Good to Great or Good to Gone? Why scale and success can be the downfall of companies facing disruptive change
There’s a good reason why half the companies on the Fortune 500 list in 2000 are no longer there today but you don’t even need to go back that far to see the impact of disruptive change and how it can lead to the downfall of once-great organizations.
Remember BlackBerries? Or, heaven forbid, PalmPilots?
Not long ago, those handheld devices dominated, yet it’s amazing how quickly we’ve forgotten the original PDA or how we’ve somehow managed to live without that little keyboard on the BlackBerry.
We weren’t the only ones who found their disappearance unimaginable. When news broke in 2006 that Apple was developing a phone, can you guess what Palm’s CEO Ed Colligan was quoted as saying?
“We’ve learned and struggled for a few years here, figuring out how to make a decent phone…PC guys are not going to just figure this out. They’re not going to just walk in.”
Walking in was only the beginning. To be fair, poor Ed wasn’t alone in minimizing the disruptive threat Apple represented. Even RIM’s co-CEO Jim Balsillie saw the iPhone as “kind of one more entrant into an already very busy space” and mistakenly went on to say, “In terms of a sort of sea-change for BlackBerry, I would think that’s overstating it.”
Quite the understatement there on Jim’s part.
Of course, they aren’t the first or last CEOs to get it wrong. Right on their heels in 2008, BlockBuster’s then CEO Jim Keyes said to the Motley Fool that Netflix wasn’t “even on the radar screen in terms of competition”. Well, we all know how that ended.
The business landscape is littered with the carcasses of companies whose leaders misread the tea leaves of disruption, or those who ignored the peripheral players in their space until it was too late. Others didn’t catch the change in the prevailing winds of customer preferences, instead holding fast to their historical assumptions and relying on their market dominance and scale.
While it’s one thing to see new entrants coming and react too late, it’s another to be blindsided by entirely new business models. Recent examples abound of companies and industries that felt mistakenly secure about the moat they’d built to protect themselves from land invaders and traditional competitors when, all the while, disruptive newcomers were swooping in overhead. Just ask any taxi owner in NYC who’s lost over 70% of their market share to Uber and Lyft and seen the value of a medallion fall 90% in what’s felt like a New York minute.
Too Big to Fail? Too Hard to Change
Large incumbent firms that recognize disruption and fear its impact still face another kind of dilemma: their own scale, complexity, and fixed ways of doing things become the real obstacles to change. Compared to the momentum of disruptors, the incumbent’s inertia is of little match. It may be said that where there’s a will, there’s a way, but that way is often not obvious and always uphill for large, traditional organizations.
The “Incumbent’s Dilemma” — an increasingly prevalent phenomenon for successful companies — is the painful recognition that the assets, products, processes, or business models that once made your company a success don’t guarantee success in the future and may actually hold you back. What got you here not only won’t get you there but may actually prevent you from getting there. The Incumbent’s Dilemma manifests itself in a hesitance to go on the offensive or to disrupt your own business model, especially if it involves cannibalizing current revenue streams.
I recall Doug Leone, the famed venture capitalist at Sequoia Capital, warning of this malaise. He said boards need to be vigilant about stopping successful CEOs from getting into an “if it ain’t broke, don’t fix it” mindset. Instead, he believes healthy paranoia is a good thing and “if it ain’t broke, break it” is the secret to inoculation against disruption.
The dilemma faced by incumbents comes about as a result of sunk costs and all the legacy processes and policies, silos and systems, models and mindsets that build up like scar tissue inside an organization over time.
While the nature and degree of the Incumbent’s Dilemma differ across industries, traditional organizations are often weighed down by some common features, including:
- Extensive physical footprints or assets in a world that’s increasingly virtual;
- Well-defined processes that are efficient but not agile;
- Stagnant channels and long-term established partners that become less relevant as your business ecosystem expands and new players or marketplaces emerge;
- Multi-year product cycles in the age of continuous delivery;
- Rigid hierarchies and conformist cultures against the growth of the gig economy;
- Legacy systems and silos of information in a world of real-time response; and
- Industrial-era regulation.
Only an objective eye by discerning leaders can decouple the return on these various “assets” today versus the opportunity cost they represent tomorrow.
Ironically, another contributor to the Incumbent’s Dilemma is a tenured workforce. While experienced professionals certainly offer a range of benefits, an over-abundance of them heightens the risk of rusting from the inside out. Diverse and innovative ideas often come from infusing new blood into an organization. Otherwise, a form of intellectual stagnation or, worse, a collective arrogance that you “know the business better than anyone” can take hold.
There is no more damning internal manacle than that of a legacy mindset.
It isn’t so much that these new (digital) disruptors have lower barriers to entry (although they often do); it’s that incumbents have much higher barriers to exit. Simply put, it’s really hard to change how you’ve always done things to embrace a whole new world order. However, that’s exactly what digital transformation requires.
A Failure to Act: The Incumbent’s Demise
Success is indeed a seductive mistress whose charms can lead companies to ignore the stealthy forces of disruption. It can also lull you into believing that you truly understand your customer’s needs and desires. The founder of ServiceNow, Fred Luddy, reminds us regularly at our board meetings how important it is to pay attention to what customers like about new competitors and to avoid sticking our heads in the sand to that reality.
A now almost classic example is the reimagining of the hotel as we know it. Forever the bastion of the hospitality industry, the legacy hotel giants didn’t anticipate the turning tides until AirBnb attacked them on a front they never even thought to protect. After all, hotel chains had a mass-market product, a solid customer base, and consistent physical presences all across the world. Why should they have worried?
To any major hotel chain (with billions of dollars of real estate on their balance sheets), it was inconceivable that a room in someone’s house would be a threat. To Fred Luddy’s point, what they missed is that AirBnB wasn’t selling a room: they were creating an “experience” that allows people to “live like a local” in any corner of the globe, all while unlocking a new form of economic empowerment for homeowners worldwide.
Beyond a new experience, AirBnB’s model offed customers a whole new way to access accommodations with transparency and personalization that met changing customer expectations. AirBnB eliminated the need for third-party website bookings, the clunky check-in lines, and the sterile and often charmless experience of a beige-clad hotel room.
Axing the concept of “sameness,” AirBnB gave customers an array of hosts and homes to choose from, a concept that was lost on many legacy hotel executives: “Our guests don’t want the AirBnB feel and scent,” Christopher Norton, EVP of global product and operations at the Four Seasons, said while speaking to Fast Company.
His point is right for some; however, with 5 million listings and an average of 2 million people staying in an AirBnB each night, it clearly works for many. Comparing AirBnB’s “service” to a traditional hotel room is like apples to oranges. Instead, what AirBnB has done is set a new bar in the “experience economy” for incumbents and disruptors alike.
Another blind spot for incumbents is the overestimation of how complex or difficult it is to do what they do. In large organizations, processes are formed, added to, and altered over the years, which artificially inflates the difficulty of execution. When you live in a world of opaque and complex processes, it’s hard to appreciate the degree to which technology platforms have eliminated the need for middle-men and the many steps they perform.
Think about how inconvenient and clunky it was to transfer funds or wire money in the past. Now compare that to the instantaneous and entirely self-serve “process” of Venmo today — a palpable difference in the customer experience.
In June 2018, Amazon beat out Walmart to purchase PillPack for nearly $1B, their fourth largest acquisition. PillPack allows users to buy medications online in pre-made doses. On the day of the announcement, pharmacy providers Walgreens, CVS Health, and Rite Aid collectively lost $11B in stock.
When Walgreens CEO Stefano Pessina heard of the deal, he said he’s “not particularly worried” about the PillPack deal: “You see, the pharmacy world is much more complex than just delivering certain pills or certain packages.” Sounds like Stefano might do well to take a hard-learned lesson from the book of Jim Balsillie.
The message here: don’t underestimate the degree to which customer expectations have irrevocably changed. Equally, don’t overestimate how complex your business is, especially when compared to how simple it could be in the hands of the “one-click” Amazonians.
In essence, incumbency comes in many forms and is as much a mindset as it is a business model. Overcoming the Incumbent’s Dilemma requires prying open the window of change, taking bold and daring risks, and embracing a world where assets can quickly become liabilities and power has shifted to consumers whose expectations have irrevocably changed.
Past success is only a predictor for future success when companies and their leadership are vigilant about disruptive forces and are adaptable to change. As soon as inertia or complacency sets in, vulnerability follows, especially if an aggressive disruptor is on the horizon (and they always are).
While history can be a harsh judge of leadership, there are only two real predictors of successful transformation: (1) an acknowledgment that there’s a problem and (2) a desire to do something about it.
Looking back, Ed Colligan, Jim Balsillie, and others failed to acknowledge their problem, until it was too late.
To avoid a similar fate you need to ask yourself what the major vulnerabilities in your business model might be? Where does the vision for your organization fall short of the expectations of all your constituents? What are your elements of incumbency?
Perhaps most importantly: How willing are you to bravely face the future and disrupt your own business before someone comes along and does it for you?
Dr. Anita Sands is an independent board director, international public speaker and creator of the #wisdomcards series. She writes and comments regularly on issues relating to boards, technology, and diversity & inclusion. Find out more about her at www.dranitasands.com or follow her @dranitasands. All comments personal.