Plant manager consults work on operations

When it comes to the mobility and transportation industries, supply chain disruption isn’t in the news.

It is the news.

Everywhere you look these days are stories about supply chain issues impacting companies of every size, in every sector, in every state. Disruptions can result in delays, shortages of both goods and labor along with a variety of other issues. In the eyes of Baker Tilly, however, disruption can be used as a filter to recognize patterns of change. And once we recognize those patterns, we can address the disruption more proactively, more thoroughly and more effectively.

Recognizing the six D’s

The first step in responding to disruption is being able to proactively recognize it. As part of the recognition process, the six D’s stand for:

  • Deny: Companies that are faced with a disruption to their current model may recognize it but fail to acknowledge its significance. Perhaps they think it’s a non-issue, or a flash in the pan and opt to continue with their business, as is.
  • Dismiss: Companies will make excuses for why they don’t need to be concerned about the disruption.
  • Disparage: Companies will claim that the disrupting new product isn’t as good as theirs is, or that it is faulty in one way or another.
  • Destroy: Sometimes companies will acquire an emerging technology and then opt not to release it because doing so would actually disrupt the incumbent’s business model (or attempt to destroy).
  • Decline: If the emerging technology is well developed, marketed and capitalized, it will begin to eat away at the incumbent’s share.
  • Die: Over time, companies or divisions of the companies will be forced to cease operations.

There are lots of examples of the six D’s impacting real-life companies, including Netflix disrupting Blockbuster and the overall disruptive relationship between IBM, Compaq and Dell. In fact, sometimes when incumbents try to outmuscle each other, an emerging technology can gain ground and eventually dominate.

Navigating the six D’s

American economist Clayton M. Christensen dedicated much of his life to developing the following strategic empowerment framework that helps companies use modeling to anticipate what to do next.

With this framework in mind, the first element to understand is that industry-based disruption generally follows a pattern. From the standpoint of the incumbent, they are focused on sustaining innovation to maintain and/or grow the (typically large) slice of their sector that they control.

Sustaining innovation is a natural and necessary evolutionary process. The best customers want more performance, so the newer innovations tend to reach the premium sector of the market. With these innovations at their fingertips, competitors rarely stand still. In turn, the technology raises the bar across all sectors of the market, enabling improvements and increasing expectations for performance.

One of the common disruptions occurs on the low-end. When the incumbents’ products are overshooting what some customers are looking for, a new entrant typically has room to enter the market (and a good chance to do well, for that matter).

Low-end entrants nearly always win by offering less performance at a lower price. They also benefit from having a structurally lower-cost business model. In this case, it’s common for the incumbents to willingly give up the low-end customers and flee upmarket.

Meanwhile, the target of a new market disruption is finding the non-consumers and targeting what those people would buy if it became available, or determining what scenarios would result in these people buying that product.

In effect, a new market disruption creates an entirely new plane of measurement below the standard comparison breakdown of time versus performance. The advantages of this type of disruption are that the new entrants are competing against non-consumption and that it essentially creates a new class of customers. Related to this, incumbents often don’t even notice the loss of share because it was not tracking non-customers in the first place.

Reflecting on the results of disruption

So, why do companies have such a hard time disrupting themselves? Fully disrupting oneself is exceptionally difficult because of three primary categories of factors, known as RPPs:

  • Resources: A company’s people, capabilities, tooling, capital, footprint, etc. All the things and people that make the machine run
  • Processes: How a company operates, how it adds value to create an engine that provides economic returns
  • Priorities: What the company values, how it makes decisions, how people get rewarded

These factors are so entrenched in a company and so intertwined with each other that it becomes very difficult for a company to accept and embrace something like a disruption that is going to send all its RPPs into chaos.

That said, it is important to reflect. In looking at what customers the company does and does not serve – and the company’s capabilities as defined by the RPPs – it is important to consider the question: Can a company disrupt itself?

The answer is that it’s very difficult. The two likely outcomes in that scenario are (1) that one company dominates while the other lags behind, or (2) that having two sets of RPPs creates significant turmoil.

In the end, sustainers need to leverage their existing RPPs in order to survive and thrive, while disruptors must build or acquire new RPPs in order to inflict change in the market.

The strategic way

As depicted in the graphic below, there are four possibilities for determining the proper strategic direction to take in the face of a disruption.

  • For an incumbent, if you are dominating the market and sustaining innovation, then your best bet is to crush it and win.
  • For an attacker that wants to sustain innovation, it will be hard to beat the incumbents at their own game. It makes the most sense to extract performance, then sell.
  • For an attacker that believes it truly has a disruptive innovation, that’s when you should go for it and win.
  • For an incumbent that feels it has a disruptive innovation, we recommend choosing one of these four levers:
    First, create a separate unit from where you have been housing your disruptive innovation
    Secondly, create a joint venture with a disruptive entity that has the RPPs you’re seeking
    Third, perhaps a full-on acquisition is the best route to take
    Fourth, we don’t encourage exit/abandon, because there usually is a way to evolve or adapt into becoming the type of company that has winning RPPs

Implementing change in RPPs in response to disruption

Change is necessary for survival, especially in the face of significant disruption. Yet, not all change is created equal. Change is relatively easy when capabilities reside in a company’s resources. It is more difficult when capabilities reside in its processes. And it is most difficult when capabilities reside in its culture.

In short, you need a culture that enables innovation.

A great culture is based on factors such as values, behaviors, beliefs, practices, norms and artifacts. With that said, we encourage you to view culture as an input, rather than an output.

The resources of a company must be embedded with the processes and the priorities in order to take on the challenge of a disruption and, ultimately, to win.

Learn how Baker Tilly can help you “win” when faced with supply chain disruptions. Contact us for more information or to speak with one of our experienced professionals.

Sources:  Harvard Business School, Stephen P. Kaufman

Jeff Jorge
Principal
Flexibility Act could provide expanded federal funding opportunities
Next up

Potential flexibility in ARP Fiscal Recovery Funds highlights importance of strategic planning for state and local governments