Thursday, January 31, 2019

How to know when the old models don't work any more

As Malcolm Gladwell and other business writers have found, it is entirely possible to write a compelling article around a rather obvious point, and still hold the reader's attention.  As a case in point I draw your attention to this article - entitled Why Corporate Innovation is so Hard.  This article was clearly written by a communications master, because it has an attractive title that seems to address an intractable problem (and suggest an answer) and is based on a premise that seems inescapable:  too many companies fail to innovate because they trust their existing understanding and the existing perceptions of the way the world and the market work, while missing key signals that a disrupter finds, interprets and implements.

The article quotes a book (The Disruption Dilemma) writing:
Disruption describes what happens when firms fail because they keep making the kinds of choices that made them successful.

This is both extremely insightful - because it is true, and extremely obvious - because it happens all the time.  Senior executives trust their understanding of the market and prefer to fail based on models of the present and recent past, where they were successful, rather than risk anything on models that aren't proven.  This is, also, true of all recorded human history.

But when do the existing models fail?

I've written previously about Tower Records, which was the largest distributor of music on physical formats for decades.  As the physical format shifted from records and 8 track to cassette and then CDs, Tower made the shift, and stayed in the lead.  However, when Napster and others started distributing digital music, and then Apple pioneered the iTunes model, Tower collapsed almost overnight.  Notice that the core business - distributing music to consumers - didn't really change.  What changed was the media and the business model.

What I was hoping the original article would address itself to is:  when should executives know that their existing models may not work any more?  What are some key trip wires, canaries in the coal mine, and so on that signal that the old models are failing, and the time to take a significant risk on a new model is nigh?  Answer that one and you'll have an army of CEOs knocking on your door.

Trip wires and canaries

The old trusted models are old and trusted for a reason.  They work, right up until they don't work any more.  It will take a significant amount of evidence for any established company to adopt a new way of working that isn't aligned to their old trusted models.  What they will need are really clear signals that the old model is failing, and cannot be restored.  For this to happen you need clear signals or trip wires and people who can act decisively when they encounter those dead canaries.

We actually have two case studies playing out right now where we can observe some moderate success and some reasonable failure from two blue chip companies: IBM and GE.  IBM saw the canaries and had a relatively decisive leader who made the shift from hardware to services.  GE read its own press and failed to see dramatic shifts in its business model and are now paying the price.

IBM's canaries - IBM's leadership recognized that hardware was becoming a commodity, which placed a lot of IBM's revenue at risk.  IBM wasn't a big player in software, where there are significant margins, so it had a few choices - double down on hardware (the trusted model) to squeeze out earnings or take a risk on services.  IBM went with services, selling most of its hardware division and making a transition to much more services revenue.  The canaries in their coal mine were 1) rapid declines in margins for hardware 2) the increasing "as a service" model for computing power 3) the cost of entry into software.  This is a very high level analysis - I'm sure there were other canaries.

Sensitivity Analysis

Perhaps the best canaries to watch in your specific business are those that have the greatest sensitivity to change.  IBM was highly dependent on hardware sales, and the sales as well as the margins were falling and not coming back.  Given how sensitive IBM was to those changes, it made sense to shift.

Which areas of your business are most susceptible to change?  What criteria, if it changes suddenly, dramatically and perhaps permanently, would create the most difficulty for your business?  If you understand these, and track them, you'll know when the old model starts to fail, and when it's time for truly disruptive innovation.

Scanning for trends / understanding potential scenarios

What Apple did well with iTunes and digital music is to understand the trends.  Just because Napster was illegal didn't mean what it was trying to do wouldn't work.  The trends pointed to a shift from physical media to digital media.  Whoever understood that shift and the implications would win.

Doing trend spotting and scenario planning is the innovation version of free money.  Having a better understanding of how the future might unfold, and the potential outcomes and scenarios will help you spot the dying canaries while the actual canaries are still relatively healthy.  Why every company in companies with a significant amount of change doesn't have an active trend spotting and scenario planning team is simply beyond my understanding.  It takes very little work to get a lot of very valuable insight.

As one of my colleagues used to say, it's not the fall that kills you, it's the sudden stop.  In much the same way many corporations spend time examining factors that are changing slowly and with predictable pace, and neglect to consider the factors that could change suddenly and drastically.  I made this point recently at a speaking engagement.  What factor changed the healthcare market suddenly and drastically?  Not technology, not the availability of doctors, not different service models.  What changed suddenly was a political phenomenon.  The point here is to understand what could change suddenly and have dramatic impact on your business.

The Timing Trap

There is a timing trap, however, much like timing the market.  You will never be able to predict exactly when or if a specific feature or characteristic of the market changes.  Since you cannot know with any degree of certainty when the market will change, and since it is more volatile and subject to VUCA than ever before, it's clear that your team should be experimenting with disruptive innovation all the time.  Otherwise you'll wait until conditions are proven to have changed before you start innovating, which will be too late.

Change is happening, and its happening faster than ever, with more dramatic results.  In the past companies would wither slowly, but today entire industries are shifting.  Companies with the greatest exposure - those in highly competitive and mostly unregulated markets - would seem to have the most risk, but here too is an unexpected twist:  so much power now sits in the executive branch, with regulators and administrators, that what seems highly regulated and protected could easily change very quickly.

For all of these reasons there is a good argument to have a constant disruptive innovation activity underway, fueled by trend spotting and scenario planning, framed by the aspects of your business that are most sensitive to sudden, unexpected change.
AddThis Social Bookmark Button
posted by Jeffrey Phillips at 9:26 AM


Post a Comment

<< Home