On the Eve of Disruption

Before an innovative new entrant upends your market and steals your customers, find a way to do it yourself.
Keith ButtonMay 21, 2014

Finance can still learn a lot from the theories first advanced 17 years ago in Clayton Christensen’s now classic business book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Christensen, who coined the phrase “disruptive technologies,” showed how such technologies could undermine the leading companies in a market if they failed to react in time.

Among the book’s case studies were hard disk drives and mechanical excavators — markets that took a couple of decades to evolve radically. Today’s markets, however, move at warp speed, adding an immediacy and urgency to the book’s argument. “It’s not a question of if you will be disrupted; it’s a question of when,” says James McQuivey, a principal analyst at Forrester Research. “And that when is no longer a decade away; it’s probably a couple of years hence, and maybe even less than a year, depending on your industry.”

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14May_Strategy_p29aThat’s a scary thought. Even when innovation was slower, highly inventive companies failed to hear the footsteps of future competitors — or they heard them and brushed them aside. When a company like Microsoft or IBM loses market dominance, the lost opportunities that “should have been obvious” (like the iPad and iPhone) are not hard to find, says McQuivey. But viewed from the perspective of the IBMs and Microsofts, and the thinking at the time, their decisions look perfectly reasonable, he says.

“If you’re Microsoft and you make billions of dollars every quarter on two products, Windows and Office, and someone says to you: ‘You know, we really should put a couple of hundred engineers on a completely new thing that no one has ever bought and that is unlikely to succeed.’ That is exactly what the decision looked like from the perspective of a Microsoft.”

Faster and Cheaper
Today, digital technologies make it possible for competitors to enter and disrupt markets quickly and very cheaply, says McQuivey, whose own book, Digital Disruption: Unleashing the Next Wave of Innovation, was published in 2012.

Take the ink-jet printer business. It still makes bushels of profits for Canon, Hewlett-Packard, and others, but it is a shrinking business, and it’s getting smaller. At one point, the market’s evolution might have been estimated to take 10 to 20 years, but the arrival of Pinterest and other digital solutions that enable people to share photos and documents online has accelerated the process.

These days, it wouldn’t be considered unusual for a digital application to expand from zero to 100 million users in two years. Messaging service WhatsApp, for example, was founded in 2009 and had 450 million active users by the end of 2013. (Facebook acquired WhatsApp in February.) Such a scenario would have been unimaginable in telecom 10 years ago.

An example of a disruptive technology that could destroy companies and perhaps even entire sectors relatively quickly is 3D printing, says Stuart Werner, national managing partner in the technology practice at Tatum, a strategic advisory firm. In biotechnology, for example, 3D printing has potential for making human organs and bones from layers of cells, adhesives, and other materials. In manufacturing, 3D printing could enable competitors to steal intellectual property, copying parts and products almost exactly, Werner says. Companies using the technique could offer a much faster time to market and a greater ability to customize their products.

The CFO’s Role
The increase in the speed and scope of disruptive technologies should raise questions about a company’s approach to innovation. “You can no longer count on your last five years predicting how your next five years of investment should go,” says McQuivey. “You should actively have some portion of your revenue or your assets set aside as funds dedicated to disrupting yourself, choosing to do to yourself what start-ups around you are trying to do to you.”

The CFO’s role in innovation is to provide a funding mechanism and a supportive attitude, says McQuivey. As an example, he cites the finance chief of a large publishing company who was summoned to discuss investments in innovation for the coming year with the CEO and other managers. Asked to explain how the company could invest in potential projects, says McQuivey, “the CFO essentially said: ‘OK, here are some areas of our budget that we can play with. If you really care about this, there are some things you may need to sacrifice — what would you be able to sacrifice?’” Instead of acting as “Dr. No,” the finance chief made himself value neutral, explaining the costs and supporting the plans that others believed strongly in.

14May_Strategy_p29b_v3“It was a very large success,” McQuivey says. The CEO later asked for five new, innovative ideas from some of the business divisions, giving them a six-week deadline. The company set aside $1 million to finance further development of the ideas.

Internal funding for innovation is similar to angel or venture capital funding — initially, only a relatively small amount of money is invested to see what the people with the ideas can do, and if they do well then more money is allocated, McQuivey says. Of course, finance chiefs will want to measure the returns on that money. McQuivey proposes a “return on disruption” metric, which is intended not to replace return on investment but rather to show whether learning occurred, even if an idea didn’t lead to a product that produced a certain amount of revenue within a given period.

McQuivey asks companies to measure the number of new ideas they generate, the number they test, and the speed at which they test them. Regarding the latter, he suggests a six-week limit, explaining that it’s cheaper than open-ended testing and forces the company to test more ideas, which increases the odds for success.

Detecting Threats
As for hearing the footsteps of new competitors, Tatum’s Werner believes CFOs need to “be the driver within the company of exploring technology impacts and what [technology] could potentially do to help the company, or how it might be a threat.” At public companies in particular, finance chiefs should be aware of potentially disruptive technologies so they can properly disclose the risks they pose to the enterprise, he says. They should also make that evaluation of the competition part of the planning process.

One simple method for spotting threats is to take the most popular search engine terms for a company’s products and search on them in the App Store and Google Play, says McQuivey. Typically, a company will find dozens of other companies trying to get into its business, not by making a product but by controlling some aspect of how it is purchased, used, or considered, he says.

A soap maker like Unilever, for example, might discover all kids of apps aimed at soap: shopping tips and coupons, reviews, and product comparisons and rankings. Unilever could develop its own apps to compete or, more practically, partner with or buy the app makers, so it gets to participate in that digitization of its product.

Why do good companies and good managements fail to take such steps or innovate in other ways? As Christensen noted, “customers and financial structures of successful companies color heavily the sorts of investments that appear to be attractive to them.” His advice is straightforward: Don’t get trapped in the past.

Keith Button is a freelance writer based in New York.

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