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An odd thing happened in a client’s boardroom recently. We were listing out the competitors we needed to keep an eye on as part of a scenario planning exercise. We had discussed the usual suspects – long-time direct – and even the more recent entrants – mostly technology start-ups that were now picking up speed. Then someone said, “What really scares me are the competitors we can’t see.”

By that she meant the entrepreneurs in dorm rooms dreaming up new algorithms and business models. They operate out of sight, too small and too numerous to track.

At that moment, I thought, “This is an entirely new situation.” Until now, competitive analysis has been complicated but possible. You identify your competitors, assess their market positions, their strengths and weaknesses, try to predict what they might do, and then plan out your response.

But to plan for a competitor that you cannot see, who is not yet there, and who may pop out of anywhere defies the long-held principles of good competitive analysis.

Antony Jenkins, former CEO of the United Kingdom’s largest bank, Barclays, recently warned in a speech that as-yet-unknown attackers could replace half of all bank employees by apps and algorithms over the next ten years. He had come back from a visit to Silicon Valley and saw armies of soon-to-be competitors preparing themselves for battle. While lenders today are worried about technology innovators like Lending Club and Funding Circle, and while payment operators wrestle with the likes of Square and wealth management companies worry about the likes of Nutmeg, greater threats are yet to come.

We see similar stories playing out for retailers, energy firms, and consumer products businesses. Across nearly every sector – from real estate and agriculture to fashion and hospitality – you will see a nearly identical competitive dilemma unfolding. You are at risk of being disrupted by a swarm of small, agile, technology-enabled attackers.

The root cause of this development is digitization.

An essential piece of the antidote is intrapreneurship.

How digitization is changing the game
You can now find libraries filled with research, articles, and books on the transformational impact digitization is having. What first began with ecommerce (selling online) is now restructuring entire industries. Experts at McKinsey & Co. estimate that technology will cut out two-thirds of the profits from things like retail lending, car loans, and credit cards. The firm also estimates that such technology-heavy and asset-light business models (what they call “idea-intensive sectors”) generate 31% of Western companies’ profits globally today, nearly doubling from 17% in 1999.

While you can read through books like the Exponential Organizations by Salim Ismail and the various works of Ray Kurzweil, you could say the digital revolution, as many are calling it, comes down to this:

  • A shift to digital
  • … is driving acceleration,
  • … and dramatically lowering costs,
  • … driving us to compete with complexity.

A shift to digital
What we once paid for physical things we are now paying for non-physical things. A hundred percent of what you spent on a typewriter when we used them was for functionality made possible by gears, buttons, and other physical pieces.

What you now pay to do the same job goes substantially toward your use of Microsoft Word or whatever software program you use. What you once paid for a car was nearly entirely for tubes, pistons, wheels, and other physical things. Now you pay an increasing portion for the software (which alerts you of obstacles, changes your gears and even parks or drives for you).

In some sectors the shift toward digital has been dramatic. University courses are being replaced by MOOCs (Massive Open Online Courses) and self-paced online learning. GPS makers like Magellan have been rapidly supplanted by mobile phones (Garmin has survived because of its early and strong position in watches and other wearable devices as well as its stronghold in the marine GPS market).

… is driving acceleration
As the portion of what you are willing to pay for something shifts from physical things to non-physical, the speed at which companies can make changes to what you are buying goes up.  For example, when your car company finds a physical defect, it has to spend months and millions of dollars managing a recall. When the same company finds a defect it can address with software, it can beam down revised code in a few hours.

Software used to be updated once every few years, when companies had to ship CDs to stores. Today it is updated weekly or even more frequently. Retailers once changed prices by season; today, with digital displays, they can do so instantaneously. Ten years ago, you’d spend an hour or more driving to Blockbuster to rent a movie. Today Netflix or iTunes gives you access in seconds. Across nearly every sector we are experiencing acceleration.

… and dramatically lowering costs
A second, and arguably more significant, effect of digitization is that it sets your product/service on a rapid cost-reduction trajectory. In 1964, Intel founder Gordon Moore proposed what is today called “Moore’s law”: that the computing power you get for each dollar you spend will increase at a dramatic, exponential rate.

Ray Kurzweil, the founder of Singularity University, author of The Singularity is Near, recognized expert in technology and artificial intelligence, and director of engineering at Google, took Moore’s law one step further, arguing that it applies not only to computing power but to anything information based. He argued that any innovation that is information based will experience an exponential drop in price per performance.

We see evidence of this across a variety of areas. In 2000, for example, the first human genome was sequenced. The effort cost $2.7 billion. Today improvements in computing and measurement have driven that cost down to less than $1,000. The toy drone that I – I mean Santa – gave my son for Christmas this year costs $20 on Amazon.com. Five years ago it would have cost $700.

driving us to compete with complexity
The acceleration and exponentially lowering price/performance caused by digitization is driving organizations to increasingly compete with complexity. There are two reasons for this.

First, your competitors move more quickly. They adjust their product offering, pricing, distribution, and marketing messages weekly rather than annually. It is no longer practical to anticipate their big moves at the beginning of the year or to wait until the end of the year to decide how to react.

Second, you have more competitors. As the information component of products and services grows and the cost of those information components drops, the “barriers to entry,” as Michael Porter named them, fall. Launching a financial technology (FinTech) business once cost $50 million. Today, because the cost of accessing servers, building APIs, and coding has come down so dramatically, entrepreneurs can launch the same business for perhaps $2 million. Lower start-up costs mean more start-ups mean more competitors.

What we see then is large organizations competing in a larger swarm of faster-moving, less predictable competitors. Digitization is driving us more deeply into a state of complexity.

By that we mean that the systems in which companies have competed for the past 50 years are complicated, but predictable. Understanding industry dynamics is akin to understanding a car. There are many moving parts but when you understand how they interact you can accurately predict how the machine will perform.

Complex systems, by contrast, have outcomes that are unpredictable. Like the weather or ocean currents, small fluctuations in inputs can sometimes have dramatic effects and at other times have no effect at all. Butterflies flapping their wings in China can sometimes cause a chain of events that make it rain in New York. But at other times the butterflies’ flapping does nothing.

A recent study of more than 30,000 public companies over a 50-year time span shows that corporations are struggling with greater complexity. Public companies today have a one in three chance of being delisted in five years (because of bankruptcy, M&A, liquidation, etc.). That is six times more likely than 40 years ago. They are also dying younger. The average age of a company delisting in 1970 was 55 years. Today it is 31.

What we are witnessing is an historic shift in the evolution of competition. Its impact will arguably be as dramatic as that of the Industrial Revolution in the first half of the 19th century or the introduction of scientific methods to management in the early 20th century.

How can corporations react? Some don’t care. Some are happy to let start-ups and entrepreneurs take over. But our research indicates if large corporations do not find a way to compete with complexity, we will all suffer.

A recent Wharton School of Business study identified the world’s 30 most transformative innovations over the last 30 years. We found that only eight of them were introduced by intrapreneurs. Twenty-two of them – including personal computers, microprocessors, office software, ATMs, stents, flash drives, the internet, media file compression, mobile phones, and email – were created by employees. Large organizations offer the reach that allows important innovations to scale. Society needs them. They must figure out how to survive, indeed thrive, in a complex world.

The answer, as we will see in our next blog post, is … the age of the intrapreneur.