In recent years, as digital takes hold, corporate mortality rates have increased. Since 2000, 52% of companies in the Fortune 500 have either gone bankrupt, been acquired or ceased to exist.
Smart, technology-driven startups are playing a big part in this development. Venture funding to startups is at historic highs. In just one startup hotspot, Silicon Valley, venture capital investment in the first three quarters of 2014 was around $17 billion, a figure that is only surpassed by the peak of the dotcom era in 2000.
But traditional incumbents are struggling to respond with agility to these increasing levels of digital innovation. Capgemini Consulting’s latest research found that nearly 74% of companies responded to digital disruption only in the second year of its emergence. Worryingly, over 38% of incumbents responded to the emergence of a disruptive company after the fourth year. Our research also revealed that the vast majority of companies that went bankrupt responded only when the digital disruption had already firmly taken root.
As technology cycles keep getting shorter, disruptions will become more prevalent. Does this spell the end of the venerable, centuries-old corporation? Not necessarily. Here are some ways for incumbents to thrive in the digital food chain.
Proactively Identify Customer Pain Points. Disruptive startups are good at entering a market by identifying customer pain points. Resolving these pain points then becomes their unique selling proposition. Startups such as Airbnb, Uber and Lending Club, which are based on a peer-to-peer economy, have identified gaps in what customers want and what incumbents provide. “Many collaborative startups find ways to simplify complex and frustrating customer experiences’, explains Rachel Botsman, a leading expert on the collaborative economy. “For example, Uber and Lyft have simplified an otherwise complex and unreliable experience for customers of taxi services.” Some incumbents react to the emergence of the pain point by denying its importance. However, this is the corporate equivalent of an ostrich sticking its head in the sand. The market has already been created.
Question the Status Quo and Constantly Audit Your Business Model. Many incumbents typically stick to the same strategy playbook that has served them for years. However, the pace of technological change has made this approach shortsighted. As INSEAD’s Serguei Netessine explains: “Business models and the advantages that flow from them are transient. What is a competitive strength today might be a burden tomorrow.” It is vital for a company to keep questioning the status quo. Blockbuster’s innovative idea of sharing revenues with the studios, instead of paying the studio for each product, revolutionized the video and DVD rental market. Blockbuster’s market share skyrocketed. However, they failed to look ahead and anticipate the impact of streaming and eventually went bankrupt. Netflix, on the other hand, thrived because it adapted and actively cannibalized its DVD business.
Reorganize Resource Allocation around Opportunities. Most organizations are typically organized by business or market unit. Resources are subsequently tied into what are in reality independent fiefdoms. Responding to digital disruptions requires that organizations move to a resource allocation that is centrally governed and organized around opportunities, not existing structures. As Columbia Professor Rita McGrath says, “In companies [that have been able to survive disruptions], employees tend to worry less about organizational roles and structures.”
Move to an Open Innovation Model. Large companies need to learn to spot the early warning signs of disruption to avoid being surprised by their impact at a later stage. This requires a shift to an open innovation model that allows them to stay tuned to sources of disruptive innovation. An open innovation model entails engaging closely with the startup ecosystem by setting up innovation labs and incubators and partnering with startup accelerators. As David Cohen, founder of leading startup accelerator Techstars says, “Being around the disruption at the early stages – and spotting it before others do – gives you a competitive advantage and you can help the startup grow at the same time.”
Digital disruptions are a fact of economic life in the twenty-first century. New digital technologies do not care for organizational history or tradition. In fact, they sweep aside existing approaches and models, creating a new world order. The age of digital Darwinism is here.