Most executives worry about disruption. They always have. It's just that nowadays it feels different. There's global economic turmoil to contend with. There are new types of competitors and new technologies to understand. Then there's the scale and pace of change - today's forces of disruption can shake up an entire industry sector in less time than it takes most companies to update their IT systems. And yet, it prompts a counterintuitive question: could disruption actually be good for business?
Disruption is often thought of as some sort of seismic, overpowering event. In fact, most industries experience disruption not from the sudden impact of a single force, but, rather, from a collision of interacting forces. To detect these disruptive forces, we believe CEOs and businesses should consider five factors: changes in customer behaviour; new kinds of competition; shifting regulation; new methods of distribution; and core technologies of production. Together, these factors have the potential to significantly change the nature of an industry - and the power and profits of players within it.
The fundamental challenge for CEOs is to figure out when disruption is happening to them, to understand where it's coming from and to have a strategy in place for more than one future. In this latest pulse, we put that challenge to 268 CEOs. And here's what we uncovered…
CEOs tell us they're experiencing disruption in all parts of their business, irrespective of geography, company size or industry sector. They also recognise there's been a shift in the source of that disruption. Not so long ago companies saw competitors and new regulations as the biggest potential disruptors of their businesses. Fast-forward to 2016 and CEOs tell us that, while both those factors still have the power to disrupt, they see the growing influence of customers and the ways in which goods and services are now produced - particularly through digitisation and new technologies - as increasingly disruptive.
One area where CEOs are yet to anticipate major disruption is in the distribution of goods and services. But here potent disruptive forces are already at play. The sharing economy and the digital enablement of distribution channels - e.g. supply chains and Internet of Things - are shaking up sectors like automotive, retail and tourism.
Every CEO already knows what Airbnb has done to the global hotel industry. But observing from the outside doesn't necessarily prepare you for disruption in your own business. It leads many CEOs to automatically assume disruption will have a negative impact. In fact, over the long term, what was initially perceived as a negative disruption often actually results in a positive transformation. In the early stages of industry disruption it's all too easy to be caught off guard: to ignore the small changes that appear one by one, to fail to believe they will affect you, and to end up at the tail of the wave, outpaced by competitors who saw the possibilities earlier. The solution lies in improving your ability to recognise and respond to the signals of incremental change.
Our research shows that customers are now the most powerful disruptive force facing business. 86% of CEOs believe customers will demand more from their products over the next five years - a sentiment that runs through all businesses regardless of size. Over half of respondents believe it's somewhat or very likely that customers will replace one of their products or services with an alternative solution in the next five years.
Indeed, customers are transforming commerce on a global scale. Business is transitioning from an era of supply-driven relationships to an era dictated by demand-driven relationships. In an age of instant information, today's customers compare prices of products, ask questions and make judgments based on quality and the sourcing of materials. They increasingly make buying choices based on what they hear about the way companies operate. Better informed, less loyal customers are willing and able to go elsewhere for what they want. This causes a big headache for CEOs and their CMOs in retaining customers and predicting what both existing and new consumers will want.
Harnessing this disruptive power by anticipating what customers want is a skill all in itself. Sometimes a CEO's technological, entrepreneurial and social vision fits perfectly with evolving customer wants and behaviours - social media networks for example. But there are plenty of cases where technology solutions have fallen flat. With every prospective innovation, whether you're promoting it or facing off against it, look for the early signals of new customer habits. The way people embrace or reject an innovation, and the logic underlying their response, will tell you a great deal about whether it's the next big 'thing'.
“The single most important change that a company in my industry should make to thrive through these disruptions is to clearly understand the evolving needs of customers and stay ahead of competitors in advancing technologies towards satisfying these emerging needs.”
Four in five CEOs think the production technologies their companies use will change in the next five years (this rises to 90% of CEOs in Asia Pac companies). And three quarters cite investing in or acquiring new technologies as the most important strategy for managing disruptions faced by their companies in general.
When a new technology changes the way an established business produces its core product, disruption often follows. Take the pricing of car insurance policies, for example. Many insurers now rely on data collected from in-car diagnostic devices instead of classifying customers' likely driving risk through actuarial statistics about gender, age and residence. This kind of real-time, exact feedback on drivers' performance allows providers to design more profitable products and return more savings to customers.
Digital fabrication is another game-changing production technology. 3D printers controlled by digital fabrication software are being used to design and manufacture components and products and are reshaping the foundations of manufacturing. Many of these machines are used to prototype new products, and development cycles are shrinking as companies quickly design, build, and redesign products before launch. Ultimately, digital fabrication could enable companies to code physical products in the same way that programmers currently write software.
Technology will continue to be both a source of disruption and an important way of turning disruption into opportunity. The challenge will be how to spot, track, develop, build, acquire and implement the 'right' winning technologies. Those who sense the disruption first will gain an opportunity to drive it, shape the industry that emerges, and capture its rewards.
As CEOs weigh up the risks and opportunities offered by new digital technologies and look to meet the expectations of an information-rich, mobile-enabled customer, they recognise that more familiar and established disruptors are still important. This is particularly true when it comes to their competitors.
Over half of CEOs are concerned about a large existing competitor from another industry muscling in on their business. And almost two thirds recognise the threats posed by low-cost competitors.
Of less concern to CEOs are tech-based non-traditional competitors entering and disrupting their industries. This is so despite the prominent examples of just that type of disruption in nearly every sector over the last decade. Often the disruptor arrives in the form of a company whose products, services and technology deployed in one sector offer a completely different (and better) way of solving problems in another. We've seen it in the use of mobile phones for paying bills and booking services, to take just one example. The emergence of this kind of lateral competitor, even in nascent form, is often a sound predictor of more widespread system change.
Then there's regulation. That (perceived) perennial thorn in the side of big business. Financial services, energy, education, transportation - all these industries and others are subject to new and revised government rules, each with its own form of regulatory push and pull. Three quarters of respondents (and 91% of those from billion dollar companies) think new regulations will affect how their industries operate over the next five years. And less than 40% of CEOs anticipate deregulation in their industries.
Amendments to existing regulations can offer a good way of anticipating change. Consider the transportation sector, where regulatory relaxation appears imminent for self-driving automobiles. We can expect a major wave of disruption to hit mass transit systems, taxi services, the car rental industry, and, presumably, many other transportation-related ventures. Tighter regulation can bring disruption too: without restrictions on the marketing of tobacco products would we have seen the emergence of e-cigarettes?
The disruptive significance of competitors and regulation may ebb and flow, but both will retain the potential to strike with force and speed.
If the forces of disruption are so prolific and so widespread that there's no hiding place for any business, how should CEOs prepare their companies for change? This is an important but challenging question. For every company that has already experienced future-shaping disruption there are many more yet to feel the full impact on the top line: a surprising 40% of CEOs tell us that disruption had no effect on revenue growth over the past 12 months.
Much depends on the way a CEO views disruption. Do they see it as a helpful influence in their organisation? Are they forward-thinking and adaptable enough to go with the flow of disruptive forces?
The CEOs most pessimistic about disruption in our survey highlight regulation as their most important concern. The most optimistic CEOs, in contrast, are looking to exploit external disruptive forces for the good of their companies. Overall, 76% of CEOs are looking to invest in or acquire new technologies to manage disruption and 70% have a strategy of engaging with external partners to form strategic alliances and joint ventures. Notably, over a quarter of CEOs are collaborating with competitors. And a few even say they're ready to leave their industry or region due to disruption.
That course of action might seem extreme to those companies for whom disruption has yet to bite. But those already affected clearly think the long-term gains from radically changing their businesses outweigh the short-term pains of disruption.
The reality for all companies dealing with the forces of modern disruption is that nothing happens in isolation. A breakthrough new technology that impacts production may shape and meet new customer demands. But it may also spark new regulation. And too many companies think they can tackle disruption as an external factor when, in fact, the forces of change are so great that a wholesale transformation of company culture is required. Furthermore, business leaders need to think less about what happened in the past and more about what disruptions are emerging now. They need to think about how those disruptions might interact and intensify, and what that means for companies that want to thrive - or even just survive - in the future.
Reinventing from the core might seem a daunting task for major companies. But many have already started this transformation. Take General Electric and their transformation to a digital industrial company or General Motors that has begun to reimagine itself not as an automaker but as a personal mobility company.
There's no easy way for companies to fully embrace and prepare for the impact of disruption. Yet, with the right mindset, courage and knowledge, disruption can be truly transformative - it can force companies to reinvent at the core and reposition themselves for success.
One of the few certainties in business today is that disruption in some form is already taking place in your industry. So how can you respond effectively?
You can begin by dispelling old assumptions about how value is built and sustained in your markets. Look at disruption optimistically and ask core questions of your business, accepting that it faces more than one potential future. What makes for efficient scale? Who is the competition? Who are the customers? What do those customers want? Who owns what? Where is the risk?
When you've mapped these potential futures, be prepared to embark on a programme of changes, rather than simply making strategic tweaks here and there. Envision a set of future industry scenarios implied by these disruptions. Then ask: what are the winning ways to play in each? What capabilities are needed? What are the strategies that work? This kind of rigorous thinking about the possible futures will help prepare your business to thrive when disruption inevitably comes.
And finally, where are you this journey? Take five minutes to model your view of industry disruption with our disruption profiler tool.
Global Power & Utilities Leader, PwC
Tel: +49 211 981 2153
Director, Global Thought Leadership
Tel: +44 (0) 20 7212 5481