The Empire Strikes Back … How “incumbent” big companies can reinvent themselves in a world of disruptive and digital challengers

December 28, 2017

We like to focus on start-ups, the great stories of entrepreneurs who have made their ideas come true, harnessed the power of new digital technologies to disrupt and dream in ways that traditional companies couldn’t event comprehend.

But most of us still work in those “incumbent” companies. Yes we have immense scale, in the form of organisations, customers, products and even cash. Often we’re just not sure what to do with it, or most likely too afraid to give up our old world to create a new one.

Cisco and IMD recently surveyed nearly 1000 executives across 15 industries about their attitudes and behaviours towards digital disruption. One objective for this research was to identify the source of digital disruption – startups or incumbent firms.

Many of the popularized stories of digital disruption come from startups, like Uber, Skype, iZettle, and Spotify. However, there are also plenty of examples of incumbents pursuing digitally disruptive strategies, like GE, Disney, Nike, and BBVA. We were interested to learn what executives regarded as the main threats of digital disruption.

Before we look at the results, let’s look at some classic “incumbent” reinvention stories. Because it’s not the technology , or even the imagination,  that start-ups have. Im sure many company workers have friends who are no smarter than they are, and have the resouces to invest in incredible tech if they wanted to. It’s more a mindset. The fixed versus growth mindset, we often talk about. Consider these classic reinventions and then consider how it could work today:

American Express

American Express was founded during the same excitable westward expansion that spawned Western Union. After gold was discovered in California in 1848, droves of pioneer settlers headed West and relied on express riders — the Pony Express being the most famous — to send and receive packages and currency from the East. Two of the founders of American Express, Henry Wells and William Fargo, split off to found Wells Fargo.

American Express has continuously reinvented itself over its history. In its early days, American Express’s best customers were banks, which relied on American Express to shuttle stock certificates, notes and even currency between remote branches. In 1882, American Express began offering its own financial product, the money order. The company issued the world’s first traveler’s checks in 1891. At the turn of the 20th century, American Express went global, opening currency exchange offices across Europe.

After World War I, American Express entered the luxury travel business, organizing international tours and chartering cruises, including the first-ever “around the world” cruise in 1922. But the reinvention that made the biggest impact to American Express’s bottom line was its entry into the charge card business. The very first American Express charge card was issued in 1958. It charged $6 per year for membership, $1 more than its competitor (Diner’s Club), to establish itself as a prestige card. Today, American Express still thrives as a global financial services and travel company.

Lego

Lego has been around since 1932 and for years has been a hallmark toy in many children’s lives. At one point in 2014, Lego even became the top toy company in the world, surpassing Mattel’s Barbie doll, reported the Wall Street Journal at the time. But the Danish toy company wasn’t always a star performer.

According to a 2015 Fast Company article titled “How Lego Became the Apple of Toys,” the company was reportedly on the brink of bankruptcy more than 10 years ago. The growth of video games and the internet threatened the toy company, which might’ve been considered as “old-fashioned” in the face of new, innovative toys and games, reports Fast Company. In reaction, Lego reportedly made a few mistakes. However, by cutting costs, improving processes and managing cash flow, the company was on its way to bouncing back.

In 2011 came a Lego line called Lego Friends, which helps the brand appeal to young girls and combat the stereotype that only boys can play with the building blocks. But jump ahead to 2014, when “The Lego Movie” hit theaters. The movie and its products really helped Lego get the revenue boost it needed to overshadow Mattel in 2014, according to WSJ. Thanks to innovative products and a successful movie, Lego is now more than just a toy — it’s a cool franchise.

According to BoxOfficeMojo, “The Lego Movie” film has grossed more than $460 million worldwide. And according to the company’s 2015 annual report, as reported by Bloomberg, net income reached 9.2 billion Danish kroner in 2015 — the equivalent of $1.34 billion and an increase of about 31 percent.

IBM

Since debuting as the Computing – Tabulating – Recording Company more than 100 years ago, IBM has undergone major transformations. Back then, C-T-R would manufacture and sell various machinery such as commercial scales, industrial time recorders, meat and cheese slicers, and more. And, it wasn’t until 1924 that C-T-R became the International Business Machines Corporation, although it has operated under the name since 1917 in Canada.

Fast-forward a few decades to the ’50s and ’60s after Thomas J. Watson Jr. became CEO and “led IBM’s transformation from a medium-sized maker of tabulating equipment and typewriters into a computer industry leader,” according to IBM’s website. In 1964, the company created System/360, which essentially made it possible for machines in a product line to work with each other, making a huge impact in the business world. Less than 20 years later, in 1981, the IBM Personal Computer (IBM 5150) arrived. Although it wasn’t the first-ever PC, people began buying these computers to use in their daily lives.

However, the ’80s and early ’90s were rough for the company. According to its website, “IBM was thrown into turmoil by back-to-back revolutions.” The company didn’t properly prepare for the PC revolution, reported NPR in 2011. With the focus on “desktop and personal productivity” instead of business applications, IBM suffered annual net losses that reached the billions — a record of $8 billion in 1993.

The company had two options: reinvent or die. So, IBM shifted its focus to IT and consulting, according to NPR.

Still, the company has plans to further reinvent itself. In her 2015 chairman’s letter, CEO Ginni Rometty wrote, “Today, IBM is much more than a ‘hardware, software, services’  company. IBM is now emerging as a cognitive solutions and cloud platform company.” Thanks to its transformation, IBM reported its analytics, cloud, mobile, social and security strategic imperative grew by 26 percent and contributed $29 billion in revenue in 2015.

National Geographical

The National Geographic Society published its first magazine in 1888 and printed its first stunning color photographs of far-flung locations, wild animals and exotic cultures in 1914 [source: Motavalli]. The yellow-bound magazine became a coffee-table staple for generations of American families, but started to hemorrhage subscribers in the 1990s as younger readers dismissed it as their grandparent’s mag.

National Geographic Society CEO John Fahey didn’t wait around for his publication to suffer the same fate as iconic photo magazines like Life. Instead, he spearheaded an effort to reinvent the National Geographic brand across all media platforms, especially the National Geographic Channel, launched in 2001

The National Geographic Society published its first magazine in 1888 and printed its first stunning color photographs of far-flung locations, wild animals and exotic cultures in 1914 [source: Motavalli]. The yellow-bound magazine became a coffee-table staple for generations of American families, but started to hemorrhage subscribers in the 1990s as younger readers dismissed it as their grandparent’s mag.

National Geographic Society CEO John Fahey didn’t wait around for his publication to suffer the same fate as iconic photo magazines like Life. Instead, he spearheaded an effort to reinvent the National Geographic brand across all media platforms, especially the National Geographic Channel, launched in 2001

Netflix

Today’s younger generation probably doesn’t remember that in the late ’90s to the early 2000s, “Netflix and chill” wasn’t as easy as firing up the laptop, logging into a Netflix account and picking a movie or TV show to binge watch. Instead, Netflix was kind of like an online Blockbuster, more or less.

In 1998, Netflix launched the first DVD rental and sales site with Netflix.com. One year later, the company debuted its subscription service, which allowed movie buffs to rent unlimited DVD rentals for a low monthly cost and receive them by mail.

It wasn’t until 2007 that Netflix transitioned into online streaming — and it was a smart move. Finally, viewers of all ages would have access to some of their favorite shows and movies, as well as original Netflix content. In fact, in 2013, Netflix nabbed 31 primetime Emmy nominations for its original shows like “House of Cards” and “Orange Is the New Black.”

Although the company has received some angry outcries from customers over the years because of changes in pricing, the company has experienced financial success over the long term. For example, Netflix stock was trading at $3.80 at the beginning of 2007. On Sept. 1, 2016, the stock closed at $97.38.

These days, it’s safe to say Netflix is considered one of the coolest stocks to invest in. And although the company didn’t grow its subscriber base as much as it wanted to in second-quarter 2016, Netflix did grow its members by 1.7 million.

Nintendo

The history of Nintendo began long before the Japanese gaming company released its monstrously popular Nintendo Entertainment System (NES) console in 1985. Nintendo Koppai was founded all the way back in 1889 as a playing card company by Fusajiro Yamauchi [source: Jones]. In 1949, Fusajiro suffered a stroke and his 22-year-old grandson Hiroshi took over [source: Melia]. Over the next 63 years, Hiroshi Yamauchi would transform Nintendo into the world’s most successful gaming company.

Anxious about the limited market for playing cards, Yamauchi tested other products and services, including a taxi company, instant rice, hourly hotels (wink-wink) and toys [source: Jones]. Nintendo had its first hit toy in 1963 with the Ultra Hand, an extendable plastic grabber with suction-cup fingers. Taking an interest in video game popularity, Nintendo got the rights to distribute the Magnavox Odyssey in Japan, the world’s first home video game console. In 1977, Nintendo released its first game console, the TV-Game 6, offering six versions of the same tennis game; it was eclipsed by Atari’s iconic 2600 console

Yamauchi’s big break came at the arcade. In 1980, legendary Nintendo video game designer Shigeru Miyamoto created the first arcade version of “Donkey Kong,” featuring the hammer-wielding hero who would become Mario [source: CBBC]. When the NES console arrived in the U.S. in 1985, it featured Miyamoto’s classic “Super Mario Bros.” launching the best-selling video game franchise of the next three decades. Yamauchi remained at the helm of Nintendo until his death in 2013 at the age of 85

Western Union

Samuel Morse sent the first telegraph message from Washington, D.C. to Baltimore, Md., in 1844, introducing the world to long-distance communication. Entrepreneurs rushed in to capitalize on this revolutionary technology, laying miles of telegraph lines to connect America’s young cities. One of those fledgling telegraph companies was the New-York and Mississippi Valley Printing Telegraph Company, founded in 1851. The company soon merged with competing telegraph networks and changed its name to Western Union [source: Western Union].

At the peak of popularity, Western Union sent out more than 200 million telegrams in 1929. That business declined with the advent of cheaper long-distance phone service and was finished off by the Internet. Fortunately, the company has always had diverse interests. It started its wire money transfer business back in 1871

Cisco and IMD’s study

In general, executives saw a bigger threat from incumbent firms than they did from startups, but this difference varied substantially by industry. As Figure 1 shows, more than half of the executives in media and entertainment, consumer packaged goods, telecommunication, and retail sectors regarded startups as the most likely source of digital disruption. By contrast, startups were seen as a much smaller threat for companies within the healthcare, utilities, oil and gas, and pharmaceuticals sectors, perhaps due to high entry barriers in these industries.

Figure 1: Large differences in the perceived source of disruptive threats across industries

Source: DBT Center, 2015

The relative advantages of startups vs incumbents

Respondents were asked about the relative advantages of startups vs incumbents. The results are shown in Figures 2 and 3. Not surprisingly, the advantages differed significantly. The top 5 advantages for startups were: faster innovation capability; greater agility; a culture of experimentation and risk-taking; highly digitalized products and services; and the vision of company leaders. By contrast, the advantages of incumbents were: greater access to capital; strongly trusted brands; a large customer base; high quality of customer relationships; and faster innovation capability.

Figure 2: The top 5 relative advantages of startups

Source: DBT Center, 2015

Figure 3: The top 5 relative advantages of established companies

Source: DBT Center, 2015

These advantages are largely off-setting. Startups compete by being agile, innovative, and active experimenters. Unencumbered by legacy systems and heavy bureaucracies, they adapt and move quickly. Incumbents may be less agile or innovative, but they compete due to strong asset bases, well established brands, along with deep and longstanding relationships with customers and other stakeholders. Ironically, when we talked to incumbents, they were envious of the agility of the startups; when we spoke with startups, they were envious of the stability of incumbents.

Recently, however, this relative balance has shifted in favor of startups. They are maintaining their advantages in innovation and agility, while quickly gaining in the areas of traditional strength for incumbents. Let’s take each of the three top incumbent advantages in turn.

Access to capital

Traditionally, access to capital has been the domain of large, established companies with solid balance sheets, stable revenues, and large asset pools. These organizations are able to tap into debt and equity markets with relative ease. Startups, on the other hand, have traditionally struggled to access capital. This is changing.

We have seen a dramatic rise in venture capital (VC) funding over past decade. According to CB Insights, $100 Billion of VC funding deals were made just in the first three quarters of 2015. The number of Unicorns – private companies valued at US$1 Billion or more – has jumped dramatically in the past 5 years, as shown in Figure 4.

Figure 4: A sharp rise in the number of unicorns

Source: CB Insights and Credit Suisse, 2015

For startups, access to capital is not as much of a constraint today as it was in the past. Low interest rates, large pools of available capital, and competition among lenders lead to generous funding opportunities. While this level of investment is probably not sustainable in the long term, at least for now, the access to capital is not a big constraint for startups.

Strong brands

Brands have traditionally taken decades to build. Yet, today this is changing. New brands are appearing all the time, and it is not taking them long to become household names. Most people had not heard of WhatsApp 5 years ago, Uber 3 years ago, or WeChat 1 year ago, and yet these brands are now global powerhouses. The speed by which brands can rise is paralleled by the speed at which they can fall. Iconic brands in the 1990s like Dell, Nokia, Morgan Stanley, Avon, and Sony have seen their reputations and valuations fall dramatically.

Large customer base

The speed at which new companies are acquiring customers is astonishing. It took Snapchat and Instagram only three years to reach 200 million users and 30% penetration of smartphone users, according to ComScore. Fast customer acquisition and instant brands are not just restricted to Internet companies. Witness the rapid rise in brands such as Uniqlo in fashion, Tesla in automobiles, Xiaomi in telecommunications, and Square in financial services.

The encumbered incumbent

All in all, our analysis does not paint a pretty picture for large, legacy businesses. The strengths that traditionally protected them from smaller and more agile competitors are being whittled away. Startups are maintaining their agility edge, but with easier access to capital, strong brands, and rapid customer acquisition.

However, the future does not need to be bleak for incumbents. In many industries where they are under threat of digital disruption, like financial services, telecommunications, retail, and technology, incumbents lead from a position of strength. They are mostly well capitalized, strongly managed, and profitable. At the moment, many of them struggle to appropriate the advantages traditionally reserved for startups, such as being agile and innovative. However, this need not be the case. If they are able to improve their sensing capability for digital threats and opportunities, their digitization of products, services, and processes, and their speed of execution, then they should be well placed to compete with startups.

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