Why do big companies change so slowly and die? They dramatically underestimate innovation velocity.
Innovation velocity is the speed and direction of growth that an innovation creates. Small disruptive organisations have very high innovation velocity and this is why they kill big slow incumbents.
In a VUCA reality, disruption happens in a non-linear and often exponential manner. This means that incumbents are blissfully unaware of what is going on until it is too late and the aggressive disruptor has captured the market. The key issue is that the incumbent is far too complacent and fails to create the sense of urgency that is essential for creating the innovation that will beat the disruptor. How can this be? How can smart and capable leaders get it so wrong? Because it’s really hard to understand the power of exponential growth that innovation creates. Let’s see if you can get your head around it.
Imagine a situation where you own 100% of the market and suddenly a new disruptor launches and gains 1% of the market. Now you have 99% and they have 1%. However, because they are very innovative and aggressive, they will double their market share every year. How many years do you have until you lose? Have a quick guess. The answer is 7 years. Yes, within 7 years, this puny disruptor will have broken you and in 8 years it will utterly destroy you; that is the power of non-linear growth. As you can see in the images below, exponential growth is difficult to comprehend, even for the most seasoned of leaders.
This is not a theoretical exercise, just ask Nokia. The iPhone launched in early 2007 and by the end of 2013, 7 years later (!), Nokia was bought by Microsoft and it was all over. Of course, it wasn’t the iPhone alone that killed Nokia, it was Apple and Android together. 2 disruptors who experienced non-linear growth and obliterated what was once the world’s mobile phone titan. The graph below shows the exponential growth of Apple and Android and the concurrent exponential collapse of Nokia. This provides a key insight to disruption; it’s not going to be 1 disruptor that kills the incumbent, it will be multiple aggressors who together create the kill.
A key point to recognise is that up to year 5 there is nothing scary for the incumbent, they still hold 84% of market share. However, on current trends, the incumbent will utterly die in 3 years! This is exactly what happens to complacent incumbents who are ‘managing change’. Only after the year 6 numbers come in, when the disruptor suddenly gains 32% market share, does management panic. They desperately seek a solution but of course it’s far too late because the disruptors grow much faster than the incumbent can change. The disruptors build on their innovation velocity to capture market share faster than the complacent and stagnant incumbent. By year 7 it’s clear that the game is over for the incumbent. Management is in shock, they say things like “we didn’t do anything wrong, but somehow, we lost” Stephen Elop, Nokia CEO. No, you lost because you weren’t paying attention to innovation velocity. Nokia didn’t understand innovation velocity and the exponential growth it creates. Its management team was too complacent and as a result Nokia died. However, my reader, the real question here is this… will you make the same mistake?
To help you avoid this mistake I suggest a simple thought exercise.
- Take your current best guess for when the disruptor will start to challenge you in the market. Most likely, you think this will be in ten years.
- Whatever your number is, halve it. Why? Because disruption is exponential and therefore happens much faster than you will expect. Also, you (and I) don’t know all the crazy stuff that is happening around the world and it is likely that we will have missed some key breakthrough meaning progress is even faster than we expect. If we halve our default number, that leaves us (you) with 5 years.
- This means that in 5 years, you need to have an organisation whose innovation velocity is faster than your aggressive disruptor if you are to retain market share.
- The big problem for you as the incumbent is your legacy systems, management bureaucracy and political infighting. You need to overcome all of these and create the agile innovation of your disruptor in just 5 years. This is a big, big challenge and realistically most incumbents can’t do that and that is why they fail.
- The most important thing to do right now as the incumbent is to create a dramatic sense of urgency. You must ignite the fires that will accelerate your organisation’s innovation velocity. In particular, use the exponential example I provide above to explain just how quickly things will go wrong.
Maybe you’re thinking this was just something that happened to Nokia, it was a niche issue. No. This disruptive trend is a characteristic of today’s VUCA reality which allows a disruptor in any sector to make massive gains. For example, Bitcoin is on track for exponential growth. What about Airbnb, Amazon, or Netflix? All of these disruptors are demonstrating exponential growth and all of the incumbents of their industries do not have the innovation velocities to compete. That is why Wal-Mart is losing to Amazon, Hilton is losing to Airbnb, Blockbuster lost to Netflix, and why the financial industry is probably going to lose to Bitcoin disruptors whose growth is currently approaching exponential numbers.
In summary, we have discussed the critical important of innovation velocity; the speed at which disruptors will capture market share from the incumbent (remember there will be more than 1 disruptor!). The key issue is that the disruptors will always have faster innovation velocity than the incumbent and this is what causes the incumbent to lose. The disruptors gain market share faster than the incumbent can change. Specifically, they gain market share at an exponential rate. However, the incumbent will not realise how much trouble it really is in until it’s too late due to the nature of non-linear, exponential growth (it only panics at year 6). If the incumbents are to survive, it will be up to leaders like you to sound the alarm now and call the organisation to innovate before it’s too late. If you need help getting started, let me know.