4 Ways To Beat Disruptive Innovation

These days, every business needs to innovate.  While many in the past assumed that they could get by running the same old business the same old way, the fact is that 87% of the companies on the Fortune 500 in 1955 no longer exist.

So clearly, today’s firms can’t stand still and must pursue a variety of innovation strategies.  Some invest heavily in R&D, others use advanced technologies to improve existing products and others create open innovation partnerships to solve tough problems.

Yet even if a business diligently pursues these efforts, it’s still vulnerable to disruptive innovations.  These are especially challenging because they require a change in business model and aren’t profitable for incumbents to pursue.  However, while competing with a new disruptive competitor is difficult, it can be done.  Here are 4 ways to approach it.

1. Acquisition

Disruptive innovations don’t mint money from day one.  They focus on new markets, made up of light or even non-consumers of the category and require a new business model.  That takes lots of sweat, tears and, most of all, time.  So, in the early stages, there are always opportunities for incumbent businesses to acquire the disruptor.

Certainly this is true in the tech industry.  Apple routinely uses acquisitions to launch new innovations like Siri and other companies, such as Cisco and Microsoft, have made hundreds of small acquisitions over the years.  Not all of these were disruptive companies, but a lot of them were.

Yet acquisitions are not a panacea.  The important thing to remember about a disruptive innovation is that it’s not the technology that makes it disruptive, but the business model. So acquiring a disruptive startup and then pushing it to embrace your business model will only defeat the purpose.

This is a persistent problem in the marketing communications industry.  The big ad agency holding companies routinely buy agile new agencies, but almost as soon as they do, they push them—through the “earn out” structure and other ways— to generate margins. Perhaps not surprisingly, the upstarts quickly begin operating like their agency brethren.

And the ad agency death spiral continues.

2. Co-Option

You don’t have to actually acquire a disruptive startup, you can simply co-opt it.  Disney did a masterful job of this when it offered Pixar a distribution deal.  Consequently, Pixar never learned how to do distribution and became so dependent on Disney that they eventually merged.   These days, Pixar actually runs Disney animation.

Steve Jobs was behind both deals (distribution and acquisition), which shouldn’t be surprising.  He was a master of co-option.  In the late 90’s, MP3’s terrified the music industry.  Jobs co-opted the technology, linked it to his existing Mac computers through iTunes and saved the music industry, while generating enormous profits for Apple.

Co-option, in many ways, is a more viable strategy than acquisition.  It’s certainly less resource intensive and can often be more effective.

3. Spin Off

In 1980, IBM had already been a victim to disruptive innovation.  As the dominant player in mainframes, it had largely missed out on the minicomputer revolution.  Its management saw personal computers as an even greater threat to its business model and were determined to not be left behind again.

But instead of throwing the full heft of IBM’s corporate resources behind the new venture, they chose a different path.  They sent a small team to Boca Raton, Florida, away from the prying eyes of corporate headquarters in upstate NY, to develop a completely new product. A year later, the IBM PC became one of the most successful products in history.

Others have taken a similar approach.  Google formed Google X to develop promising new technologies that don’t fit with its core business.  Facebook has made high profile acquisitions like Instagram, WhatsApp and Oculus VR, but vowed to keep their operations separate.

Spinning off disruptive innovations, if done right, can offer the best of both worlds, the independence of a startup and the resources of an industry giant.

4. Bayesian Strategy

There is no “right” way to respond to a disruptive innovation.  Incumbent firms have a variety of options and the success of any approach is highly contextual.  The one crucial element is that you have to know it’s going on.  All too often, managers want to be faithful to their business model and do not appreciate the danger until it’s too late.

We can no longer treat strategy as a game of chess, in which we sit in conference rooms and plan out a punctuated series of moves and countermoves.  Instead, we need to take a more Bayesian approach to strategy, in which we are not so much trying to get it right, but to become less wrong over time.

That’s easier said than done because we need to effectively change the software in our organizations to become more sensitive to changes in the marketplace and adaptable.  This transformation starts with data, which needs to be made not only more accessible, but more easily combined with analytic resources to become actionable.

But most of all, it requires a change in perspective.  We can’t wait for emerging trends to become salient, by then it’s often too late.  Rather, we must focus on emerging platforms and build the skills we need to integrate with them.

As Rita Gunther McGrath has put it, planning needs to become discovery driven, rather than knowledge driven.  In other words, we need to focus on how we can learn, not what we think we know.

– Greg