Understanding the Current Disruptive Environment

Historically, managers have understood what disruptive innovation in their industry entails and they have felt equipped with strategies that generally work well to mitigate the risk associated with competitor disruptions.  In the past, companies monitored new entrants into related markets that offered cheap substitutes that took a while to gain market share before the innovators moved into higher end products.  In that environment, incumbent businesses had some time to react to such disruptions given the time it took to gain market traction. 

A recent Harvard Business Review article, authored by Larry Downes and Paul Nunes, highlights the new reality in the current business environment that traditional risk mitigation strategies designed to address disruptive market innovations may obsolete.  The recent evolution of new entrants with disruptive innovations, such as cloud computing, new apps for mobile devices, and instant information sharing, has brought about a significant change in a core factor impacting the way managers address disruptive innovation risk—time. 

Historically, time worked in the favor of incumbents.  But with the emerging trends of instant information sharing, as well as increasing technological advances, comes “big bang” disruptive companies that experience overnight success.  Disruptors need not be in the same, or even related, industries as incumbent companies, and they don’t necessarily follow traditional paths to market adoption.  All this calls for rethinking strategies of how to manage risks of disruptive innovators.

Characteristics of Major Market Disruptions

In order to understand and plan for major market innovation disruptions, managers need to understand the characteristics of what they are trying to trump—competitors with integrated, cheap services disrupting a company’s business with a more relevant business model.  According to the HBR authors, “big-bang” disruptions have the following related characteristics:

  • Unencumbered development-Big bang innovations are often built off platforms with minimal cost barriers in a rapid fashion using existing technologies which have allowed them to easily enter markets with few restrictions (e.g., Hulu, Skype, Twitter, etc.).
  • Unconstrained growth-Big bang innovations have shortened product life-cycles by embracing free trial basis adoptions to grab market share while the product is being fine-tuned and by quickly converting trial users to revenue generating users. Innovators need only to get a service or product offering right once in order to be successful. This product life cycle is much shorter as it only experiences three stages: development, deployment, and replacement (e.g., NapsteriTunes; SoftbookKindle, etc.)
  • Undisciplined strategy-Big bang innovations don’t necessarily follow the traditional strategy paradigms we’ve come to know. New offerings today compete on every level (cost leader, differentiation, and customization) as opposed to focusing on one to dominate (e.g., Google Maps).

Strategies to Survive and Prosper

Managers don’t have the resource of long reaction timeframes as they once did to strategically mitigate the risk of new entrants stealing market share.  Disruptors require bold strategies for incumbents to survive “big bangs” and the disruptions they impose.  The authors suggest implementing the following strategies in order to proactively addressing disruptive risk:

  1. Know the signs of major market disruptions.  Failed experiments suggest that innovators are honing in on quickly developing a successful offering.  In addition, visionaries in the industry as well as external customers may offer insight into what or how future success may come about in the related market.
  1. Don’t make it easy on disruptors once they have entered the market.  Once innovators have offered their products or services, their profitability may be delayed.  For example, incumbents can slow the growth of those who offer services using a freemium model by lowering their prices or forming strategic alliances that lie in the path of disruptors. 
  1. Realize what assets are still valuable and relevant.  It may not be popular among managers of incumbent companies, but as disruptive innovators enter the market, the physical assets of incumbents may be of little worth.  However, intangible assets (e.g., brand name, patents, etc.) may be used in other product lines and services that continue to generate high margins and growth.
  1. Take on a different diversification strategy.  Differentiating businesses within the enterprise offers a way to mitigate risk, as business leaders have always known.  However, the diversification strategy needs to be built upon a platform that can be flexible in a rapidly volatile environment as well as scalable.

Summary

Regardless of how stable managers believe their industries are, disruptions can occur at any moment and are often when the industry least expects it.  By not having risk management strategies in place to offset the abilities of future disruptions to take over, companies have already failed their stakeholders.  By realizing the characteristics and early indicators of potential innovative disruptions, as well as having platforms to stay ahead of future competition, businesses may thrive through major market disruptions.

Link: Harvard Business Review, Larry Downs and Paul F. Nunes

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ERM Enterprise Risk Management Initiative 2013-03-01