Many years ago, I had the privilege of interviewing the noted CEO of a major, successful airline. At the end of the interview, I asked if he thought the then-new, innovative, low-cost startup People Express Airlines would survive. “That’s a totally stupid, irrelevant question – it doesn’t matter whether they survive or not,” he responded. “When someone enters your industry or competes with you who has little cost of money and no concern for or concept of profitability, it’s your industry as you know it that will not survive. ‘People Distress’ will lead to the bankruptcy of every airline. The question you should have asked is whether any of us will be able to act properly to survive.”
The SSTDCPs (self-serving technology disruption Cassandra pundits) have been extolling “digital disruption” for over a decade. I believe this is a red herring and that we’re actually experiencing two trends that require totally different – perhaps congruent but also focused – strategies: digital disruption and financial disruption. Responding with a knee-jerk reaction to alleged technological disruption will prove dysfunctional, if history serves.
Sorting Out the Disruptors
Nearly all the typically touted digital disruption examples are actually financial disruptions. A company with seemingly endless, free money and zero concern for profitability enters a market with existing players, where profitability was the primary driver. The financial disruptor, aka People Express, could start from scratch on a new technology base. Call it asymmetric financial guerrilla warfare.
Uber, with losses over $15 billion, has been the poster child for financial disruption. Overstock.com is another great example. Conceived and built as a digital disruptor, the company continues to operate that way. We can question the nature of its management, but Overstock went public in 2002 and followed up with several years of revenue growth and profitability. However, since 2017, the company has seen declining sales and ever-increasing losses. Among the major factors has been the advent of a financial disruptor competitor, Wayfair, whose losses through 2019 are over $2 billion.
Many dismiss financial disruption, citing the advent of Amazon. But seeing this onslaught as technological disruption that demands immediate digitization fails to deal with the primary threat. Claiming this is technological disruption is a case of the tail wagging and being called the dog. Instead, legacy enterprises need a financially based strategy against such disruption.
Missing the Target
I have spoken to many executives about the financial disruption challenge. Nearly all recognize the challenge, but few have successful substantive responses. Unsuccessful approaches include:
- Trying to raise or throw massive amounts of money at defensive barriers or offensive initiatives.
- Suffering significant losses to fund digital initiatives, even over extended timeframes.
- Establishing separate digital businesses in unfamiliar market segments or that are deployed on unfamiliar technologies.
- Lobbying for regulatory barriers.
- Flooding the leadership with digital natives.
Several executives mentioned setting up parallel digital entities or acquiring digital startups. While sometimes successful, more often these weren’t. In some cases, they couldn’t afford the major losses required to launch and sustain these startups as prisoners of quarterly earnings. In others, they had trouble recruiting and keeping the exuberant, totally immersed, properly talented leadership and staff.
Meeting the Challenge
The successful strategies that were mentioned, on the other hand, include utilizing the funding, talent, risk tolerance and, frankly, bravado available in the startup market. In other words, become adept at leveraging other people’s money by investing in startups that can later become competitors or that complement existing businesses. This may entail cannibalizing your established business. As the computer industry has been saying for years, “It is better that you eat your business than have your competitor do it.”
This entails a major upgrade in the quality, talent, discipline, process, integration/coordination with the core business, as well as with those performing the corporate venturing role. Suggestions include:
- Ensure your investments include terms to potentially acquire the startup at some point.
- Set up a separate function to increase your scanning, perusal and consideration of relevant technologies, new business models and startups, similar to what a competitive analysis function entails.
- Tie, with incentives, some of your most creative and effective staff to market segments, technology segments and each of the startups in which you invest, as well as those your competition supports.
- Develop fold-in, opt-out and what-are-we-learning scenarios for each corporate venturing initiative.
- Conduct at least a quarterly review not only of the status of the corporate venturing portfolio but also of its overall performance and the scenarios identified above.
- Use your learnings to build defenses, especially of a digital nature, against emerging financial disruptors.
As others have said, make sure you have the right people on the bus to address the challenge of financial disruption. History has proved the airlines didn’t.
Keep Your Strategies Separate
In my conversations with senior leaders, I was told that the financial disruption strategy and the digital strategy – while they may overlap – are distinct, and that a digital strategy is unlikely to protect against a financial disruption. Each of these two strategies requires its own well-qualified resources, thinking, processes, skills, financial considerations and action plans.
As Wall Street and investors lose patience with the infinite losses of financial disruptors, it appears that both the number of financial disruptors and their competitive impact on established businesses are waning. However, financial disruption still occurs, and failing to recognize and deal with it can prove cataclysmic for legacy businesses.
My next blog will address the separate and ongoing critical role that digital technology strategy and investments must play in business sustainability and viability.
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