by Kai Riemer

When it comes to Digital Disruption, one of the most vexing and important questions is:

Why do incumbent businesses have such a hard time dealing with digital disruption even when it unfolds right in front of them?

Drawing on my work and experience in this field I have distilled a number of important factors into a framework, which I name the VIRUS model. The acronym emerged conveniently from the process of isolating these factors, but carries a deeper meaning: It captures the ways in which the disruptive product or service is able to emerge slowly, steadily and unrecognised – when symptoms are first noticed by the wider market, it is often too late, and full-blown disease strikes.

VIRUS stands for: Visibility, Information, Risk, Utility, and Speed. Each of the factors are explained below.

VISIBILITY: Can’t fight what you can’t see.
Despite what the name suggests ‘disruption’ doesn’t happen suddenly. The disruptive technology, product or service usually has been around for a while before it unfolds its disruptive potential. Why then do we frequently (dis)miss it? Because the disruption typically doesn’t make sense initially; incumbents literally can’t see the disruptive potential in emerging ideas. This is because disruptive innovation is revolutionary, not just evolutionary, it is path-breaking – it challenges the background on which the industry is currently understood. Therefore it appears as irrelevant, as a niche or fringe product initially. Yet, the disruption happens when it brings about a tectonic shift in understanding of what counts as a valid product, which can catapult the disruptor from the fringe to the core and the incumbents to the margins in a very short period of time.

Think of mp3 and CDs, or the iPhone and Blackberry/Nokia – initially dismissed as fringe products they have redefined the very idea of what counts as music media or a mobile phone – a fact that appears self-evident in hindsight but not while unfolding. Neither the first generation of mp3 players, nor the initial iPhone were a great success, yet both have disrupted entire industries, relegating previous incumbents to the fringes. The problem is to know before the fact which of the many (sometimes competing) emerging ideas will have that effect.

INFORMATION: Information rules!
Software is eating the world, according to Marc Andreessen. Digital Disruptors change the nature of competition in many industries from a dominance of physical assets (hardware) to a business dominated by software and digital information and data. Digital Disruptors are ‘Information First’ businesses; they change the rules of competition by becoming very good at working with data, collecting and exploiting information to add value to the industry. They turn physical into digital industries. Because of the very different nature in their business model, these emerging ideas are easily misunderstood or dismissed initially.

Both mp3 and the iPhone are good examples of this, mp3 has turned a formerly physical into a digital product. The iPhone has redefined the mobile space from a hardware to a software dominated one. Further examples are Uber, Airbnb, Yelp or Tripadvisor all of which redefine business not by owning the physical assets in their respective industries, but by redirecting customer allocation and value creation streams by exploiting information and data in innovative ways.

RISK: Risk adversity is the greatest risk.
Incumbent businesses become hamstrung by their own success. In stable markets, asset exploitation, efficiency and compliance through process optimisation and risk management through rigorous budgeting processes all make sense and underpin success. However, when markets are disrupted those traits become the greatest risk. When faced with a disruption those structures make it hard to innovate and change, all the while the existing business acts as a powerful disincentive to necessary self-disruption. First, there is the fear of self-cannibalising what is still a profitable business in favour of a new way of doing business that is not yet proven to work. Second, internal incentive structures are built on the old way of doing business, the risk of which is that people will not be inclined to get involved with something that doesn’t add to their KPIs, leading to the “not involved here” phenomenon. Finally, budget processes are based on rigorous cost-benefit analysis; yet benefits are foundamentally unknowable when it comes to disruptive change (as I have argued previously for the NBN example). Risk adversity becomes an inhibitor of the capacity to innovate internally.

Take Kodak for example: Kodak had all the technology and patents to be a leader in digital photography, but could not pull it off for the above reasons.

UTILITY: Different, not just better!
Clayton Christensen in his work on disruptive innovation has argued that new products or services initially start out as inferior to the incumbent product, which makes them appear harmless in the short term, but that they eat away at and slowly emerge as a powerful and disruptive alternative to incumbent products. So, initially the product’s utility appears inferior, but later it’s not. My point is that the change that happens is not just one of linear improvement, but a subtle, yet radical change in the understanding of what counts as utility in the market in the first place. Disruptors are not delivering an initially inferior, then better solution – in essence, they do something different and thereby, over time, redefine the rules of the market. Once this tectonic shift in what counts as utility happens, their product appears as vastly superior – but only on this new understanding.

Take mp3 again – initially it appeared inferior in terms of sound quality to the CD (it still is by the way!). But our understanding of music consumption has changed fundamentally. When the original iPod was released many people asked “what do I need 1000 songs in my pocket for?”. Today we take mobile music consumption for granted, with streaming of anything anywhere a given reality – this marks a tectonic shift in what counts as the actual product!

SPEED: Late but slow…
This last one is the accumulation or outcome of the previous factors. Once the digital disruption is widely recognised within an industry the disruptor tends to have a strong head start on the incumbent players. And because of the inertia of existing business, the shift in perception of understanding, and the ways in which internal structures tend to hamstring the incumbents, reacting to disruption becomes an uphill battle. Remember: disruptors not only came earlier to what is now a different market environment, they are also quicker in execution…

Acknowledgements:
My thanks goes to all colleagues in the Digital Disruption Research Group, and in particular Ben Gilchriest at Capgemini, all of which have inspired and contributed to these thoughts through joint work and discussions. This article was first published on my Research Blog.

by Simon Terry

The Russians have absolute proof that the Bible is Wrong. According to the Holy Book originally there was chaos and then there was order. The Russians know from experience that this is not so. First there was planning then there was chaos. – Soviet era joke from Russia. 

In the Soviet era in Eastern Europe jokes about queues and rationing were plentiful. People laughed in an effort to mitigate the real economic damage of central planning. In dealing with disruption, the consequences of rigid corporate planning can have real damage on the ability of the organization to meet the market.

Corporate Rationing

We do not apply the same standards to our companies as we do to our political systems. To achieve their quarterly earnings per share (‘EPS’) expectations, many large corporations resort to central planning processes with a goal of excluding any uncertainty from performance. Budgets are set and allocated in advance to deliver a number. As a result, there is limited flexibility for the organization to respond to changing circumstances or new opportunities.

Budgets are often based on hierarchical silos, further limiting the ability of the systems and processes within the organization to respond. Reallocation of budgets across silos is a major challenge within a plan year, as it has consequences for power and status of leaders, the achievement of silo-based performance and incentive plans and potentially the fate of entire functions.

The consequence of this central planning is that the modern corporation is full of rationing processes and queues. The rationing goes under many names, such as strategic priorities, investment management committees, project pipelines, resource availability, etc. The business impact is that a corporation has many barriers to responding to the market around it. To deliver certainty of the EPS outcome, the organization deliberately constrains its response to improvement opportunities and declines or delays profitable customer opportunities.

Rationing in organisations can be as absurd as that under central planned economies. Resource plans across silos or measures are often mismatched so that a budget may exist for an activity but the ability to hire additional full time employee equivalents or spend the money on vendors does not exist. Growth in sales may not be matched with additional resources to manage onboarding of customers or ongoing support. Frustration of employees inevitably rises.

Rationing also has a consequence for the scale of economic activity that organisations will consider. Given the effort required to manage the way through the rationing queues small projects are often simply abandoned. Many organisations even limit entry to the rationing process to investments of a significant scale. Each of these further constraints creates more areas in which an organistion will not respond and constrains smaller or marginal lines of business.

Consequences for Disruption

If all your competitors ration to achieve comparable metrics of performance this system of corporate rationing is sub-optimal, but rarely fatal. Everyone playing the game plays with an assumption of limited resources. The big players resources will still be bigger than smaller players and dramatic change is less likely.

However, the introduction of disruptive competitors changes the game. Disruptive competitors often deliberately choose different performance metrics to incumbent players as they see the customer opportunity and the business model differently. They are not constrained by the rationing systems that restrict decision-making and action in the larger incumbent players.

Accentuating the difference in approach, many digital disruptors enter markets with an abundance mindset and not a constrained mindset. They embrace risk and experimentation. Many a traditional organization has bemoaned their ability to compete as a large corporate when your new small agile competitor has more fundraising capacity than you, is more willing to deploy capital quickly and disregards the measures of performance that you traditionally demand?

Before an organization can respond to the market in this situation, it needs to tackle the challenge of undoing its traditional model of hierarchical rationing. The organization needs to become more responsive to its market and pursue the economic opportunities in front of it, instead of an arbitrary central plan. Power to act needs to be devolved from central functions and all areas of the organisation need the capacity to respond to demand, threats and opportunities.

These change are easy to say but incredibly difficult. Change on this scale involves the creation of an entirely new system of economic activity. It changes the roles of participants in the system of the corporation from employees, to managers to the shareholders of the organization. That kind of change is complex, hard and takes time that an organization under threat lacks.

Every company that relies on central planning and rationing as part of its management process should consider the implications of this approach and go looking for the hidden consequences. The time to build a more Responsive Organisation is before it is needed to fend off a digital competitor.

At the May Day Parade in Moscow, Leonid Brezhnev and other Russian officials watched as usual as the long parade of Soviet Military power – missiles, tanks, armoured cars and the like. At the end of the parade came a little truck with three middle aged men sitting in it. Comrade Brezhnev turned to the Defence Minister and asked: “Who are they?” The Defence Minister replied “Those are three economists. You would not believe the destructive power that they possess.” – Soviet era joke from Russia