Why companies should embrace disruption

Key Takeaways:
• To stay competitive in today’s market, companies must think like a disruptor, investing both in the innovations that sustain their business and in new revenue streams that can defend against potential competitors.
• For some companies, this could mean enabling and embracing the bold leadership necessary for transforming of their core business—as Netflix and others have done—to avoid disruption by new technologies.
• For others, staying ahead of the curve while minimising costs will mean adopting lean production techniques that enable quick testing and iteration or using open innovation to leverage the intelligence of the crowd.

Innovate or die. Companies that ignore this modern mantra risk dying faster than ever before—today’s typical S&P 500 company survives on the index an average of 18 years, down from 61 in 1958. By 2027, an estimated 75% of the S&P 500 may have been replaced, according to consulting firm Innosight. An important driver of this high replacement rate will be the rise of disruptive technologies, some of which—like open source, cloud computing and mobile Internet—are helping to lower the cost of launching a start-up. Today, the average amount a start-up accelerator invests to get an early-stage start-up on its feet in the US is $22,890.

Rates of start-up success are notoriously low, of course – between 25 and 30% of business backed by venture capital fail, according to the US National Venture Association. Disruption, however, sees the crucial consideration to be not how many start-ups fail but whether a few succeed. That criterion considers the last ten years as having been productive, with nearly half (44%) of MIT’s top 50 Disruptive Companies having launched within the past decade.

Interestingly, however, the disruptive companies in the other 56% aren’t all that young, suggesting that scale is not incompatible with disruptive potential. It also implies that organisations hoping to ensure their survival don’t need to necessarily think like a young start-up—they simply need to think like a disruptor.

This requires companies to tackle the “innovator’s dilemma”, argues Harvard professor Clay Christensen. The dilemma appears when the innovations that led to a large company’s initial success—what Mr Christensen calls “sustaining innovations”—are no longer enough to ensure longevity in a market in which younger companies are pioneering “disruptive innovations”. Such innovations are often cheaper products or new business models that initially gain popularity at the lower end of the market and then rapidly gain market share.

To solve this dilemma, foresight is not enough. The leaders of Kodak, which declared bankruptcy in 2012, had allegedly identified the potential for digital photography to disrupt their business as early as 1979. Transforming a company’s core business can prove difficult, however, and requires leadership. On-demand internet streaming media provider Netflix, when it decided to go online, had to cannabalise the very business model (DVD-by-mail) that had enabled it to disrupt the video industry in the first place; this year, the company’s stock hit an all-time high. Similarly, when McKinsey managing director Dominic Barton began building McKinsey Solutions, a new product that did not focus on human capital—the company’s core asset—he had to battle what he refers to as the inherent “antibodies” that “try and kill” new ideas because they identify them as different. One solution Mr Barton suggests is to choose a “very strong leader” to “protect and nourish” the innovative project.

Needless to say, the more a company relies on hardware, machines and infrastructure, the harder it is to make a radical shift (because of sunk cost). For industrial companies, therefore, staying disruptive is less likely to require changing the whole company and more likely to occur via radical changes in strategically chosen parts of the business. One important area, considering the ease with which new start-up can rise, will be the need to get to market faster.

To stay agile, some companies look to lean manufacturing techniques that are designed to speed the product development process and bring products closer to existing market needs. GE, for example, developed “FastWorks”—a manufacturing approach that builds upon the “Lean Start-up” method articulated by Silicon Valley entrepreneur Eric Ries. The approach mandates rapid, three-month development cycles in which small teams deploy “minimum viable products” and test their appeal with customers. FastWorks, first used for appliance products in 2013, is now being applied to H-class gas turbine business. The hope, the company says, is to cut upgrade costs by half.

Companies are also increasingly employing open innovation, a method designed to reduce the cost of continual innovation by soliciting the knowledge of crowds—whether internal or external to the company—to produce solutions to a specific challenge. While the costs of proposed solutions may not always justify their development and implementation—as occurred after Netflix famously offered $1m to anyone who could improve its recommendation algorithms—open innovation has been shown to increase both the number of and innovative qualities of products created, especially when firms acquire external technologies identified as useful.

This article is published in collaboration with GE LookAhead. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nina Curley is a journalist, investor, and startup advisor working in the Middle East.

Image: A couple walk past “Filament Lamp”, an art work installation, at a commercial center near a construction site in Beijing’s Sanlitun area May 7, 2013. REUTERS/Jason Lee.