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Mitigating disruptive innovation through strategic transformation

James Mckue
3 Dec 2021

Modern day business regularly sees market leaders and stagnant industries completely disrupted by innovative challengers. In response, organisations can use strategic transformation to devise a balanced strategy and complementary business model, allowing them to deliver on both their core activities that provide stable revenue, as well as innovative exploration to help maintain their market leading status.

A well devised strategic transformation can be a means to mitigate disruptive innovation while also enabling opportunities for future revenue streams.

A term coined by Harvard Professor Clayton Christensen, disruptive innovation is a process in which a product or service that was initially seen as inferior takes its roots in the bottom end of a market and subsequently moves towards the premium end of the market through offering greater value to a wider set of customers and ultimately disrupting established competitors.

Relatedly, strategic transformation is the adaptation of an organisation’s business model to generate increased value for the customer or the organisation, simultaneously resulting in greater alignment between the strategy, business model, and operating model of an organisation. As outlined in our recent article – Strategic Transformation or extinction – undertaking strategic transformation is no longer optional in modern day business. Providing value to customers is paramount to organisations in every industry, ensuring that your product or service is not constrained in delivering its value is essential, and an organisation should ensure consistency between its capabilities, its strategy, and its business model in order to best deliver this value.

Figure 1: Potential triggers necessitating Strategic Transformation due to misalignment of Strategy, Business Model and Operating Model.

Even the largest and most entrenched corporations undertake strategic transformations. They do this to ensure that their business models reflect a considered, market-driven strategy which is guided by organisational capabilities and enables them to efficiently deliver their value proposition. Whilst adapting to changing consumer preference and technological innovation can be a significant burden and considerable expense for organisations, the threat of being disrupted is often greater. The consequences of being disrupted in this way can include a declining market position, decreased revenues, and difficulties in competing against companies with a first mover advantage. Many organisations find this threat substantial enough to warrant regularly undertaking strategic transformation as a mitigation against disruptive innovation.

Whilst business leaders of the past may have been able to rely solely on the iconic management theories of 20th century business researchers Sloan, Drucker and Porter to inform the development of their strategies, todays executives must go further than the previously sufficient snapshot view taken by their predecessors to accommodate the fast pace of technological progress and ever-shifting demand. Throughout the late 20th and early 21st century, firms that have focused solely on their core strengths for extended periods of time have been blind-sided by technological disruption, changing consumer attitudes, or competitors who have been able to adapt more quickly.

The opportunity presented by global demand for internet service runs counter to the infrastructure requirements of traditional internet service provision, a scenario inviting of disruptive innovation.

Whilst the importance of the internet continues to dramatically increase, many readers may be surprised to hear that as of 2019, only half of the world’s population had access to the internet. Much of the constraint in providing service to those countries with less access is driven by the exorbitant cost of infrastructure in creating, managing, and maintaining Internet Exchange Points (IXPs) and laying copper, coaxial, or fibre optic cables. In response to these challenges, many individuals without access to hard-wired internet connections opt for wireless connections – typically through the medium of mobile data networks or satellite internet– which present significantly less infrastructure requirements for consumers and providers alike. Much in the way that a lack of copper cabling across Africa led to consumers ‘skipping’ landline telephone technology and adopting mobile phones as their first experience of telecommunications, infrastructure challenges are also driving the adoption of wireless internet services.

Since the creation of the internet, wired services have offered more stable and faster connections to the internet. As a result, ISPs have historically had little interest in providing wireless service, but recent developments in mobile data technology including 5G and the upcoming development of 6G mean that ISPs now have to concern themselves with keeping up the pace and upgrading an infrastructure-heavy system. In addition, developments in the satellite internet industry through endeavours such as SpaceX’s Starlink are offering consumers in remote areas access to speeds magnitudes faster than the same services were able to provide just a few years ago.

Historically, market shifts such as these have resulted in incumbent market leaders suffering significant losses in market share and in extreme cases, dissolution of those previous market leaders. In a bid to avoid a similar fate, traditional ISPs are now partnering with mobile networks to offer 4G and 5G based home internet packages, essentially undertaking strategic transformation to avoid disruption. Modern markets demand a measured approach to balancing business as usual with innovative exploration to mitigate against new entrants.

Whilst maintaining core business revenues should continue to be the focus of most companies, it is clear that organisational strategies in the 21st century must be adaptable, considerate of external factors, and forward-thinking to survive. Understanding where to focus your innovative efforts can be difficult, but by outlining a strategy that accommodates innovative practices whilst continuing to capitalise on existing revenue streams, managers can alleviate some of the threat of disruptive innovation and position themselves well to be the first competitor at scale by utilising their existing resources. 3M has a great track record in this, having developed innovative products from the simple – such as the original Post-it Note – to the incredibly complex – such as photocatalytic coating for roofing shingles that react with air pollutants to improve air quality. 3M have effectively employed an innovation-driven strategy to consistently grow and ensure that they have remained a market leader for a century.

By taking time to consider disruptive innovation whilst undertaking strategic transformations, managers can adapt from focusing solely on their core products to being better able to counter potential disruption while also creating opportunities for resilient new revenue streams. In order to guide our clients through these complex decisions, we regularly turn to a framework developed by Alexander Osterwalder, the Business Model Canvas. This framework takes account of the assets, capabilities, and strategy of an organisation in order to clearly identify and translate the changes needed across the organisation’s business model. When our clients are looking to transform their business, our approach to strategic transformation helps to ensure that, in addition to the proposed changes, each of the dimensions of the Business Model Canvas has been collectively tailored towards effective delivery of the organisational strategy and gives managers the opportunity to adapt their business model to mitigate disruptive innovation.

Figure 2: The Business Model Canvas by Alexander Osterwalder