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December 12, 2014
Decoding digital disruption
By: Mark McDonald

Many people use ‘disruption’, in the case of digital, to strike fear into the hearts of executives and their business strategies. But the term has lost its meaning and impact from overuse and under definition. The result is a word that often passes through an audience with little impact, other than to check off that the speaker used the term.

It puts me in mind of that old but classic kids’ movie, The Lion King, and the hyenas’ misuse of the name Mufasa. That moment embodies the feeling of many audiences towards the word disruption. Without a clear and actionable understanding of disruption, it will become a misused and misunderstood term like Mufasa.

For the term disruption to have resonance and impact it requires two things; we need to know what we really mean by disruption, and we need to have a way of thinking about it.

What do we really mean when we say disruption?

The term disruption means different things to different people for different reasons. A deep change in the status quo is a common denominator across these definitions. Saying that the world is changing states the obvious, it’s like saying morning follows night. Executives need something more to seriously consider the forces and impact of disruption. That requires a focused definition, such as:

Disruption occurs when past proven practices no longer produce predicable results.

It’s a simple definition. If you cannot expect to be successful in the future following today’s game plan, then you are being disrupted. Using this definition gives executives something they can measure – the effectiveness of their strategies and operations.

When things stop working its hard to notice, particularly when you feel successful but the success of others outpaces your own. This means that the first place to look for disruption is from the outside. Instead of focusing on progress against your own plan, look at the progress of alternative solutions, particularly ones that appear to offer less than you do in the marketplace. Be expansive when considering substitutes, and consider how traditional industry lines are blurring.

Scale; disruption often hides in small companies that give incumbents a false sense of security as they think that XYZ start-up will never take them out. They are right. Chances are your company will not lose to a start-up but to the competitor who adopts the new rules of engagement.

Substitutes are the basis for disruption as customers choose alternative solutions, rather than yours. The seeds of disruption germinate when people choose someone else for what they consider better reasons. If you do not look at the substitutes you are preparing to be blindsided.

Internally disruption changes growth rates, market share, margins, productivity, free cash flow, etc. There are other small signs of disruption that point to disruption’s impact before it becomes overwhelming. Applying these measures internally and in comparison to others gives executives a way to measure disruption.

Things rarely collapse overnight and when they do it is more likely because of questionable activity than aggressive disruptive forces. Using this definition it is easy to see that developments like the Affordable Care Act, Uber, or MOOCs (Massive Open Online Course) are disruptive. Each was disruptive in their own ways by altering business terms in ways that require a similar change in order to survive.

The overused tales of disrupted companies in the photography, entertainment, media and other industries have declined over time. They knew they were facing conditions that would eventually render their business strategies and models untenable.

It is not just the more you know, its what you do with that knowledge that matters.

What can we do in the face of disruption?

Disruption overturns the effectiveness of traditional business strategies and practices. It is easy to lose sight of this in the face of shifting revenues and futures.

Executives who revert to tried and true practices and expect a different result have a limited understanding of disruption. Calls for greater responsiveness, customer centricity, and the like are ineffective as they try to match generalities with a general understanding of what to do, meanwhile the rules change from underneath their industry.

The difference between thrashing around and thoughtful planning lies in understanding the gaps between disruption and resolution. A roadmap and a business case alone are insufficient to address disruption, you need a strategy that makes hard choices and sets direction.

Facing disruption requires strategies that seem disruptive on the surface but reflect the changing rules of new realities. While every response should be unique, there are some basic ideas associated with responding to disruption. These include:

Follow the information flows. Information asymmetry is an essential aspect of every industry and business model. Digital technologies give companies the ability to change information flows and therefore disrupt markets, distribution models and economics. Look for opportunities to place yourself at the origination, intersection or application of information as the basis for a disruptive business model.

Defend the bottom of your market, the parts conventional wisdom says are no longer profitable. These are not losing markets. They are changing markets. These are the market segments that feed disruption as others find ways to make money where you cannot.

Get younger customers as they have the greatest future lifetime value, they are also the ones who will choose future winners. Get younger by rethinking the good business reasons why younger customers will choose you. Avoid pandering and marketing to these customers as that creates cynicism and mistrust.

Get lean as digital disrupts the transactional fundamentals in every industry exploiting surplus and inefficiencies in current business models. Do not confuse lean with cost cutting or re-engineering that reduces the cost of operation without changing the operations. Lean management, six sigma and other techniques play a role, provided they concentrate on creating new ways of working and outcomes.

Decoding disruption involves more than tightening your belt and hoping for the best. Disruption is not an option. It is a reality. It is happening and gaining momentum as start-ups and incumbents both play the game. As leaders double down on digital it is time to stop obsessing about how things are different, and start writing new rules for success.

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