4 Signs Your Industry Is Being Disrupted

In his book, Thinking, Fast and Slow, Nobel laureate Daniel Kahneman explained that there are two modes of thinking that we use to make decisions, which he calls “System 1” and “System 2.” The first is more instinctual and automatic, the second more rational and deliberative. We need to use both to make good decisions.

Businesses also have two systems, which can sometimes conflict. One is immediate and operational. It seeks to optimize processes, gain market share and maximize profitability. The second builds capacity for the long term, by investing in employees, building trustful partnerships and creating new markets to compete for the future.

Obviously, these are not mutually exclusive. Just as we can step back and think rationally about instinctual urges, we can invest for both the short and the long term. Yet given that every business eventually matures and needs to renew itself, many end up taking the wrong path. Here are four signs that your industry might be in the process of being disrupted.

1. Maturing Technology

Fifteen years ago hardly anyone had a smartphone. Social media was in its infancy. Artificial intelligence was still science fiction. Yet today all of those things are somewhat mature technologies that have become an integral part of everyday life. Anywhere you go you see people using them as a matter of habit.

It’s become conventional wisdom to look at these developments and say that technology is accelerating. It certainly seems that way. Nevertheless, look a little closer and it becomes clear that’s not really true. Buy a computer or smartphone today and its capabilities are not that different to those that came out five years ago.

The truth is that every major technology has a similar life cycle called an S-curve. It emerges weak, buggy and flawed. Adoption is slow. In time, it hits its stride and enters a period of rapid growth until maturity and an inevitable slowdown. That’s what’s happening now with digital technology and we can expect many areas to slow down in the years to come.

In the 1920s and 30s there was a time of explosive growth in the automobile industry and electronic appliances. The 1950s and 60s was a golden age for antibiotics, with a number of life-saving new drugs being discovered every year. The 1970s were considered the heyday for airlines and the past few decades have been focused on digital technology.

Yet every technology matures and every S-curve flattens, which is exactly what we’re seeing with digital technology today. Moore’s Law, the consistent doubling of transistors we can cram on a silicon wafer, is ending, and the digital era will end with it. Once opportunities to innovate narrow, firms look to other avenues to increase profits.

2. Consolidation

One of the key tools in any strategist’s toolbox is Michael Porter’s five forces analysis. The basic idea is that to compete effectively, you need to focus not just on the key competitors in your industry, but also customers, suppliers, new market entrants and substitutes. To build competitive advantage, you need to increase your bargaining power against all five.

Yet when an industry is in decline, the forces external to the industry get the upper hand. With new market entrants and substitutes becoming more attractive, customers and suppliers are in a position to negotiate better deals, margins get squeezed and profits come under pressure.

That’s why a lot of consolidation in an industry is usually a bad sign. It means that firms within the industry don’t see enough opportunities to improve their business by serving their customers more effectively, through innovating their products or their business models. To maintain margins, they need to combine with each other to control supply.

I think it’s clear that Silicon Valley is going through some version of this today. With Moore’s Law ending, the opportunities to innovate are narrowing and acquisitions are accelerating. The last breakthrough product, arguably, was the iPhone launched in 2007. Startups, don’t try to upend incumbents anymore, they sell to them.

3. Rent Seeking & Regulatory Capture

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself unable to make an economic profit—that is profit over and above its cost of capital. In other words, unless a firm can beat Adam’s Smith’s invisible hand, investors would essentially be better off putting their money in the bank.

That leaves entrepreneurs and managers with two viable strategies. The first is innovation. Firms can create new and better products that produce new value. The second, rent seeking, is associated with activities like lobbying and regulatory capture, which seeks to earn a profit without creating added value. In fact, rent seeking often makes industries less competitive.

There is abundant evidence that over the last 20 years, American firms have shifted from an innovation mindset to one that focuses more on rent seeking. First and foremost, has been the marked increase in lobbying expenditures, which have more than doubled since 1998, especially in the tech industry. Firms invest money for a reason. They expect a return.

It seems like they are getting their money’s worth. Corporate tax rates in the US have steadily decreased and are now among the lowest in the developed world. Occupational licensing, often the result of lobbying by trade associations, has increased fivefold since the 1950s. These restrictions have coincided with a decrease in the establishment of new firms.

If your industry is more focused on protecting existing markets than creating new ones, that is one sign that it is vulnerable to disruption.

4. The Inevitable Scandals

In the 1920s the Teapot Dome scandal rocked Washington. The Secretary of the Interior, Albert Bacon Fall, was found to have corruptly leased Navy petroleum reserves to private companies. In response, Congress was given the right to subpoena any US citizen’s tax records as well as increased regulation of campaign finance.

In the century since, we have had continuous cycles of largesse and reform. The savings and loan crisis in the 1980s led to the FIRREA Act to increase oversight. Accounting scandals, like those involving Enron and WorldCom, led to Sarbanes Oxley. The Financial Crisis led to Dodd-Frank.

More recently, tens of billions of dollars were plowed into WeWork before it was exposed as little more than a Ponzi scheme. The Theranos fraud went on for more than a decade before its board realized that its product was an elaborate ruse. FTX was valued at $32 billion but turned out to be worthless. Yet there has been no reform.

As Bain pointed out a decade ago, the extreme measures taken after the Great Recession led to a superabundance of capital, which paved the way for the highest profit margins in half a century. Now it seems that the era of easy money and easy regulation is ending, making it a near certainty that more frauds will be exposed.

We need to learn the telltale signs that an industry is being disrupted. Once technology begins to mature, we can expect consolidation, rent-seeking and regulatory capture to follow. After that, it’s just a matter of how much time—and how big the bubble gets—before everything bursts.

Greg Satell is a transformation & change expert, international keynote speaker, and bestselling author of Cascades: How to Create a Movement that Drives Transformational Change. His previous effort, Mapping Innovation, was selected as one of the best business books of 2017. You can learn more about Greg on his website, GregSatell.com and follow him on Twitter @DigitalTonto

Like this article? Sign up to receive weekly insights from Greg!

Photo by Matt Botsford on Unsplash