CORPORATE VIEW

Shape up for the future

The business environment is tougher than ever and recent history is littered with examples of companies that have failed to adapt. To succeed in an era of technological disruption, successful corporates must embrace change.

Businesses have always faced competition. Innovations have constantly emerged that threaten a company’s competitive advantage. They either adapt their product or service to face down the new threat (as many carmakers did when confronted by an existential challenge from Japanese rivals in the 1980s). Or – like steel producers and railways in the US in the days before anti-monopoly regulators – they impose restrictive business practises that make it hard for others to compete.

The latter choice is tricky these days. But the former option – the transformation of the business to outwit new rivals – can seem impossibly difficult given the astounding speed with which new ideas and business models are created, deployed and adopted. In the past, new technologies took years or even decades to spread worldwide. Now apps can seemingly come from nowhere and achieve critical mass in a matter of months. As Google’s Eric Schmidt and Jonathan Rosenberg note in their book How Google Works, “technology is roiling the business landscape and the pace of change is accelerating.”

Perhaps the best known disruptor of our time is Uber, which has devastated the established taxi business in cities worldwide in just a few years. It seems almost certain that similar companies will revolutionise other business sectors – including those with more consolidated incumbents than taxi firms – in the near future.

A quick route to extinction

Any company can fall victim to technological change. As Pierre Nanterme, CEO of Accenture, notes: “New digital business models are the principal reason why just over half the companies on the Fortune 500 have disappeared since the year 2000”.

With the benefit of hindsight, technology-related decision-making at many firms appears woeful. But often the direction of change is hard to spot at the time. DVD rental chain Blockbuster’s failure to buy Netflix and its subsequent demise has become legendary, for example. But could Blockbuster really have anticipated that streaming technology, which at that time was hampered by slow broadband, might one day upend the highly profitable video rental business?

Even when companies are technologically advanced and well-financed it is possible to lose ground quickly. In the 1990s and 2000s, Nokia mobile handsets were so ubiquitous that no one could have envisaged the brand disappearing in this market segment. Yet following the introduction of Apple and Android smartphones, Nokia’s offerings looked old-fashioned. A belated adoption of Microsoft’s unpopular smartphone platform did little to help. “This was, in retrospect, a classic case of a company being enthralled (and, in a way, imprisoned) by its past success,” notes James Surowiecki, author of The Wisdom of Crowds.

In a few years, Nokia went from hero to zero as a handset manufacturer. After a catastrophic decline in sales, the handset business was ultimately sold to Microsoft for $5.4 billion – a fraction of the roughly $250 billion it was worth at its peak in 2007 – with much of its value coming from the patents it owned. Microsoft’s subsequent decision to kill the Nokia brand for handsets spoke volumes about the value of heritage in a market defined by innovation (although the brand has since been sold on and is poised to return as an Android-focused firm).

Research in Motion, which owns the Blackberry brand, remains a functional standalone business. But it has experienced a similar trajectory to Nokia’s mobile business and is now a shadow of its former self, having lost its footing when it tried to combat the newly launched iPhone in 2007 with an overly ambitious and inferior product. “We tried to do too much… in an incredibly short period of time and it blew up on us,” recalls former Research in Motion co-CEO Jim Balsillie. At the end of September 2016, Blackberry announced that it would no longer make phones and would focus on software instead.

Transformation is possible

The examples of Blockbuster, Nokia’s mobile business and Blackberry may give corporate managers nightmares. But fortunately, there are plenty of inspirational examples of companies that have used technology to turn their luck around and make their business more future proof.

IBM is a textbook example of a company that could easily have been scuppered by technological progress – dozens of times. The company, which started off making punch cards, dominated mainframes before taking a similar leadership role in the PC market in the early 1980s. But the advent of cheaper PC clones undermined its position. In 1993, following the biggest loss in American corporate history at that time, IBM set about re-inventing itself by offloading its PC business and focusing on IT services for companies, acquiring hundreds of new businesses. By 2013 IBM was the largest seller of enterprise server solutions globally. Now the company is focusing on new higher value markets, such as big data analytics and the cloud.

Encouragingly, one of the goliaths of today’s tech scene was once an also-ran which suffered a number of near death experiences before engineering a dramatic transformation that continues to this day. Steve Jobs’ return to Apple to pioneer the iPhone and other new products is well known but it’s easy to forget how moribund Apple was in 1997: its heyday of reinventing the PC was far behind it, the candy-coloured iMac blobs had yet to come and it was just 90 days from bankruptcy.

Perhaps the highest profile current example of a tech-driven turnaround is Nintendo. To be sure, the company has long been famous in the gaming market; it transformed the business in the late 1980s and made a surprise comeback in 2006 by thinking outside the box with the motion-sensitive Wii. But in recent years, the formidable power of Nintendo’s back catalogue was notably absent in the fastest-growing gaming segment: mobile.

Equity analysts despaired that the company would ever bring its long-gestating plans for mobile gaming to market. Nintendo took its time but it was worth it. Pokémon Go became a sensation in mid-2016, dominating the gaming and receiving widespread coverage in the mainstream news media. By September, Pokémon Go had been downloaded 180 million times globally and generated an estimated $440 million in revenue. While Nintendo only gets a part of that revenue, Pokémon Go has got “people thinking about Nintendo” and created excitement about its forthcoming NX console system, according to Mick Hickey, research analyst at financial advisory services group Benchmark.

Less dramatically – but no less impressively – Deutsche Post DHL Group, one of world’s largest logistics firms, has addressed the significant technological disruption facing the sector. To avoid getting left behind, it has opened innovation centres in Germany and Singapore where it works with customers, experts and academics to re-think its services and solutions. “The DHL Trend Research team continuously analyses and identifies new developments and their potential impact on the logistics industry along the entire value chain,” explains Bill Meahl, chief commercial officer at DHL.

DHL’s proactive approach to change has resulted in robots that can independently unload loose parcels from containers, others that collect parcels before placing them on autonomous vehicles for delivery elsewhere in a warehouse, and augmented reality smart glasses for warehouse order picking. It has also trialled a Parcelcopter drone delivery service and in September 2016 revealed a collaborative research project with the Massachusetts Institute of Technology and the Amsterdam Institute for Advanced Metropolitan Solutions to design and test the world’s first fleet of autonomous boats in Amsterdam.

How not to get left behind

Every sector has different competitive dynamics. But each is susceptible to new competitors that leverage technology and don’t have the baggage of legacy business models, IT systems, reputations or responsibilities, such as former workers’ pension plans. Every smart company should keep abreast of potential new rivals or innovative business or financing methods.

Technology, moreover, should not be feared. Instead, it should be embraced for its transformative capabilities – it creates new opportunities, lowers costs and increases efficiency and supply chain resilience. As Lou Gerstner, the legendary former CEO of IBM, who rescued the company from near collapse notes: “Longevity is the capacity to change, not to stay with what you’ve got.”

To develop an open-minded attitude to business change, companies need to think long term. This can be challenging: investors now hold stock for short periods of time, encouraging companies to think likewise and focus on quarterly results rather than long-term goals. Nevertheless, there are signs of change: 58% of respondents to PwC’s 2015 Corporate Directors Survey of 783 public company directors said their time horizon is greater than five years, compared to 48% in 2011. Let’s hope that directors are prioritising a reassessment of their business and technological models when thinking about their future business prospects. They should also be making sure their finance and treasury operations are as efficient and effective as possible to ensure the company has the firepower necessary to achieve its strategic goals.

There is evidence that entrepreneur-driven market disruption is now a recognised fact of life in virtually every industry and market sector: 99% of participants in a survey of more than 250 enterprise business leaders and innovators across North America, Europe and Asia believe traditional markets are being disrupted by new category contenders. Prompted to a significant degree by these inventive new start-ups with vision, ambition and a willingness to take risks, many of the world's largest corporations are transforming and remodelling their businesses. Just as the pace of change has increased so, it seems, has the capacity of established companies to respond to disruption.

 

Sources

  • Schmidt, E, Rosenberg, J and Eagle, A, 2014, How Google Works
  • www.weforum.org/agenda/2016/01/digital-disruption-has-only-just-begun/, accessed August 15, 2016
  • www.newyorker.com/business/currency/where-nokia-went-wrong, accessed September 7, 2016
  • www.ft.com/cms/s/0/a1d57422-16fb-11e3-9ec2-00144feabdc0.html#axzz4HNvJXtDI, accessed August 15, 2016
  • www.theglobeandmail.com/report-on-business/international-business/us-business/microsoft-buying-nokias-devices-and-services-business-in-72-billion-deal/article14078586/, accessed August 15, 2016
  • fortune.com/2015/06/10/blackberry-storm/, accessed September 7, 2016
  • www.theguardian.com/technology/2015/jan/31/apple-worlds-most-profitable-company-iphone-china, accessed September 7, 2016
  • www.gamespot.com/articles/pokemon-go-has-reportedly-made-more-than-440-milli/1100-6443251/, accessed September 9, 2016
  • www.cnbc.com/2016/07/11/pokemon-go-nintendos-comeback-begins.html, accessed September 7, 2016
  • www.dhl.com/en/press/releases/releases_2015/group/dpdhl_group_to_foster_global_growth_through_pioneering_innovation_approach.html, accessed August 16, 2016
  • www.mckinsey.com/global-themes/leadership/lou-gerstner-on-corporate-reinvention-and-values, accessed August 15, 2016
  • Annual Corporate Directors Survey, PWC, 2015
  • Start-Up Innovation Inspiring Business Transformation, Business Performance Innovation Network in
  • Association with Tech Mahindra, May 2015
  • Ibid.

The View is the online magazine of ING Wholesale Banking