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Disruption’s Long, Slow, Complex Journey

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The original 1995 HBR article on disruption from Joseph Bower and Clay Christensen was titled “Disruptive Technologies: Catching the Wave”.

If you work in traditional retail you had a very bad week of headlines on reported earnings, reset guidance, and public market carnage. If you read those on your smartphone while also chatting with Alexa to place an order, these looked more like headlines for “Duh” magazine.

From Philz to Mo’z to Coupa Café, one does not need to go far in Silicon Valley before bumping into a conversation about disruption in some form or another. Despite being a term that originated on the east coast, disruption is a key part of the language of Silicon Valley. Defining a company or technology as disruptive, or declaring a company or industry to be disrupted is a basic conversation starter. While most startups aim to be disruptors, those that become successful will one day become targets of disruption. That’s why it is always helpful to dig into the complexities of this important business dynamic.

Disruption is a complex dynamic that is much easier to accurately declare after the fact rather than while it is taking place. In fact, if you are part of a successful company or product there’s a good chance a competitor is already using the language of disruption against you. Two of the key elements of disruption that are often overlooked in this dialog are worth some discussion:

  • Duration of entire disruption timeline
  • Impact on every business attribute

Duration of entire disruption timeline

When you read about disruptions that have taken place in the past, such as Blackberry versus iPhone (my old post), one can easily get the impression that disruption can almost be marked by a specific date or event. Blackberry usage did not drop to zero nor did the company shut its doors with the launch of the iPhone in 2007. Having a point in time is great for a narrative, but doesn’t help at all if you are on either side of disruption.

The past couple of weeks of market carnage in the retail sector included Macy’s, Walmart, Gap, Nordstrom, Kohl’s, L Brands, Ralph Lauren, and more. The only common thread in reading about all of these was Amazon which continues to dominate. One story trying to explain the challenges faced by Gap analyzed the situation, “[t]he Gap, which once suffused the zeitgeist, now barely registers.”

That’s pretty harsh. It is also a story from March 2006, more than a decade ago, The Shrinking Gap. While Gap might very well be in its twilight, it has been one very long and slow decline.

Retail’s mass disruption, from a Silicon Valley perspective, probably started when we ordered our first holiday books from Amazon in 1994, over 20 years ago — before the phrase disruption entered into our vocabulary. It is interesting to consider the book category and the impact Amazon has had (directly or indirectly) on Barnes & Noble simply because Barnes & Noble still exists.

One way to measure disruption is to consider the public market view of a company over the course of this increasingly long timeline. Here is $BKS from the time Amazon started selling books:

Barnes & Noble stock price starting from the launch of Amazon.

Why does disruption drag out? I mean we all used our first iPhones with apps in 2008 and Blackberry is still around. It almost seems like cruel and unusual punishment. Shouldn’t companies just be put out of their (or our?) misery?

The journey, at least through the lens of the stock price, is anything by straight down over the past two decades. In fact there are several significant peaks along the way. It is easy to dismiss these as Wall St dynamics like M&A activity, management changes, or even macroeconomic changes. In practice the reason disruption takes so long is due in part because of all the actions incumbents can take to try to avoid becoming the victims of the disruption that is “obvious”. In fact here’s Macy’s, which by all accounts has seen quite a run relative to the market over the past 5 years all while being disrupted:

Macy’s stock price from the arrival of Amazon.com along with the S&P 500.

Why does disruption drag out? I mean we all used our first iPhones with apps in 2008 and Blackberry is still around. It almost seems like cruel and unusual punishment. Shouldn’t companies just be put out of their (or our?) misery? It is not so simple.

First, and most importantly, we should not confuse an ex-post view of the world with what is happening in real time. For every disruption that actually happens there were a lot of people, beyond a single company or technology, saying it would not happen. I remember having dozens of conversations, say in 2005, with customers (“users”), PC makers, and disk drive manufacturers about the rise of flash storage. As a technologist working on operating system support we had to make a bet on the future, but there was a loud and varied chorus of reasons why flash was either a long ways off or would never replace spinning disks: cost, capacity, ever-increasing needs, customer choice, and more. In some sense, everyone was right but we each had different views of the timeline. This week Western Digital finally closed the purchase of SanDisk, Western Digital Starts New Era As SanDisk Acquisition Completed. That sure took a while when I think back to those conversations with disk drive makers a decade ago.

Second, and this is the tricky part, incumbents really don’t just stand still like the proverbial deer in headlights. In fact, because incumbents have market presence, capital, business relationships, and a lot of people, they have the capability (and shareholder responsibility) to take many different actions. These actions tend to look rational and responsible and because of the market presence they often receive considerable attention.

Historically, we can look back on the Barnes & Noble Nook as almost desperate. But if you recall the in-store presence and broad outreach and that the competition was also just an “eReader” then this seems less desperate and more formidable competition for Amazon, except it wasn’t. At the time, though, many put it on equal footing with Amazon. In fact it seemed rather bold and strategic.

When the hard drive makers saw the rise of of flash, they responded on two fronts. First, they focused on very high capacity drives which would be cost prohibitive if done with flash. Second, they added flash to their spinning drives to bring the benefits of flash. That sounded amazing on paper. In practice these ended up bringing the existing unreliability, form factor, and power consumption to customers that already had more storage than they needed for their shrinking, battery-operated devices.

Time and time again, hybrid is the one thing that never works because you can never distill disruption down to a single attribute to be added to your existing business.

In the retail space, all of the earnings calls this week included discussions of the “online segment” of the major retailers. In the retail world, the equivalent of adding flash to a hard drive is “omni-channel”. Retailers talk about how much their online store is growing and how important it is to have both a physical presence and an online presence. The key strategy is that their existing assets are critical parts of the growth that everyone is seeing in the new online business. A Macy’s employee said, “[T]here’s a lot of investment being made in digital growth, which, by the way, is not all digital sales…Part of that is omnichannel investments, so the customers can easily go back and forth between stores and the Internet.” This isn’t new and even Walmart has been talking about that for quite some time.

There’s one word that sums up incumbent response to disruption — hybrid. The pattern is almost always the same, which is the new technology or approach that appears or threatens to disrupt an incumbent is best expressed by combining the new with the old. Time and time again, hybrid is the one thing that never works because you can never distill disruption down to a single attribute to be added to your existing business. More often than not, adding something also makes things worse in every dimension. Yikes.

Impact on every business attribute

It would be really great if as an incumbent facing disruption, all you needed to do to respond and thrive was just add something to all you were already doing. All the spinning hard drive makers needed to do was add flash. All retailers needed to do was stand up a web site. All Kodak needed to do was embrace digital (oh wait, they invented digital).

In our coffee shop discussions about disruption we tend to simplify how disruption is playing out and often zero in on some specific technology or business approach that appears to have incumbents hamstrung. We like to say “cloud” or “SaaS”, for example. As with most things, it turns out there is a lot more there.

Every successful business is made up at the highest level of a vast number of decisions and processes often described as the Four P’s or marketing mix. Within each of Product, Price, Place, Promotion we see many attributes:

One of the many examples of the Four P’s of the marketing mix as a graphic.

The attributes of any of the P’s can be an arbitrarily long list. In fact the more successful a business and product become the most knowledge the company gains about their processes and approach. In turn, these become the very constraints that can’t be solved.

Instead of looking at a well-worn example, let’s look at a hypothetical example of a typical on-premises software company facing a new cloud competitor. From a high-level technology perspective, the difference is clear between cloud and on-prem. Digging into those details, however, one realizes that the architectural approaches are totally different (scale out v scale up). Continuing through the technology stack, you start to think about the tools and languages used which contribute to how the product is built — for example, integrations with third-party APIs via services compared to injecting customization code. One can look at the product from the systems management perspective and consider that most on-prem software was designed to be tweaked, customized, and actively managed by a nearby IT professional compared to cloud software that aims to bring simplicity, reliability, security by minimizing those touch-points. At the extreme, one (me) might assert that if you have on-prem software then something approaching zero lines of your existing code is “appropriate” to developing a modern cloud solution to compete.

That’s a real problem though because all of your features, your value proposition, your positioning, and go to market depend on that code. And you’re behind your new competitor in developing a cloud solution (by the way your competitor probably has a fraction of the features, customers, revenue, profits, partners, and more that you have). The idea of making a fresh start as a product or technology seems, literally, absurd. It is the rough equivalent of shutting down all your retail stores to focus on a web site.

As if that wasn’t enough, beyond Product the other 3 P’s also contribute to your assets — and now your liabilities. An example we see in cloud companies competing with many on-prem companies is a classic channel conflict. The on-prem world of software often served small/medium business with channel partnerships often called VARs. These partners would sell the software, but also sell the services of setting up a local server, deploying, and managing your software. This is a very healthy business and because of the need for a local presence (i.e. someone to come fix the server or back it up) the channel partnerships work well. In the cloud era, the utility view of SaaS all but eliminates this level of complexity. Channel programs can be replaced by broader outreach, lead generation, and a product that can be used without such a deployment step. Once again, an entire “P” has been uprooted and replaced with a new one. If you think this is easy, consider the elaborate relationships Barnes & Noble maintained with the book publishers. Not only could the Nook not disrupt the need for big box stores it had to maintain the relationships with publishers who were not exactly wild about digital books to begin with. Even with the Nook, the company found itself tied to all the other aspects of its business.

This hypothetical example is playing out across industry segments in enterprise software right now. While we talk broadly about the cloud as a technology, there is depth and breadth to the disruption that poses an incredible challenge to incumbents. When something is disruptive it is almost every single aspect of a business that is impacted.

The classic view of a response would be to drop everything and just do what it takes — hire new people, get them a different building, relax all constraints, and so on. Boy is that easier said than done. This is where the ability to change quickly and even the capital (or public market) constraints prove challenging. All the relationships a company develops as it achieves success, from customers to partners to investors and even to employees become challenges to overcome in the face of disruption. That is why attempting to “respond” to disruption is very much like trying to rebuild an airplane while in flight.

The allure of the hybrid shows here. A hybrid gives you the comfort of focusing on a single attribute of disruption and “addressing” it. Considering that disruption is almost always pervasive throughout the 4 P’s, one can see the weakness of such an approach. In the SaaS world, one only need look at the crazy channel programs incumbents employ in order to provide incentives and comfort to existing partners who no longer have servers to deploy and manage all while working to create a “hostable” version of the existing product.

Retail shows this challenge in a very visible way today. Imagine you oversee a 1000’s of retail outlets (Gap, Walmart, anything). These stores are capital intensive and in need of constant nurturing. For example, the Gap business model requires inventory turnover and new displays every couple of weeks. Your whole model is based on the cycle of new merchandise, advertising that, attracting customers, then repeating that. You know that if you slow that cycle down or do less of any element that your sales drop. If your sales drop then employees will become demotivated, the public markets will react, and then of course customers will notice and stop thinking your store is a great place to go. You are stuck in an over-constrained situation.

You have to find the capital to build out an entire “stack” to compete with the likes of Amazon. This includes merchandise that changes every minute, not every two weeks. It includes items you don’t normally carry. You might price things to match entire baskets of multiple brands and items rather than the commitment to specific line. You need to promote what is being bought by consumers, not what you committed to promote based on shelf-space deals or what you acquired. You pay employees for the code they write and data they analyze, not the in-store presence. You have to accomplish all of this while growing your retail business and stores because if you don’t do that then the capital to fund this hypothetical expansion won’t be there. In fact, for every dollar you spend on something new someone will tell you that the old thing is failing simply because you spent that dollar somewhere else! (That dollar can be across any of the 4 P’s!)

During this time there are many actions incumbents will take that will appear like they are going to power through the disruption. Certainly it starts from a hybrid of some form when it comes the product or service offering. Capital will be deployed to channel partners to keep them engaged. Positioning will be used to de-position the disruptor or to re-position the offering (for example, this week we learned a lot about down-market segments of retailers doing well, as if Amazon won’t also be selling those lines).

The fact that disruption is so sweeping is why it takes so long and why it is so difficult for incumbents to respond. As a disruptor one needs to be prepared for a long drawn out battle on many fronts because competitors don’t just pack up and go home or retreat to their existing businesses (well most eventually will do that).

While we talk about disruption in simple terms, it is enormously complex. The next time you’re having that conversation try to think about all the aspects of the company being disrupted and ask yourself what you would do. The lack of an answer might surprise you.

The goal of every startup is to build a business that creates an incredible and enduring foundation. In doing so it means the forces of disruption you once created will be pointed at you. The sooner you recognize the challenge and shift investments and efforts to what is new the better. When considering the likes of Facebook, Google, Netflix, or Amazon one sees a new generation of companies that were created with an intrinsic understanding of disruptive forces. One can see how these companies respond to change differently. That is very exciting because I think there is a new “theory” being created now and a true change in how companies operate.

— Steven Sinofsky (@stevesi)

Written by Steven Sinofsky

May 14, 2016 at 3:25 pm

Posted in posts

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