Disruption and Technology: The Elephant in the (Board) Room

S&P 500 corporations have reduced their life span by 70 percent since 1958.

Organisations have reacted to such a mortality rate by blaming technology, in part because technology became coupled with Clayton Christensen’s disruptive innovation theory, as his work happened to be published right at the time of the dot com bubble burst. Since then, technology was to be condemned for all traditional businesses falling apart. Music record labels accused the music streaming services; retail stores and malls accused Amazon; taxi drivers rushed to the streets to protest against Uber and the likes; and the banks’ hegemony was threatened by cryptocurrencies. It didn’t matter that many of these industry transformations could hardly be categorised as ‘disruptive’ (I’m using brackets here, because, as we will see later, the term has been overtly abused, and it needs a face wash).

However, companies have wrongfully reacted to such an issue by either sweeping the management of the allegedly technology-driven ‘disruptions’ under the rug of the only technology-related department: IT (calving the ‘digital transformation’ term, another overused expression), addressing it with the wrong tools (the problem cannot be managed by Marketing, PR, or by extending the corporation portfolio), or embracing it by launching new ‘open innovation’ initiatives (from incubators to corporate venture capital funds) that still have to prove their suitability to preempt, contain and manage these external ‘disruptions’.

As expected though, these measures have not stopped the business mortality rate, which is envisioned to continue at least until 2027. Technology alone failed to explain why companies kept falling apart. Because ‘disruption’ is not that much about technology as it is about the end customer.

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When embracing ‘disruption’, the various open innovation initiatives in corporations initially inherited the financial focus of non-corporate VCs (that is, financial gains), granting CVCs a notoriety for killing start-ups (other reasons include e.g. the cultural and organisational clash between start-ups and corporations, but I’m not getting into that, it’s a different debate).

As for addressing ‘disruption’ through ‘Digital Marketing’ strategies, it has the merit of granting the end customer a role in this debate. But it’s nothing more than a ‘digital’ (as opposed to ‘analog’ … I guess) technology-enforced defense mechanism against new (and potentially ‘disruptive) entrants. So it’s an incremental innovation approach, as it tries to extend an already attended and profitable customer market (while true disruption rises in a different place), so the term has nothing to do with ‘disruption’.

An extension of the portfolio also is an incremental approach. As in the case of a PR strategy, the intention is to build up even higher barriers of entry to new players. But again, portfolio growth results through sustained innovation, although blessed by the new trends in intrepreneurship and open innovation mechanisms (incubators, accelerators, VC funds …).

And finally, charging the IT department to manage a supposedly technology-caused ‘disruption’ is structurally flawed in the sense that the CIO has an exclusive internal role (it’s a cost center, not a customer-looking customer function), while true disruption (apart from not being caused by technology, as I explain below) originates externally.

‘Digital transformation’, ‘Digital Marketing’, ‘Intrapreneurship’ and ‘Open Innovation’ share then a common trait: they are incremental by nature, and they fall short of managing the true disruption that lurks corporations. True disruption has to do with the end customer, and this is where we need to dig.

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Let me first take the brackets off ‘disruption’, and explain why it has more to do about the end customer that with technology.

Using C Christensen’s Disruptive Innovation theory, we come up with four categories of companies (depending on their focus: growth or profit, and their market: mainstream or unattended), where different types of innovation take place:

  • Ever-Improving. Incumbents are found in here. These are monopolistic or pseudo-monopolistic, relatively at-ease, grown-up, marketing-driven companies that have prevailed for a long time by exploiting a highly profitable market that they consider ‘their own’. Growth is based on constantly trying (through sustained innovation) to maintain their status through differentiation. Examples include Gillette, Xerox, government-protected and hyper-regulated industries …
  • Unattended Riches. Companies in this category manage to find a brand new, or unattended, market that is highly profitable right from the start. Normally these businesses are based on services, more than actual products, in search of higher margins.
  • Start-Ups Realm. As its names implies, this is where start-ups (with ‘good enough’ products) fall in. Not the scale-ups though, as these have already commercially-proven and viable (although often still imperfect) products. The key characteristic is that these companies are permanently pivoting, and are therefore unstable, until they find their niche segment or their right business model.
  • Disrupting Candidates. These are the nimble scale-ups that everybody thrives for these days. And it’s where true disruption (of the Ever-Improving incumbents) would eventually start. They target low-end or unattended (by the incumbents) markets, often with an alternative business model (than the incumbents), and their focus is on growth (e.g. number of subscribers), more than immediate profit. Netflix when they decided to ship physical CDs across the US, Apple with its iPod and iTunes, UberSELECT … are examples of these companies.

True disruption originates by an external company that either addresses a low-cost market segment, only to gobble up a higher profit and mainstream customer, or an unattended one that has been disregarded by the incumbent. True disruption has more to do with the approach to the end customer than with technology.

And it’s not that corporations are permanently looking to disrupt themselves (should they ?). But thinking about the end customer — not the technology — would certainly allow them to respond, or even anticipate, the future (it’s not a matter of ‘if’, but ‘when’) disruptions.

(By the way, just to clarify terms, as we live in a world full of hypes and confusions: disruption and ‘digital transformation’ are not interchangeable or even related terms. Digital transformation can have one of three objectives: decrease costs, boost efficiency, or hike customer intimacy and experience; none of which are shared by a disruption process. Plus, while digital transformation is a continued introspective process that is triggered and managed within the company, a disruption is almost invariably an involuntary and unexpected process.)

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So disruption is not that much about technology as it is about the end customer. Undeniably though, Technology is a major catalyst for disruption, a vehicle, as it lowers the barriers of entry of incumbents. When Netflix started shipping physical CDs across the US, it discovered (voluntarily or not) a type of customer that was unattended by the CD rental Blockbuster chain; and the vehicle to do that was Netflix extensive online catalogue. As was the case with Amazon, that uncovered a type of customer that was looking for more, even international, shopping options, and that cared for immediacy in delivery; something that local physical stores couldn’t offer (and still can’t).

At this point though, technology means Technology, with a big ‘T’. That is, technology enablers (telecom networks, cloud computing, IoT, AI …) plus other increasingly important aspects of it, that cannot be taken for granted anymore, like Internet governance, regulation, privacy, ethics … even geopolitics and cyberwarfare, as these topics increasingly are points for differentiation and leverage.

As such, Technology needs to be managed, as part of the business transformations. And this is not a small task.

First of all, because boundaries are increasingly blurred. Traditionally non technology businesses like automakers, banks and hospitals are now increasingly about technology. Automakers are turning into service providers, actually competing for data with the telcos, the Internet giants, or even the municipalities. Goldman Sachs’ Chairman and CEO Lloyd Blankfein declared that “Goldman Sachs is a technology firm”. And hospitals are one of the remaining businesses that are yet to be ‘disrupted’, because of the patients’ lack of trust in how their confidential data would be managed, but that’s about to change. So automotive, financial services or healthcare are now described as ‘adjacent’ industries to telecoms & high-tech.

Second, because technology is going through a period of upheaval that is pegged with a dramatic increase in its level of sophistication … and entanglement. Connectivity, the backbone of all businesses, as the vehicle to reach the end customer, is ‘cloudified’. Both the telecommunications network, and the cloud as we know it, each in their own ways, are being centrifuged to the edge, wherever this is. The edge in turn acquires its relevance from IoT technologies, whose usefulness is crippled if there is no ‘intelligence’ that makes use of the generated data. Quantum computing empowers artificial intelligence and machine learning. And there is an increasing number of companies that use blockchain technology to tack the security holes of IoT. And so on. It’s the end of the technology silos.

Third, and as I already mentioned, it’s not just about technology. It’s also about governance, regulation, data, privacy, ethics and even geopolitics. Mostly Facebook (but also other social networks) has triggered a heated debate about privacy, that has sparked a movement for increased regulation, even in the US, a debate that is polarizing the “splinternet” (which consists of four models: the original libertarian model; the commercial model dominated by big tech companies; the regulated European model; and the digital authoritarian model developed by China). Amazon, Google and Microsoft quarreled over a billionaire Pentagon contract last year, not on technology terms, but on the ethical derivatives of using AI for military purposes; the debate seemed to be forgotten, only to reemerge around the military uses of augmented & virtual reality. How the US-China 5G war resolves will have a major impact on the corporate communications licenses of western service providers to operate in China. Not to mention other tech races, e.g. in artificial intelligence, semiconductors and quantum computing.

So it’s not just that technology encompasses an increasingly number of topics, that are ever more entangled, and that invades an increasing number of industries and companies that traditionally had nothing to do with technology. It’ also is that “the time for watchful negligence may be over”, as Sir Tim Berners-Lee recently declared. “We now need people with vision making a very calculated effort in an extremely deliberate way”. It’s not about managing technology, but Technology.

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Organisations need then to manage Technology, in order to anticipate, manage and perhaps even cause disruption. But the structure and the mandate of organisations, including boards, have not changed. Although businesses have reached various degrees of success when managing today’s technology landscape, depending on the stage of their transformation, and on who is assigned to the task.

The most conservative organisations chose to address the job at the management level instead of the board, by creating an ‘innovation management’ function, that is assigned to an existing, somehow technology-related but industry-knowledgable employee, who hires a technology savvy person(s) who conveniently bends to the internally perceived needs of what the company should do. Because of the company inherent desire to perpetuate its traditional industry role, the underlying lack of trust on the external hire that this path shows, the lack of recognition and understanding of the role of technology, and the lack of mandate and resources that underlays the constitutionally mere scouting flavour of this role, investors, shareholders, and candidates should avoid these companies, at all costs.

Move a level up, and corporate incubators, accelerators, and VC funds bourgeoned in parallel to the introspection of industries and organisations. CVC funding has flourished to USD 53 billion in 2018 at 38% CAGR since 2013. Nevertheless, only a handful of CVCsare successful. The reasons are multiple: the discrepancy in the goals of corporations and ‘participated’ ventures, goals that actually fluctuate depending on the many types of these businesses, from early stage start-ups, to commercially proved scale-ups; the differences in company cultures, organisational structure, and processes (or lack thereof); the financial impatience of the incumbents that makes relationships specially sensitive to the corporate economic cycles; … but above all, most CVCs seek to boost (in terms of sales and/or strategic differentiation), the existing corporate business model. CVCs often then become fashionable tools for business model perpetuation, not transformation, even less so, disruption.

There is another reason why an exclusive CVC approach disappoints in predicting the true disruption of organisations. Start-ups are not the only source of change. Companies have to analyse what players in other industries are doing. Every single company out there, in or out our industry, is susceptible to become a partner or a competitor of ours. Corporations need to monitor outside of their own industries. Although two utterly different companies, in two entirely different industries, Daimler and Nokia are now at odds because of the use of telecommunications patents by the automotive industry … and none of these two companies are start-ups precisely.

Other organisations decide to recycle some of their existing executive corporate functions, but these roles don’t actually have the mandate to implement, or even to lay out, a business model change for the company, even when they are charged to ‘look out’ for new Technology leverage. Some companies initially call off the customer-facing CMO for help, but again, this approach is more incremental than disruptive. Although it certainly helps to better understand the existing customers’ needs, it does not create new approaches. On the other hand, the CIO, in case you are thinking of it as the most meaningful technology candidate to look out for disruptions is an in-company implementation function, and like the COO (who overtakes the organisational transformations that result from e.g. an M&A opperation), works inherently inward.

Even more recent corporate functions, like the CDO and the CISO, because they were born out from the need to address specific issues holistically (including technology, but also legal, ethical and privacy concerns, among others), are necessarily too focused — in data and in security management, respectively — to actually take on business disruption (the ‘digital transformation’ that targets the amelioration of the relationship with the end customer is indeed a daunting task, although still within the border walls of the existing business model).

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Disruption management is both a pre-emptive as well as damage control task, one that clearly makes the cut to be assigned to the board. But the management of Technology and its role in the future disruption of corporations is far from resolved, because of its complexity and nuances. Technology (with a capital ‘T’) largely still remains a tiptoed topic that the corporate board needs to address.

Carlos Ruiz Gomez — International Strategic Alliances

Telecommunications, Media & High-Tech | Madrid & London

cruizgomez@gmail.com 00.34.672.025.194 www.linkedin.com/in/carlosruiz @cruizgomez