What CEOs Can Learn From Disruptors

Why do many established and often well-managed companies struggle with disruptive innovation? Many times it is simply because companies have been doing the same things, in the same ways, and for the same reasons for so long, that they struggle with the concept of change. Disruptive business models focus on creating, disintermediating, refining, reengineering or optimizing a product or service. Most people assume disruption occurs with the introduction of new technology but that often isn’t the case.

There are many examples of companies across every sector that have either failed to embrace disruptive business models, or have failed to maintain their once disruptive edge. Why didn’t Gillette see Dollar Shave Club coming? Why didn’t Folgers recognize the retail consumer demand for coffee and develop a Starbucks-type business model? Couldn’t Microsoft have kept Google at bay? Because established companies tend to focus on making incremental gains through process improvements and are satisfied with their business models they often fail to see disrupters coming until it is too late. By shifting one’s focus from managing opportunities to managing risk, they end up managing themselves into brand decline.

New market disruptions are particularly difficult for incumbent firms to spot because they emerge in a new plane of competition that competes on different measures of performance than the original plane. To the incumbent, this often doesn’t look like disruption at all, and that leads many incumbents to make mistakes that allow entrants to build substantial businesses or even topple the incumbent.

Most managers, skeptical that the innovation will take off, adopt a wait-and-see approach to the new market. As the entrant grows and it becomes more clear that the business model is viable, incumbents begin creating contingency plans. At the core of the ineffective responses is a belief in the value of the fast-follower strategy. The fast-follower strategy works because success comes from leveraging existing resource and capability advantages. The idea is to sustain existing competition which tends to favor incumbents.

Today the traditional automotive paradigm in which vehicles are sold is being threatened by a new mobility paradigm in which miles are sold. The automotive industry is at the early stages of this transition, but a services ecosystem built on the foundation of the new mobility platform will generate unexpected and transformative opportunities.

Most are aware of Zipcar, the industry leader in car sharing that was founded in 2000 to offer an alternative to car ownership for urban residents. Zipcar didn’t directly compete with either car manufacturers or traditional car rental companies but it grew quickly thanks to its convenience and affordability.

“ By shifting one’s focus from managing opportunities to managing risk, they end up managing themselves into brand decline.”

Zipcar offers hourly rentals that are reserved in advance on the company’s website or mobile app. Zipcars are parked at fixed locations throughout urban areas, and at high population density locations like corporate offices and college campus. Customers drive the vehicle for as long as they have reserved and return it to its assigned parking space for the next user. Users pay an annual membership fee and an hourly rental fee that includes all potential costs including gas and insurance.

Seeing Zipcar’s early success, the traditional car rental companies all launched competing offerings. In 2008, Hertz launched Hertz Connect and Enterprise launched WeCar. Both companies took very similar approaches to Zipcar, essentially copying its model and leveraging their existing brands, fleets and technology systems. But the results proved disappointing. According to market researchers, Zipcar controlled almost 30 percent of the U.S. market by 2015 while Hertz controlled 9.5 percent and Enterprise just 5.4 percent. Both companies were forced to re-brand and re-launch their car sharing businesses. Avis took the best approach by acquiring Zipcar in 2013 for $500 million in cash.

While the traditional rental companies copied Zipcar without seeing many positive results, German automotive giant Daimler developed a different response. In 2008, it launched a unique car sharing alternative called Car2Go, which operates a very different model than Zipcar. Car2Go operates a “roving” model where its cars have no fixed spaces but can be parked anywhere in their home territory at the end of a trip. Rentals are one-way and users don’t book in advance but instead locate available vehicles on their smartphones and have no claim to a vehicle until they drive off in it. Also Car2Go charges users by the minute (although it allows for hourly or daily rentals, too). The firm initially targeted smaller cities with lower population densities that were less attractive to Zipcar because of its need for high densities. Doing this meant that Car2Go avoided direct competition with Zipcar and the traditional rental car companies and created a completely new market.

The most important thing to take away from the example of Car2Go is the importance of creating a new, disruptive business to disrupt the disruptor. Daimler recognized that car sharing could have significant negative impacts for its business and it used that understanding to create a business that leveraged corporate strengths where appropriate but created a fundamentally new business model that is disruptive to all competitors in addition to itself.

Similarly, the IT industry has undergone several major shifts since computing became a business resource. The mainframe era gave way to client/server computing, which then ceded its position as the dominant compute model to a branch-centric computing model. Today, the industry sits in the midst of another major computing revolution: the shift to cloud computing.

Historically, the network has been considered “the pipes” and a non-strategic asset. Because of this, best-effort services and rigid architectures were the norm. However, the cloud is a network-centric compute model, and network strategies must now change. In the cloud era, connectivity is the dominant force, and businesses must now consider the network a strategic enabler.

Recognizing that the cloud has had and continues to have a disruptive effect on enterprise IT, GTT Communications, a McLean, VA-based upstart saw an opportunity to  reshape the way applications are consumed. Until recently enterprise connectivity was the sole province of Big Telco—AT&T, Verizon, CenturyLink, and others. But these giant incumbents appear to be more interested in diversifying away from their core business with Verizon acquiring Yahoo and AT&T pursuing Time Warner. In the meantime, the technology has moved on. Businesses that align their network strategies with the cloud will achieve levels of agility and productivity never seen before in business; those that do not will struggle to survive. This makes network evolution a top initiative for CIOs and all business leaders.

Having acquired some 39 communications companies GTT became a pure-play networking provider that is taking market share away from telecom giants who basically think of enterprise connectivity is their birthright. While the big players are distracted, GTT built an extensive core network and does not have to own the last mile of connectivity. “We don’t need to own anything,” says GTT CEO Rick Calder. “In the 1990s companies like MCI tried to build everything from scratch. We didn’t need to do this because we built it from acquisitions.” Because the established giants are working off older MPLS networks, multinational companies can now use newer technologies such as software—defined WANs, optical transport and private cloud networks such as Microsoft or Amazon’s AWS. GTT boasts a light CapEx business model mostly leasing fiber and only acquiring fiber when the volume of traffic running across specific routes reaches a tipping point where owning it becomes economically advantageous.

Anti-incumbent disrupters like GTT can’t go head to head with Big Telco but in a business enterprise market which is fairly large–in excess of $200 billion– they enjoy an  advantage in that older legacy networks are static and highly inflexible. In the cloud computing era, the network needs to be dynamic; businesses require the ability to make changes rapidly. A 2015 ZK Research network management study revealed that on average, it takes businesses four months to implement a change on a traditional network. This is far too slow for the current business climate. If organizations continue to use a traditional network, they will miss out on business opportunities.

AT&T and Verizon do not break out North America, but Verizon’s Global enterprise business declined by over 5 percent sequentially in the third quarter of last year after posting sequential declines of 1.7 percent in the previous two quarters. At approximately $2 billion in annual revenue on a pro forma basis with only 1,300 employees GTT may be a flea to giants like AT&T or Verizon, but over the past five years the company has experienced a compound revenue growth rate of 50 percent and a 75 percent CAGR in adjusted EBITDA.  GTT’s network is so robust that Dyn Research, a leading Internet performance measurement company, has ranked GTT as one of the top five IP networks in the world. A client-centric model that focuses on simplicity, speed and agility has allowed it to offer large company customers such as Tenet Healthcare and Rockwell Collins to enjoy a tier-one backbone and network connectivity at around half the cost.

The lesson for business leaders is never stop trying to disrupt one’s own company by asking yourself whether your customer could obtain better value by doing things differently. In addition, ask yourself any of the following questions:

1. When was the last time you rolled-out a new product?
2. When was the last time your business embraced change and did something innovative?
3. Does your organization focus more on process than success?
4. Are your management and executive ranks void of youth?
5. When was the last time you entered a new market?
6. Are any of your executives thought leaders?
7. When was the last time you sought out a strategic partner to exploit a market opportunity?
8. Do you settle for just managing your employees or do you inspire them to become innovators?
9. Has your business embraced social media?
10. When was the last time your executive team brought in some new blood by recruiting a major player star?