Archive for the ‘Disruptive Innovation’ Tag

The Coming Disruption in Professional Services

Is there a way for advisory service companies, which provide accountants, lawyers, consultants and marketing experts to other businesses, to adapt to changing demands?

Some pundits, such as the Harvard scholar Clayton Christensen, have questioned whether traditional consulting firms will get less work as more innovative business models emerge.

I think challenges bring opportunities and that firms which change with the times will remain relevant and flourish.

Like many other sectors, the advisory service industry has had its ups and downs. Its current slowdown may herald the start of a darker period thanks to three significant trends:

1. Democratization of information

Prior to the Internet, advisory service firms offered clients knowledge and insight, which they couldn’t find elsewhere. Now, a lot of information is available for free, or at low cost on the web, and that includes expertise through freelancer portals like guru.com. To find critical facts and figures on market trends, customer research, or industry costs, organizations no longer need to hire a traditional advisory firm.

2. Fewer intermediaries

It used to be that if you needed top talent to address a business issue, you paid the price and dealt with a blue chip firm or hired a leader in the field. Today, a manager has many more options, often with lower costs and faster turnarounds. The rise of the freelance and sharing economy allows companies to find talent and knowledge as needed on a global basis.

3. The rise of machine learning

Machine learning, also known as artificial intelligence, has the potential to disrupt many facets of the professional services industry. Using machines for rote and even complex tasks can reduce the need to hire firms to do mundane tasks, or for an expert’s analysis, judgment and time. For example, judges and lawyers are increasingly resolving small claims through “e-adjudication” as opposed to using the expensive and time-consuming legal system.

Power of disruption

Despite these disruptive forces, traditional firms aren’t going away any time soon: the fact that they have a wide-range of services and expertise to offer, the changing regulatory and technological environment and fickle customer needs will ensure it. However, they need to evolve if they want to stay relevant to their clients, outflank competitors and maintain juicy margins.

Terry Donnelly, chief marketing officer for Canada of New York-based MDC Partners Inc., an advertising and marketing company, agreed.

“The traditional ad agency model is dying,” Toronto-based Donnelly said. “Marketers want leading edge, unique and practical solutions that drive measurable results and provide a durable and sustaining competitive advantage. MDC Partners recognized the ‘new normal’ early on and built a unique portfolio of agencies that retains the visionary founders as partners, motivated to do great creative work, versus the staid multinational agencies that regularly lose their best people.”

Advisory service leaders who want to better assist their clients and avoid disruption might want to consider these strategies:

1. Become a virtual provider

Companies can leverage their strengths such as client relationships and a trusted brand to create their own, on-demand virtual offerings as a complement to their traditional business. This model could mean acting as an online skills, data or problem-solving hub, and delivering of the best services to suit a client’s needs.

2. Get more involved in execution

While people and expertise may be plentiful, that’s not the case for excellent execution. Advisory service firms can offer follow-through and even take on line responsibilities through a shared service model. This could go beyond being an outsourcer to actually embed adaptable and skilled individuals and tools directly into the client’s workflow process.

3. Focus on capability building, not projects

Advisory services should focus their work on addressing long-term projects and needs instead of short-term contracts that deal with a specific issue. They could help clients build strategic capabilities to ensure competitiveness. One way to do this is to train people to do the work themselves.

As an example, a lawyer would not just draw up a contract based on the client’s needs and then walk away, rather they could give the client tools to become somewhat proficient in their own right.

In addition, companies could provide regular advisory support to make sure long-term goals are met.

Mitchell Osak is managing director, strategic advisory services at Grant Thornton LLP.

Mitchell.Osak@ca.gt.com

Twitter.com/MitchellOsak

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Innovation from left field

Most companies are on the hunt for breakthrough ideas and technologies that will enable them to leapfrog competition. Increasingly, the big innovations are found outside of their existing products’ or technologies’ domains.  Usually this is a result of serendipity but it doesn’t have to be. New research out of Wharton Business School (published in the Knowledge@Wharton newsletter) outlines how creative problem-solving techniques can be used to bring new innovation to products and service categories.

There are many examples of innovation that have seemingly come out of left field.  Semiconductor firm Qualcomm’s unique colour display technology is rooted in the microstructures of the Morpho butterfly’s wings.  The cushioning in Reebok’s best-selling basketball shoe is based on technology borrowed from intravenous fluid bags. Design firm, IDEO, leveraged technology from a shampoo bottle top to create a leak-proof water bottle.   How can other firms efficiently find and exploit innovation from the outside?

Wharton management professor, Martine Haas and doctoral student Wendy Ham, studied how to harness ideas from the “periphery”.  Their conclusion — supported by our client work — is that there are two ways to bring in peripheral knowledge to advance breakthrough innovation: Idea transplantation and perspective shifting.

Idea transplantation is the leveraging of technologies or practices from outlying areas into core product domains, with or without some modification. This is what IDEO and Reebok did.   Perspective shifting occurs when a R&D team’s know-how or experience in a tangential area leads them see a problem in their core category differently, thus revealing new solutions.  The researchers cite the example of Israeli entrepreneur Shai Agassi and his mission to commercialize electric cars.  Agassi borrowed the concept of contract-based leasing from the mobile phone industry and applied it to battery purchasing and consumption, one of the barriers to consumer acceptance.

Both idea transplantation and perspective shifting rely on individuals paying attention to and filtering seemingly irrelevant information in a systematic fashion. This can be a time consuming task fraught with many false starts and dead ends.  Some of the challenges include information overload, not choosing enough peripheral domains to study, and neglecting the importance of idea filtering criteria.

As with other complex undertakings, using a disciplined analytical framework can help improve the chances of success.   The authors along with our innovation generation model recommends a number of strategies including:

Consider multiple external domains

Initially, there is often no way of knowing whether one external domain will yield breakthrough innovation.  The odds of success improve when the team considers a range of peripheral areas and where these might be compatible with the current technology set.

Naturally, companies that already compete in different product categories will be at an advantage (although internal silos may scuttle this advantage).  For single-domain firms, managers should look outside through open innovation strategies and regularly engage in collaborative outreach.  A word of caution:  studying too many peripheral areas can result in diminishing returns.

Focus matters

Since exploring new domains is not easy, companies can maximize the effectiveness of the effort by increasing organizational and individual focus like adding more people, raising the percentage of the day focused on key domains, and lengthening the mandate.

Yet, sustaining this focus can be a challenge.  Firms need to ensure their R&D initiatives have the appropriate internal priority and time to conduct a proper assessment.  Furthermore, managers can institutionalize  “patience” by tweaking management schemes.  Still, being focused is not a sufficient condition by itself.

Dabble outside

The Wharton study reinforces the problem-solving and brainstorming value of taking breaks and engaging in outside activities (like a hobby or project) while undertaking innovation-oriented work.  However, it is unclear how much outside activity is too much or too little to stimulate the identification of peripheral innovation. The research suggests that breakthrough innovation will be more quickly generated by input from seemingly irrelevant areas, such as creative industries, product design or entrepreneurship” – as opposed to fields that have “rigid problem-solving paths,” like engineering or accounting.

Some of the innovative companies we work are successful at bringing outside creativity in.  They maintain a variety of policies including deliberately looking for hires outside of their industry or technical domain; encouraging employees to pursue outside interests during company time, and teaching creativity and problem solving skills as part of corporate training.

At the end of the day, you often don’t know where the big idea will come from.  Firms that can be optimistic, patient and deliberate in their approach will maximize their odds of success. They should also be mindful that tapping peripheral innovation is as much about the journey as the outcome.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Turning the Tables on Disruptive Innovators

Over the past 10 years, disruptive innovators (DIs) have taken on established industries like banking, airlines and media  – and have won.  By targeting unmet consumer needs or introducing breakthrough operational innovation, DIs can significantly alter the competitive landscape, industry margins and product offerings.  Unencumbered by institutional factors, DIs pose a major threat to market leaders because of their ability to quickly capture share, drive down pricing and reset the consumer’s value perception.  In many cases, traditional firms have had a difficult time fighting back due to their legacy strategies, financial requirements, and organizational environment. 

One common strategy is to launch a similar business model as the DI.  In effect, the new model competes against the DI in the low cost segment while the traditional model continues to fight it out in the core market.  This strategy, despite considerable effort and resources, is generally not successful in defending against DIs. In particular,  managing two different business models in the same industry at the same time is extremely difficult.  Furthermore, a dual business model plan is loaded with economic contradictions and frequently leads to insufficient investment and focus on one of the units.   Some management gurus like Michael Porter and Clayton Christensen believe it is possible to fight DIs with two business models if executives get certain things right.  These prerequisites include autonomously structuring and operating the business units with each choosing its value chains and go-to-market approach. As well, executives would need to integrate the units where they can coordinate strategies, reap scale economies and capture synergies in areas like finance, purchasing and channel management.  Who is right?

A study recently published out of MIT’s Sloan School of Business looked at what worked and what didn’t work with a dual business model strategy.  Sixty-five public and private companies were analyzed between 2007 and 2009. The authors concluded that running the units autonomously may not be enough in making a dual unit strategy work.  To successfully defend against DIs, the study recommended firms consider 5 fundamental questions before committing to any strategic moves:

  1. Should the company enter the market space created by the new business model?  Incumbents may correctly choose not to defend in the short term.  The new market may not be attractive or be a good fit with the firm’s competencies.
  2. If the firm wants to enter the new market, should it do it with the existing business or a new unit?  There is no simple answer to this question.  The decision will be based on which strategy best serves the customers and delivers the highest profitability. Furthermore, companies may decide to get into the market without adopting the DI’s model (e.g., an acquisition or strategic partnership).
  3. If a new model is required, should the company follow the same strategy as the DI?  The research indicates that incumbents will not be able to beat DIs at their own game.  Instead, firms should look to ‘disrupt the disruptor’ with a better business model, where they could better leverage their strengths in areas like scale, talent and relationships. 
  4. If a new business model is developed, how much should be leveraged from the parent company?  The question is not whether units should be separate or apart but rather which assets or activities should be run together and which should be run separately.  The decision should be based on careful deliberations around 5 factors:   1) name/brand 2) location 3) equity 4) value chain activities and 5) organizational environment.
  5. If a new model is formed, what are the specific challenges of managing both of them at the same time?  Not surprisingly, winning companies tended to give much more financial, organizational (e.g., culture, incentives and processes) and strategic autonomy to the new business unit.

Ultimately, the most successful companies are the most pragmatic and ambidextrous, basing their approaches on their unique circumstances and capabilities.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Big companies can reinvent themselves.

When it comes to large companies changing and adapting to new conditions, conventional wisdom especially around Disruptive Innovation theory, is not optimistic:

  1. Due to a number of factors including size, reward systems and culture, it is extremely difficult for large companies to reinvent themselves.
  2. For change to be successful, companies need to bring in outsiders untainted by functioning in the culture.
  3. Since change has a low probability of success, firms should concentrate on their key competencies and customers and be cautious about moves beyond their core.

A recent study out of Stanford’s Graduate School of Business on IBM’s successful transformation from hardware to solutions provider challenges the above thinking and suggests that large companies are well-suited to reinventing themselves. 

Back in 1999, IBM was a large company facing significant financial and market pressure and an uncertain future.  Internal analysis revealed that the company had failed to capture value from 29 separate technologies and businesses that where internally incubated.  Examples included the first commercial router (Cisco later dominated that market), new technologies to accelerate web performance (Akamai captured this market) and desktop PCs (Dell and Compaq took over this business).  The Stanford authors summed up IBM’s issues this way: “The maniacal focus on short-term results, careful attention to major customers and markets, and an emphasis on improving profitability all contributed to the firm’s ability to exploit mature markets — and made it difficult to explore into new spaces. The alignment that made the company a ‘disciplined machine’ when competing in mature businesses was directly opposite to that needed to be successful in emerging markets and technologies.” Not surprisingly, this assessment may sound familiar to other executives.  

IBM understood that their traditional business model was unsuited to capitalize on emerging technologies and market opportunities.  So, what did they do to change?   Use their global size, client & channel intimacy, and substantial resources & talent to their advantage while ignoring the cliché that large companies can’t be agile.

To focus sufficient management attention and resources, IBM situated its new technologies and products in a new, measurable line of business called the Emerging Business Organization (EBO). In the past, high potential technologies and products were lost in the shuffle when they were sprinkled across traditional business units. In addition, IBM put internal, experienced managers at the top of the new business units, a sharp departure from past practice. These managers had some key advantages that were crucial to success.  They knew their way around the company, they had internal credibility and they were proven leaders.  The logic of the earlier strategy was that younger leaders would be less imbued with the “IBM way” and more likely to try new approaches. More often than not, those leaders failed.  As well, IBM cycled top managers through the EBO, helping cross-pollinate new products, technologies and processes throughout the entire company.  This built internal awareness of EBO products, drove cross-selling and triggered new innovation.  Finally, IBM’s used its strong cash flows to put its money where its mouth was.  They properly invested in the EBO and its initiatives from R&D through to product commercialization.

These innovations have generated impressive results. Between 2000 and 2005, EBO projects added $15.2B to IBM’s top line. When compared to IBM’s M&A strategy at the time, EBOs added 19% to IBM’s top-line while M&A delivered 9%.

As the IBM case shows, scale and pedigree can be significant weapons to enabling change. Indeed, other companies such as P&G, J&J and Corning have successfully followed a similar approach to reinventing their business model or shifting product focus. When it comes to change, size does matter.

For more information on our services and work please visit the Quanta Consulting Inc. web site.

Management Best Practices: BRAC

Can a Bengali-based Non-Governmental Organization (NGO) teach for and not-for-profit enterprises important lessons on strategy and helping society?  Yes, if it’s the Bangladesh Rehabilitation Committee (BRAC), considered by The Economist magazine to be one the largest, fastest-growing and most business-minded NGOs around.

BRAC was founded serendipitously in 1970 by Sir Fazle Hasan Abed in response to a deadly cyclone.  Its original mandate was to provide credit to the poor farmers and trades people  (who hitherto would never qualify for bank financing) of Bangladesh, one of the World’s poorest countries.  Success in microfinance encouraged BRAC to venture forth into new activities to help the disadvantaged including education and healthcare. Today, BRAC’s global scale is truly impressive with over 7 million microfinance group members, 37,500 non-formal primary schools (BRAC educates 11% of Bangladesh’s children) and more than 70,000 health volunteers.

As the World’s largest NGO, BRAC’s employs 120,000 staff (the majority are women) who regularly and positively impact the lives of 110 million people.  Ian Smillie, who has written a book on BRAC, calls them “undoubtedly the largest and most variegated social experiment in the developing world. The spread of its work dwarfs any other private, government or non-profit enterprise in its impact on development.”

In many ways, BRAC is a unique organization, offering many management lessons for not-for-profit as well as private enterprises:

  1. It’s all about the recipient (or client’s) needs – By thoroughly understanding the beneficiary’s economic and social needs plus the cultural milieu they are a part of, BRAC is able to effectively deliver a variety of different services while leveraging core capabilities.  For example, in addition to operating clinics and schools for the poor, BRAC runs tea plantations, dairies and retail stores that employ, empower and serve their target recipients.
  2. Success is about innovation and execution – Although BRAC was the pioneer in Bengali microfinancing, they did not rest on their laurels when other NGOs joined the fray. Today,  BRAC has grown to become the largest global microlender, disbursing approximately $1B per year. The competencies developed in Bangladesh have been successfully transplanted to other lending programs around the World.
  3. There is potential (and money) in ignored parts of the market –   BRAC’s work is an excellent example of what Clayton Christensen calls Disruptive Innovation.  BRAC devised new, inexpensive ways of getting credit, healthcare and education to needy recipients (especially to disadvantaged groups like Women) in a variety of countries and economic systems. These service and organizational “disruptions” allowed BRAC to grow larger than many Western charities in some countries, despite the latter’s multi-decade head start.
  4. Continuous measurement and learning is a virtue and a necessity – BRAC is a NGO that operates like a performance-driven business.  Given ongoing demands for help and the constant shortage of resources, BRAC relentlessly focuses on results, research and continuous improvement in order to maximize efficiency and effectiveness. For example, where programs can not be sustained from internal funds, they are cancelled.  David Korten, author of “When Corporations Rule the World”, called BRAC “as near to a pure example of a learning organization as one is likely to find.”
  5. Self-funding (read: cash flow) is key – Unlike most NGOs, around 80% of all disbursements are generated internally from operations.  Not only does this free up considerable focus and expense away from fundraising, but it also instills financial discipline and allows for greater strategic and tactical freedom of action.  In particular, BRAC can respond faster to crises as well as experiment with new programs.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.