Our Guide to Navigating Disruption
Disruption is on everyone’s lips these days. Tales of Kodak and similar-fated companies are repeatedly shared at conferences and in news articles. While important, it is my opinion that we must transition the conversation – from a pure focus on the existence of disruption – to how decision makers in large corporations can navigate disruption.
As a strategic discipline, navigating disruption is by nature different than other disciplines, as disruption challenges managers to re-evaluate existing patterns and rules. In other words, there are no guarantees that the strategies, which successfully built a thriving business in the past, will continue to work when disruption occurs.
A good analogy to managing disruption is driving. Most of the time, you’re mentally on autopilot while still observing your surroundings. Occasionally, however, something unexpected happens, and your immediate responce is required. In such situations, an in-experienced or inattentive driver will most likely react instinctively by hitting the brakes. On the contrary, a more experienced or observant driver will anticipate the danger earlier on and identify options (i.e. going around, braking or speeding up) instead of a knee jerk reaction.
In this article, I will use lessons from a historic example of disruption to give you insights into how corporations can learn to identify, evaluate, and navigate the uncertain waters of disruption.
In the late 90’s, personal computers and the MP3 format were gaining momentum. Shawn Fanning, the founder of Napster, was growing frustrated about how music was distributed digitally. Before Napster, the user experience was horrible. Solutions didn’t have a user interface and downloads were often interrupted. Powered by a revolutionary peer-to-peer technology, Napster provided a user-friendly solution. Subsequently, it went viral and all of sudden millions of people were downloading music digitally (and for free)! The music industry was struggling with indecision: Should they collaborate with Napster, try to distribute digital music themselves, or go the legal route? After much thought, the industry decided to go with a lawsuit, a strategy that has worked historically.
Managers from the largest music labels wanted to protect the physical retail business model, and refused to distribute music digitally or work together with Napster. After years of legal battle, Napster finally folded. However, the taste of success was short as copies of Napster appeared immediately after. It took the music industry several years to realize that digital distribution was the future. However, the industry quickly grew desperate as several attempts to build their own online music store failed. Steve Jobs exploited the situation and negotiated exclusive digital rights for digital distribution. This move turned out to be costly, as Jobs later leveraged his distribution power to push prices down.
There are a few important takeaways from the Napster story:
- First, it’s critical that top management spend time listening to signals in the market place before an emergency might occur. It’s possible that if management had personal computers and internet on their radar, then they might have been faster to embrace new business models instead of fighting change. To master this, managers must learn to be flexible in their focus. Often managers are excellent at applying tunnel vision to optimize EBITDA. However, today it’s also critical that managers can zoom out to observe trends in society. This will allow them to spot opportunities earlier and prepare for upcoming market changes.
- Second, managers must define a new set of measures to warn them when things are heading in a new direction. One method is to observe the startup landscape and look for growth indicators such as funding and hiring. If a competing ‘disruptive’ concept gains traction, managers should evaluate how the rules of the business environment. In retrospect, it became pretty clear in the Napster case that lawsuits were an ineffective response.
- Third, while in-action is detrimental, desperate reactions to disruption can be almost as costly. In the case of Napster, Jobs solved the music industry’s most immediate problem. However, taking the easy route and outsourcing distribution also made the entire industry dependent on iTunes.
What happened afterwards?
In the end, the music industry could not protect itself defending their existing business models. Like any other entertainment product, which can be completely converted into bits and thereby replicated for free, owning such “assets” has become less lucrative. However, as replicated digital copies get easier to access, unique live experiences such as concerts and festivals are rising in demand and becoming more lucrative. This is also referred to as ‘the experience economy’ and represents the main focus of many artists and labels today.
A Structured Approach
At Vertical, I’ve developed a framework on growth spotting to help business spotting signals and preparing themselves for sudden market changes. If you would like to receive our guide, feel free to contact me directly on LinkedIn.
Written by Joachim Allerup and Johan Bender