McKinsey and Company recently published “An incumbent’s guide to digital disruption.” In the guide, they suggest that all incumbent businesses are susceptible to digital disruption and the four phases that executives should be aware of and plan for so as not to go the way of the dodo bird. Siting examples for the music, newspaper, and travel industries, McKinsey charts the path of creative disruption. Below is my interpretation for small to mid-sized B-to-B firms, having lived through digital’s onslaught of the advertising business.
Creative Disruption is inevitable.
All businesses have life cycles. From inception, where agility, knowledge acquisition, and risk-taking are valued, to demise, where holding on to legacy processes and outdated product offerings are the harbinger of death.
Twenty years ago, the advertising business was predominately print-oriented. Company revenue was generated from print advertising, brochure production, sales collateral, and media placement. The internet was in its infancy and the stock market was looking for a set of metrics to assign a monetary value to early practitioners of online sales such as Amazon.
Phase one – blip on the radar
The first phase associated with creative disruption is a faint ripple in the pool that signals a change in the business environment. While not an immediate threat to the core business, management continues to be occupied with generating monthly reoccurring revenue, building the balance sheet, and hoping that perhaps it’s just a passing fad.
This is where management should be asking the following:
- What is this?
- Can this affect our business?
- Can we utilize this to gain a competitive advantage?
- What new skills do we need?
Phase two – what side of this trend are we on?
Phase two requires investment in rethinking where the business is going and anticipating how the customer will select and use the product offering. A good example of this was Apple’s introduction of the iPod in 2001, which offered music for sale by the song instead of purchasing an entire album, delivering the purchase using iTunes via the internet.
At this point management should be concerned with:
- Experimental ventures
- Building market share
- Strategies that take advantage of the trend
- Identifying efficiencies that will maintain profitability in a shrinking profit pool
Stage three – hurry, the future is now
Phase one and two set the stage for the early adopters to become disrupters of incumbent businesses. Now management is confronted with a choice: hunker down and protect the core business by cutting research and development, reducing staff, and generally tightening the belt, or embrace the changing tide and start the rejuvenation process.
The danger at this phase is that management will select an incubator business demonstrating high profit margins and saddle it with unrealistic expectations as the saving product line. The problem is that the incubator business is burdened with internal legacy systems that are inefficient and not suited to the scale of market share that the new product line can capture or the profits it can deliver.
Phase four – yearning for the glory days
At this juncture, the disrupters have reached critical mass. Their business model is the new normal and profit streams are much shallower. Incumbent businesses that did not see and react to the first three warning signs now find themselves in the unenviable position of a slow swirl to the bottom of the pool with declining business activity and revenue generation. Those that heeded the warning signs and took the necessary steps to understand the new challenges and retool their businesses are now faced with the relentless onslaught of digital destruction and the challenges of constantly cannibalizing their core business to reinvent another one.