How to Avoid Getting Disrupted!
Disruptions are a real threat to established companies. Disruptive companies destroyed many great firms, such as Blockbuster or Nokia. That was why Business Harvard School Professor Christensen come up with the groundbreaking theory of disruption. In this article, we want to speak about what companies can do to avoid this crucial destiny of getting disrupted. For that, we developed a 4P approach: Prepare, Prevent, Paradigm Change, and Prevail. In the end, we will also discuss how to react when facing a disruption. To read more about what disruption is, click here.
Two aspects make this topic interesting. First, disruption poses by its nature a great risk for incumbents. Thus, it occurs the question of how to manage the threat of getting disrupted. Second, leveraged by evolving digital technologies combined with more knowledge about disruption and business modeling, more companies might choose a strategy to disrupt, which shows us the relevance of this topic.
How to anticipate disruptions
It is acknowledged that risk management should be integrated into strategic management (for example, in the management framework of COSO ERM 2017). Strategic risks should be identified during the strategy setting. Strategic management should also use goal-setting as a tool to identify, assess, and react to (potential) strategic risks, such as getting disrupted.
Having the risk identified, companies should scan their environment for weak signals and early indicators to detect a possible disruption as early as possible. Once a potential disruption has been detected, it should be carefully monitored since the risk of getting disrupted is threatening to kill an entire business model as disruption causes critical damage. Even great firms fail when getting disrupted. Despite the perhaps low likelihood of getting disrupted, the risk should not be neglected as it can cause immense damage or even bankruptcy. Abbosh et al. (2018) created a great analyses tool on how to anticipate disruptions in your industry, to read their article in the Harvard Business Review, click here.
Companies will face more disruptions in the future
The risk could increase in the decades to come. Evolving digital technologies are the foundation for plentiful disruptive strategies. Managers know more and more and more about business models and the dynamic business environment. Together with the knowledge of how disruption works, the digital transformation might enable managers to choose disruptive strategies and disruptive strategies to prevail.
How to avoid getting disrupted!
First of all, a company might want to prepare for disruptions by becoming capable of anticipating and responding to disruptive competition, which would make the company more resilient and robust. Important is, to have an innovative mindset and leadership. An ambidextrous ("two sided") leadership helps to integrate an innovative mindset in management whilst running the core business (Tushman et al. 2011).
Being a learning organization and able to innovate to embrace change as well as knowing the market well enables your company to act when necessary or wanted. Collecting knowledge about the low-end market and niche markets should not be neglected since disruptions often originate from there.
A company could act proactively to avoid getting disrupted. The incumbent could offer satisfying low-cost propositions to low-end customers. For niche segments, a company could provide satisfactory solutions for their individual needs. Doing that could make it harder for a possible disruptor to start in the low-end segment or at niche markets. Also, a outpace strategy by shifting to cost efficiency could make it almost impossible for a disruptive start-up to compete in the first place, if, of course, done well before the disruption occurs.
3. Paradigm change in marketing: focus on getting your customer's job done than on improving your product
According to Christensen and Wessel (2013), it is more effective and more helpful in case of disruption to think about jobs that people need to get done. Customers don't necessarily buy a product to have the product rather they buy the product to get a job done through the product. Jobs don't change, but products do. They give the example of products that fulfill the job "get home safely". First, it was a knife then it changed to a compass, and now a smartphone helps us get home safely.
So, it is better to think about jobs that customers have and how a product can help them to get the job done more efficiently and cheaper. A company that focuses on fulfilling a job as good as possible (now and in the future by disruptive innovations through new technology) will be way harder for start-ups to disrupt than a company that solely focuses on improving, market, and selling its existing product. Also, it is advisable to segment the market after jobs rather than after sociology-demographic determinants.
(Christensen and Wessel, 2013)
4. Prevail in the future by creating disruptive innovations yourself
Another option for incumbents is to pursue a disruptive strategy by themselves. By doing so, established companies could preempt possible disruptive competition. Frankly, this is quite a bold move. However, according to Prof. Christensen (2012), frequent disruptive innovations is the key to long-term success in a dynamic market environment. Or differently phrased (by Kreutzer, 2017, among others):
If we don't create what kills us - someone else will
Moreover, by crafting and executing an actual long-term strategy that includes the anticipated change in the industry and technology, a company can focus its resources on shaping new business models rather than on tactical responses to a changing environment as tactical reaction leaves the organization vulnerable to disruptions according to Webb (2019).
How to react when facing disruption
To respond to the risk of disruption is no simple endeavor. When facing disruptive competition, incumbents can embrace and/or evade the disruption. It is quite possible to use more than one of the following options at the same time.
Strategies when facing the threat of getting disrupted
Source: Rogers (2017)
Embracing the disruption means to fight and taking defensive strategies. In most cases, when the disruption is likely to prevail in the future, the company has no other choice than to switch to the disruptive innovation. That could be done with the whole company or by a dedicated business unit. The bigger the company is, the more advisable it is to embrace the disruption through an independent business unit as it gets easier to act and adopt an adjusted strategy faster and tailored to the new market situation. Incumbents could also buy a disruptive rival as a strategic move as being your own enemy is better than having a disruptive rival. Next to this advantage, the company quickly acquires the necessary new competencies.
To evade disruption, incumbents could adjust their focus. They could primarily focus on customers who most likely remain loyal. If the entire business of an incumbent got disrupted, the incumbent is still not out of options. In this case, an incumbent could diversify its products, services, and business models and/or possibly even find an unrelated new market in another industry. Fujifilm, for instance, refused to get disrupted by digital cameras (as did Kodak). Instead, they survived by the creative solution of looking for business opportunities at different markets such as flat screens and displays. The last remaining option for the incumbent is to accept its fate by giving up and quit.
Advisable in most cases is to readjust the focus to the customers who are most likely to remain loyal to the company and to embrace the disruption with an own dedicated business unit to be agile in the new competition of the future. If your company is big enough to buy the disruptive company it might be the right move to buy them to have the competition with your core business balanced but to shape the future with less rivalry. However, important is, whether through M&A or R&D, to follow the path of the disruptive innovation, as if you don't do it yourself - someone else will.
Abbosh / Savic / Moore (2018): How Likely Is Your Industry to Be Disrupted? This 2x2 Matrix Will Tell You, hbr.org/2018/01/how-likely-is-your-industry-to-be-disrupted-this-2x2-matrix-will-tell-you [12.5.2020]
Christensen (2012): How To Escape The Innovator's | Keen On... Clay Christensen, YouTube, published 2.4.2012, youtube.com/watch?v=gfr3uLbC22Y [12.5.2020]
Christensen / Wessel (2013): Innovating over the Horizon: How to Survive Disruption and Thrive, Harvard Business Review Webinar, published 5.4.2013, hbr.org/2013/04/innovating-over-the-horizon-ho.html [12.5.2020]
COSO ERM 2017 (2017): Enterprise Risk Management Integrating with Strategy and Performance: Executive Summary
Fuchs (2019): Mastering Disruption and Innovation in Product Management: Connecting the Dots, Munich
Grgurevic (2017): Geschäftsmodellstrategien im globalen, digitalen Wettbewerb, in: Schallmo et al.: Digitale Transformation von Geschäftsmodellen, Wiesbaden, pp. 127-158
Kreutzer (2017): Treiber und Hintergründe der digitalen Transformation, at: Schallmo et al.: Digitale Transformation von Geschäftsmodellen, Wiesbaden, pp. 33-58
Rogers (2017): Digitale Transformation: Das Playbook, Frenchen
Sethi (2015): Innovating at Scale: The Companies That Don't Let Size Slow Them Down, medium.com/@arjunsethi/how-companies-can-avoid-the-innovator-s-dilemma-3f980ae533a7 [28.10.2020]
Taylor (2018): To see the future of competition, look at Netflix, hbr.org/2018/07/to-see-the-future-of-competition-look-at-netflix
Tushman / Smith / Binns (2011): The Ambidextrous CEO, hbr.org/2011/06/the-ambidextrous-ceo [28.10.2020]
Webb (2019): How to do strategic planning like a futurist, hbr.org/2019/07/how-to-do-strategic-planning-like-a-futurist [11.03.2020]
Wolke (2016): Risikomangement, Edition 3, Berlin