Does Disruption Create Value or Destroy It?
It is difficult to separate disruption from evolving technology. Evolving technology such as driverless cars or even electric cars can cause disruption in the marketplace or for the manufacturer or for the user or both. Except through a slower evolution, there is time for companies and people to readjust. Disruption can also be abrupt.
The necessary is impossible. The impossible is necessary.
While $150 billion to $200 billion of traditional automotive supplier revenues are at risk over the next decade, more than $700 billion of opportunities exist for Value chain players to capture, according to Deloitte’s third annual “2018 Global Automotive Supplier Study.”
When the rate of change outside exceeds the rate of change inside, the end is in sight.
–Jack Welch
Some say that disruption is connotatively and denotatively negative. I do not agree. We will show disruption can be positive for some and negative for others. Entrepreneurship is the creation and capture of extraordinary Value. Placing Value creation (usually economic) at the heart of entrepreneurship helps us recognize (and therefore engage in) disruption where it is often ignored. Dan Isenberg says1 “Creation and disruption are virtual opposites. This distinction is both practical and important; because people can create a lot of disruptive innovation while destroying Value rather than creating it. Let me take an extreme (and painful) example to make the point: On September 11, 2001, a group of 19 men disrupted life as many of us knew it, killing thousands, shaking our feelings of safety, and disrupting the normal course of events in the world’s most powerful cultural and commercial center while negatively impacting the lives of many millions. The masterminds of this terrorism used totally unanticipated and novel methods that defied detection by the best trained intelligence apparatus in the world.”
The 9/11 terrorists were disruptive innovators. Isenberg continues: “Don’t try to escape your (and my own) discomfort with this by forcing the definition of innovation as intrinsically good, it won’t hold much water.” This tragic example warns us not to treat disruption as a good in and of itself, and suggests that entrepreneurs recognize that disruption is neither an objective of, nor a strategy for, entrepreneurship; sometimes it is a by-product.
People are starting to understand the logic of Value creation in disruption. Thrive (2016) states:
This (disruptive) environment leaves a credit union with no option but to disrupt itself before someone else does. At the core of the disruption battle is Value creation. How the credit union define, create, and deliver Value to the members they serve is critical to understanding how to improve their offerings and delivery channels.
Robert Fellner (2017)2 states that Value creation is more important than job creation for the economy.
Liam Colley, in his Insight: Value Creation, discusses Creatively Overcoming Disruption asks how to innovate to create and protect Value?3 The answer may lie in our ability to foster and harness creativity.
A group of CEOs suggested, work with what you have, expose people to new experiences and take calculated risks, develop the right environment, and enable creative courage. Unleashing creative forces will help you face disruption and create sustainable Value. The pharmaceutical industry suggests be disruptive or face disruption. Their thesis is to move from molecular-type thinking to patient-centric thinking. New products will not prevent disruption. You need new business models. These include convenience, cost, integration, empowerment, and satisfaction and crafting disruptive solutions including user-friendly formularies, mobile and personal devices, actionable information, and customer relationship building. It’s a radical change from long-held strategy: pharma’s next generation innovation is streamlined toward long-term, replicable customer engagement.4 This includes wearables, body sensors, visible and invisible, AI, augmented reality, and virtual medicine.
Disruption can come from Google or Amazon, outside their business. The suggestion is to put people and culture first, look for partnerships, architect innovation. Remember, Rick Krohn, President of HealthSense, says deliver Value to the physician, the payer, and the health-care consumer.
Helsinki University is crafting programs and research along these lines. Their studies in innovation, market disruption, and Value creation look at consumption and consumer behavior as challengers of established market practices. Drivers for change include technological change and digitalization, which have first created new markets (online and mobile services, for instance) and then changed market structures and practices (energy, electric traffic, and shopping). Ecological and economic sustainability are highlighted in their studies, which are typically multidisciplinary in their character.
Accenture5 suggests that M&A is changing from the classic methodology to focus on ability to disrupt business models and long-term Value creation, resulting in new practices and organizations. Their focus is on disruption potential, adjacent and unrelated industries, and smaller bets (with bigger impact).
Failure of an M&A should lead to greater learning and experience and lower Value destruction.
The first reason for failure is simply the inability to understand the environment in which you operate. The second, the inability to adapt to that environment.
Consumption is approached through a number of parallel concepts such as collaborative consumption and access, co-creation, lead-users and prosumerism. Value creation is viewed from the vantage points of consumption and consumerism.
Disruption hits legacy companies the most. Only 33 percent can navigate through to success and two-thirds go out of business or are acquired. An example of a successful transformation is Monsanto who changed from a chemical producer with expensive feedstock (high oil prices in the 1980s) to genetically modified organisms, which it paid for by spinning off legacy businesses. They spent 3 to 5 percent of their profits for over a decade to change over.
Ten percent of their market capitalization may be needed to make these disruption bets. Those with less than this seldom make the grade.
Old beliefs and not looking at Value waiting to happen prevent companies from changing. They have to engage with the threat and the disruption model. Adobe, for example, moved to paid subscription Cloud-based software as a service model. They went from that service giving 12 percent of its revenues in 2012 to 85 percent today and a 33 percent increase in revenues by taking share from slower changing competitors.
Top executives are active Value creation champions in such changes.
There are so many Value-creating examples of people taking advantage of business shifts. Steve Ballmer disrupted Microsoft’s successful license, desktop-based business model. He drove the shifting from software sales to a Cloud-based business platform to build Azure. Similarly, he set in motion the process of transforming Microsoft Office from a software product to a Cloud-based service.6
Seventy percent of the 8.7 billion R&D budget went into this change. Microsoft CEO Nadella predicted in 2015 this Cloud-platform business would grow from $6 billion to $18 billion in 2018, which seems possible now. Microsoft’s stock price has almost doubled. Other legacy companies have reduced stock prices, some almost to half !
Clark Golestani,7 CIO at Merck, suggests that there are three time frames for investment: Short-term investments are primarily operational, and are focused on driving service levels up and lowering costs over the next 18 months. A second portfolio of investments aims to drive revenue from customer activities between 18 months and three years out. Finally, longer-term investments—those that enable disruptive capabilities—are intended to drive revenue within three to four years. “Looking at investments in this way is how we went from nothing to having an engineered-from-the-ground-up data lake with advanced machine learning for intake of medically based information, very advanced search capabilities, and machine learning for looking at unstructured data.”
For example, increased data, analytics, and insights are changing the ways that health care companies can create Value. Health-care companies have to invest in digital technology for payments and incentives, and customer experience.
Digital technology can improve communications and improved clinical delivery to the patient. Also pharmacies can use their access to customers to help them with better life styles and Value.
The Seeds of Disruption
Horse carriage to cars to driverless cars to drones to hyperloops to supersonics. Disruption always existed but it took a long time. It was not called disruption then, because it happened over a period of time. Today disruption is much faster, because supply chain, technology, and communications make the change swift and disruption more apparent. It can spread geographically much faster. The pace is even faster when no physical products have to be invented; instead Internet of things based changes can be extremely fast.
Measuring the Value of Disruption: It’s Not Always about the Money
Jim Spohrer of IBM and I discussed disruption due to technology or social changes. Typically the expected impact is measured in dollars and cents and not in the Value (benefits vs. expended effort in a competitive context).
Jim and I discussed driverless cars and their impact. Most people are looking at the impact from a monetary viewpoint. We would like to also look at this from a Value viewpoint.
This will force us to define Value for society, and how to measure these (see, for example, Porter et al.8). Shared Value is a word used but there is little true sharing.
We will then be able to tell where Value is created and destroyed. Thus for developing countries, increasing wages may in the short term improve the Value to labor, but long term, it would force them to be replaced by automation, AI, and robots. What happens to the Value to these unemployed people, and the societal impact and what should governments and companies gear toward?
We could expand this to other areas. Irene Ng’s business thought of healthcare companies focusing on well people and keeping them well, versus concentrating on un-well people. What will this mean to the medical ecosystem, and where will Value be created and destroyed? What role do the players have in viewing the consequences and reversing the destruction of Value by proposing alternatives to those who might lose jobs, or those whose businesses might be impacted? Or should they look at the greater good at those for whom Value is being created in hitherto unthought of but in an immense way. How do you view these gains from Value to society?
Dave Frigstad of Frost and Sullivan and I discussed my Value creation thoughts, a few years after introduction of driverless cars (say five years from now) and at maturity (15 years from now?).
Disruption and Way of Life and VI
It will be there, and it will be a way of life, but some disruptors will have a long stay, especially when they create more Value than they receive. Facebook and Google Search are examples of giving more than they receive.
People like you and me have to live in and participate in this disruption as it influences us and our way of life. As we get used to one disruptor another one will come, which dictates our living and living spaces, our transportation, our work, our ability to change careers, our health and healthcare, our leisure, and our resilience, and sense of humor and persistence, and above all our desire to conquer all, or at least survive.
VI, through its first principle, suggests improvement of well-being, and the seventh principle that suggests disruption must create more Value than it destroys. The fifth principle says that our potential to live with and even overcome disruption is important. And making decisions vis-a-vis disruption and dilemmas can be helped by the sixth principle.
1 https://virgin.com/disruptors/entrepreneurs-dont-disrupt-they-create-Value
2 https://mises.org/wire/we-dont-need-create-jobs-%E2%80%94-we-needcreate-value
3 https://legacy.alixpartners.com/en/Publications/AllArticles/tabid/635/articleType/ArticleView/articleId/1543/Creatively-Overcoming-Disruption.aspx
4 http://pharmatimes.com/magazine/2018/march_2018/be_disruptive_or_be_disrupted
5 https://accenture.com/in-en/insight-outlook-m-and-a-Value-creation
6 https://bcg.com/publications/2017/Value-creation-strategy-transformationcreating-Value-disruption-others-disappear.aspx
7 https://www2.deloitte.com/insights/us/en/focus/cio-insider-business-insights/technology-investments-Value-creation.html
8 http://hbs.edu/faculty/Publication%20Files/Measuring_Shared_Value_57032487-9e5c-46a1-9bd8-90bd7f1f9cef.pdf