By Drikus van de Walt, Synthesis Cloud Disruption Engineer
In roughly the 5th Century BC a book emerged from ancient China. Attributed to the ancient military strategist Sun Tzu, this book: The Art of War1, is still considered to be one of the greatest military treatises ever penned. It has remained popular through the centuries because its lessons are still applicable – not just for war, but for business and life.
Modern business strategy is firmly rooted in military tactics. The great Prussian general and military theorist, Carl von Clausewitz, highlights this relationship in his most famous work On War:
War is a clash between major interests… Rather than comparing it to art we could more accurately compare it to commerce, which is also a conflict of human interests and activities.2
One business strategy that has gained immense popularity is Disruptive Innovation3. Coined in the 1990s by Clayton Christensen, it describes how new entrants can disrupt established businesses. The entrant’s disruptive power lies in their novel use of existing technologies. Hence, Disruptive Innovation is the process for new entrants to dethrone existing players.
We need to understand how existing businesses become vulnerable in the first place.
For this, we turn to Richard N. Foster and his work Creative Destruction4.
Richard describes how a company can become caught in a state of cultural lock-in. Frozen in place and crippled by existing mental models and ways of working. A sitting duck for Disruptive Innovation.
The lock-in process consists of 4 stages:
- Stage 1 – Foundation: A brand new company capitalises on unrealised opportunities. This is the basis of Disruptive Innovation. People in the company are driven by a passion for novelty and change.
- Stage 2 – Growth: Having survived Stage 1, companies aim for rapid growth. They begin to think about the cause of their success. Was it their technical skills, their corporate culture, or their unique marketing tactics? They try to capture that success and replicate it at scale. The original passion is replaced by processes, procedures, automation, and repeatability.
- Stage 3 – Dominate: Survival to Stage 3 means you’ve grown to dominate your industry. These companies tend to become mechanical and rigid. Established boundaries and limitations suppress new strategic initiatives.
- Stage 4 – Cultural Lock-In: In this final stage, a dominant company finds itself in a battle for survival. The company is consumed by fear, unable to adapt, and resistant to any change.
We can clearly see evidence of this process (existing companies being pushed out of the market by new entrants) playing out in the stock market.
Take, for example, the S&P 500®, widely regarded as the best metric for the state of the US financial market. The S&P 500® tracks the 500 leading companies and covers approximately 80% of the available market capitalisation5. Research conducted by both Innosight6 and McKinsey7 clearly demonstrate the increasing effect of Disruptive Innovation.
In the late 1970s, the average tenure of a company on the S&P 500® was between 30 and 35 years. This is down to 15 to 20 years in this decade and projected to decline even more (down to 12 years by 2027). It’s not just that companies on the index are changing but are changing at an ever-increasing pace.
In 2015, for example, the index changed by 28 companies (28 new entrants replacing 28 established companies). This is a churn rate of 5.6%. Think of it this way: On average, every 2 weeks a new company enters the list of 500 leading companies of the US.
We know there is a disruptive force changing the existing market order. But consider the ‘lock-in process’ and an important insight emerges:
The disruption felt by established giants is not only due to technological factors.
Technology enables rapid innovation and scalability never experienced before – it is a mechanism for disruption. The vulnerability of incumbents, however, stems from strict institutional control by impairing creative thinking, freedom, and autonomy.
“He will win who, prepared himself, waits to take the enemy unprepared.” – Sun Tzu
Times have changed, and are changing with increasing rapidness. To have “been there and done that” is not good enough anymore. What do you need if you want your business to remain relevant in a decade’s time? How do you prepare yourself? Through Disruptive Innovation – a process that prioritises freedom and autonomy to develop at scale.