Industrial Engineering

Management by Paul Engle

ISE Magazine –Volume: 49, Number: 08

Guarding against fearful disruption

Harvard Business School professor Clayton Christensen explains that a disruption displaces an existing market, industry or technology and produces something new, more efficient and worthwhile. It is at once destructive and creative.

Despite embracing technology and encouraging innovation, most senior leaders fear disruption from a previously unidentified source. Strategy experts recommend innovation as the best approach to dislodge an entrenched competitor. Hundreds of real-life cases prove that changing the rules of the game allows much smaller enterprises to take market share from larger, powerful competitors. This process might have taken decades prior to the internet and the widespread availability of powerful technology. Today the process can happen overnight.

Can large, successful enterprises defend against disruptive innovation? History indicates the answer is no. Eventually, market forces work against entrenched competitors and favor the newcomers.

Retailing may be the most visible example. During the latter half of the 20th century, Walmart began providing consumers with low-cost products in a warehouse environment. Small retailers were decimated. Thousands went out of business. Whole towns soon featured downtown areas littered with empty storefronts. Walmart’s ability to source products inexpensively, particularly from Asia, redefined retailing in the United States.

Walmart’s growth astonished most observers. Twenty years ago, the company reported $80 billion in annual revenue, gigantic compared to its competitors. Today, Walmart enjoys annual sales revenue of around $480 billion, but growth has ground to a halt for the last five years.

The culprit? The internet, and more specifically, the new 21st century disruptor, Amazon. Amazon’s revenue 20 years ago was $15 million. Today, the number is around $140 billion, an astonishing 60 percent plus annual growth rate during a period when the economy increased 2 percent to 3 percent each year. Amazon doubled in size, on average, every other year competing against much larger companies with enormous resources in a sluggish economy.

Walmart’s disruption included providing its customers with warehouse style shopping and offering lower prices made possible by huge volumes sourced overseas. Amazon’s disruption includes offering nearly anything you need at competitive prices without having to drive to the store. Free shipping negated any penalty associated with delivery.

Walmart remains four times larger than Amazon in annual revenue, yet has about half the market value of Amazon at $240 billion vs. $450 billion. Amazon may be forcing hundreds of suburban malls to rethink their strategies as retailers reduce their number of stores or even cease to operate.

Many executives fear small, unknown competitors far more than their largest foes, spending enormous resources to monitor the marketplace in an attempt to identify potentially disruptive competitors. At the same time, companies should encourage staff members to innovate continuously and remain customer focused.

Will a disruptive competitor offer a new approach to the business that captures the imagination of consumers? Thousands of entrepreneurs are hard at work attempting to do just that. Will they be successful? Perhaps. The days of the dozing giant may be ending, raising the bar for newly hatched competitors.

Our advice for these companies continues to include staying very close to your customers providing innovative products and services and attempting to identify new forms of competition before they gain a foothold.