Entrepreneurship & Innovation Insights from Prof. Dr. Nikolaus Franke
For start-ups, it is a chance to grow and succeed; for managers of established businesses, it is time and again the worst of nightmares: disruption. When the rules governing an industry change, principles of success that seemed to be set in stone suddenly no longer apply; the “logic” of value creation is turned upside down and market leaders may be faced with an existential threat.
In the following paper, Prof. Nikolaus Franke, Academic Director of the WU Executive Academy's Professional MBA Entrepreneurship & Innovation and Head of WU Vienna's Institute for Entrepreneurship & Innovation, explains what businesses and executives can do to protect against disruption.
There was a time, not so long ago, when Nokia was the world's leading manufacturer of mobile phones and Kodak dominated the photo industry. Travelers invariably booked their trips with a travel agent, and every street had its own video rental store. All these markets have changed fundamentally as a result of disruption. Nowadays, digitalization and globalization are leading to new challenges. While the winners are mostly start-ups or newcomers who have learned the new rules quicker, companies that used to be leaders tend to lose out. Plenty of research has been carried out on the process of disruptive change. The resulting findings provide valuable guidance for executives and businesses looking to turn the threat of disruption into an opportunity.
Disruption is a threat to all businesses. However, experience shows that many companies, and especially successful ones, ignore this fact. The bigger their success in the past, the greater the likelihood that businesses sit complacently in their comfort zones. The situation is reminiscent of the old joke about the man who fell off the world's tallest skyscraper and on his way down past each floor, he kept saying, “so far, so good” to reassure himself. A key job of executives is to raise awareness of the threat and see to it that their organizations are neither inert nor complacent - and this is particularly important in good times.
What many victims of disruption have in common is that their actions had a strong inward focus. The bigger a company, the more important company policy becomes and the higher the proportion of employees who are disconnected from the market reality. Businesses cannot detect early signs of disruption unless they are looking outside of their own borders: Disruptive innovation typically comes from unexpected directions. Therefore, it is not enough for companies to keep abreast of what their clients and current competitors are doing. They also need to enhance their appreciation of the bigger picture, for instance through regular analysis of analogous markets and lead user studies.
Following the disruption of successful businesses, it often turns out that these firms had been aware of the threat for a long time but failed to respond to it quickly enough. The bigger a company, the greater the number of people and departments involved in the decision-making process. As a result, there are endless meetings, strategy sessions and discussions, leading to delays, half-hearted compromises and unclear lines of responsibility.
Yet time is at a premium - frequently, the only advantage disruptors have is a head start in terms of time, and established companies often unknowingly tend to do things to give disruptors even more of a lead. Ergo, in order to protect against disruption, companies need to decentralize and set up small independent units. When it comes to designing processes, rigorous modularization is often more important than efficiency optimization.
People looking to tap into new opportunities in a flexible manner will inevitably run into fierce resistance within their companies. This is because disruption is an act of creative destruction, meaning there will be losers. Those whose careers are based on skills that may no longer be needed, will try to prevent change from happening. This also applies to organizations as a whole: As a result of disruption, investments made in the past become sunk costs—hence, fighting it seems to make sense from a short-term perspective. However, in the long run, it is better for businesses to disrupt themselves than to get disrupted by others. In this context, leadership is vital. Executives need to take energetic action; otherwise, inertia will prevail.
Disruption is always the result of innovation. Therefore, being the disruptor is the best protection against disruption. In order to be able to turn the threat of disruption into an opportunity, businesses need to consistently strive for innovation.
However, disruptive innovation is not the same as incremental change. Many large, established companies are good at this process of adding to or building on the things that already exist. Disruption, by contrast, means using completely new approaches: a new technology, a new combination, a new business model. In addition to the attributes discussed earlier, such as outward orientation, organizational flexibility and willingness to innovate, it requires innovation-oriented leadership, a culture promoting creativity and courage as well as processes designed to help generate something new - and not to defend something old. Clearly, these are enormous challenges for established companies. But accepting them is essential for success in the age of disruption.