Every business needs to be competitive within its industry. Sometimes, a bigger problem emerges because commoditization, consumer behavior changes or new innovations render whole product categories unprofitable. With careful observation, planning and action, leaders can navigate their companies successfully through these shifts.
The dramatic industry shifts, called disruptions, have felled or crippled companies that couldn’t adapt. Blockbuster died when it didn’t anticipate digital video. Bookstores like Barnes & Noble suffered when Amazon hit the scene, and fell even further with the emergence of digital books. The classic case of a company not coping with disruption is Kodak, which didn’t anticipate digital photography. Even Microsoft was caught flat-footed when the PC market flattened.
Technological shifts aren’t always the causes of disruption. Mid-tier department stores like Sears and JC Penney are on the ropes because consumers moved to discount and specialty stores.
Disruption need not be a death knell. Leaders facing disruption need to act, and to act quickly. Many companies have done well moving into different markets. Scotch Tape maker 3M was originally a mining company, but that didn’t pan out. The key is to acknowledge the change and respond accordingly.
Bring in outsiders
Often, it takes an outside observer to recognize industry disruption. “It turns out to be very hard to see it while the disruption is going on,” says Hank Lucas, information systems professor at the University of Maryland’s Robert H. Smith School of Business. “There are signs of it; the trouble is not everyone agrees what those signs are.”
Managers within the company have been rewarded for doing what they’ve been doing, and are less likely to buy into radical change, Lucas says.
Other times, it’s readily apparent. “The day that Google came out with turn-by-turn directions, stock in Garmin, Tom-Tom and Trimble Navigation plunged. That’s a very clear immediate disruption,” he says. “The digital photography disruption took 10 or 12 years. It was obvious to most people before it was obvious to Kodak.”
“You can probably do some focus groups with people, polling and surveying to giving them options,” Lucas says. “Set up a forced-choice situation. Ask them what would you do today, and what would you expect to be doing in three years. Do market research, just as you would if there’s going to be a new product. “
Ideally, the outside consultants should be from a different industry, says technology analyst Rob Enderle. “If it’s anyone too close, they’ll lock into what we’re doing, and they won’t see the change,” he says.
In addition, the outside firm needs to be respected enough and authoritative enough so your executive team will accept a verdict, even if it’s not what you want to hear.
“The person has to be independent enough to see the changes and authoritative enough so people will listen,” Enderle says. “Otherwise, you come up with a report that says ‘I told you so,’ instead of having an effect.”
Lead the disruption
One of the best ways to overcome industry changes is to be the disruptor. When Apple, formerly Apple Computer, saw the decreasing margins from the PC business, it introduced the iPod and later, the iPhone, disrupting both the music and smartphone industries. The company that was once a computer company is now a consumer electronics company.
When Microsoft saw Apple’s success with the iPod, the Redmond, Washington, company decided to compete by building a better iPod, according to Enderle, but it should have anticipated the next wave. Microsoft even had internal meetings exploring combining a music player with a phone. If Microsoft had done that, Apple might have been the company playing catch-up.
‘Eat your own children’
One thing that’s really important is to not be afraid of letting your new product cannibalize the previous cash cow, something Enderle referred to as “eating your own children.” After all, the existing market is the one that’s going flat. You’re making your bets on the emerging product.
For instance, in the financial year that ended Sept. 27, 2014, Apple made $102 billion in iPhone sales, but only a quarter of that in Mac sales. In units, Apple sold 169 million iPhones, but only 24 million Macs, which was a 12 percent increase over financial year 2013, which was down 7 percent from the prior year. They’re not complaining in Cupertino, California.
Not every company is Apple. Enderle says Apple is the only company he knows that has disrupted multiple markets. Another strategy he recommends for entering a new market is to buy another company with the technology you’re seeking.
Leaders with patience, courage, and a willingness to listen to hard truths from the outside can bring their companies to survive disruption.
Tags: Business Leadership