by Tom Goodwin
Secondly, self-disruption is rooted in the notion of acting fast, early and, most importantly, before you have to. If you buy a competitor that’s rapidly eating your market share and ride on the back of it, this is merely a sensible acquisition strategy. It’s investing, as most companies would, in protecting their position. What is key about self-disruption is that you act before many think you have to.
In 2014, when Facebook bought WhatsApp for $19 billion (BBC, 2014), it did so because the company was a threat to the success of its own messaging platform, and ultimately its own company, but it did so less as a proactive and aggressive play, and more as a defensive move.
When Walmart bought Jet.com for $3.3 billion in 2016 (Reuters, 2016), it was less about confidently and positively creating its own future; it was the acceptance that it didn’t have the right skills, size and reputation in the online marketplace to compete with Amazon.
It’s worth adding that it is these defensive moves by large legacy players that fuel a huge proportion of venture capital investments. Most mobile-based ‘banks of the future’ are basically created to be irritating, dangerous, large and attractive enough so they will be bought by an incumbent business that realizes it is too late to start its own.
Many of these companies are like pacemakers in long-distance running; they can’t make the entire distance but that’s not what they are there for. Sometimes they get so far ahead that, perhaps even surprisingly to the founders, they end up winning. It’s possible to see Netflix and Tesla in this light.
There are very few examples of self-disruption. Large legacy players are often too big, too reluctant to accept they are not right, too careful not to signal to the financial markets that they are somehow not already the best placed company to survive. This way of changing is more likely to be used by smaller companies, ones with more to gain, yet often the smaller size of these entities makes them feel too vulnerable to pursue this course.
Self-disruption is like seeing a therapist when most patients would rather have a boob job. Taking those first steps can sometimes feel like steps backwards; it is mentally hard and most people want faster results.
In two years of research the best example of self-disruption I can find is Netflix.
Netflix’s transition to streaming from DVD rental by mail was not nearly as smooth as many would like to remember it, but in hindsight it appears genius.
Netflix was founded in 1997 as a DVD mail service and pretty rapidly rose to take huge market share from local video stores who could not compete with its vast range of titles. People soon appreciated the appeal of no late fees, the ability to have several movies out at the same time, as well as its unlimited consumption tariff.
Always keen to keep abreast of the latest technology, in 2007 Netflix spent about $40 million to build data centres and to cover the cost of licensing for the initial streaming titles (Rodriguez, 2017). When internet speeds allowed, it introduced streaming as an additional service for its existing subscribers. Monthly fees remained the same, but those with more expensive tariffs were given access to more hours of streamed content. While it added something for free, it also helped give people a reason to upgrade to more expensive plans. Growth was impressive, the video libraries of streamed content rose, the share price rose impressively from $3 in 2007 to over $42 in 2011, and life was good.
In September 2011 Netflix made a very bold move. It created two tariffs, and moved all its US subscribers onto two separate plans: the original DVD-by-mail service was to be called Qwikster; the other was a streaming service for a lower monthly fee. The market was shocked, and by December the stock price was below $10 and the company was in pieces. The company rapidly lost higher revenue DVD subscribers and within nine months profits were down by 50 per cent (Steel, 2015).
And yet slowly things changed. First, the lower prices suddenly appealed to a much wider market, bringing in far more paying customers, allowing Netflix to buy more content and to slowly raise prices. Then Netflix started making its own original content, clearing out global streaming rights, and then at a flick of a switch it was able to expand globally.
If Netflix had not disrupted itself it would be a very different company. It would rely on a massive physical distortion system, with very high costs. It would probably have lost out massively to YouTube and would have withered away as a mail-order DVD supplier.
Instead, Netflix’s share price is now nearly $200, five times more than it was when it bravely self-disrupted, it operates in 190 countries, makes nearly $9 billion in revenue from over 110 million customers (Feldman, 2017). Today DVDs represent only 4 per cent of Netflix’s users. It seems that in 2011, when Wall Street was demanding the resignation of Reed Hastings for reinventing the business, they were wrong.
From this you can see the pressure this approach places on leaderships, the confidence you need to have, the degree to which this antagonizes the market and everyone around you. This move takes balls. The confidence, conviction, and aggression, to change before you have to create your own future, is remarkable.
It’s why it rarely happens. IAC is a media and internet group, one of whose brands is the online dating Match Group. Figure 6.1 shows the US market shares of IAC’s Match Group portfolio, which includes online dating sites Match.com, OKCupid etc. Match went on to create Tinder in what can be seen as a form of self-disruption: a free dating site that was once massively undermining the user numbers and profitability of the company’s own dating sites. Tinder was launched before it had to and under no competitive pressure, and it was incubated under Hatch Labs, which IAC partly owned.
Figure 6.1 Match Group mobile dating apps: US market share by session, January 2013 to November 2014
SOURCE 7 Park Data, http://www.businessinsider.com/jmp-securities-analyst-note-on-tinder-2015-4
You could perhaps argue that when the mobile operator O2 launched a far cheaper, youth-focused tariff with the idea of it being ‘mutual, simple and fair’, it was cannibalistic enough to be self-disruptive, but I don’t think the ambition was there.
When Amazon launched the Kindle, a device that could have in theory displaced a significant portion of its own book sales, on which the company was founded, it happened at a point when the company was making more money in other ways.
Self-disruption may not be right for you. Is the baby so bad you need to throw it out with the bathwater? For some companies, lurching confidently into the future is vital. I’d not want to be in the department store or magazine printing business much longer, but most companies can approach self-disruption more positively. They don’t have to eat the old entity soon, they don’t need to assume that the new unit won’t take far more from other competitors and be accretive. For most companies, there is an urgent need to set up new future-focused units or buy units that lead to growth but that don’t bring with them the risk of self-destruction. These I introduce in the next section.
2 Continual reinvention
At what point does a start-up become a legacy business? Are eBay or Skype or Microsoft examples of some of the world’s oldest start-ups or of the youngest legacy businesses? To some extent the transition seems to occur when they go from being the hunter to being the hunted, from pursuing growth to maintaining profitability, from offence to defence.
Continual reinvention is a profound and serious commitment to change and at the deepest levels, one based in the idea that the best defence is a good offence. It is the process by which companies maintain a significant position in a market, by undertaking continual and significant changes to maintain that position. This process may take various forms.
As I mentioned before, there is no magical line companies cross from being mere significant innovators to being continual reinventors. There is something about the size of these investments, however, and the frequency with which they are core to the business, rather than just buying another form of revenue. American Airlines buying US Airways was a big financial deal, but it wasn’t reinvention or acquiring a futu
re threat; it was just a step to become bigger and change little else.
The difference with self-disruption is that there is less risk of cannibalization, it’s less proactive and more reactive. When Adobe moved slowly from selling its software on disks to selling its software as perpetual licences to becoming a cloud-based software-as-a-service (SAAS) provider where you merely pay for their Creative Cloud, it represented a great example of continual reinvention, not self-disruption.
Another good example is IBM, a company that first made massive mainframe computers, but which over decades became marginalized by mini-computers. So IBM shifted to the business and consumer personal computer market, before largely giving up on hardware and buying SoftLayer to become an infrastructure-as-a-service provider, then a management consulting outfit, and now is looking to become a leader in AI with IBM Watson.
Continual reinvention always feels like progress. It feels risky, but generally speaking it’s undertaken by companies in fast-changing sectors. TV or media owners in theory should have bought Facebook when it was small, they should regret the day Snapchat was born, newspapers should kick themselves for not starting Twitter, but these sectors don’t think this way. Recently ASOS became more valuable than long-standing UK high-street leader Marks & Spencer – but you just don’t sense that these companies think about change in this way.
It’s hard to keep turning companies around, so most examples of this form of innovation have been done through acquisition. Microsoft, to its credit, has invested in maintaining relevance and making big calls. In a world that loves Apple, we forget that Microsoft is today worth more than ever at $642 billion, and has nearly tripled in value since 2010. In the last five years Microsoft’s share price has gone up by 200 per cent, and Apple’s ‘only’ by 114 per cent (Fraley, 2017).
Arguably the best example of this serial investment approach is Facebook. While the company itself spends billions on R&D, it really seems to rely on buying the most promising developments by acquiring thrusting companies who are growing fast, just before they get too successful to resist selling (they missed Snapchat this way) or too expensive.
In 2012, as the web was becoming more visual, as cameras were getting more advanced, as the mobile sharing of images became most popular, Facebook made probably one of their best ever investments: for the at-the-time insanely high price of $1 billion, Facebook bought Instagram. In retrospect this was a genius move that allowed Facebook to dominate imaging. And while some think Instagram is worth $50 billion, many believe that, since so many people are threatening to leave Facebook, Instagram is a safety net worth far more than this, and that in fact it has allowed Facebook to swell from a $58 billion company to a $500+ billion business.
Each and every time a new screen or behaviour appears, Zuckerberg has been quick to pounce. Facebook’s need to stay modern, to get the best people, to ensure they don’t miss out on the next big thing, has been behind their acquisition of WhatsApp for instant messaging, Oculus for virtual reality, face.com for face recognition, MSQRD for facial filters and swapping, and most recently Ozlo for better driven AI on messaging.
Is continual reinvention right for you? Continual reinvention is based on paranoia and things changing fast and is not for everyone. Samsung doesn’t need to assume that everyone is a threat to their refrigerator business and buy everyone in that space. Nike does not need to panic about Allbirds and set about buying everyone that dares make shoes. For companies that are faddish in nature, that don’t offer much in the way of protective moats, for companies in spaces growing fast, this makes more sense. Perhaps a TV station should be buying a fast-growing video site, perhaps Lyft should acquire Gett, or Wal-Mart buy ASOS, but it’s not for everyone. Some need a calmer approach.
3 Measured bets
The most common approach to innovation is one that is far less involved, less deeply integrated, and typically not part of a long-term, continuous approach to innovation. Sometimes these approaches are bolder and bigger, and more threatening to the parent company; other times they are clearly small offshoots, less likely to have a strong chance to change the future, and are more about testing the market, learning more about the business environment, or just showing the world they can do it.
Midland Bank (now part of HSBC) was probably the first company ever to do ‘a start-up’ when they set up First Direct. Created in 1989 from the need to find new growth, especially from profitable, reliable, affluent customers, First Direct started life as a blank sheet of paper with the word ‘customer’ in the middle. Inspired and intrigued by the idea of telephone banking, an entirely new company was created from nothing, but was based on the notion of reinventing everything in the banking model. They destroyed all conventions in the industry: the bank would be open 24 hours a day, would have no bank service charges, would deliver helpful unbureaucratic, unfussy, customer-oriented service. It seemed to change the world of banking overnight, and for the first time ever, a bank seemed fresh, modern and different. People loved banking with First Direct.
First Direct has been in profit every year since 1995, more than one in three of First Direct’s customers join because of personal recommendation, and they have over 1.3 million customers (First Direct, 2010).
The BMW i is a sub-brand of BMW founded in 2011 to manufacture plug-in electric vehicles. It’s part sub-brand and part innovation lab for the main parent company. So far two BMW i models have been made: the surprisingly practical i3 all-electric car and the i8 plug-in hybrid. BMW i series is now sold in 50 countries. While the unit itself has sold over 100,000 cars, it’s unlikely to be close to being profitable by itself. Instead, the company is a feeder unit to the main company, developing technology to be used in other cars. In fact, in 2017, BMW confirmed that by 2025 it will sell 25 electrified vehicles, nearly half of which will be purely electric (Taylor and Preisenger, 2017). It’s this example which shows how innovation can be done both internally and significantly but without threatening the main corporate brand, and with the hope that, one day, the two will blend.
Measured bets are what most companies do. It’s just that some are smaller than others. However, I worry that measured bets are too small. It’s PR not corporate strategy. Companies need to get bolder with how they place bets on change. The process needs to be much more about core change, not just the superficial. The fourth and final approach derives from even less ambition to change, and more from the need to spread risk.
4 Hedge fund
A significant and increasing number of companies think that their future is best placed in the hands of others. Perhaps you think turning your company round yourself is just too hard, or that achieving growth by investing in other businesses, just as a private investor would with a share portfolio, is a sensible use of your company assets. We are seeing the growth of well-funded, high-revenue-earning companies that do not seek to buy, take over or run interesting companies, but instead invest heavily in them so that they can share in their success, often without any controlling stake or seats on the board.
This is not a new concept. In 1914, the president of chemical and plastics manufacturer DuPont, Pierre du Pont, invested in the then still private and only six-year-old car company called General Motors.
Corporate hedging is done with an independent arm of a company or a designated investment team, off their company’s balance sheet. The goal is to invest in high-growth companies that drive value for the company. Companies like Google Ventures and equivalents from Cisco, Intel, or Dell have been using this approach for some time. It’s been common for technology companies to do this.
The most dramatic example of all comes from the huge Japanese mobile carrier, Softbank. It’s already a holding company with self-driving cars, energy trading units and cloud services, yet now it’s leading a new fund, called the Vision Fund. It’s raised $93 billion to do it, putting only $28 billion of its own money into it (Massoudi et al, 2017).
I am not aware of any company that has tried to change too much, to
o quickly. I don’t see any examples of companies taking this too seriously. I see small bets placed, I see innovation labs that open and do nothing, I see PR stunts and I see the gesture of change. Not everything is changing, not everything will change, but I’d like to see companies get more excited about what is made easier, faster, better, cheaper, and more popular every day. I’d like to see hotels delight in what they could do extra, retailers embrace the power of influencers, car companies get excited about what it would be like to thrill customers with a sense of belonging. Let’s start to consider what more practical things companies can do to achieve this.
In this chapter, we’ve explored how to establish a base to grow from, how you can alter remuneration strategy to incentivize people to bring about long-term change, how you can drive a platform for change, and think about the role you will play in consumers’ lives in a more expansive way. But once you’ve done that, what can you actually do to bring about change? This is what I explore in the next chapter.
References
BBC (2014) Facebook to buy messaging app WhatsApp for $19bn, 20 February, available from: http://www.bbc.co.uk/news/business-26266689 [last accessed 7 December 2017]
Christensen, CM, Cook, S and Hall, T (2005) Marketing malpractice: The cause and the cure, Harvard Business Review, 83(12), December 2005
Christensen, CM, Hall, T, Dillon, K and Duncan, DS (2016) Know your customers’ ‘jobs to be done’, Harvard Business Review, September 2016, available from: https://hbr.org/2016/09/know-your-customers-jobs-to-be-done [last accessed 7 December 2017]
Feldman, D (2017) Netflix is on track to exceed $11bn in revenue this year, Forbes, 16 October, available from: https://www.forbes.com/sites/danafeldman/2017/10/16/netflix-is-on-track-to-exceed-11b-in-revenue-this-year/#417ac27b65dd [last accessed 7 December 2017]
