A Call For More Measured Responses To Digital Disruption

We’re wrapping up a year in which digital disruption was the hottest topic around — it’s hard to escape the endless demands to get aboard the digital train or else. But every now and then a study or report comes through that challenges some of the conventional wisdom of what we’ve been hearing over and over in the media echo chamber. Such is the case with a recent analysis published in the Harvard Business Review by Julian Birkinshaw, professor at the London Business School, which suggests that digital players have not been wiping out established companies, and most of these legacy companies are alive and well, thank you.

Read all the media, analyst reports, and listen to enough conference speakers, and one can be forgiven for assuming that companies have been collapsing right and left, getting crushed under the digital steamroller and associated digital-native businesses. However, there may have actually been less bloodletting among established companies than thought, Birkinshaw states.

“While many believe that technological disruption has been rampant for decades, the internet has actually caused much less creative destruction than people think,” he writes. Of the top 500 companies that existed in 1995, 483 are still around. Seventeen new companies have elevated to that list since then.

There’s a tendency to overreact to potential digital threats, Birkinshaw adds, noting that the disruptions wrought by digital upstarts tend to extend over years, giving incumbents time to regroup and move in new directions as required. Some predictions of doom extend back decades. “Many observers claim that we are on the cusp of full-scale disruption in industries such as finance, insurance, and education,” he says. “My research shows that people have been making the same predictions—erroneously—since the 1990s.”

Birkinshaw also addresses questions about the methodology that led him to his against-the-grain conclusions, stating that he used sales data as a metric versus stock price value. He also mentions that his analysis is limited to the top 500 global companies, and therefore does not track the fortunes of the middle to small business market in the digital age.

What about the once-great companies that have seen their businesses crumble with a competitive onslaught? Think Nokia, Kodak, Sears, and Blockbuster. While these highly visible stories of decline have struck fear into many executive hearts, it’s also notable that over the past three decades, incumbent companies have remained in leadership positions, Birkinshaw relates.

This doesn’t mean letting your guard down, of course. It should be noted that these incumbents are, in many cases, well-run companies that embrace cultures of innovation, enabling them to adapt to new market realities. After all, the top 500 companies in the world didn’t get where they are with sloppy management and ill-conceived products. And, very, very importantly, they have the resources to hire, retain, train and incentivize the very best people across all professions. No matter how large your concern, it takes motivated and talented people — encouraged by a conducive corporate culture — to make things happen.

Looking at corporate responses to digital challenges, Birkinshaw suggests four types of responses that companies of all sizes can emulate:

• Double down. “Benefit: You leverage your longtime assets. Risk: The market may not value those assets in the future.”
• Retrench. “Benefit: You reduce threats from new entrants through scale and lobbying. Risk: It’s a recipe for managed decline and hard to sell to stakeholders.”
• Fight back. “Benefit: By moving quickly, you keep new entrants at bay. Risk: It’s hard to execute and easy to get the timing wrong.”
• Move away. “Benefit: You seize opportunities in new markets. Risk: Diversification is always challenging to pull off.”

It’s important not to be distracted by high-profile examples of companies overrun by the digital revolution, Birkinshaw says. Think before you leap — it’s possible to move too quickly, he advises. “Some creative destruction has happened in technology, media, and retail. All other major sectors haven’t seen that much, thanks to a range of barriers to entry including high switching costs, economies of scale, trusted relationships, and regulation.”