Many executives are getting tired of the “D” word. Yet, even longtime market leaders with a reputation for innovation-led growth are stumbling in the face of fast-changing customer expectations. Importantly, this is not a technology industry issue. It’s a business issue that is cutting across industries and geographies. Here are a few examples.
Gillette has controlled between 60% and 80% of the U.S. men’s shaving products market for many decades. But as more men choose to buy shaving supplies online via a subscription model, Gillette is being left behind. Gillette now controls only 20% of online market share, and online is the industry’s fastest growing channel.
Last quarter, Unilever announced that year-to-year sales in China had dropped 20%. The reason: Unilever did not recognize the remarkably fast shift in Chinese consumer buying patterns, from primarily in-store purchasing to smartphone-driven m-commerce, in just one year. Unfortunately, its competitors did, and responded much faster.
Gillette and Unilever are very recent examples of a much broader trend - global companies with a history of industry leadership being disrupted in the fastest growing markets by smaller, more nimble competitors. The disruptors are not focusing on these leaders’ traditional core customer base. They are stealing the next incremental customer, or said another way, they are stealing the market growth.
While there are many reasons why large, complex companies have a hard adapting to today’s much faster cycles of change, the root cause stems from core management practices that were designed for a much slower moving age.
The annual budget is a perfect example of a classic management tool engineered to foster certainty at expense of nimbleness. Due to the prominence of the yearly budget cycle, an anachronism from a distant, paper-based past, executives must commit scarce capital resources over a year in advance of knowing how markets will respond. This model supposes that executives are astute fortune tellers, able to project market conditions and customer expectations 18 months away.
This tradeoff no longer makes sense, as customer expectations, competitive threats, and tighter supply chains mandate actions driven by fast, constant feedback at the expense of certainty. Cycles of change are accelerating, and companies that want to grow profitably must be able to adjust, pivot, and reorganize as quickly as market conditions warrant.
As examples of companies that can adapt quickly to constant feedback, look to the new global leaders, first in their core segments, and then in an ever expanding circle of adjacent segments.
AGAFA (Apple, Google, Amazon, Facebook, Alibaba) are all larger than just about every company in existence, and for all of their complexity and global reach, they can launch new products and services that are ahead of customer expectations. They will also soon compete in domains far afield from their tech core, and given their ability to adapt and learn, they will win.
According to John Chambers, former CEO of Cisco, over 40% of all businesses in operation will fail by 2020 because they will be outcompeted by more nimble, adaptive companies.
What differentiates responsive, resilient companies from brittle ones?
The answer lies in truly understanding the Disruptor’s Advantage.
Advantage #1: Disruptors Focus on the Customer, not on the Boss
At Apple, staff members can override a manager’s decision if that decision makes the product worse. Every decision is centered around making the best possible product. Apple takes great pride in choosing effectiveness over efficiency, and driving every decision through a value stream defined by product excellence, measured by customer delight and the resulting market share.
At most large companies, creating customer value takes a backseat to pleasing the boss. The value stream begins with the business unit’s short term objectives, and ends with the compensation and incentive structure. Decisions and measurements are optimized provincially, which in turn creates substantial enterprise-wide suboptimization and organizational inertia. This behavior traps change initiatives into nuanced maneuvers designed to elicit just enough executive approval to pass while protecting the underlying bonus-protection dynamic.
Advantage #2: Disruptors’ Teams are Empowered, Not Cowered
At Amazon, Facebook, Google and other digitally native industry leaders, teams are empowered to test ideas and methods to achieve their goals. They are held accountable to achieve outcomes, and they have the authority to fail fast, try many things, and focus on ideas where evidence supports further investment. Thoughtworks client Guggenheim Partners considers this characteristic its own competitive advantage, proving that these methods work in highly regulated industries as well as emerging ones.
At most large companies, activities, or “projects," are prescribed by management, and autonomy is treated as a code word for anarchy. Teams are given tasks, and success looks like checking the boxes that define done. Initiative and experimentation are met by either amused cynicism or threats of withheld bonuses if the outputs do not check all of the right boxes. The actual focus on delivering value takes a back seat to showing compliance with the boss’s demands. And very few of those boxes can be tied directly, or indirectly, to any value creation for the firm’s customers.
Advantage #3: Disruptors’ Engineers are Celebrated, not Tolerated
Every large technology-focused company is fighting a war for talent. They know what engineering excellence looks like, and they develop cultures that celebrate technical innovation and risk-taking. They offer broad opportunities for technologists to work with autonomy, to pursue mastery, and deliver for a purpose. They offer their employees reasons to deliver value to customers that transcend their individual compensation. At these companies, technologists are the core of the business.
Many firms pursue highly credentialed technologists, but they offer a regimented environment that deprive the talented staff from producing work of actual value for users or consumers. The optimistic spirit of “anything is possible” is replaced with cynicism about what is feasible given all of the internal constraints. The developer’s desire for software in production takes a back seat to learning how to be a politically astute mid-manager. The cost center mentality pervades every decision, leading to resignation from employees on how “the business” perceives their contributions as tangential.
Advantage #4: Disruptors’ Organizational Architectures are Adaptive, not Brittle
Amazon is shape-shifting, with a capacity to enable cross-functional teams to work collaboratively to build a new product, feature or function. Incentives are aligned to ensure a team dynamic that is focused on customer value, not on internal silos or Profit and Loss centers. If they see value in building a new product that could cannibalize existing businesses, they begin those product initiatives with haste before a competitor has a chance to steal market share.
Most enterprises are aligned to P&L centers and Cost Centers. Generally speaking, IT is primarily measured by its cost of service, not its value creation. Individuals in these cost centers conform to provincial interests - usually the boss’s interests - to justify their value proposition to their employer. What’s lost is the focus on the customer-centered value stream. While executives constantly push their teams to innovate and launch new products quickly, their middle management ranks still conform to behavior that produces short-term results, which generally means introducing as little change as possible.
Truth and Consequences
What is the net effect of this growing delta between industry incumbents and technology-driven disruptors?
- Disruptors have an organizational capacity to experiment, launch new products and features quickly and regularly, and incorporate customer feedback into what comes next.
- Disruptors have a culture that is much more attractive to the next generation of talent, technical, functional and otherwise.
- Disruptors have an “esprit de corps” that will be a critical competitive advantage as the traditional “moat”, or barriers to entry, in more sectors fall.
- Disruptors do not make long term thinking the boss’s job. Everyone is asked to focus on how their company will compete and win customers today and five years from now.
- Disruptors’ products have been designed to meet unmet customer needs with more delightful experiences than legacy companies offer, and in many cases, at lower prices. Gillette has resorted to copying Dollar Shave Club to remain relevant for men who shop online.
- High regulatory scrutiny is not an excuse. The root causes of the inability to change is not regulation, or the need for compliance. Thoughtworks has helped leading financial services firms and other highly regulated organizations automate the entire audit trail. The root cause is a culture that demands obedience and conformity to provincial interests at the expense of customer focus.
The greatest disruptor’s advantage, the thing that truly distinguishes the leading technology-driven companies, is a culture of empowerment.
Over time, adaptive systems will always defeat rigid, brittle systems.
Part two will offer a path to a culture of empowerment, with the empowered developer at its heart.