How Incumbents Beat Disruption

Author

Steve Faktor

April 21, 2016

You can probably still find clumps of my hair inside dozens of companies where I’ve launched products and services. Why is it always such a yuuuge struggle? Big companies have lots of valid – and lame – reasons not to innovate. By far the most insidious is: they secretly know they don’t have to. Not only does data show big companies aren’t being “disrupted”, but they’re running away with all its juicy perks. This is the story of why innovations like Bitcoin and Netflix aren’t ‘changing the world’ but instead, pulling all-nighters for The Man.

Why so slowwwww?

Compared to startups, big companies are notoriously slow and vision-challenged, but they have menacing quills. Many luxuriate in piles of cash. Their household names can open doors for even the laziest of employees. Global distribution and supply chains refill empty shelves with Germanic efficiency. Some have exclusive contracts to lock out competitors or huge volumes to lock in unmatchable discounts. And their IP has unknowable powers…until their lawyers consume you like Ebola.

Industries like insurance, finance, auto, and aerospace are now besieged by startups, but those incumbents have even better defenses. Bankers like to grumble about regulators, but no love is more unconditional. Compliance barriers are the only thing keeping companies that process numbers from destroying companies that process numbers with dollar signs. Liability and equipment costs thin the herd even more, raising capital requirements beyond Angel or VC thresholds. Even when a startup clears these hurdles, it can struggle to meet the unforgiving requirements of government and corporate contracts.

Then there’s the question of longevity. When it comes to life insurance or 50,000 mile warranties, disruption isn’t at the top of anyone’s list. Those customers want certainty. Despite early (but slowing) successes of companies like Wealthfront and Zenefits, it’s hard to rush trust.

R&D-linquent

So…what we often called a “disruption” is more like an interruption. Not only do most “disruptors” fail to put major players out of business, the vast majority sell out to the establishment. The numbers couldn’t be clearer. Acquisitions are, by far, the vast majority of exits (in dollar value).

In effect, startups aren’t harbingers of disruption, they’re an externalized R&D function.

R&D and more broadly, innovation, has flatlined in many industries. Many aren’t particularly digital. That opened the door for startups to provide features and functions fossilized corporations neglected. The incumbent’s punishment for their R&D-linquency? Paying top-shelf prices – retroactively – to buy what they should have made.

Big companies are waking up to the sticker shock of retroactive R&D. Many are jockeying for position in earlier stages, where prices are cheap, but odds are low…kind of like actual R&D. They’re starting venture funds, directly pitching startups for help, or hiring companies like mine to find startup diamonds in the rough.

The Assimilation

Some incumbents are brilliantly – or deviously – seizing disruptive technology for themselves…or slide gently into the establishment.

Axel Springer, an old school German (dead tree) publisher, is proving that if you’re smart, bold and have capital, all things are possible. The company reinvented itself with digital now generating more than 60 percent of revenues and over 70 percent of operating profit.

In financial services, incumbents are neutering the Bitcoin “revolution”. They’re adopting Blockchain technology to transfer money cross-border and eliminate middlemen. Major banks are even cornering the market on Bitcoin IP, laying landmines for Bitcoin challengers. Others still are financing Bitcoin’s biggest startups. Who are you disrupting when you’re owned by the establishment? It’s like declaring emancipation from your parents, but living in their basement, raiding their fridge, and sending them your tuition bills.

Long before Bitcoin, Paypal was by far the most innovative company in payments space. While it’s carved out a profitable niche, it has not put a single incumbent out of business in its entire 15 year history.

Even Netflix, which looks disruptive, has nuzzled itself comfortably into the media mainstream. It distributes content from – and gets distributed through - the very cable and media companies cord-cutters thought it would eviscerate. Netflix is also hiring Hollywood talent to produce originals that seek recognition by the establishment, no different than NBC or AMC. Netflix is an undisputed innovator and success story, but not a disruptor.

Then there’s the dark side.

Individually or through lobbies, some corporations command a staggering cesspool of lawyers and cronies to threaten, retard, or bankrupt innovators.

Patent intimidation and resource-draining lawsuits are a norm for threatened, idea-starved incumbents. Best Buy stole Techforward’s algorithm and generated $140M in revenue with it. The startup won $27M – years after going bankrupt. Lesson learned?

Taxi companies worldwide are either suing Uber or pressuring political cronies to regulate away its advantages. Hotels are doing the same with AirBnB in cities like New York. Car dealers are doing their part to keep Tesla from circumventing their cartel by selling direct to consumers.

Fossil fuel giants happily take subsidies, but lobby aggressively to keep solar, wind and other alternatives from tapping that same booty.

Cable companies famously slowed web traffic to extract payments from providers like Netflix and sued startups like Aereo out of existence. (Admittedly, Areo was a novelty built on a loophole.)

As unsavory as these tactics are, they knock the teeth out of disruptors. And a gummy bite is just a tickle.

The Real Disruption

The last impression I want to give is that incumbents are safe. They’re not.

In aggregate, the world is speeding up. The web is a giant brainstorming session where no one’s ideas stay precious for long. That puts individuals and companies on edge. Many corporations will fail. But rarely will coroners rule it a homicide. They won’t be executed by some disruptive gansta-grammer puffed up with VC cash. They’ll be vaporized by an extinction event. A meteor made of rising consumer fickleness, too much choice, or good old obsolescence. It’s already happening as household names consolidate or drop like flies from major indexes.

Sadly, just as many will be suicides, caused by complacency, lack of vision, or mismanagement. I talk to companies every day whose potential suffocates beneath their own inertia. Some lumber like they have more time than they do. Others misread market signals. Many more fail to build on the goldmine of growth assets they already have.

As someone whose business is helping companies face ‘disruption’…or change, it’s not exactly in my best interest to undress the emperor. (Sure, maybe a platonic backrub, but never full frontal.) Besides discussing it here, I just assumed this draft would end up in my coffin next to my copy of “Breakdancing for Dummies”. Still, it’s a conversation I’ve had privately so many times, I’d rather just send this link.

For now, “disruption” remains a feel-good mantra both startups and corporate-types can enjoy rubbing all over their bodies. It’s like those motivational quotes people post on Facebook. On the surface, they look like they’re meant to help others. But in reality, they’re there to comfort the poster – to convince themselves they are the identity they’ve crafted.

In the end, if everything Is disruptive, nothing is. If everything is amazing, nothing is. If everything is offensive, nothing is. Without relativity, we lose objectivity. But maybe honesty just isn’t that inspiring.

Feel free to read my piece about all four reasons big companies don’t innovate and sign up for my future articles on innovation.


Mini-Bio:  Steve Faktor is the author of  Econovation , CEO of  IdeaFaktory  growth & innovation consultancy, and advisor to numerous startups. Steve is a recovering Fortune 100 senior executive from American Express, Citi and MasterCard. He’s a popular keynote speaker and contributor to Forbes, HBR, LinkedIn Influencer, NPR, Bloomberg Radio, MSNBC and many others. You can hear Steve predict and satirize the future on his new  The McFuture podcast and stalk him via  email newsletter Facebook Twitter  &  Google+ .

This article was written by Steve Faktor from Forbes and was legally licensed through the NewsCred publisher network.

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