"Companies need to establish disruption units and disrupt themselves" | Outlook Business
Home  /  Strategy  /  Interview  / "Companies need to establish disruption units and disrupt themselves" | AUG 04 , 2015

Soumik Kar

Interview

"Companies need to establish disruption units and disrupt themselves"
Mckinsey Global Institute's Richard Dobbs on how technology has disrupted the traditional way of doing business

Krishna Gopalan

In No Ordinary Disruption, which McKinsey Global Institute director Richard Dobbs co-authored with James Manyika and Jonathan Woetzel, Dobbs championed the powers of disruptive ideas. Dobbs points out that corporates are yet to fathom the scale of technology disruption. Edited excerpts:

Technology has already disrupted the brick-and-mortar way of doing business. Is the scale of disruption only going to get bigger in future?

I think corporates will face a huge shock. Historically, they have enjoyed the benefits of scale. You could run a wholesale distribution system and simply monitor the quality of sub-contractors. But now those contractors can directly sell to the customer on Alibaba or Amazon Marketplace. The customers can rate the products and, suddenly, these small and medium enterprises (SMEs), which have a very different cost structure, can compete very effectively. 

An example is that of the UK government’s IT procurement portal called G-Cloud. If you want to sell IT to the UK government, you can do it through this portal. With this, SMEs are able to compete just as well as large companies. So, 50% of the value of the IT bought by the UK government comes from SMEs. Scale will matter but only at the level of an Alibaba or Amazon Marketplace or G-Cloud — it does not necessarily matter at the lower level. I think large corporations, unless they own a platform, will have to get ready to compete. To give you an example, I bought some seeds for my garden the other day on Amazon. The seeds, in turn, came from a company in China. Large companies have to compete with the likes of such players.

The time taken between technological breakthroughs, according to your book, has steadily been dropping. But there are instances where incumbents have given newbies a run for their money and emerged more successful.

Sure — both Blockbuster and Netflix were built on old-world business models. Blockbuster had stores that stocked videos catering to leisure activities at home. Netflix allowed you to choose videos that were sent to you by post and could be returned after you watched them. Both could have died and we would have watched our videos on streaming instead but Netflix made the migration. Blockbuster did not and is bankrupt today. 

There are more examples. Look at Amazon, which had a business model based around its own products. At some point, it took the decision to start selling other people’s products on its marketplace. The problem it faced was that it was cannibalising its own business. People were unsure but Amazon made the transition and it worked.

The one thing that it doesn’t get hung up on is cannibalisation. The standard logic is that if I start a channel, it will cannibalise my existing business. My assertion is that the word cannibalisation has destroyed more value for western companies than any other word. Netflix and Amazon did not think like that. What they said was that if we do not cannibalise it, someone else will. 

The other point is that the executives who have done this have spent a lot of time looking outside. Being inward-focused is a bad idea and successful companies have spent time outside looking at the music industry. They want to ensure that it does not happen to them. Companies, in that context, need to demonstrate agility as well. If you waste time on figuring out what you need to do to stop Uber, you will become pessimistic and defensive. Instead, optimistically, think that there is no better time than now to migrate. Today, Uber still offers you a black cab if you like the idea of chatting up with the driver.

But there is resistance to change. Take the case of Uber: it has not gone down too well with traditional cab drivers in some markets.

We have a lot of people who are making a lot of anti-Uber noise. Let’s be clear — if Uber were to shut down, the silent demonstrators who love Uber will suddenly appear. Twenty years ago, if I was in India, I would to have carry rupees, explain to the driver where I wanted to go or convince a driver who was just not interested. Today, I no longer need to do that. I just need to use the Uber app and I get a taxi in two minutes and make my payment through a credit card. The customer experience is just phenomenal and I want everything to be as easy as that.

Now, when I go to my bank, there is a two-stage process for everything. I always ask banks why their services are not as easy to access as Uber or why their banking apps are so hard to use. Ten years ago, we could have had an entrepreneur who wanted to make a device that you could carry in your pocket. If you said you would just need to push a button to call for a taxi on such a device, the immediate reaction would have been that it would take $100 million to produce that. That’s because you would need transmission aerials and would need to make the actual electronic device, apart from mapping the city or getting drivers. 

Uber managed to do all this for just $100,000. It saw an opportunity in the fact that everyone has a smartphone. With the phone networks in place, it brought in the apps and maps. If the smartphones were from Apple and Samsung, the maps came from Google, while companies such as Airtel already had the phone systems. The winners are those who don’t try to do everything themselves. 

Technology has been replacing jobs for hundreds of years. The monks that used to handwrite bibles had their jobs replaced by the printing press. If you went to an office, you would see a huge telephone switchboard manned by people. All those jobs have disappeared through technology and that is changing a lot faster today. The telephone took 75 years to reach 50 million people, radio took 38 years, Twitter took nine months and Angry Birds took 36 days. 

Are there any industries that will possibly be insulated from the disruption that modern technology creates?

The answer is no. The question is when will you be disrupted. Media and music were among the first industries to be disrupted. If Google was disrupting media, in the case of music, it was because of Napster and then iTunes. Retail is being disrupted by the likes of Amazon. Today, I just need to scan the bar code on a product and do a price comparison. This will be followed by financial services and, eventually, the petroleum industry.

Today, you fill up your car’s tank at the convenience of the petrol station. If you have a self-driving car, it will go off and refill itself. As we move to self-driving cars, you won’t need to own your own car; you can have an Uber without a driver. Utilisation levels will increase and the car can go electric. That can connect to the power system throughout the day and provide storage capacity to the grid. An electric car can discharge into the grid if it is short of electricity and can recharge when the grid is on. Suddenly, we will have a whole bunch of free storage effectively added to the electric grid. 

Coming to renewables, you need to put in storage, which comes for free. The economics of renewables will change and, at that point, it will just take off. Maybe at that point we will discover there is excess oil refining capacity of 30%. The oil industry will end up getting hit then. The government is also changing. If you wanted a driving licence in the UK a decade ago, the process was quite painful. Now, the whole process of proof of identity can be done online and it is a very simple experience. You are doing the same thing in India with the national registry. For any government or an industry, the opportunity to change is substantial today. 

Is there always a Google waiting in each case? Is that really the way forward for large companies?

The interesting thing about the Google story is that besides YouTube, they bought Waze and Android as well. I think large corporations need to look around for new businesses to acquire. The mindset should be to just be out there — understand these businesses and work out how to acquire them. Take the instance of FinTech, which is serious competition to banks. I remember asking a bank how much it was planning to do itself versus how much it could gain from buying start-ups. If you view these smaller companies as a threat, then you are in trouble.

I think the financial services sector in general has struggled to be good on information. Banks, for example, know very little about their customers — at the most, they would have done a quality check on a person at the time of opening an account. They don’t know what kind of a job you are in today and may, at best, see your salary coming from a different place. They will have only the information that you furnished in the past. Companies need to establish disruption units to come up with plans on disrupting themselves. They should not rely on someone else to do it and instead have an internal group whose job is to come up with disruption ideas. It does exist in some companies in Europe across sectors. If you don’t do it, someone else will disrupt you.

Where do you see the next round of unicorns coming from? Where is India poised in this game?  

I think it is all about the current technologies that I spoke of earlier. Will India be a leading country in driverless cars, for instance? As the rest of the world ages, if you can improve the quality of rural education, that will be a huge strength for India. Indians are going to be one of the most important races in the world in getting these disruptions to happen. You just have to go to a place like Google and see that it has a disproportionate number of people of Indian origin; it wasn’t so a decade ago. In the US, science, technology, engineering and management studies account for less than 15% of higher education, which will have a large number of Indians. In the engine room of disruption, too, the Indian diaspora will form the core. The question really is about how India plays a big part in this. 

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