To survive and thrive in a world of disruptor ‘Davids’, established ‘Goliaths’ of industry have advantages they can leverage – but it may mean sacrificing near-term profits. Case studies from Morgan Stanley, Microsoft and NASA show potential ways forward
Some would say that history does not repeat itself, but that it often rhymes. During the dotcom days, there was a sense that startups were going to beat established companies at their own game. Phrases such as ‘big companies don’t get it’ and ‘the fast will eat the slow’ were thrown around casually. People who had built remarkable careers within large companies were settling for more junior roles at startups with the dream of IPO riches. Landlords in San Francisco were demanding equity in venture-backed companies as part of over-priced office leases.
Well, we all know how the dotcom bubble ended – badly. Two decades later, there is a lot of rhyming going on. Today’s dotcoms are called unicorns – private companies valued at over $1bn USD. There are now 344 of them globally, according to CB Insights. It is starting to feel like Pets.com [a shortlived pet supplies retailer and noteworthy victim of the dotcom bubble] all over again.
Beyond the crazy valuations, yesterday’s hubris is alive and well. There is palpable contempt for established companies and their ‘legacy’ industries in Silicon Valley. Venture capital pitch meetings are filled with startups’ plans to ‘disrupt’ those industries through digital capabilities like AI, robotics, edge computing, and the Internet of Things. Startup business plans seem to all begin with ‘we will be the Uber of this’ or ‘the Airbnb of that’.
Smart cannibalisation: from Morgan Stanley to Microsoft
As was the case with the dotcom days, established companies are being jolted out of their complacency and putting the digital tools to work for themselves. In fact, some are already turning the tables on digital disruptors in a process we call ‘smart cannibalisation’.
These established companies are proactively delivering the new outcomes that customers want before digital attackers can do so. Many are even sacrificing near-term profits as they innovate new business models for a digital future.
A few examples. In 2018, Morgan Stanley launched its own robo-advisor called Access Investing. Externally, it already rivals the automated investing capabilities of digital attackers Betterment and Wealthfront. Internally, it sometimes competes with the firm’s traditional human-advisor wealth management business. Morgan Stanley CEO [and MBA alumnus of Columbia Business School], James Gorman, is playing the long game by putting some of the firm’s high-margin wrap fees at risk in order to deliver automated wealth management for the investors that are ready for it. The company has adopted a mindset of ‘we would rather compete with ourselves to deliver step-change customer outcomes than allow digital disruptors to do so’. Of course, Morgan Stanley still has a thriving business delivering traditional wealth management for customers that are more comfortable working with one of the firm’s 15,000+ human advisors. It has put the ‘smart’ in smart cannibalisation.
NASA has opened up its tightly-integrated engineering approach to make explicit decisions around internal versus external innovation. Open innovation sources new ideas from eight discrete innovation channels: private equity firms, business incubators, research universities, corporate venture groups, open innovation platforms, strategic customers, strategic suppliers, and startups. In this way, NASA has leveraged a new solution-finder role to integrate innovations from attackers, such as SpaceX and Blue Origin, rather than following the slow road of engineering everything in-house. In the past, relying on startups for mission-critical systems would have been laughed at within NASA.
The Weather Channel (TWC) has executed an even more radical pivot. Back in the 1980s, TWC rode the transition from broadcast TV to cable to become the leader in ‘weather news on TV’. A TV channel focused solely on weather was once a novel idea. Today, however, many of us get weather news on our phones. TWC put smart cannibalisation to work. It morphed its business model to become the leading cloud platform for industry-specific predictive analytics based on weather insights. Think of farmers deciding what crops to plant, when to fertilise, how much to water, and when to harvest. Think also of retailers trying to reduce inventory without being out of stock in stores that are far from their distribution centres. TWC built a cloud platform that makes its massive data set – 200 meteorologists and 108 forecastable weather patterns – available to data scientists and app developers via an application programming interface (API). TWC is more important now than it has ever been.
Smart cannibalisation is even underway within the tech industry itself. Microsoft CEO [and Chicago Booth MBA] Satya Nadella has had a front-row seat to the rise of Amazon Web Services (AWS) in Seattle. The disruptive customer outcome of ‘infinitely elastic computing and storage’ that AWS brought to the market was shaking up the boardrooms of every established technology company. Customers were shifting their spending away from on-premise hardware and software towards cloud-delivered ‘infrastructure as a service’ (IaaS). Nadella aggressively reallocated capital investment, engineering, marketing, and sales resources to its competing IaaS business, Microsoft Azure. This meant sacrificing near-term revenues and margins within the core Windows franchise on which Microsoft was founded. But, the gamble has paid off; other IaaS competitors are now fighting for third place in a two-horse race and Microsoft has joined a very exclusive club – public companies valued at $1tn USD in market capitalisation.
The incumbent’s advantage
In industry after industry, a similar pattern is emerging. A small number of established companies are separating themselves from both their industry’s digital attackers and their traditional competitors. We call this phenomenon ‘Goliath’s Revenge’. Imagine for a minute that the biblical Goliath figured out how to use the sling at around the same time as David. In fact, imagine if Goliath was able to apply more force to the sling than David ever could. Goliath might then have come out on top in that mythical battle.
Established companies may not fully appreciate the advantages they have in an era of digital competition. Our research across hundreds of companies and dozens of industries has uncovered seven specific sources of what we call ‘the Incumbent’s Advantage’ – self-funding innovation, brand reach, existing customer relationships, installed base, data sets, blocking patents, and standards influence.
Two are particularly important. First is installed base. That is, the complete set of a company’s customer-deployed products and services. The ‘base hits’ of digital innovation are new digital offerings that bring incremental value to those products and services that customers already own. Apple is pursuing this strategy now in an era where most of the people who want a smartphone already have one. Apple is increasing its focus on ‘digital yield’. That is, the annual spending of its iPhone customers on digital subscriptions, like the $15 USD per month for Apple Music or the $10 USD per month for Apple News+, divided by the value of the iPhone itself. Other established companies across sectors as diverse as healthcare, automotive, elevators, oil and gas, and aviation are following suit.
Second is data sets. Companies are sitting on mountains of what you might call ‘dark data’. That is, data about product and service offerings, commercial transactions, web traffic, social media likes, call centre interactions, and marketing campaigns that sits idle in the bowels of their IT organisation. Large, multi-faceted data sets are the fuel that makes machine learning run. Machine learning, in turn, is the future basis of competition in every industry. Those data sets are fragmented today across the corporate hierarchy of established companies. Aspiring Goliaths are putting Chief Data Officers in place alongside their Chief Digital Officers. Chief Data Officers are ingesting, blending and extending those fragmented data assets as the basis for new digital offerings that digital attackers cannot match.
The end of average
While there is much to be positive about in terms of established companies’ opportunity to thrive in the age of digital disruption, one thing really is different this time – the winners really are taking most. Digital is bringing remarkable transparency to the performance of both companies and the people who work for them.
If a retailer over-charges for products, customers will be ordering from Amazon using the retailer’s own barcodes on their phones. If a doctor fails to deliver expected patient outcomes, he or she is soon going to have a lot more time to play golf. If a stockbroker takes actions that put brokerage revenues ahead of client investment returns, investors will move their money to other providers without hesitation.
This is the scariest part of our collective digital future. At both company and career levels, average will no longer be a safe place to be. Embrace the tough medicine of digital reinvention and you and your company can become even more successful. Wait too long and you are likely to be pushed to the left side of a bell curve measuring success. Few will remain in the middle.
So, it’s time to get on with it. Inventory your sources of Incumbent’s Advantage. Be brave and invest in smart cannibalisation before digital disruptors achieve a scale where they are impossible to dislodge. Be the Goliath and turn the tables on your industry’s Davids.
Todd Hewlin is Co-Founder of Silicon Valley consulting firm, TCG Advisors, and a leading expert on digitisation and business model innovation. He is co-author, with Scott A Snyder, of Goliath’s Revenge: How Established Companies Turn The Tables On Digital Disruptors (Wiley, 2019).
