“Business leaders are increasingly focusing on risks that threaten to disrupt the fundamental assumptions of their organisations’ strategies. Prioritising such risks has become increasingly crucial – these risks cannot be handled in typical organisational silos, and they can destroy sources of value creation for the business. Yet, they also have the potential to form the basis of game-changing moves for the organisation, if handled well. Disruptions in the form of emerging technologies, business model transformations and ecosystem changes will force executives to make significant strategic choices to drive organisational success” (Deloitte: Future of Risk Series)
Disruption, although perhaps an overused buzzword in a business context, talks to the innovation that has not just met current customer needs, but has anticipated the unstated or future needs of customers and displaced the established system. It was Clayton Christensen who introduced the concept of “disruptive innovation” in his book, The Innovator’s Dilemma (1997). In the book, he explained how small companies with minimal resources were able to enter a market and change the industry (almost creating a market where one never existed before). Thus, when mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred (perhaps an obvious example would be the arrival of e-mail and scanning documents for digital transmission and the subsequent ‘death’ of the traditional postal systems in the world).
The Deloitte study notes the following contributors to this risk trend:
- Globally distributed business models are increasing dependencies on stakeholders across geographies, making brands more vulnerable to geopolitical risks
- Growing connections between businesses are expanding the sources of potential disruption
- Advances in social, mobile, analytics and cloud-enabled emerging technologies are creating opportunities for start-ups to disrupt incumbents
- Traditional industries are converging to create new markets
- Business model innovation (such as sharing-based, freemium and subscription-based) is driving organisations to reinvent themselves constantly
- Increasingly, customers are expecting more personalised products and services
Disruption is not instant – it may take decades to get sufficient “adopters” of the innovative products and services before a trend is developed, but once established, it blows other more traditional approaches out of the market. For example, when Netflix first arrived on the scene, it wasn’t appealing to most of Blockbusters’ customers, who rented movies on impulse. Netflix had an exclusively online presence with a huge library of titles, but delivery in the mail took days to arrive – only okay for some customers who didn’t care about new releases. As new technologies allowed Netflix to shift to streaming video on the internet, however, the company eventually became appealing to Blockbusters’ core customers with a wider selection of titles, on demand, low price, high quality and a highly-convenient approach. Failure to respond adequately to this approach led to the demise of Blockbusters.
How do companies mitigate risk? Deloitte’s study notes the following actions:
- Continuously monitor the changes in the environment to determine which could be truly disruptive
- Revisit the approach to corporate strategy development to introduce more agility, adaptability and responsiveness to emerging threats
- Identify organisational blind spots, built-in institutional challenges and personal biases of senior management that can get in the way of action
- Employ tools and techniques such as real-time monitoring, scenario planning, stress testing, war-gaming and simulations to drive higher levels of sophistication in managing risk
Companies simply cannot afford not to be aware of new trends and introductions to their respective markets and should respond immediately to be part of and capitalise on any looming disruption. Some companies are even employing innovators to create new ways of monetising new approaches. In any event, decisive action is required so as not to be caught off-guard.