Managing the Risk of Disruption

Incumbents tend to have the stronger position – but in today’s business world as contexts and technologies evolve at a frantic pace, the strength of incumbency is far from sufficient to ensure survival. Plenty of research indicates that the life of S&P 500 companies is getting shorter all the time. From around a 33-year average on the S&P index in the mid-1960s to 24-years now, and a forecast of just 12-years by 2027¹ before they disappear through bankruptcy, merger or being bumped out through no longer being large enough.

The new boys on the block, the original GAFA (Google, Apple, Facebook, Amazon) now FAANG (with the addition of Netflix) could soon be joined by Uber, AirBnB or some other unicorn, further threatening current industry incumbents with new platform-based business models.

Research by Cass Business School professor, Elena Novelli, has focused on what strategies incumbents can and should adopt when faced with disruptive technology business models². In an environment that is always changing there can be no silver bullet solution, the appropriate response will depend on the customers, both existing and potential, and how much cost is required to change models to meet any new demand.

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Firstly, the incumbent needs to monitor potential threats, particularly how consumer trends are changing and assess how certain they can be that any new business models appearing will actually be successful. This is a matter of judgement, but a large mistake companies often make is an over-focus on their existing core customers. These people by definition will have a degree of loyalty and may well be the last to move away to a new model – but by focusing on them the incumbent may miss that the rest of the market is going in a different direction.

When a potential threat has been identified we see there are five alternatives that the incumbent might adopt:

• Status Quo – choosing to ignore the new business model and stick to their current one. This could be a sensible choice if they see that the customer base is distinct between the two models, so that they can continue to have a cash-generative business without incurring extra cost; or if the costs of changing models are too high, particularly if their current assets are not suited to the new model.
  • Nike, for example, experimented with wearable technology before retreating seeing that pure tech companies such as Apple and start-ups like FitBit, were better placed to develop and brand such products.

• Straddle – this is a dual-strategy approach, where the old model is retained, while in parallel a new one is also adopted. This works where the new customer segment does not overlap with the existing customer base, so the market can be expanded without confusion. It can be highly expensive to run two models simultaneously however, so needs to be carefully managed.
  • Unilever bought Dollar Shave Club as a way to compete in the shaving market, utilising a new online, subscription and delivery business model, while not leaving the traditional shop distributed sales model it has built its wider business on.

• Strengthen/Synthesize - this is where elements of a new business model are incorporated into an existing one to face-off competition and enhance benefits. It works where the customers of both models overlap and where the additional features of the new model are easily added (i.e. there is not significant changes that have to be made). The risk here is that of adding features that are appealing in the new model but inconsistent with the old one, creating an inconsistent combination of choices.
  • The heavy farm machinery company, John Deere, has incorporated sophisticated new technology that responds to weather conditions, GPS and other data-gathering info into its tractors and machinery that keeps it at the forefront of productivity benefits without being side-lined.

_{© Ahuja, G. and Novelli, E., 2016.}

• Start-over / Scoot – when the incumbent sees that it can no longer compete effectively with the new business model, but sees an entirely new revenue-generating business model for its existing assets.
  • Blockbuster could perhaps have put its huge network of physical retail locations to a different use – home delivery collection points, perhaps. At one point 70% of the US population were within 10 minutes’ drive of Blockbuster store.

• Switch – if you can’t beat ‘em, join ‘em. Move your business to the new model entirely. This is high risk, as the incumbent culture or your existing assets may not be at all aligned for the required delivery of the new product or service;

Evaluating which alternative to go with is not simple – radical change is always high risk, but peripheral or non-committal change can also lead organizations to believe they are managing the problem when they are in fact just postponing a decision.

_{1. https://www.innosight.com/insight/creative-destruction/} 

_{2. Ahuja, G. and Novelli, E., 2016. Incumbent responses to an entrant with a new business model: resource co-deployment and resource re-deployment strategies. In Resource redeployment and corporate strategy (pp. 125-153). Emerald Group Publishing Limited.}