Challenges Spotting Disruption  

  A large problem for many organizations is that a significant disruption may not recognized until it is too late. Examples could include loss of market share of hard copy encyclopedias to the web version Wikipedia. Generally the issue is that a company fails to realize that its market leadership is being lost. When new companies enter the market with a different approach it is important to determine what the product or service value proposition is and how long it takes to manifest and become popular in the market. Another way a disruption can happen is when multiple smaller competitors start to bloom in the market. Even though these competitors are small, if enough of them survive and grow eventually some part of your organization’s market is going to be affected.

  Sometimes a new way of doing business develops but the incumbent company is still able to keep its market share. Does this mean that the incumbent is safe? More often than not the answer is no. At some point failing to capture growth in a growing market can hurt the company as investors move elsewhere, talent leaves, and the chance to learn and be prepared for an industry revolution disappears. Generally, an organization makes this mistake when they define their market and competitors too narrowly which means they look for disruptions in the wrong place. Finally, fragmented or smaller incumbents face the risk of market consolidation. If scale becomes the necessary competitive advantage unaware organizations are forced to acquire/be acquired or to specialize.

Context and Timing Importance

  An irony with disruptions is that sometimes incumbent companies are the creator of the very disruptions that destroy them. Kodak for example invented the digital camera in 1973 that eventually tore their business apart. At the time of creation the digital camera was not viable for use in the general public.

  One key component to a disruption coming to light is market conditions. For example, in very concentrated markets with high switching costs incumbents might become lazy about customer relationships and lose the ability to respond to changing preferences. In other cases new technology may take longer or be faster depending on the technology to reach viability in the market. 

  Catalysts serve as early indicators of potential disruptions. A catalyst is a shift from old patterns to a new and tangential trend. These catalysts can change the appeal of a product or change the manner to cost effectively produce the good, eventually taking away a competitive advantage from the incumbent. 

  Enabling technologies are those that drive radical change. Examples include electricity, the steam engine, the internet and many others. All the examples drastically change how a company conducts its business. Another change that can occur is due to the customer mindset. If a customer’s preference or way of living on a day to day basis changes then demand for an incumbent’s good or service can be affected as well. What makes customer preferences difficult is the fact that these changes can occur over a long period of time. Worse still, customers don’t explicitly express a preference for things until they learn that something they thought was impossible or did not exist actually does. Platforms, the economy, and public policy also can affect market conditions and the ways an incumbent can do business. 

Lack of Incumbent Response?

  Many people wonder why companies don’t react. Why didn’t they do something to change the trend of the company before they declared bankruptcy? The main reason for this is simple, it is easy to spot what a company should have done in hindsight versus making the decision when it matters most. However, even if a company identifies the change, they then are forced to assess it properly as a significant business altering change. Three types of barriers inhibit an incumbent’s ability to properly assess and respond to disruptions.

  The first barrier when replicating the disruptor’s approach is that an alternative action may reduce current profitable revenue streams. If changing to a new product initially hurts sales for a large publicly traded company, many would rather take the easy road and double down on current efforts. In the long run, however, this strategy typically loses important market share.

   The second barrier that keeps large companies unresponsive to change is that current assets and investments can be rendered useless. If a new product needs entirely different machinery to be built in a production facility it means that an entire new round of assets must be acquired and previous asset acquisitions may seem wasted.

  Finally, the third barrier is that a disruptive strategy challenges assumptions set in stone in the minds of top executives of how their market operates. This phenomenon only gets worse the longer a company is successful as people become set in their ways. 

Avoiding Disaster

Companies that made their mark in the business world during the 20th century now face difficult times. The world is changing and shifting underneath their feet with no end in sight. In order to combat and be prepared for the coming future the article identifies nine patterns of disruptions below. These patterns are the shape of what is to come in the years that follow.

  1. Expanding market place reach – connecting fragmented buyers and sellers
  2. Unlock adjacent assets – creating opportunities on the edge
  3. Turn products into platforms – providing foundations for others to build on
  4. Connect peers – making direct peer-to-peer connections
  5. Distribute product development – gathering forces to create one
  6. Unbundle products and services – giving the customer what they want nothing more
  7. Shorten the value chain – fewer inputs into greater value outputs
  8. Align price with use – reducing the barriers to use
  9. Converge products – making a product plus another product equal more than simply just two products 

Link: Patterns of Disruption

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ERM Enterprise Risk Management Initiative 2016-02-01