If You Think Your Company Is Safe from Disruption, Think Again
One of the Big Ideas for 2016 is likely to be a continuation of a major trend that has been around for a number of years now. That is businesses and industries being transformed by disruptive new competitors.
What is likely to be new about the upcoming year, though, is that more industries that assumed they were safe from disruption, because the services they delivered were more complex, will find themselves under increased threat from new entrants to their markets who deliver products and services more conveniently and less expensively.
In hindsight, it’s now easy to say no one should have been surprised that technology and the “internetization of everything” would deliver cheap and convenient ways to rent movies or take taxi-like car services. But those of us who deliver what we’d like to consider as more sophisticated products and services shouldn’t be resting too comfortably.
In the industries my firm and its customers operate in – asset management and financial advice – the disruptive competitors have already made significant inroads. Index funds, which aim to match the returns a market delivers by passively owning all the securities in a market index, have been taking market share away from active managers. Traditional financial advisors are facing a threat from “robo advisors” that will deliver investment recommendations to someone after they’ve completed an online questionnaire.
Today, no industry can assume it is safe from major disruption. As we prepare to face these competitive challenges in 2016 and beyond, it may help to consider the lessons that can be taken from industries that already faced major disruption from the now seemingly constant waves of technological innovation.
Look Beyond Your Current Business Model
Those who still have VHS-cassette players in our garages or basements remember when Blockbuster was the dominant brand in the movie-rental business. I was recently at a conference in which Reed Hastings, Netflix’s founder, mentioned that he approached Blockbuster in 2000 and offered to sell 49% of his firm to them for $50 million and become the online arm of Blockbuster.
We all know how that story ends. Blockbuster turned him down. Netflix is now a billion-dollar company, while Blockbuster is a shell of its former self.
Blockbuster was too focused on improving its existing business model and didn’t recognize the disruptive change that was looming. Its vision of the business it was in was too narrow. Its employees were incentivized to find new ways to increase revenue in its stores, which led them to do things like offer movie snacks, while Netflix was building its base of digital customers.
Every company needs to constantly rethink its value proposition and align it with what its customers want, while recognizing that what customers look for continually evolves. While Blockbuster enabled people to bring home a movie that night, the convenience of having DVDs delivered to your door, a broader selection, and a lower cost clearly proved to be more appealing.
A Survivor of Three Centuries’ Worth of Disruption
A good example of a company that has managed disruptive change well is the oldest still-operating business in North America.
The Canadian-headquartered department store company Hudson’s Bay traces its origins back to 1670 when it was founded as a fur trading business. Clearly, they have had to rethink their business many times over the course of their 300-year history, while still remaining true to their core identity as a retailer.
Today the firm is being led by Richard Baker, who is using the significant real estate properties Hudson’s Bay has in Canada, the United States and Europe, in an effort to deliver a unique experience when customers visit their stores.
Those who were predicting that Amazon and other online retailers would eventually bring the demise of brick-and-mortar stores failed to recognize that products aren’t the only things people want when they shop. Many customers also want an experience – a comfortable and interesting place to visit, where they can be cared for and be served by sales clerks who know their buying history and personal preferences.
In a way, it’s almost a return to what people experienced in past decades when they could walk into the local store and interact with clerks who knew them personally and understood their tastes and buying habits. Today, with the help of handheld devices and tablet computers that can tap into advanced customer relationship management systems, store clerks can offer that same personalized touch.
In fact, the best brick-and-mortar retailers are embracing technology as wholeheartedly as the digital companies who represent their new competition. Technology has transformed the logistics of getting products to their stores. With just-in-time inventory systems, stores don’t need to warehouse large volumes of the products they sell before they hit their shelves. The innovative ways they now engage with their suppliers have generated huge cost savings that contribute to their bottom line.
Lessons for All of Us
For those of us in industries at the beginning stages of disruption, I think the lessons we can take from those who faced it before us are:
- Be willing and able to continually rethink your business model
- Embrace technology
- Deliver value and an experience to your customers that they will be willing to pay more to receive.
It’s a natural urge to want to raise your hands and try to hold back the waves of disruption. In some cases, that may even be a noble effort. In the case of both financial advice and asset management, I would caution investors from putting too much faith in robo-advisors and passive investments.
We have been fortunate to experience a rather prolonged bull market since 2009, even though we’ve had a few relatively short-lived periods of volatility. My expectation is that if we go through another major market downturn, people will be eager for the personal support an advisor can provide. Similarly, no one wants market-like returns when the market is down significantly. Only an active asset manager has the ability to cushion the downturn.
Still, I think it’s important to embrace the new competitors and realize you don’t have to be engaged in a battle of “us vs. them.” In both the financial advice and asset management business, for example, we can deliver our services on a continuum with a sliding scale of costs to enable our customers to decide the price they’re willing to pay and the level of support they want. That may mean traditional advisors offering robo-like services to clients who don’t have complex wealth management needs, and active asset managers offering products, like smart-beta strategies, that bridge the gap between passive investment vehicles and fully active portfolios.
So, as disruption moves up the value chain, don’t imagine your business is too complicated, too customized, to be undercut by new, innovative entrants. Don’t define yourself by the product you sell. Rethink exactly what business you are in, what experience you provide and what need you fulfill. Your world is changing. Will you?