Networked disruption often involves exponential change. One of the reasons traditional organisations are challenged by the threat of networked disruption is that they tend to struggle to interpret small changes in their markets.
Exponential change can see small changes blow out to large scale change while organisations are still trying to determine whether to react. This effect is multiplied if the organisation experiences a lot of volatility in its performance. The impacts of small disruptive competitors might get lost in other movements.
Often small changes are lost because many companies do not have a complete view of the growth of the industry. The effect is most dangerous for an organisation that may not even factor new disruptive services into its industry definition. These organisation can be quite satisfied with their growth and fail to see the initial market share loss to a small disruptive competitor
Coming from nowhere
If a smaller competitor, grows exponentially it can quickly explode. Let’s consider the example of a new disruptive competitor that is doubling customer growth every quarter. The new competitor might hit the large companies radar when it finally hits 1% of market share. The next quarter it is at 2%. These numbers might well be able to be explained away as short-term effects or an appropriate outcome for a niche. At 4%, management of the traditional organisation might begin to feel impacts and need to explain the change in the market. However by now they only have 90 days to respond before the disruptive competitor is at 8% and 180 days to 16%. There are not many organisations or industries that can afford to cede 8%-16% market share to a new competitor having to go through the distracting processes of cutting costs or dealing with capacity in their system.
Facing disruptive competitors growing exponentially through network effects too many organisations wait to respond until they have to respond. As we have seen in the music industry, photography and newspapers that is often far too late.
The situation is complicated further if the new business model fundamentally changes industry economics. These changes or market share losses may impact cashflow and might bring on issues in financing the business. Adjusting business models and financing under the pressure of disruption can take far longer in a mature business, particularly if the path forward is uncertain.
Beware of small signals
To guard against exponential change from networked competitors, organisations need to adopt a few strategies:
- use your customer’s market definition, not your own: Your customers ultimately decide who your competitors are. Make sure you understand who they see as viable substitutes. Make sure you are influencing those views. Engage in the networks where your customers are connecting. If a customer would consider that competitor as an option, they need to be on your radar. Make sure your achievement of sales targets and growth is not masking customer share loss.
- treat small signals with respect: Take the time to regularly look in the edges of your industry and related industries. Consider startups. Look at home and abroad. Evaluate each new threat with respect and on the assumption that they are as skilled and effective as your team. Assume your competitors are rational and have a path to success.
- don’t count on barriers to entry: Innovation is about breaking down barriers to entry in markets. Always assume a new competitor is targeting a way around the barriers that have made you safe today.
- don’t disregard competitors because they are small, underfunded or uneconomic: Once they have traction with your customers, they will have solved these problems.
- leverage your own networks: start to leverage network effects in your business. How can partners, customers and others help you to grow and beat the threat.
- build the capability to respond quickly: There is no point working out how to respond quickly once the threat arrives. Build a capability to experiment and respond while you can. Plan scenarios and work through what you would do in each threat. The exact option is unlikely to occur but having worked through the scenario can help the business to recognise the signals and cut the arguments later.