When Google ate TomTom’s lunch and had Garmin for dessert with its maps and navigation technology, it was precisely the kind of competitor-destroying explosive disruption we laid out in our recent book, “Big Bang Disruption.” In this form of disruption, companies are out-innovated—and blown-up—by a competitor that can quickly create products that are at the same time cheaper and better.
Knowing that not every industry will be disrupted in this way, we recently turned our attention to asset-intensive industries that seemed to be immune to these shocks. Conventional wisdom has held that these industries would be protected from the marauding invaders by large and deep moats known today as barriers to entry. As is often the case, conventional wisdom is wrong.
The truth is that asset-intensive industries are experiencing a form of disruption that is slower but just as deadly. In fact, there is additional danger in this slowness: It can sneak up on companies, catching their sentries sleeping and allowing the enemy to be over the walls before the companies know anything is happening.
This is what we call “compressive disruption.”
We studied 1,200 companies in six industries that are mostly asset-intensive (telecommunications, utilities, energy, materials, automotive and industrials). Something that surprised us: Compressive disruption is not a smooth, steady decline of business fortunes. Rather, it occurs in four specific phases.
During the “empty growth” period, revenues continue to grow but operating profits—as measured by earnings before interest, taxes and amortization (EBITA)—flatten. In the automotive industry, for example, revenues have grown substantially in the past 10 years, but profits were essentially unchanged from 2005 to 2015, the period we studied. We also see this “empty growth” phase in traditional telephone service and in personal computer manufacturing, two industries that have been substantially flattened and compressed by smartphones.
“Decay” is next. Here we see revenues flatten and start to fall; at the same time, EBITA starts falling, but even faster than revenues. Consider the beer and soft drink industries that have experienced this recently. There’s not too much to toast at the moment.
Then comes “false hope.” Both revenue and EBITA reverse course for a brief period, often as a result of drastic cost-costing efforts and deep discounting of prices to grow demand and revenues. Think of the briefly renewed fortunes of some big name social media companies or online gaming companies that seemed to be making a comeback.
“Decline” is where the hammer drops. It’s a little bit like Big Bang Disruption; both revenue and EBITA drop dramatically and the industry hits the end of its useful life. You’ve only to look at certain categories of retail to see this in action.
Another surprise unearthed by our researcher is that three issues keep industries from responding to the compressive disruption threat. We call them “siren songs,” because, like the songs of the sirens of mythology, they can be irresistible but lead to peril. They include:
The perception of industry stability. After 50 years in business, leaders don’t expect dramatic changes, and the changes they do see are often ascribed to the normal business cycles that their industry has seen “a million times.”
Ownership of many expensive assets. Enormous investments can provide a sufficient barrier to market entry for potential competitors–but with technology and innovation, no moat is too deep or wide for the other guys to cross.
A belief in the strength and longevity of current technology. For example, energy companies might not believe that solar will ever replace coal and natural gas, especially since energy costs have lowered again, despite the competitors’ technological and longer-term benefits.
The siren songs can be confusing. It’s as if they seem to play more loudly for some industries than others. But no industry should ignore them. Compressive disruption is actually occurring across many different industries at varying degrees of intensity, including cable television, the film industry, insurance, banking and even some public services.
However, with considerable effort and new strategies, any company can—like a sailboat seeking to avoid the doldrums—foresee and steer around the disruption.
Avoiding death by compressive disruption requires overcoming the siren songs, as Odysseus did with his crew—to get people to ignore false signs of stability and see the real threats. The real winners see an opportunity to not just escape compressive disruption, but to use it as an opportunity to hunker down, get more out of their core businesses and invest in new technologies and innovations. It means experimenting with the kinds of technologies that are going to be disruptive and it means really, fully embracing what we at Accenture call “the inevitable future.”
Think of the recording industry and music. As vinyl and tape succumbed to digital, some foundered on the rocks and some flourished. Apple saw it coming. It advanced the future by selling songs online via iTunes. Today, Apple must compete with Pandora and Spotify, which are creating the future by providing listeners with anytime, anywhere access to music.
Companies can turn compressive disruption into an opportunity to innovate and map out new routes to “lead in the new” and capitalize on it.
All it takes is foresight, resolve, the right technology and more than a bit of bravery.