If 2020 showed us anything, it was the absolute necessity of finding ways to manage disruption. Disruption is more than a single, contained event. It is a coming together of a number of events that radically change the way we do business. This change is complex, full of uncertainty and requires new strategies, business models and relationships. While each time a major disruption, such as the Covid pandemic or the 2008 financial crisis, occurs, it has unique factors, the process of disruption is constant. By recognising the process of disruption, business leaders can analyse where they are in the disruption process and plan accordingly.
The Atmosphere Disruption Index (ADI) is the tool that defines where a sector, and business, are in the disruption process. It is built around an analysis of four interrelated factors:
Disruption occurs when these factors enter into a feedback loop: new technologies and lowering barriers to entry create new customer demands. Most legacy businesses in the sector are unable to compete or pivot fast enough in the new environment and lose market share rapidly.This opens up opportunities for new competitors and the whole sector radically changes.
An external shock is the wild card in this process. It may accelerate this process, exposing firms who cannot adapt and supporting challengers who are more agile and able to take advantage of the situation. It could also be the catalyst for the other factors.
The factors that we have highlighted come together to create three disruption scenarios. They reflect the likelihood that the sector will be severely disrupted in the next three to five years. The disruptions that we are referring to relate to a paradigm shift in the sector. The music industry is a good example of this disruption. Up to late 1990’s, the music industry was built around the sale of physical objects (records, CDs, cassettes) with live events mostly serving as a marketing tool to sell these physical objects. Starting with the launch of file sharing services, like Napster, the market for records and CDs began declining. The appearance of legitimate streaming services like iTunes and Spotify accelerated the trend.
When we look at the interaction of disruption factors, we can identify the probability of a similar sort of disruption happening in the sector. The probability is unique for each sector and depends on the original state of the sector and how the three factors are interacting with each other.
A critical disruption in the sector is either already happening or highly likely to happen in the next 3 years. There are already new technologies, competitors and customer expectations that the business must address. As a result, the business’ existing business model is highly likely to reduce market share. The business has a very short window in which to make substantial changes to the business’ technology, operating model and consumer offering.
A critical disruption in the sector is likely in the medium term. The technologies are nearly mature enough to replace existing operating processes and roles. The barrier to entry into the sector is not large to prevent outside competitors, using the new technologies and associated business models, from taking market share through new offerings at lower cost.
There are risks for businesses in persisting with their current business models. They may continue to provide short-term growth, but over the medium and long-term, they will not support the business. The key decision here for senior teams is: how soon will the disruption take place and what steps can be taken now to build in resilience and adaptability alongside the current financial model.
A critical disruption in the sector is highly unlikely in the near feature. This can be due to the immaturity of the technology or a large barrier to entry for outside competitors. It is likely that businesses can continue with their existing business models with some level of confidence that they will continue to sustain growth.
Even though the disruption is not immediate, that doesn’t mean that companies should be complacent. This is a time for preparation and horizon-scanning. Building resilience into the company and getting into the practice of scenario playing can help the company respond better when the disruption appears.
The ADI assesses where in the disruption life cycle a particular sector is. Each disruption has a similar pattern, even if the form is unique to that sector at that time. It is essential to identify where a sector is in the cycle, as that provides important data for the business’ strategic direction. Disruption is a process. It takes a time and there are recognizable characteristics for each stage in the process. They are:
Identifying where the sector is in the process is important because it helps determine the strategic options that a company has in that moment. This is important when deciding at what point the business should address the disruption through shifting focus to innovation, transformation and building in adaptability. Do it too soon and run the risk of investing in technologies, products and models that do not have longevity. Do it too late and the risk of not being able to respond quickly enough increases. Also the cost of the changes increases, because everything needs to be done at pace in a rapidly maturing market.
The emerging disruption phase is often the most difficult one to respond to. Technologies appear that seem game changing, but they are still immature and more hype than substance. Startups begin to appear but the propositions are all over the place. There is no clear direction as everything is new.
Looking at the situation, business leaders often do not see the immediate threat because it is too unfocused and small scale. Despite the initial hype, it appears that there is not a sufficient immediate disruption in the sector to justify investing in the technology or pivoting the company’s business model to respond to the challenge. If we return to the music example, when the file sharing services first appeared, they were used by a small group of people, the quality of the audio was low and the experience was not particularly good (long downloads, limited selection and poor interfaces on the products). Revenues continued to be strong. At the turn of the millennium, the industry reached its revenue peak at the same time that the first file sharing services were founded (Napster in 1999. Gnutella in 2000). While the record industry was aware of their disruptive potential, they were mostly treated as a legal problem.
In this stage, the technology has matured and it is clearer what the new business model is. Provided the barriers to enter the sector are not high, new competitors, without legacy models, are eroding the market share of traditional players. From 2000 to 2015, for example, revenue in the music industry dropped alarmingly from a peak of $21b to a low of $6b. During this period, record companies still made money. There were, however, clear signs that a massive shift was taking hold. CD sales were in a steep decline. Legitimate streaming services appeared as customers began to shift to using digital music devices such as iPods and MP3 players.
In this phase, the question shifts from “should we respond?” to “how do we respond?” New players have entered the market, customer habits are shifting and the technology, in this case, broadband, has improved enough to support the new customer demands. While certain niches in the sector may not be as impacted, every business in the sector has to face the disruption.
Business leaders then have to look at their specific responses. The strategic considerations include:
This marks the turning point, or paradigm shift. The sector is now in the phase of consolidating the disruption into a “new normal”. The technology has matured and become mundane in a sense. It no longer has quite the same cache that it had a few years before. The challengers are now the big players in the sector. Customers have adapted new behaviours and the old products that had been so lucrative are now either not produced or have become niche offerings. At this point, if a business has not adapted, it is most likely in terminal decline or has shrunk to be a niche player.
In order to determine where the process is, businesses need to have a framework, like the ADI, that focuses attention on key aspects and gives the leadership team a way to analyse the data. The framework can then suggest useful strategic responses to the situation. This is the science, or technique, of ADI
Of course, none of these phases are so clear-cut. Each blends into the other over time and that time can be different for each sector. In the music industry, it has been just over twenty years since the founding of Napster. With the pandemic, an external shock has added a new dimension to the situation, making it more complex and uncertain. This is where the art of analysis comes in. It is in the subtle weighing up of factors, including the culture and psychology of the firm, the strength of relationships and communications within the firm and with the wider customer and stakeholder world that leaders have to be creative.
Every sector, and every business, faces disruption at some point. It may be happening right now or it may be a glimmer on the horizon. Regardless, leaders can use the ADI to build the right level of preparedness and resilience through understanding where they are on the disruption timeline. Atmosphere can help you translate the findings from the ADI into a practical roadmap of change so that you can manage risk, see and take advantage of opportunities, and keep focused on your strategic objectives in any environment.
It all begins with a conversation.