Incumbents fail to understand disruptive business models — 1 of 3, managing disruptive innovation
Following my introductory thoughts on how to manage disruptive innovation, I wanted to now take a deeper dive with some fundamentals on why do incumbents fail to manage radical and disruptive innovation?
There are 3 key reasons why incumbents continue to fail —
- Incumbents fail to understand disruptive business models (details below)
- Incumbents’ inability to compete with speed and agility of startups (article coming soon…)
- Incumbents underestimate the growth of technology innovation (article coming soon…)
Incumbents fail to understand disruptive business models —
Leaders and their senior managers at the incumbent companies need to learn that successful global organizations build corporate longevity by strengthening their core business first. These successful organizations then adapt business model innovation to discover adjacent opportunities by serving existing or new customers in different ways. And finally, these organizations start figuring out how to accelerate growth by creating new opportunities and new customer segments that are not related to the core business. Typically, these new opportunities originate from a customer need (jobs-to-be-done) that is serviced by a venture-funded startup in a disruptive new business model. Such startups then become an acquisition target of forward-looking incumbents pursuing growth in these new customer segments.
We all understand that incumbent companies are slow to recognize and largely unable to respond to new integrated business models that satisfy unserved jobs-to-be-done for its existing customers. It can be argued that it’s easier for startups to capitalize on such opportunities since incumbents are hampered by the imperatives of their existing business models. But it doesn’t have to be the case, as many incumbents (like Inditex — Zara, P&G Connect+Develop, Walmart Labs) have gained transformational growth when they shifted their product-focused strategies to deeply understanding their customers’ behaviour.
To better understand why some incumbents continue to fail, I began by reviewing the literature on the relationship between business model innovation (Johnson et al., 2008), knowing your customer (Christensen et al., 2016) and corporate longevity (Anthony et al., 2018). This literature review further led me to public sources on disruptive innovation, identify key practices at firms with transformational growth from Silicon Valley and the importance of technology platforms with network effects (Alstyne et al., 2016) as it pertained to the research (more on this in future articles).
From the study, it was clear while business model innovation provides organizations a powerful process to exploit the white space within their existing markets, it is equally effective in unlocking even more exciting opportunities to serve entirely new customers and create new markets.
My research also surfaced that Silicon Valley startups continue to threaten incumbent companies when it comes to opening new markets and address customers’ jobs-to-be-done as they first deeply focus on determining what barriers constrain consumption by those underserved customers (understanding customer journey, needs). Once those needs are established, startups take an iterative approach to new product development, capture continuous end-user feedback during development and leverage latest technologies, even unproven ones at times, to bring new innovative business models.
Case study: Rogers Communications Canada versus Netflix, 2016
One secret to maintaining a thriving business is recognizing when it needs a fundamental change (Johnson, M. W., Christensen, C. M. and Kagermann, H., 2008 HBR article & 2018 book).
Most companies lose market share due to strategies that fail to recognize or define the challenge they are facing. Their inability to deeply understand the changing market dynamics and customer needs directly affects how they define the challenge. When you cannot define the challenge correctly, then you cannot evaluate a strategy or improve it.
An example of this is Rogers Communications’ launch and failure of SHOMI streaming service to beat Netflix in Canada. Rogers failed (wrote-off $140 million in 2016) to recognize that the challenge was not just about streaming movies or TV shows over a cross-platform app but a combination of an intelligent technology platform, deep understanding of consumer behaviour, a creative culture, and a strong business model innovation framework (customer value proposition, profit formula). Netflix iterated on its’ disruptive business model over the years delivering DVD sales and rentals to consumers. In 2015, as Rogers was launching SHOMI, Netflix still had 5 million DVD subscribers and had fundamentally transformed its business by delivering a rich mix of original and third-party content over the web across multiple countries. As an incumbent Rogers failed to understand Netflix’s disruptive business model and lost valuable capital, time, resources etc.
Top leaders at large organizations routinely misguide their employees by sharing desired goals as strategies. These goals are often impracticable, have no plans for overcoming obstacles or tactics to solve key challenges. As mentioned earlier, incumbents can gain an advantage over fast-growing startups and better manage disruptive innovation but only when they have a strong core and a deep understanding of their target customer base for adjacent opportunities in a new business model.
Research source -
- Johnson, M. W., Christensen, C. M. and Kagermann, H. (2008) ‘Reinventing Your Business Model. (cover story)’, Harvard Business Review, 86(12), pp. 50–59.
- Christensen, C. M., Hall, T., Dillon, K., & Duncan, D. S. (2016). Know Your Customers’ “Jobs to Be Done”. (cover story). Harvard Business Review, 94(9), 54–60.
- Anthony, S. D., Viguerie, S. P., Schwartz, E. I., & Landeghem, J. Van. (2018). 2018 Corporate Longevity Forecast: Creative Destruction is Accelerating. Strategy & Innovation, (February), 11.
- Alstyne, M. W. V., Parker, G. G. and Choudary, S. P. (2016) ‘Pipelines, Platforms, and the New Rules of Strategy’, Harvard Business Review, 94(4), pp. 54–62.
- Business model innovation
- Rogers Communications Canada — Financial statements 2016, 2017