Patterns of disruption Anticipating disruptive strategies in a world of unicorns, black swans, and exponentials
Why are potentially disruptive forces so hard to see? And how can executives make sense of the endless headlines on the subject? John Hagel and John Seely Brown spoke with Tanya Ott on how executives might need to change their lens to identify patterns of disruption.
Digital technology is being broadly adopted by every large company basically to do the same things, more efficiently, at lower cost, and more reliably—but they’re not stepping back and saying what would I do differently? How would I redefine my business? That’s generally not on the radar screen.
We know how to look ahead brilliantly. We’re not so good at looking around, because maybe that requires changing our lenses, changing our mind-sets. So our challenge today is to think much more seriously, what can we learn from our context in order to help think about new pathways ahead?
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TANYA OTT: Not just the new pathways ahead—but how to survive! Today we’re going to hear about companies that have disrupted the traditional marketplace—and companies that have been disrupted out of business.
Welcome to the Press Room, Deloitte University Press’s podcast on the issues and ideas that matter to your business today. I’m Tanya Ott, and those two guys you just heard—they’re the Johns. And they know a little bit about disruption.
JOHN HAGEL: I’m John Hagel. I’ve been in Silicon Valley for 35 years.
I worked at a couple of tech startups. Worked with Atari in the video game business.
JSB: John Seely Brown.
TANYA OTT: He goes by JSB.
JSB: With a name like Brown, you gotta figure out something else to say.
TANYA OTT: He’s been in Silicon Valley for 45 years. For several decades he ran the Xerox Palo Alto Research Center, and then he was chief scientist at Xerox Corporation.
JSB: Basically, it was my job to disrupt companies.
TANYA: Today, they co-chair the Deloitte Center for the Edge, a research center whose basic job description is to identify emerging business opportunities that should be on a CEO’s agenda, but are not, and do the research to persuade them to put it on the agenda.
JOHN HAGEL: By definition, if executives are asking about it, it’s probably too late; we’re focused on the things that they haven’t yet asked about.
TANYA OTT: Lately, they’ve turned their attention to disruption. We all know there are disruptive forces in the marketplace: companies or technologies that seem to come out of left field and turn things upside down. John and JSB have been studying these disruptions and have come to the conclusion that most of them aren’t all that unpredictable—especially if company leaders have their eyes open and really see what threats are out there.
JSB: How do you find ways to frame things? We see things through lenses, so what are the lenses you want to use to make sense of the world today? They ain’t the same lenses they were 10 years ago.
TANYA OTT: We hear the word “disruption” a lot these days. I was going to pull all of the newspaper headlines or magazine headlines that say “disruption,” but if I tried to repeat them all to you, we’d be here for an hour-and-a-half-long podcast. But it can mean lots of different things to different people. What does it mean to you two?
JOHN HAGEL: Yeah, it’s a great question. We frankly were somewhat hesitant to take this topic on just because the term has been used too loosely. Basically it means anything that’s new or innovative is disruptive. We took a much harder definition. What we were looking at was, are the leading incumbents displaced as a result of the disruption? And is it through a new approach that is very difficult or challenging for the incumbents to adopt or pursue themselves? So there’s got to be something about the approach that makes it really challenging for those incumbents, and that’s why they tend to get displaced. Does it challenge the basic assumptions of the business—what’s required to be successful? But part of it, too, is does it challenge the economics of the business? I mean, if you were to copy this or adopt this new approach, would you cannibalize a significant portion of your existing revenue or profits? That’s really hard for an incumbent to get their minds around even if they see it coming. Alternatively, does it require you to write off a certain amount of your assets? Again, you might be able to logically justify why that’s necessary, but actually doing it is very difficult.
TANYA OTT: And you’re talking about disruptions that hit more than one market. That’s what you’re focusing on. Because there are disruptions that hit just one market. An example of that would be what?
JOHN HAGEL: I think one of the classic examples is the advent of refrigeration technology that disrupted the ice business, that delivered ice to the homes (God knows that no longer exists). But it only hit that one market or industry. It wasn’t something that was going to hit a whole bunch of other industries. So what struck us in all this is there was a white space that hadn’t really been addressed. Most of the stories about disruption are these one-off, great stories about how somebody came in and disrupted a specific market. On the other side, there is a tendency—and we’ve also done this ourselves—to talk about what we would describe as universal disruptions. Things that all businesses are going to face, and they’re going to be extremely challenging to adapt to or evolve into. There’s a middle ground, which is, certain disruptions are going to hit some markets, more than one, but not all markets. And that’s what we really thought had not been adequately explored . . .
JSB: It’s almost a unique take on this more general concept.
TANYA OTT: When you’re talking about those more universal—global, if you will—disruptions, would that be something like a major economic downturn that affects lots and lots of markets?
JOHN HAGEL: It could be one of those extreme events that come in and disrupt everything, and everybody has to respond. There are others which are more, in some cases, driven by digital technologies. We actually wrote a book called The Power of Pull. One of the disruptions that we see is that we’re moving from a business world that’s based on push-based models. The ones that we believe are going to thrive in this new world are going to have to move to pull-based . . .
TANYA OTT: Tell me the difference between those two.
JOHN HAGEL: A push-based approach is basically, you develop a forecast or prediction of what demand is going to be, and then you push all of the right people and the right resources into the right place at the right time to meet that demand. That’s the push-based model, and most of our large companies are based around that model. Very successful.
TANYA OTT: And then how does digital turn that upside down?
JOHN HAGEL: Part of it is we’re in an increasingly volatile world where predictions are harder and harder to make. You get more of these unexpected events. And part of it now it gives you the potential to operate with what we call “scale-based pull platforms,” where you can draw out people and resources when you need them and where you need them, rather than having to push them in advance. Just as needed, you pull them out, and digital technology creates the scalable platforms that really are the foundation for that alternative business approach.
JSB: For example, in the early days, perhaps most of our major corporations grew up under the whole notion of striving for scalable efficiency. The more you could produce of something, the more you get to learn, the cheaper you could make it, etc., etc. So that happens to be diminishing returns. That’s a long-term problem, but scalable efficiency is the holy mantra of the corporate world. And that really meant that in order to be able to produce much stuff, you had to be able to predict—and John just pointed out why that’s no longer a valid idea. But equally so, once you create a warehouse of stuff, then you go to marketing. You go to advertising. You go to sort of pushing this stuff out in order to create demand for your idea of what people actually need. So economy was based on a push model. Today we see this being dramatically flipped around.
TANYA OTT: Because the economy is driven more by consumers?
JSB: Well, (A) by consumers. And the network age. And the pull age—that you pull resources to [put] together. Pull what you want. So it’s a completely different dynamic, yet most of our corporations still think in terms of things that relate to scalable efficiency. Our mantra in the Big Shift is, how do you move from scalable efficiency to scalable learning? The ability to learn faster from people around you, from what customers want, all this kind of thing. It is a new game. People still think that corporate learning is still driven by HR and training departments as opposed to saying, no, no, we are embedded in a complex world. Every one of us ought to be taking every opportunity to try to make sense of what’s going on: to learn ourselves, to learn collaboratively, to learn collectively, and so on.
TANYA OTT: You say it’s a whole new world, but I want to rewind us for a moment, because you start your article with the words “In January 2012, Eastman Kodak Company filed for bankruptcy after a tumultuous decade. The 130-year-old company . . .” and then you have these, just stats that, boy, paint a story, don’t they?
JOHN HAGEL: Yes, they do.
TANYA OTT: It’s a real cautionary tale, what happened to Kodak. Remind us what happened.
JOHN HAGEL: Well, I think at the core, based on the wisdom of hindsight, you can see that Kodak culturally was very much a film company. The whole skill set, culture, was focused on film. So, yes, they could see digital cameras coming in, but, as I like to say, the capacity for rationalization is infinite. You could construct all kinds of reasons—that consumers weren’t going to go with these fancy new devices—and so they waited too long, actually.
TANYA OTT: I was going to say—I’m going to interrupt you for a minute—because it wasn’t that they just saw digital coming in. They had an engineer that designed . . .
JOHN HAGEL: Yes! They had some of the key patents for digital cameras.
TANYA OTT: So how is it that Kodak had an engineer that designed, basically, one of the original digital cameras, and yet the company didn’t embrace it or understand what it was or where it would go?
JOHN HAGEL: Well, it’s a much broader phenomenon. I joke, because we’re here in Silicon Valley, that every single large company has an innovation lab somewhere in Silicon Valley. They’re doing some really interesting things and they’re getting patents. But the extent to which those innovations are actually adopted by and transforming the core business? Very rare! So I think it’s, again, back to the point about mind-sets and cognitive biases: You can put all the rational arguments you want on charts and present it to the leadership of the company, but, again, if the leadership is going to rationalize, part of their rationalization is, like, we’ve got some stuff going on in digital cameras. Yeah, that’s fine. We’re protected.
TANYA OTT: We have this little team over here in this little office, and they’re doing science.
JOHN HAGEL: Right, right. But they’re not scaling it and not embracing it as the new core of their business. And that’s a much more challenging choice or decision.
JSB: But if you were also at Kodak (which, fortunately or unfortunately, I spent many, many decades at Xerox studying pretty carefully—they’re down the street from Xerox in Rochester), the digital technology would have disrupted so many core competencies in that company, that it’s hard to wipe off the table 40 or 50 years of mastery of chemistry. The talent inside that company is truly amazing. And that’s part of the problem: it was truly amazing. There was good reason to believe they could keep at the cutting edge and push that edge a little bit themselves.
Then other technologies took them over, and so did the market, what people really wanted. Kodak’s a very informative study to really understand how powerful the forces of denial can be. They had a really great group there that was doing cutting-edge research, but most innovation in those days, you had this radical group on the edge, and then they would try to push it into the core. When what you push into the core, you have a corporate immune system that’s brilliant at gobbling up this brilliant new idea and turning it into trash.
TANYA OTT: You talked about the power of denial, which is a theme we’re probably going to revisit over and over again because it’s such a massive theme. So why are potentially disruptive forces so hard to see? There’s a lot at play there, one of them being, I guess, that you don’t always see where it’s coming from. It can come from any number of directions.
JOHN HAGEL: Right, and I think that’s the core issue. One of the catalysts for us to decide to do this research initiative was talking to executives who are disruption weary, if you will. Everybody’s talking about disruption, and the way it’s framed, it could come from anywhere, anytime. So you’re basically just overwhelmed.
I think that part of our goal was to say, yes, there are some disruptions that will be totally unexpected and come from anywhere. But there are certain disruptions that are much more likely to hit your market or industry, and your market or industry are most vulnerable to these. You might want to focus your attention on how to respond to those. And yes, again, keep alert that there are going to be other things going on, but [with] the people we’ve shared this research with, there’s a sigh of relief in terms of, oh, thank God, there’s something I can focus on—versus . . .
TANYA OTT: Trying to focus on everything.
JOHN HAGEL: Look everywhere. Yeah.
TANYA OTT: So you come up with these different ways that disruption can happen. One of them is that there is a new entrant into the marketplace that displaces the incumbent—you mention the Amazon/Borders situation . . .
JOHN HAGEL: Yeah. It was very significant, and, again, the capacity for rationalization was infinite: Why would anybody really buy books online? You want to touch and feel and skim the book. It was just something that the management was unfortunately not able to really address quickly enough to effectively respond to the disruption.
TANYA OTT: Now this is what a podcast and audio doesn’t really capture: You were saying that you sighed, and your shoulders went down . . .
JOHN HAGEL: Right?!
TANYA OTT: Fragmented players—where you have, maybe, existing a couple of players, and then you have the ability for a bunch of fragmented smaller players to come into the marketplace. That’s disruptive.
JOHN HAGEL: Yeah. Again, it can some in many different forms, but in certain patterns of disruption, it’s the notion that, now the means of production are much more accessible to more people, and you could actually stay a very small company and be very successful challenging the incumbents who are extremely large. Back to the theme of scalable efficiency: The incumbents have scalable efficiency to their benefit, but these newer, more nimble, innovative companies can basically master scalable learning, and, over time, they may not get to be the size of the incumbents today, but in aggregate they will represent the bulk of the market.
TANYA OTT: One of the examples that you point to is what’s happened in the record industry.
JOHN HAGEL: Yes. Music, video, digital software. The means of production to produce an application now, anybody can do that.
JSB: And most people realize how good these tools can be. If you look at the tools of post-production that you yourself might be using after this podcast, that was unthinkable 10 years ago—simply unthinkable.
TANYA OTT: Well, I’ve been in the audio business for 27 years, and it used to be I’d have to spend a couple thousand dollars to get this recorder.
TANYA OTT: And I would have to have a studio where I’d put it all into reel to reel, and start slicing it up by hand.
JSB: And it would take you at least 10 times longer to do.
TANYA OTT: Yeah. Right now, I have a $350 recorder on the table in front of us and some microphones and a laptop with some digital editing software that is easy to use.
JOHN HAGEL: And no studio in sight.
TANYA OTT: No studio in sight. And I can turn it around in the airport if I need to.
JSB: Yeah. It’s interesting now that this democratization and ability to do this have really opened up the ability of an awful lot of people to be able to engage in one form or another to create their own media.
TANYA OTT: One of the other ways that this disruption can happen is that there’s a new approach that changes an entire market. I was in a taxi cab recently, where the cab driver said to me—we had our smartphones out . . . let me rephrase that: It was not a taxi cab. It was an Uber! I was in an Uber recently!
JSB: Don’t know where you found taxi cabs anymore.
TANYA OTT: I was in an Uber recently. Talk about disruption! And we were talking about phones and things like that, and he said, I wonder what’s happened to the flashlight industry?
TANYA OTT: Perfect example, right?
JOHN HAGEL: There’s one pattern of disruption, which is integrating what were previously a lot of different products into a single product. The smartphone is a perfect example of that. Flashlights are gone. Alarm clocks are gone.
JOHN HAGEL: Cameras are gone.
TANYA OTT: Travel clocks. You remember the little pop-up travel clock that you used to travel with?
JOHN HAGEL: Right! Who needs it?
JSB: It’s interesting because in hindsight all this seems too obvious. But if you’re living in it, it’s the furthest thing from obvious.
TANYA OTT: Why is that?
JSB: Part of the question is coming back to the whole notion of lenses. What’s our ability to actually see the world through a new set of lenses? We’re completely unaware of how the lenses we are wearing now shape everything we see. Yes, it’s metaphoric, but it’s more than metaphoric. It’s mental and social, in terms of how we talk about things, and so on and so forth. There’s a set of practices, that we have tacitly acquired, that have shaped the way we see the world. We just think the world has to be this way. Lo and behold, Uber comes along, Airbnb comes along and does things that now seem ridiculously obvious, but seemed pathological at the time. We could think up a thousand reasons . . .
TANYA OTT: Like, who would get in a car with a stranger?
JSB: Let alone, let a stranger in my house?
TANYA OTT: Who would sleep in a stranger’s house?
JSB: Yeah! I mean if somebody had actually walked in and said that 20 years ago, let alone around the world, it really is inconceivable. Yet today it seems, how could you have not seen that?
TANYA OTT: It would seem to me that part of the issue here is how widely or narrowly a company defines their market.
JOHN HAGEL: That’s a classic example of where you can get blindsided, because if you accept the definition of the analysts or the regulators or whatever, you can get locked into a view of the market which is not going to help you identify the new players who are coming in, and who you may view as different markets but may actually turn out to be the same market.
JSB: Building on that, take Uber or Airbnb. You also have public policies that build up around ways to protect those markets for one reason or another. So what you find is, you take some of these types of disruptions that we’re talking about, [they open] up a new kind of market where you find regulatory frames that are there to protect the old. You begin to have much more than just a technological clash; you almost have a regulatory clash. So this starts to get complicated.
JOHN HAGEL: I think it’s a big challenge. Our basic advice to executives in terms of how you think about markets is, again, focus on the customer—in a world where the customer is more and more powerful. Then focus on, what’s the task that the customer is trying to accomplish or need they’re trying to address? Be open to the fact that there are many alternative ways that they need or tasks [that] could be addressed, and that will help you to spot things. Again, the thing we’ve been talking about, the taxi industry, was defined by regulation. It was, do you have a medallion or a license or not? If not, then you’re not part of the taxi industry. [This is] versus the user need is to get conveniently and safely from one location to another, and whoever can address that need has a chance of becoming the leader in that business.
TANYA OTT: So there’s another level of disruption. Sometimes it’s a product. Sometimes it’s a tool. But sometimes it is a process—which is very interesting as well, because that’s the part of it that’s not transparent, necessarily, to the consumer.
JOHN HAGEL: Yeah, disruptions around processes are shortening the value chain—removing a significant step out of the value chain to enhance the value to the end customer. Again, I go back to Kodak as an example: One of the reasons digital cameras proved so successful was it eliminated that whole step of having to take your film to a film developer, come back, and pick it up at some future time—versus, I got it already in my camera. A huge value! Again, given the mind-set focused on the power of film and the chemistry of film, very hard to acknowledge that that was going to be a value to the customer.
JSB: Because we didn’t have the notion of instant gratification.
JOHN HAGEL: Yeah, right.
TANYA OTT: That wasn’t a thing, right?
JSB: All of a sudden, this enables us to be able to do that. Also, in terms of radical shortening of the value chain, think about 3D printing. I mean, maybe we can actually eliminate the whole supply chain in certain cases and say, no no, let’s just build it here . . .
JOHN HAGEL: On demand . . .
JSB: On demand. Let’s take you down four floors, and we’ll show you how you build your own product.
JOHN HAGEL: Yeah, it’s going to be more and more feasible. Again, one of our beliefs around the Big Shift is that customers are getting a lot more power, and their expectations are changing. They used to be willing to accept that there were these lead times and additional expense. Now, if you can provide it to me on demand and at a lower cost, I’m there.
TANYA OTT: You guys have a handy graphic of various products, and how long it took those products to reach 50 million users. I found this really interesting because, at the top, you’ve got radio, which is where I spent the bulk of my career, [which] took 38 years to reach 50 million users. Next, TV took 13 years to reach the 50 million users. Then the Internet, 4 years. Facebook, 3.5 years. Twitter, 9 months. Instagram, 6 months. And then Angry Birds, 35 days to reach 50 million users. First of all, really? 35 days? 50 million users?
JSB: Took that long?
TANYA OTT: That’s astounding, right? I mean, think about that, JSB. Forty years back in your career, the idea of . . .
JSB: I know. But it also flips to why we think you can do a tremendous number of things on the edge, inside your own corporation—because you have infinite reach. So in some ways you can kind of build prototypes of products. You can try them out in the marketplace.
TANYA OTT: Test ’em, bring ’em back, whatever . . .
JSB: Right. So this ability to experiment and learn has just been completely redefined.
TANYA OTT: Here’s one of the questions, though, that that graphic raises for me, and that’s Twitter. Nine months to reach 50 million users, but it has still had a very, very hard time turning a profit. A lot of people use it, but what’s the business there?
JOHN HAGEL: Right, and I think it is a challenge for many of these companies. We’ve identified nine different patterns of disruption, but we ended up identifying two broad categories. One was disruptions that are driven by network effects, where “the more participants you have, the more value everybody receives from that” approach. In those kinds of businesses, and I think Twitter is an example of that, social media certainly, the race to get to critical mass and then to go beyond, and get more and more people, often overwhelms the focus on profitability. The belief is, if we can get to that large number of participants, we’ll find a way to make it a sustainable, profitable business.
TANYA OTT: Is that a legitimate belief?
JOHN HAGEL: I think it is at one level. It can be taken to extremes, leading to businesses that just have no business rationale whatsoever. But I think the implicit belief on a lot of these disruptors is that speed is of the essence, that this isn’t something that you can sit back and wait and be a fast follower . . .
JSB: Or study . . .
JOHN HAGEL: That’s not going to work. So I think one of our key messages, particularly around the network effects disruptions, is you’ve got to get in there really early in order to start to get to that critical mass before somebody else does, because once they do, you’re going to have a really hard time challenging them.
JSB: But once you start to get this network effect going, that also gives you a chance to step back and think, what may be an alternative business model? Let us not forget that this small, little company down the street—I think it’s called Google—did not have a business model. Search, by itself, is not a business model. And it wasn’t until two or three years in that they actually decided to invent a new, very clever way to do advertising, and that created the business model. That was a complete disruption to the classical advertising business, the way they actually did the AdWords, etc. —and that came after the fact. So it was kind of the vision of the venture capitalist as well, who said, we think something’s going to happen here. You guys are clever enough. Let’s play together, and let’s get a huge following, and then it gives us more space to tinker. It was a brilliant breakthrough when they actually found that new way to think about advertising. That was not obvious when they first started.
JOHN HAGEL: Another example that’s playing out right now is Pinterest. It started as a photo sharing website, and, you know, how can you make a business out of photo sharing? That’s crazy. By watching what people were doing in terms of sharing photos, what kinds of photos were they sharing—a lot of them were sharing photos of products that they were making or had bought—put a Buy Button on the photo, and allow that person to actually buy that product if they really like it. They just announced that, so it’s not clear how it will play out. But it’s interesting to JSB’s point of watching what people do as you start to create these platforms and networks, and then coming up with the ideas of how to monetize.
TANYA OTT: I didn’t want to miss the opportunity to mention you had radio at the top of that graph. Of course, there’ve been a lot of challenges to radio. Television was going to kill radio, which didn’t really happen. Then digital music and podcasting and all that stuff. But I had someone ask me recently, what’s the thing that keeps you up at night as it pertains to radio? And I said, self-driving cars is the thing that concerns me because we have people captive, consuming audio in a car. They may not consume it anywhere else, but they’re in a car, and they’re commuting, and they’re consuming it. And when they can suddenly have a self-driving car, where their eyes don’t have to be on the road, will they consume video? Or answer emails? Or do any other things? Or read a book?
JSB: Or do them all! More frightening. Simultaneously! (laughter) I think it’s a beautiful example because it’s not at all obvious at first. Self-driving cars, autonomous vehicles might aptly transform something as far away as consumption of radio. There’s almost no obvious connection except once you say it.
JOHN HAGEL: Yeah.
JSB: You say, oh yeah!
TANYA OTT: It makes sense, doesn’t it?
JSB: It makes sense, yeah.
TANYA OTT: And then billboards, and then there’s all that trickle-down. The other one that wasn’t obvious until someone pointed it out to me with self-driving cars is that—of course, it makes sense when someone sees it—is that sheriff and police departments finance a lot of their business based on traffic tickets. If self-driving cars are so efficient at not having accidents and not speeding . . .
JOHN HAGEL: Hmm.
TANYA OTT: What happens to them?
JOHN HAGEL: There are big issues for city revenues in general. Parking fees, a whole range of things.
JSB: Same with taxi medallions. (laughter)
TANYA OTT: Yeah.
JSB: Yeah. We’re entering a world where all these changes could be seen as an adventure. Or it could be seen as just goddamn scary. Part of our game is to say, how do you turn more of these things into a learning adventure? Where now you have a chance to pick up new ways of doing things and learn from people around you. You don’t have to go back to school to learn a lot of stuff.
TANYA OTT: So it’s the difference between a disruption and an opportunity.
TANYA OTT: But of course there are real barriers, particularly for incumbents in responding and thinking of it as an opportunity instead of a disruption—one of those being that they’re going to magnify the risks of it, and they’re going to discount the rewards.
JOHN HAGEL: Yeah, we find there’s a really interesting dysfunction that occurs in times of mounting pressure. Part of it is magnifying perception of risk and discounting reward. If you do that, it also shortens your time horizon. Because if it’s all about risk, I just want to focus on risks that are happening today or tomorrow; don’t bother me with stuff that’s way out there. And if you start to shrink to that shortened time horizon, you also fall into what economists call the “zero sum view” of the world. If it’s all about today, there’s a given set of resources out there, and the only question on the table is, who’s going to get them? Is it gonna be me? Or is it gonna be you? Trust erodes as a result. The whole notion of learning together and coming together to learn more rapidly . . . I can’t trust anybody, and I’ve got to focus on doing the job that’s on the table today. There’s a lot of risks, so I gotta stay focused on that.
JSB: Which is a death knell in this kind of world.
TANYA OTT: But it doesn’t have to be. Learn the patterns of disruption. Be able to recognize them in your industry. Then think of ways to flip them around to do some types of new “edge” innovation. John Hagel and John Seely Brown outline the patterns in more details in an article on dupress.com.
While you’re there, check out the archives of our podcasts. We just posted a fascinating deep dive into behavioral economics. We talk to some of the top thought leaders in this area to find out why we make the personal and professional economics decisions we do—and how we can set ourselves up to make better decisions. An easy way to find that and all of our Press Room podcasts is to subscribe on iTunes or through your favorite podcasting app.
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