Hi Everyone,

We've completed the first month of a brand new decade and I'm reminded of Charles Darwin's statement, "It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change". He could easily have been writing about business today. It's the ability to anticipate the future and adapt quickly to new market developments that separates those that thrive from the soon to be extinct. As you'll read in this newsletter, it's not that industry disruptions are anything new, it's that they are happening with an ever increasing pace. Prepare for them, management them; read on to understand how.

Enjoy - Cam

CTipping@iibd.com

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Volume 20 Newsletter 1

Disruptive technologies

Early in my career we conducted a program for Kodak. This was when Kodak was still selling chemical film, along with disposable cameras and making buckets of money. It was also a time when the first digital cameras were just hitting the market. These innovative cameras were bulky, produced grainy pictures and were mostly used by newspaper reporters excited they could instantly transmit newsworthy photographs back to their publication for printing.

Approximately 30 participants attended the program but something peculiar happened as the room filled up. On one side of the room sat the younger tech looking crew who as it turned out were part of the digital transformation team preparing Kodak for a new world of digital photography. (Remember it was Kodak who developed the first digital camera). On the other side of the room sat the chemical engineers who had grown up with Kodak, a ‘chemical film’ company. Even though both groups worked for the same company it was as if they had lined up against one other on opposite sides of the room; one side playing offense vs the other playing defense in an epic struggle to shape Kodak’s future.

The future, as perceived by the older chemical engineers, was five to seven years away as many them expressed a desire to ride the chemical film train just a little bit longer until they could retire. The future for the digital crew was more immediate. They could sense the urgency needed to transform Kodak quickly to catch the digital wave that was reshaping the industry. As we all know, Kodak missed that wave.

Contrast Kodak to Netflix which, in the late 1990’s, competed with Blockbuster in retail videos. In 2007, when video streaming technology arrived, Netflix quickly pivoted to offer online videos and later began creating their own content. Today they are a pioneer in AI tailoring their output to their customer’s interests. It wasn’t that Kodak didn’t know digital was going to become big; they just couldn’t overcome the inertia of the chemical film team. So how was Netflix able to switch mid-stride from the tried and true to embrace the innovations of the future while Kodak couldn’t escape their past and make what was an obvious transition?

Rebecca Henderson, a former professor at MIT, proposed a theory about change which suggests that if there is a “sustaining change”, a new type of film or a new generation processor for example,  then the current business leader will most likely succeed. However, if the industry change is a “disruptive change”, think chemical film to digital cameras or traditional energy to green energy etc., then the market leader is likely to fail. Why they fail is vital to understand, so you can benefit from disruptive change rather than fall victim to it. 

Look at any company’s portfolio and it’s likely that only a select few products or services are driving a large majority of their profits. For that reason, the incumbent business units have a large voice in how the business is run. It seems it’s almost impossible to have a sustaining “status quo” culture and a disruptive “innovative culture” thriving in the same organization. The “sustaining” culture is often so entrenched and so empowered by its historic ability to generate revenues from existing customers that they quash the innovators even when they know it will ultimately kill their organization.

This is what was happening at Kodak. On the surface they did all the right things; they listened to customers, innovated new film products but still fell victim to a disruptive technology that, initially, may have seemed irrelevant and economically unviable. It’s not that this market leading company didn’t innovate – they did  – it’s just that they continued to innovate within the old technology. Like an old world naval architect putting more sails on ships to make them faster (true story) to complete with new steam powered vessels, the incumbent market leader quickly became redundant. 

At Netflix they understood that video streaming was a disruptive technology and immediately separated the video streaming team from their ‘cash cow’ video rental team creating a cultural distance complete with different systems and performance metrics that could not be downtrodden by the old guard. When championing a disruptive change, a complete separation of business units is the only way to bring about the shift without it being sabotaged by the incumbent business team. Netflix successfully used this approach.

What can we learn from Kodak and Netflix:

·  Understand the difference between sustaining change and disruptive change.Disruptive changes can often look cumbersome or appear to bring little value to your existing customers but the potential to transform the industry in the longer term is profound.

·  Separate teams: Teams that work on sustaining business with incremental change vs teams that work on disruptive change can’t work in the same building. These are two different animals that can not share the same cage without devouring each other! 

·  Create different performance metrics for disruptive technologies: NPV and other similar performance criteria used to measure new “sustaining” technologies are counter productive for innovative “disruptive” technologies. This doesn’t mean anything goes however it does mean the metrics for “disruptive” technologies are tilted toward market development rather than immediate ROI.

Darwin taught us that ecosystems evolve even though often the individual species may not. The same appears to hold true for organizations. Disruptive technologies are going to be introduced, evolution will happen and, while individual business units may not be able to evolve, your business must. In the face of disruptive innovation be ready to create the spin off business units that can incubate newly hatched ideas and adapt and prosper when your time comes.