Disrupt or be disrupted

When no industry is immune to disruption, that reality must become the pervasive theme for thinking about strategy in every enterprise. Either you seize the opportunity or fall victim to the risk
By John Caldwell

In a recent interview, Dr. Dieter Zetsche, the managing director of Daimler AG, said his company’s competitors are no longer other car companies but Tesla, Google, Apple and Amazon. He went on to say that software would disrupt most traditional industries in the next five to 10 years.

Clearly, technology advancements are driving unprecedented change, change that has the potential to disrupt virtually every industry in some unique way. That, in turn, requires every business to adopt new ways of thinking about strategy and strategic risk.

Consider three far-reaching examples: autonomous vehicles, 3-D printing and cryptocurrencies. The shift to autonomous automobiles will not only transform the transportation industry but directly impact the insurance, energy, real estate, public transit, urban infrastructure, health care and banking sectors as well as, among other things, extend productive work hours across virtually all industries. Three-dimensional printing, initially a plastic prototyping tool, has morphed into an array of transformative applications in many fields ranging from medical, aerospace and automotive to apparel. And cryptocurrencies—unheard of just a few years ago—are already revolutionizing cross-border financial transactions by creating frictionless, instantaneous processes that bypass bank charges, eliminate delays and are validated by computer networks rather than a central banking system. Who would have predicted even 24 months ago that cryptocurrency firms would today have market capitalizations aggregating an estimated $165 billion?

Artificial intelligence (the subject of this issue’s cover story, “Artificial intelligence gets real”) could well be the next major disruptive technology to reshape the competitive landscape. The exponential growth in data stored in the cloud, seemingly limitless, inexpensive processing power and advancing machine-learning algorithms that can process and learn from enormous amounts of data now forms a lethal combination for gaining competitive advantage though better understanding of customers and offering unique solutions.

In the interview cited at the outset of this column, Zetsche elaborated on this potential by referencing a few present-day examples and a present-day prediction. “Watson [from IBM] already helps nurses diagnosing cancer, four times more accurate than human nurses,” Zetsche said. “Facebook now has a pattern-recognition software that can recognize faces better than humans. Computers are becoming exponentially better in understanding the world. This year, a computer beat the best Go player in the world, 10 years earlier than expected. In 2030, computers will become more intelligent than humans.”

Disruptive forces can come from two sources: traditional competitors executing a new revolutionary strategy or new entrants bringing an unconventional approach that drives a new compelling customer value proposition. The most familiar names today in the new-entrant category are Uber and Airbnb. The former, founded just eight years ago, is the largest taxi company in the world, yet it owns no cars. Similarly, Airbnb, which is slightly older than Uber, rents more rooms than any hotel chain in the world yet owns no bricks and mortar.

Who’s next? Today, countless start-up companies are being funded for the sole purpose of developing creative and disruptive products and services aimed at transforming traditional industry sectors.

BUT WHAT IS disruptive strategy? At its core, there are three simple themes: products or services that are better, faster, cheaper. It may be one, two or all three components. For example, Amazon’s value proposition has all three—it offers its customers an almost endless array of products that are very well priced; they can be delivered to the customer doorstep at no additional cost and often within 24 hours. And returns are handled seamlessly.

So how should executives and boards of directors think about disruptive strategies? Here are several principles to consider.

Embrace disruption

It starts with leadership. The executive organization should make disruption a constant theme of doing business—how can we better serve our customers by making our products and services better, faster, cheaper? This should be reinforced not only through regular formal and informal communications but backed up by actions. Make innovation part of the organization’s DNA—encourage curiosity, creativity and experimentation; recognize and reward failures as much as the successes. Recognize that transformation is no longer a reactive plan as conditions change but rather a continuous process.

Assign resources

Without assigning leadership and resources with specific accountability to work on innovation, the enterprise is more likely to be road kill than the predator. And innovation is not something that can be done effectively after hours or on weekends. Recently, a large North American steel distribution company established a vice-president of innovation position to work full time on how to bring new technologies, systems and processes to do things better, faster, cheaper in an industry hardly known for innovative solutions.

Undertaking disruptive strategy formulation not only requires creativity but also continuous external scanning and drawing upon expertise from outside of the respective industries. For example, in 2016 Barrick Gold set as a goal to become “a leading 21st-century company” in part by teaming with Cisco to digitally transform its mining operations—an unusual step for a conventionally capital-intensive business.

Consider using small teams to work on issues requiring innovation solutions. Staff the teams with millennials—people unencumbered by the past and fresh with curiosity and creative access to new ideas.

Consider creating an innovation advisory board consisting of experts in different fields to bring new perspectives on emerging technologies and identify new opportunities.

Overhaul strategic planning

Strategic disruption will be the new, pervasive theme for strategy. Enterprises will be faced with a direct binary decision—either seize the opportunity or be victim to the threat. Never dismiss too quickly singular technological advancements as inapplicable to the business. It is often the combination of new technologies that can create transformative disruption.

The risk is that organizations may choose to delay adoption of an unorthodox strategy preferring others to over-invest, make inevitable errors and await the maturation of newer technologies. How many retailers even five years ago dismissed Amazon as a nuisance rather than an overwhelming force?

There is merit, however, in a fast-follower strategy. That is to recognize emerging opportunities and quickly develop a superior product or service. There is none better at this than Apple. With few exceptions, Apple products fall into the fast-follower category but come with greater functionality, ease of use and attractive form factors and packaging.

Recognize there can be a new form of competition, not coming from traditional competitors but the emergence of new players with a different business model and new customer value proposition. As part of strategy development consider establishing a separate team to develop business models and strategies that could “put us out of business.”

Rethink board roles and make-up

The board of directors can play an important role in emphasizing the continuous need for innovation and transformation. It can encourage and support new ways of thinking about disruption and related strategy. It can reinforce the need for management to take the blinkers off and to support investment in new capabilities to identify and develop new technologies for competitive advantage or even survival.

Human nature is to look for the emergence of revolutionary new products or services to magically appear to focus the attention of the enterprise on the need to embrace innovation and early adoption. The board has the advantage of some level of detachment allowing differentiation between the forest and the trees and to recognize the uninspiring reality that just like the internet, transformational evolution goes unnoticed and only by looking back will the impact be recognized of the enormity of the change.

Boards may wish to rethink their own composition. Is there a need to bring a technologist onto the board even though it may not be a technology company? Should boards opt for younger, less-experienced directors who would bring new, contemporary perspectives? Would the board benefit from outside speakers on disruptive technologies?

Finally, the board has a powerful device at its disposal—its own agenda. Enlightened boards will insist on periodic formal reviews of emerging technologies, internal innovation developments and require separate sections of strategic plans to include disruption strategy options for competitive advantage. The board also can expand its examination of strategic risk to encompass transformational exposures.

Be under no illusion, disruptive forces are the new reality. Enterprises must be prepared for both evolutionary and revolutionary change and choose to capitalize on the opportunities or be victim to the consequences.

John Caldwell is a veteran CEO and board member experienced in distressed situations and is the author of CPA Canada’s A Framework for Board Oversight of Enterprise Risk. E-mail: johncaldwell@rogers.com.

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