Like many readers, I still vividly recall when Nokia was the dominant player in mobile phones, with over 40% of the market, and Apple was just a computer company. I remember when Amazon was known only for books, and when dirty taxis or high-priced limousines where the only alternative to public transport or my own car. And I recall when the Four Seasons, Ritz Carltons, and St. Regises of this world competed with one another – not with Airbnb.
Now, I may be old, but I am not that old. These changes happened recently – and fast. How did they occur? Will the pace of change remain so rapid – or even accelerate further? And how should companies respond?
An industry can be transformed by top-down economic, financial, political, and regulatory changes. But companies like Airbnb, Amazon, Apple, and Uber exemplify a different kind of transformation: agile players invade other, seemingly unrelated industries and brilliantly exploit huge but previously unseen opportunities. Importantly and counter-intuitively, doing so serves their own core competencies, rather than those of the industry that they seek to disrupt.
Indeed, rather than using existing approaches and processes to compete, these entrants created radical new game plans, rewriting the target industry’s rules. Their creativity and passion enabled them to subdue – and in some cases even destroy – less adaptable giants remarkably quickly.
Central to these companies’ success has been their understanding of a fundamental trend affecting nearly all industries: individual empowerment through the Internet, app technology, digitalization, and social media. Most traditional companies, meanwhile, remain focused on their macro environment, at the expense of responding adequately to the new micro-level forces in play.
If existing companies hope to compete in this new environment, shaped by both top-down and bottom-up forces, they will to have to adapt, preempting disruptive new players by figuring out how to disrupt themselves. Otherwise, they could face a fate similar to Nokia, which was disintermediated by one tech company (Apple) and acquired by another (Microsoft).
In this effort, companies must recognize that both demand and supply factors are or will be driving the transformation of their competitive landscapes. On the demand side, consumers expect a lot more from the products and services they use. They want speed, productivity, and convenience. They want easy connectivity and expanded scope for customization. And, as the success of services like TripAdvisor show, they want to be more engaged, with companies responding faster to their feedback with real improvements.
On the supply side, technological advances are toppling long-standing entry barriers. The online car service Uber adapted existing technologies to transform a long-sheltered industry that too often provided lousy and expensive service. Airbnb’s “supply” of rooms far exceeds anything to which traditional hotels could reasonably aspire.
An existing company would have to be highly specialized, well protected, or foolish to ignore these disruptions. But, while some well-established companies in traditional industries are already looking for ways to adapt, others still need to do a lot more.
One traditional industry in which progress is being made is the automotive branch, where companies are pursuing digitalization. Though new entrants could undoubtedly disrupt incumbents’ production platforms – Elon Musk’s Tesla Motors is a clear example – they are rare. These days, the more pervasive competitive threat comes from companies in other domains that can erode the customer value proposition after the car is sold.
Automotive companies are recognizing that, over time, the digital experience in the cars they produce will command a larger share of the consumer surplus, owing largely to the potential for substantial profit margins and economies of scale. As a result, they are adapting their vehicles to the new sharing economy, helping people to remain well-connected in the car, expanding the scope of after-sale services, and preparing for the shift away from individual car ownership toward car sharing.
Banks are also adapting, but much more slowly and hesitantly. If they are to make progress, they must move beyond simply providing apps and online banking. Their aim should be holistic engagement of clients, who seek not only convenience and security, but also more control over their financial destiny.
In these and many other industries, the competitive landscape is undoubtedly becoming more complicated and unpredictable. But four general guidelines can help managers effectively adapt their mindsets and business models to facilitate orderly and constructive self-disruption.
· First, companies should modernize core competencies by benchmarking beyond the narrow confines of their industry.
· Second, they should increase their focus on customers, including by soliciting and responding to feedback in an engaging way.
· Third, managers should recognize the value of the data collected in their companies’ everyday operations, and ensure that it is managed intelligently and securely.
· Finally, the micro-level forces that have the potential to drive segment-wide transformations should be internalized at every level of the company.
Companies that apply these guidelines stand a better chance of adapting to what is driving today’s rapid reconfiguration of entire industries. The bottom line, once again, is supply and demand: More than ever, people want – indeed, feel empowered to expect – cheaper, smarter, safer, and more efficient tools to live a more self-directed life. Companies that fail to deliver will find that their days are numbered.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz and a member of its International Executive Committee, is Chairman of President Barack Obama’s Global Development Council. He previously served as CEO and co-Chief Investment Officer of PIMCO. He was named one of Foreign Policy's Top 100 Global Thinkers in 2009, 2010, 2011, and 2012.