second problem is avoiding the pain of treating a threat as real, and acting to prevent it.

The third stage, is the last stage where an attacked company can mount a defence. Whilst there is a critical mass of adoption of the new technology, there is still the opportunity to jump on board. But there is often now debilitating inertia within the business not to change, to stick with what they have because to change now would mean total destruction of profit, of performance targets, business model, everything about the business.  We saw this with both Nokia and Blackberry trying to fight Apple and Samsung in the last few years with antiquated operating systems and technology and failing badly.

The last problem before failure is the inertia when its too hard to change.

The last stage is…. too late.  The new technology is prevalent and ubiquitous and buyers could never think of not using it.  Your company is dead, bankrupt, sold.

So how we we avoid this fate?

By incorporating three capabilities into your organisation, summarised on the next chart.

sense seize transform
After – D. Teece Dynamic Capabilities, 2011

The Dynamic capabilities that can enable companies to avoid being disrupted can usefully be thought of as belonging to three clusters of activities :

  1.  identification and assessment of an opportunity (sensing);
  2. mobilization of resources to address an opportunity and to capture value from doing so (seizing); and
  3. continued renewal (transforming).

These activities are required if the firm is to sustain itself as markets and technologies change.

Sensing is a set of capabilities that involves exploring technological opportunities, probing markets, and listening to customers, along with scanning the other elements of the business ecosystem. It requires you to build and continually “test” your beliefs (or hypotheses) about the market and its technological evolution, and your ability to profit from it through your business model. It includes recognising  “latent” demand or unmet needs, features and benefits people don’t know they have, but which with technological advancement you believe can now be uncovered and met, and eventually you can profit from. The world wasn’t clamouring for another new mobile phone but Apple, under the guidance of Steve Jobs, recognized and successfully exploited the potential market for a phone with a fantastic and intuitive operating system that covered a multitude of uses- communication, music, media access etc.

Before the iPhone, mobile phone were all about keypads and replaceable batteries...
Before the iPhone, mobile phones were all about keypads and replaceable batteries…

Incidentally a critical facility here is to look beyond customers stated needs and to intuitively understand what they would really want. After launching the iPod, Jobs intuitively knew two things- consumers don’t need a keyboard, and battery life doesn’t matter IF you have a GREAT customer experience. IF you had surveyed buyers before the iPhone came out or just as it was launched you would have heard two things from consumers- they MUST HAVE keyboards, they MUST HAVE replaceable batteries for extended battery life- as a mobile phone buyer in 2006 I KNEW I needed both until the iPhone. Jobs knew these two customer demands to be surmountable, yet every other phone manufacturer was a slave to having both key board and replaceable battery to the detriment of the tech experience of using a mobile. Plus the user interface sucked as it was based on old telephony standards, not computer based user experiences. Now, ten years after the iPhone … no keypads no replaceable batteries, no telephony based interfaces- we have computers in our pockets . As this example implies, Sensing requires managerial insight and vision – or an analytical process that can be a proxy for it – to look beyond the short term to avoid myopia.

Seizing capabilities include designing business models to satisfy customers and capture value. They also include securing access to capital and the necessary human resources. Employee motivation is vital. Good incentive design is a necessary but not sufficient condition for superior performance in this area. Strong relationships must also be forged externally with suppliers and customers, and industry commentators. Here, Seizing capabilities may also mean actually seizing the potential disruptors- maybe you can buy them and manage the innovation yourself, or close them down, or partner with them or invest in them. For

Apple “seizing” capabilities when they moved from computers to other consumer electronics tech necessitated building relationships with new suppliers and new retailers, eventually leading to creating their own retail outlets to create a perfect environment to retail Apple tech. Apple also had to think through how to deliver on their differentiating user experience promise and then go through the pain of setting up iTunes and the App Store to deliver a great user experience. The biggest decision they made was to retain a closed loop OS system- to ensure they had complete control over the user experience of iPod, iPhone, iPad and now iWatch.  Apple chose not to buy any potential disruptors- they didn’t feel Xiaomi, for example, would disrupt their business model and strategy… but maybe Samsung should have invested in Xiaomi or partnered with them?

Transforming capabilities are needed most obviously when radical new opportunities are to be addressed. But they are also needed periodically to unglue processes that develop over time from ungluing approaches asset accumulation, standard operating procedures, and insider politics and misaligned incentives.  Apple was able to transform from being a computer manufacturer to become a major retailer earning the higher per square foot margins in the whole of retail.

Apple has proved to be a superb practitioner of dynamic capabilities as it has disrupted a series of different markets, and without using low pricing to win. The table below shows how each of its major product introductions reflected aspects of dynamic capabilities.

D. Teece, 2011
D. Teece, 2011

Lets look at Apples revenue results illustrating the impact of having dynamic capabilities.

Re
revenue by Product 2009-13

While a case could be made that Apple is just selling tech, until the mid 2000s its only revenue was from computers sold to other retailers, and from there it added consumer tech (iPod) then mobile telephony (iPhone) then consumer screens (iPad), plus eCommerce (iTunes and App store)-  which is itself a USD20 BILLION company on its own- remember above sales are quarterly!!!

Revenue by territory plus retail 2010-13- vertical axis same scale as above

Here again, Apple moved from being purely a western business- US/Europe- to becoming a multinational.  And here you can see the size of retail also approaching USD 20 BILLION revenue business- just for comparison Tesco and Carrefour in the top 5 world retailers have turnover around USD100 billion, number 1 retailer Walmart’s turnover is USD 500 billion. Not bad from a zero revenue 15 years ago.

 

So lets revisit the disruption process, and show where these new dynamic capabilities can play their part.

Your newly developed capabilities kill the three preventers of success.

disrupting disruption

Sensing capabilities avoids the danger of myopia. You are constantly on the look out for potential opportunities.

Your Seizing capabilities negate pain avoidance, you learn to actively seek to destroy your business models before others do it for you.  It was expensive and painful for Apple to open retail stores…. but this simple move has underlined their clear differentiation as well as making them lots of profit.

Dynamism in your organisation enables you to transform in the face of new opportunities, re-envisioning your company, and redeploying assets and people in new ways enabling your company to transform in the face of both competition and uncertainty.

Whilst its certainly easy to describe this process, its not easy to implement, especially if the overall organisae is resistant to change.

Thanks for reading my five posts on disruptive innovation, i hope you understand the process better, and writing this really has cleared my thoughts.