The digital and borderless nature of the global economy means that threat and opportunity abound. Most established businesses are being targeted by startups, some of which act like ‘cookie-cutter sharks’, going after specific chunks of a business or service line, while others aim to disrupt entire industries. As established businesses face this roiling sea of change, what lessons do they need to learn from the startups that are coming to eat their lunch?
Here are several key principles from the digital disrupter’s playbook that corporates and established businesses should look to implement themselves:
- Disrupt yourself
- Be relentlessly customer-focused
- Get agile
- Embrace failure
- Establish innovation satellites
Disrupt yourself
The most successful startups see an opportunity where existing business models are not fully serving customer needs, and then aggressively go after the opportunity. To compete, established companies need to be prepared to disrupt their own business models. As painful as this may be, it is far less painful than having someone else come and do it you.
Fairfax is an unfortunate case in point. Back in the late 1990’s, massive printed newspapers thudded onto front porches around Australia every Saturday, filled with property ads. This was one of Fairfax’s so-called ‘rivers of gold’. Yet by failing to aggressively allowing the digital versions of its real estate listings to cannibalise sales of its highly profitable printed product, it left the door open for digital pure-play realestate.com.au to come in and take a dominant market position.
The banks are trying to avoid a similar fate right now by trying to embrace blockchain technology, even as it threatens to literally wipe out some of the most profitable parts of the banking industry. Blockchain can replace banks’ traditional role as a trusted intermediary between two parties.
For example, if a business wants to transfer money to another organisation overseas, banks have always provided a safe – but slow and expensive – way to make that happen. Great for banks. Not so great for their customers. Blockchain upsets this model by providing an efficient, frictionless and virtually free way to transact with confidence, without the need for any trusted intermediary, because transaction history and ownership information is built right into the blockchain itself. It’s a game changer…and banks (among other organisations) are all desperately trying to work out how to respond to a technology that is shifting the landscape in which they operate.
Digital advertising agencies have profited for the last decade as brands have shifted media spend from traditional channels like TV and radio to online. However, these digital agencies are about to be disrupted themselves.
A significant part of their profit comes from having team members work spreadsheets or online tools to figure out how to improve clients’ campaign performance. Those days are coming to an end, as large advertisers bring this work in-house, and platforms like DoubleClick start now use Artificial Intelligence and deep learning to optimise advertising spend better than any human can.
Smart agencies are already aggressively looking for alternative revenue streams to replace this work, including focusing on coming up with game-changing creative ideas (taking the industry back to its roots), and building up strategic capability around data analytics. The ‘unicorns’ that agencies are all looking for are talented creatives who can also work with big data, for they are truly worth their weight in gold in today’s shifting marketing landscape.
Established companies should ask themselves this question: “If we were going to disrupt our own business, how would we do it?” Because one thing is certain: there’s a bunch of talented and motivated entrepreneurs out there right now asking themselves the same question.
Relentless customer focus
Successful startups have a laser-like focus on meeting customer needs. They live and breathe customer experience. It’s why elite user experience and user interface (UX/UI) designers are so in-demand right now.
In 2009, Jodie Fox and her co-founders asked themselves “Why shouldn’t people be able to design their very own shoes and have them delivered at a reasonable price?” And thus Shoes of Prey was born.
WeWork offers workspaces to startups and small businesses by addressing two needs that traditional tenancy options don’t: 1) they offer inexpensive and flexible office space, which is great for new businesses with limited cashflow but high growth potential, and 2) they provide attractive workspaces and social environments filled with like-minded people.
Running a startup can be an isolating and lonely experience, particularly in the early stages, and WeWork helps provide some of the social ‘connectedness’ that typically comes from being part of a larger organisation.
Spacious, a coworking company out of New York, is taking this a step further. Recognising that many city restaurants sit empty during the day, it offers these as funky co-working spaces, complete with seriously good coffee on tap.
The learning for established businesses here is that a relentless focus on the customer needs to sit at the heart of the company’s culture. This has to go beyond customer journey mapping exercises or putting up Scrum or Kanban boards around the office. It’s about the CEO and executive leadership team genuinely buying into the idea that the customer sits at the centre of every decision.
At last month’s Australian Human Resources Institute conference, former Telstra CEO David Thodey said “culture and values are the best tool you’ve got to drive change in an agile, fast-changing environment.” He’s absolutely correct, but what companies often miss is that the acid test for culture and values is staying true to them even when it is uncomfortable or inconvenient to do so.
“Communication, Respect, Integrity and Excellence”. That’s a good-looking list of values, right? Those were Enron’s values, right before the multi-billion-dollar company became a cautionary tale, as it put the relentless pursuit of profit ahead of its stated values, and in doing so, treated both its customers and the law with disdain.
Get Agile
One of the most effective ways to stay customer focused is to work like a startup and get agile. The agile methodology involves an ongoing and iterative series of intense, short sprints, typically lasting two weeks at a time.
At the start of each sprint, a development team works with members of the business and/or customers to decide what to deliver over the next ten working days. This work is chunked into estimated levels of complexity, with the team aiming to get through a certain number of ‘units’ of work. At the end of the sprint, a new set of product features is delivered that adds real value to customers and to the business. Then, based on customer and business feedback, the sprint planning cycle starts again.
In this way, development work is intensely focused on where it will make the biggest difference, fast. This is in contrast to the traditional ‘waterfall’ approach, where projects would be carefully planned for six or twelve months (or more!), only to find that the work product finally delivered didn’t meet the needs of customers or the business. Many large corporates (or areas within corporates) are starting to take an agile approach to development, and we are starting to see this philosophy move beyond the its traditional domain of digital and IT, and into areas such as marketing.
There are some really exciting businesses now combining an agile philosophy with big data, to generate insights, test them, and then feed the results back in to the process to influence future insights and product offerings (sometimes in near-real-time). Marketing is being transformed before our very eyes.
Accept failure
Innovation requires trial and error. The Wright brothers built three separate planes before finally achieving powered flight. And by some measures we’ve gone backwards since then: Elon Musk’s SpaceX has had a spectacular history of failure, with many of its rockets blowing up. It took a combination of trail-and-error, some of the brightest minds on the planet, and Musk’s singular drive and vision before the company was able to start consistently putting rockets into space and then, more recently, bring them safely back to earth to be reused.
Smart companies conduct multiple, safe-to-fail experiments that test coherent ideas in the real world. They test them cheap and they test them quick. Some of those experiments show promise, and justify further investment (in the shape of further safe-to-fail experiments that build on the initial success). Other experiments fall flat and are left to fall by the wayside.
Dave Snowden’s Cynefin framework, which was the cover article of Harvard Business Review a decade ago, was the genesis of this concept, and is regarded as one of the leading pieces of research on leadership and innovation of this century. In order to innovate, companies need to build a culture in which small scale failure is not just tolerated, it is embraced. It is only by testing promising ideas in the real world at low cost that companies can work out which ideas have merit and which don’t.
This has implications for efficiency as well. Processes like Lean, which are designed to squeeze all flaws out of a system, work well in areas where good or best-practice is well known, and ground-breaking innovation is not the immediate goal.
For example, accounts payable and receivable processes, or established production processes are a pretty useful place for Lean thinking, where incremental gains are the objective. But Lean is anathema to innovation. There needs to be enough space in a system to allow for trial and error. For experimentation. For failure.
It’s why companies like Atlassian have followed 3M’s longstanding practice of allocating time each month for employees to pursue any project they like, with the only condition being that they present their results to the rest of the company. Some of the best – and most profitable – ideas have come from this type of initiative.
Companies should think about their culture and processes, and decide whether they genuinely encourage innovation, or whether – in the relentless pursuit of efficiency – they stifle it.
Innovation satellites
What’s the fastest way to kill a startup? Have a corporate acquire it and ‘integrate it’ into the main body of the business. Established businesses who are either buying startups or early growth stage companies, or trying to generate a startup culture themselves, need to think carefully about where within the organisational system they place these efforts.
Startups need to be able to move fast. Decisions can’t be made via committee. They also need to be able to attract elite talent, which may require offering packages outside the ‘mothership’s’ usual pay scales. A middle-of-the-road remuneration offer isn’t going to get that one-in-ten-thousand coder to move his family over from Israel or to choose your company over that job in Silicon Valley.
Startups should typically be placed outside the core organisational system, but with sufficient links back in to it to allow the new company to access resources from the parent organisation as needed. Many corporates are physically placing their startup initiatives in separate offices, such as co-located spaces like WeWork. This is not a ‘one-size-fits-all’ solution, and the point is that careful thought needs to be given by corporates as to where within their organisational system startups belong, or whether they even belong inside the organisational system at all.
Treating startups as ‘just another department’ is not the answer.
Conclusion
As organisations face threats from both traditional competitors and emerging new players, they need to start thinking like disrupters in order to stay ahead of the game. The answer to the question “Why do we do things this way?” cannot be “Because we always have.”
Established organisations need to have the courage to consciously look at disrupting their own businesses. They need to build truly customer-centric cultures – starting with the CEO and her direct reports – in which the customer experience sits at the heart of all decisions. They need to adopt a faster tempo, including using agile approaches where appropriate. They need to embrace the notion that experimentation is the key to innovation, and that by definition, not all experiments will succeed. And finally, careful thought needs to be given as to where a startup or potentially game changing new product offering is situated within the organisational system.
Great new initiatives are like wisps of smoke within kindling: they have the potential to become a roaring blaze, but an ill-timed gust of wind can extinguish them before they ever get going.
