How are organisations thriving through disruption?

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Economist Intelligence Unit

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The Economist Intelligence Unit (EIU) is the research and analysis division of The Economist Group.

1 minute read 4 Apr 2018

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An Economist Intelligence Unit report, sponsored by EY, shows that the organizations must embrace disruption to thrive.

The influential theory of disruptive innovation first articulated 20 years ago by Harvard Business School Professor Clayton Christensen has come under the spotlight of late.

  • What types of innovation are truly disruptive?
  • Is low cost the only basis for upending established business models?
  • Is it only outsiders who are capable of doing this?

Academics may disagree about terminology and how practice fits theory, but business leaders across sectors are keenly aware that established models are increasingly under threat from technology-led change.

In the classic definition of disruptive innovation by Christensen, upstart challengers use technology to offer cheaper alternatives to mainstream products or services. Disruption may also occur when more convenient means of obtaining products and services are introduced. Whatever the business, there are disrupters and the disrupted.

Disrupters are usually newcomers, and the disrupted are often the large, established players in a market, sometimes even its leaders (such as Blockbuster in videos).

But as this research makes clear, incumbents are not predestined to be victims. Sobered by how quickly new technology-driven business models can take root and leaders can be dethroned, companies of all sizes are now constantly on the lookout for disruptive trends, and many seek to be disruptive in their own right.

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Chapter 1

Staying ahead of disruption

Disrupting from outside, from inside and in partnership

Leaders of established companies seeking to be disruptive are challenging their management teams and workforces to revisit their products and processes, and to look outside the traditional enterprise walls for innovative approaches.

  • In financial services, BBVA, a Spanish bank, has been partnering with and purchasing “fintech” start-ups in Europe and the US in areas ranging from cash management to inter-bank settlements.
  • In the automotive sector, Volvo Car, Renault-Nissan, Audi and other original equipment manufacturers have all joined forces with technology companies in different initiatives to develop the “connected car”.

In lighting, home electronics and medical technology, GE and Philips have both fronted open innovation initiatives to develop new products and improve their existing ones.

Disrupting through M&A and partnerships

Mergers and acquisitions have been one method incumbents have employed to acquire potential disrupters and gain access to their technology.

In 2015, BBVA acquired a stake in UK online banking challenger, Atom, and another, Helsinki-based Holvi, in early 2016.

GE has reportedly set aside US$10bn to finance the purchase of smaller digital companies over the next three years.

In other cases, as in the already heavily disrupted hotel sector, established players have been acquiring rivals – to gain scale, exemplified by Marriott’s purchase of Starwood, or to establish themselves as online players in niche market segments, as in Accor’s deal for Onefinestay.

Large players have also become more open to partnerships, with organisations inside and outside of their industries, to try and stay ahead of nimble digital challengers.

Car sharing is a good example. Ford, for example, has engaged app developers, car park owners, insurance providers, financial institutions and local councils in a scheme to make Ford cars available for hire around London. Its rivals BMW, Daimler, Honda and others are pursuing similar car-sharing programmes in Europe and elsewhere.

Equally, senior management can sometimes use acquisitions and partnerships to shake things up internally by importing desired business practices and attitudes.

More often, however, the acquisition or alliance remains separate from the core business; it may prove effective at seeing off dangerous challenges, but does little to alter the prevailing culture.

Disrupting from within

Some companies respond to disruption in more radical ways – by disrupting their own business model.

The Italian electricity utility Enel is attempting to do just that by forgoing any further investment in coal-powered generation and re-directing its future investment toward renewable energy sources such as wind and solar.

The Chinese consumer electronics and appliances company Haier, on the other hand, is in the process of reorganising a hierarchical management structure into several smaller “micro-enterprises” that compete with each other to design, build and distribute the company’s products; they will also compete for staff and investment funding.

Only time will tell whether such internal disruption will help organisations meet the challenge.

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Chapter 2

Four questions to help you thrive in the age of disruption

Complacency may be your greatest enemy

Question 1: Can you see disruption coming?

Of the executives surveyed by the Economist Intelligence Unit, most believe their organisations are being reactive rather than proactive when it comes to disruption. But fortunately, most organisations are starting to rise to the challenge by recognising disruption can come from anywhere and that they need to prepare.

What does your organisation need to do to seize the upside of disruption?

Despite the great promises disruption could bring, most companies still fear it. The report revealed six in ten executives believe their senior management see disruption as a threat rather than an opportunity to seize. The same number of executives also say their organisations are reacting to disruptive forces, rather than being the ones to drive or be ahead of the game.

Given the rapid pace of change, this wait-and-see approach could prove fatal. Organisations must push themselves to embrace disruption as an opportunity. Fortunately, many organisations are doing so. Over 60% are investing financially in a disruption strategy, and the same number have either created, or consider creating, a new role to focus exclusively on disruption.

Know that technology isn’t the greatest disruption driver

Technology is a great enabler of disruption, but it is not itself the greatest underlying driver – despite the accepted wisdom of most people. The EIU report discovered that regulatory changes are viewed by 29.3% executives as the single greatest driver of disruption, particularly by those in the heavily regulated financial sector.

Changing customer behaviour is seen as the second greatest driver by 26.4% of executives – though it is first among healthcare respondents – while the third greatest driver is red tape and bureaucracy at 21.8%.

Although technology is only seen as the fourth biggest disruption driver at 21.4%, it does nevertheless heavily influence regulatory reviews and stimulate new customer behaviour patterns.

Don’t forget the older generation

Possibly at their own peril, businesses focus too much attention on younger generations of customers for signs of future trends. However, the EIU report found the so-called ‘silver market,’ those over 60, are more likely to have disruptive potential. Healthcare executives are particularly aware of this, with 86% believing the older generation will be a greater source of disruption than emergent technologies such as the Internet of Things and data analytics.

Question 2: Are you looking outside your industry?

As disruption challenges the status quo of organisations, industries are beginning to converge, and this is impacting upon business models.

What does your business need to do to prepare for convergence?

Partnership models can prepare you for disruption

With disruption driving rapid change in the business world, businesses are increasingly turning to partnerships, including strategic alliances, consortia and large firms collaborating with challengers. The EIU found that 31.9% of organisations had formed a strategic alliance with a company in their industry, while 25.8% had partnered up with one outside of their industry. Furthermore, 21.1% have engaged with disruptive start-ups as part of a formal corporate venturing program, revealing their resolve to accept and embrace disruption.

Be ready and willing to change your business model

With business leaders increasingly seeking cross-industry partnerships, there will be inevitable changes to established business models. This trend is already causing disruption in financial services, due to the disruptive innovation of fintechs. It is also visible in healthcare where both incumbents and start-ups are harnessing big data and consumer technologies to improve patient care and solve medical challenges.

This convergence will likely bring disruption to the energy industry, which has largely escaped it so far, with new business models such as small-scale power distribution and renewable energy products.

Person walking away from lighting fireworks

6 out of 10 senior executives view disruption as a threat.

Question 3: Is your organisation communicating its purpose clearly?

The clear articulation of a resonating purpose plays an important role in driving an organisational culture of disruptive innovation.

Employees in innovative companies actually want to continuously and actively innovate – they need not be forced by their job requirements and obligations. Their passion is nurtured through a strong, believable and clearly stated organisational purpose – one that creates greater engagement than purely economic ones. Money alone can only motivate employees so much.

Though internal competitions, ‘deep work’ spaces and material incentives all positively contribute to fostering a culture of disruptive innovation, the ability of management to articulate a clear purpose does so even more. Most executives value the potential of purpose for nurturing innovation as 61.4% believe having a purpose, one that includes both commercial and social goals, makes an organisation more innovative.

Question 4: Are you fighting complacency?

Executives must overcome their cognitive biases and recognise that all industries will eventually be disrupted to some degree or another. And those organisations that actually understand the need to prepare and adapt must recognise there is no one-size-fits-all solution for dealing with disruption.

There is no fool-proof technology-enabled business model or product that will definitely disrupt your rivals – nor is there any guaranteed method for an incumbent market leader to fend off usurpers.

Immediate business successes, which are no guarantee of future ones, should not lead to complacency. Disruption will not forgive those organizations, even successful ones that become relaxed and complacent. The undeniable reality of disruption means even the most entrenched organisation and industry will continually need to be on guard and ready to adapt.

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Chapter 3

Four key areas of disruptive success

Adapting to disruption requires a management outlook that embraces rather than resists

It is clear from the past two decades of rapid business change that far from all digital challengers succeed, or that challenged incumbents are doomed to decline.

The EIU has identified four areas of particular importance:

  • Leadership – Transformational change of any sort must always be communicated from the top, even if driven from the bottom. The board, C-suite and other senior management must sing from the same hymn sheet. If adapting to disruption involves a strategy for change, a senior executive or leader must own it.
  • Culture and purpose – Employees must want to experiment and innovate, rather than be directed to do it. Changing attitudes can take a long time, but management can accelerate the process by creating incentives, and removing obvious structural barriers to team collaboration. Just as important is articulating a sense of purpose – values that employees enthusiastically buy into and make them want to innovate.
  • Customers – Companies tend to see competitors as the sources of disruption. But customers are often the driving force, particularly where digital technology is involved. Companies must be able to spot emerging changes in customer behaviour, model their potential impact, and be ready to change products or revenue models accordingly.
  • Trends – Similarly, companies must be able to see through industry noise and identify the technologies that have a real chance of winning favour among customers. There is much more involved in this than guess-work or simply hedging your bets.

Whether or not the responses involve acquisitions, partnerships or organisational upheaval, or something in between, adapting to disruption requires a management outlook that embraces rather than resists it.

Summary

To create truly sustainable growth, companies should embrace disruption rather than resist it.

About this article

By

Economist Intelligence Unit

Native news outlet

The Economist Intelligence Unit (EIU) is the research and analysis division of The Economist Group.