Reflections on CES 2024 | Deloitte US has been saved
Reflections on CES 2024
Risk-averse incumbents may not define the Future of Health
By Neal Batra, principal, and Andy Davis, principal, Deloitte Consulting LLP
Each year, the CES conference in Las Vegas provides us with a window into where health innovation is…and where it might be headed (we are still sifting through our notes). The event confirmed the march toward the Future of HealthTM continues unabated. Innovation is taking place throughout the health care and life sciences sectors. What is less clear is which companies will ultimately lead this transformation? Will it be the incumbents that defined the industry, or will it be innovative startups. History says it will likely be the new entrants.
In any industry, large incumbent companies tend to focus on predictable markets and predictable returns on investment. But that strategy can cause them to miss, or ignore, emerging areas. Incumbent players might be hesitant to step outside of existing, well-defined markets and navigate unfamiliar terrain. But maintaining the status quo is not a recipe for disruptive innovation or for building new markets. Risk aversion among incumbent companies could impede their ability to further define the markets they currently dominate.
By contrast, most entrepreneurs understand that uncertainty (and the need to build new markets) is part of their business model. They tend to embrace risk and are more willing to build new markets rather than try to capture a slice of an existing one. Harvard University professor and businessman Clayton Christensen coined the term “disruptive innovations.”1 He described how large incumbent companies can become too focused on satisfying an existing customer base and wind up getting blindsided by a disruptive innovation that creates a new market that eventually disrupts an established market. Larger companies might also worry that innovations could cannibalize their existing products. While leaders of an incumbent company might recognize an emerging market trend, they might try to apply it to existing products or customers. This “innovator’s dilemma” could play out in health care and life sciences.
Disruptors and incumbents at CES
Some of the innovative startup companies we saw at CES are working to develop new markets and are pushing deeper into the future that we outlined several years ago. From a gyroscope-equipped glove that reduces hand tremors often associated with Parkinson’s disease, to a portable hemodialysis unit, to an at-home test to diagnose urinary tract infections, innovators are trying to identify new markets. Pulsetto, a Lithuanian startup, displayed a device that provides electric stimulation to activate the vagus nerve (watch our interview with Pulsetto from the CES exhibit hall). The sensation, which is similar to taking an ice bath, can help reduce stress and anxiety, manage pain, improve sleep, and boost mental wellness. (Check out our video series, On the ground at CES 2024, where we walk the floor and introduce you to companies that are bringing us to the Future of Health).
We also noticed some startups that captured our attention at past CES shows were nowhere to be seen. Did they run out of funding? Did they go public? Or were they acquired by a larger company? In some cases, mergers and acquisitions (M&A) can help an incumbent push into new markets. This strategy can be faster and less expensive than building something organically and might be attractive for companies with tight research and development budgets. Acquiring a disruptive startup might also help a large company shift its gravitational center and force it to readdress its risk/reward appetite.
However, M&A could also be the end of an innovation rather than the beginning. The acquiring company might not have had a clear idea of what to do with the startup after the acquisition. If the acquiring company is risk-averse, the startup might never reach its market potential. Sometimes a large company will acquire a successful startup from a space where it has no experience. Or it might not know how to help the startup continue its momentum.
Consider a football team that acquires a first-round draft pick who never reaches his potential. Perhaps the coach didn’t know how to get the most out of that player’s talents, or maybe the team just didn’t gel. Maybe the acquisition was purely a defensive move to keep competing teams from signing that player.
Are small companies more willing to fail?
Startup companies tend to be more nimble, more willing to experiment, and less afraid to fail than established companies that have multiple products and revenue streams. Unlike publicly traded companies, startups generally don’t release quarterly reports, and they don’t have to protect legacy markets. Their investors (who might be private) tend to have longer-term objectives and might be more comfortable with uncertainty and marketplace gyrations than typical venture capital investors. Moreover, a large, deep-pocketed legacy company might also be a bigger target for lawsuits. That risk can push those companies to take a conservative stance when it comes to introducing new products or innovations. A small startup, with limited assets, might not be worth suing.
The issue is not that the large incumbent companies are unable to innovate. The issue seems to be that these companies often do not have the appetite for risk and might also lack the agility to move with the pace of change. If a company was acquired because it was disruptive, then that organization should continue to be disruptive. Startups that are looking for an exit should try to ensure that a potential acquirer will respect the organization’s individuality and maintain the integrity of its innovation. Innovators should help the acquiring company define a strategy for scaling the company or innovation once the acquisition is finalized.
Conclusion
There were more than 4,300 exhibitors—including more than 1,400 startup companies—at this year’s CES. About 60% of FORTUNE 500 companies were also represented.2 Startup companies that have innovative ideas and are willing to take risks are often positioned to create new markets and help define the Future of Health. Incumbents might be able to retain market dominance but, most likely, only if they are willing to take risks. Industry leaders who are unwilling or unable to step outside of their comfort zones will likely find it difficult to take advantage of what appears to be a transformative moment in health care and life sciences.
Incumbents should try to fight through their risk-aversion and find ways to participate in emerging markets. A wait-and-see approach might feel safer and still participatory. But when breakthrough discoveries emerge—particularly when powered by novel technology—the ability to catch-up could be challenging. Startup companies that are looking to break into a market should try to identify an unmet need, zero in on a target customer, and go for it. Waiting to sort through the multitude of applications and possibilities could delay market entry.
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Endnotes:
1The Innovator's Dilemma: When new technologies cause great firms to fail, Clayton M. Christensen, Harvard Business School, 1997
2Startups at CES 2024: Entrepreneurs tackle extreme challenges, CES, February 1, 2024
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