Jul 26, 2015

Manage Disruption by Building Your Own Emerging Technologies Function - Part I

CC flickr image courtesy of @boegh

One hears a lot about disruptive theory and while the data and examples of disruption are compelling, there aren’t a lot of concrete examples about what to do if you’re an incumbent looking to proactively manage the impact of disruption to your business. I have worked in and led Emerging Technology teams at IBM, HP and Red Hat and based on my experiences I’ll discuss both why and how to build a function within your company (an Emerging Technologies team or CTO Office) to manage the impact of disruption. I’ll be doing this across several blog posts. It will be useful if you are somewhat familiar with disruptive theory, diffusion theory and chasm theory but its not required. This first post is focused on why an Incumbent should have an Emerging technologies team. 

The Lifecycle of Creative Destruction

Creative Destruction describes a phenomenon whereby a company or a technology that delivers an improved benefit, or performance, displaces a previous company or technology.  Examining the rate of Creative Destruction is interesting in that it can give Incumbents (successful, established companies) a quantitative metric about their susceptibility to competition. A popular example to illustrate this point is the average duration of a company within the S&P 500 Index. A company entering the index in 1935 was able to maintain its position in the index for an average of 90 years, whereby a company entering the index in 2005 is forecasted to only remain there for 15 years. Clearly, this trend is accelerating which suggests that Incumbents are becoming increasingly susceptible to competition. Disruption is a common cause of Creative Destruction and thus learning how to successfully manage the impact of disruption is something that every incumbent should have in their playbook.

Year Entered S&P 500  Average Duration until Exit
193590 Years
195555 Years
197530 Years
199522 Years
200515 Years
Data courtesy of Ralph Katz, Professor at MIT Sloan School of Management

Managing your competition

Most incumbents have sophisticated product management and marketing functions that keep a close eye on the competition, so why is this not enough?

To better explore this question, lets start with a scenario. I am an incumbent. I have a company and it is very successful. I have a product that provides a benefit, using a particular technology, and there is a market that is willing to pay for the benefit. In terms of diffusion theory, I'm in a particular technology S-Curve. I have competitors, but we are all within the same S-Curve, as we’re all using the same core technology to provide the benefit. For simplicity, lets assume both my own and my competitors' sales teams are equally competent and successful and that we both have wide market reach.

In order to differentiate myself from these competitors, I need to build a better product. To do this, Product Management and Marketing meets with customers and builds a multi-year product roadmap with the belief that as long as engineering can deliver on the roadmap, on the intended timeline, my company will stay differentiated and remain the market leader and the dominant vendor within my S-Curve.  Engineering Plans are created, streamlined and staffed according to this roadmap. The Sales team find that the differentiation is appreciated by their customers and the product or service is selling well. Per innovation theory, this model is known as sustaining or continuous innovation. 

Enter the disruption - Lately, I’ve started noticing that new and non-traditional competitors have emerged that are addressing the same opportunities in the market, but in a different manner using a different technology. A new S-Curve has emerged creating a discontinuous or disruptive innovation. This new technology has demonstrable performance advantages over the technology my product is based on. The companies commercializing this technology begin moving upmarket, resulting in a significant loss of my market share and revenue.  

Threats and Opportunities that fly under your radar

In the scenario I described above, the Incumbent was well equipped in their ability to deliver on continuous and sustaining innovation models, but the competitive analysis functions within those teams were not equipped or skilled in identifying, managing and responding to disruptive threats and opportunities. Why were they ill-equipped? There are a number of organizational and personal factors that prevent teams involved in sustaining innovations to successfully respond to threats and opportunities around disruptive technology. While Christensen’s disruptive theory describes these factors in much more detail, here are a few that I run into fairly regularly:

Bias 1 - Optics. This is the first time you’ve ever encountered competition from a technology in a different S-Curve. Previously you’ve only dealt with competition from the same S-Curve using the same core technologies as you. These new competitors don’t look at all like the competitors you usually deal with. "I mean, come on, they’re a startup and they’re only 50 people.  We’re a company thats 100x or 1000x that size. How on earth are they getting into our accounts?"

Bias 2 - Pride. I’m the head of the product team at the incumbent and I know this market inside out. I’m right, they are wrong and they’ll go out of business.

Bias 3 - Sticking your head in the sand. If I admit we’re being disrupted, the consequences are too painful. I’m just going to hope this goes away. As an incumbent, I have millions of dollars (or hundreds of millions) and years of investment in the roadmap based on our current technology strategy. Going back to the drawing board and changing my strategy, product roadmaps and engineering plans to adjust to the new technology will be extremely inconvenient and costly, for everyone. 

Bias 4 - Efficiency - Those customers don’t matter. Per Christensen’s disruptive theory, disruptive Innovations enter the sectors of the market in sectors which the incumbent traditionally sees as low margin and then diffuses upmarket from there. The incumbent is not incentivized to defend these low margin sectors, and to quote, "Moving up the trajectory into successively higher-margin tiers of the market and shedding less-profitable products at the low end is something that all good managers must do in order to keep their margins strong and their stock price healthy. This ultimately means that in doing what they must do, every company prepares the way for its own disruption."

Bias 5 - Incentives - I’m not interested in this battle. I see the disruption but Im just a cog in the plans for the current strategy and I’m too busy executing on that. My annual performance review is measured against how well I execute on the current strategy. I don’t have the time or energy to become a champion for revisiting the strategy. 

What can you do to manage the impact of disruption to your company?

The first thing is that you have to come to grips with the fact that disruption is inevitable. If you concede this point, you have to decide whether you want to anticipate and manage disruption or just roll the dice and attempt an ad-hoc response. If you want to anticipate, identify and manage it, it helps to have a framework and a function with your company that is skilled at handling this. The issues around motivation and incentive I described above are key. If you want a response to disruption to be successful (or even happen in the first place) you need to put in the appropriate structures that will increase the chances of success beforehand. In my subsequent blog posts I will describe how to build an emerging technologies function with your company that can identify and manage disruption ahead of your own product teams and your competitors.

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