How Old Industries Become Young Again
Five indicators reveal
when your sector is about to be transformed by dematurity.
When
contemplating possible threats to their business, many executives worry about
disruption. They see competitors with new technologies poised to capture their
existing customers, and they know it’s better to be a disruptor than a
disruptee. But disruption is often misunderstood. In fact, as New
Yorkerwriter Jill Lepore points
out (“The
Disruption Machine,” June 23, 2014), many celebrated cases have
been less disruptive than they were portrayed as being. What most industries
experience as disruption is typically not a sudden change from one source, but
the accumulated impact of a range of interacting factors. If you want to be
prepared for disruption, it’s critical to understand the more gradual,
prevalent, and multifaceted dynamic that underlies it: a phenomenon called
dematurity.
Dematurity
is what happens to an established industry when multiple companies adopt a host
of small innovations in a relatively short time. Those seemingly trivial moves
combine to rejuvenate the old mature industry and make it young again. The term
was coined in the early 1990s by Harvard Business School professors William
Abernathy and Kim Clark. They were thinking of the U.S. auto industry, which
was undergoing a profound operational renewal, spurred by Japanese competition,
the quality movement, and lean management. Toyota and Honda, with their
superior production methods, did not fully disrupt Detroit. They dematured it.
Instead of collapsing, the Detroit Three adopted their rivals’ tools and
techniques, and the entire industry advanced to higher levels of quality and
customer satisfaction.
You
can think of dematurity as a crescendo of mini-disruptions that add up to great
effect. It will hit most industries sooner or later; it struck sectors as
varied as software development, entertainment, and defense contracting. It is
happening right now in the U.S. in healthcare and electric power generation. In
the long run, dematurity is a great boon, but it can also be terribly
threatening to individual companies. Nearly all cases of dematurity have one
thing in common: the genuine surprise of executives when it happens to their
industry. It is all too easy to be caught off guard—to ignore the small changes
that appear one by one, to fail to believe they will affect you, and to end up
at the tail of the wave, outpaced by competitors who saw the possibilities
earlier.
The
solution lies in gaining better sensitivity—in other words, improving your
ability to recognize and respond to the signals of incremental change. This is
difficult, but not because information about the pending changes is sparse.
Rather, the signals are too abundant. News breaks of deals, partnerships, and
market entrances or exits. Scholars, commentators, and business leaders talk of
looming disruption. Some of that talk is accurate in its foresight, and some of
it is hyperbole. It is difficult to know which is which.
Here,
then, to help you sharpen your mental gauge for disruption and dematurity, are
five often overlooked but genuinely prescient signals of pending industry
change. They reflect more than 20 years of close observation of innovation
launches in a variety of industries. These phenomena tend to arise when an
industry is on the verge of dematurity. Look for early signs of these five
changes, and you can better recognize the impact of today’s events—and the
trajectory of tomorrow’s.
New Customer Habits
In
the 1980s, most people who bought telephones installed them in a single
location, connected them to the telephone network with a wire, and used them
exclusively to communicate via voice. By the end of the 1990s, mobile phones
were available with analog transmission networks. Consumers used them as portable
supplements to their wired voice lines—a widespread incremental improvement,
but not a dramatic shift in people’s habits.
Then
digital transmission (2G and 3G) became available. In 2002, people sent more
than 250 billion text messages. Before long, they began to integrate other
functions—reading magazines and books, listening to music, playing games,
finding places to eat in unfamiliar neighborhoods, and so on. This new group of
consumer habits added up to a paradigm shift in everyday life. The same person
who might once have carried a cellular phone, map, book, camera, Gameboy, and
Walkman now could have one device serving all those purposes. By 2007, the year
the iPhone was introduced, it was clear that major changes were coming in
business and pricing models for a broad group of digital
industries—electronics, creative content, gaming, photography, video,
music—that had formerly operated independently of one another.
A
similarly powerful paradigm shift is happening now in business-to-business IT
with cloud- and Internet-based software subscriptions, known as
software-as-a-service (SaaS). This sector did not exist before 2000. Formerly,
nearly all corporate technology adopters bought the software they needed to run
their businesses, and installed it on machines residing in their own
facilities. Web-based software delivery models, known as application service
providers (ASPs), struggled to gain enough scale to make money. They were
hobbled by slow Internet speeds, non-modular software development practices, and
a lack of cloud computing, and their offerings were too frustrating to be
usable. Today, employees in companies of all sizes routinely access application
services via high-speed cloud connections, a completely new customer habit that
took hold only after incremental improvements in related technologies and
practices propelled SaaS across a threshold of usability. The business is
growing 20 to 30 percent per year; this, plus its clear link to new habits,
indicates that it has only just begun to rejuvenate the software industry.
Not
every promising technology fosters a customer habit. The Segway, a highly
publicized, technologically ingenious self-balancing electric vehicle, turned
out to be too unwieldy and expensive to reform habits. It has sold only about
50,000 units since its launch in 2001. Similarly, although the SodaStream home
soft drink machines are widely distributed kitchen appliances, it’s not yet
clear whether they have enough popularity to disrupt the carbonated beverage
industry. Much depends on how many people prefer the convenience of never
running out and the thrill of making soda themselves to the convenience of a
prepackaged can that doesn’t need cleaning.
For
every prospective innovation, whether you’re promoting it or facing off against
it, seek out any early signals of new customer habits. The way people embrace
or reject the innovation, and the logic underlying their response, will tell
you a great deal about whether it’s a smartphone or a Segway.
New Production Technologies
When
a new technology changes the way an established business produces its core
product, dematurity often follows. For example, many auto insurance providers
are changing the way they price their policies. Instead of classifying
customers’ likely driving risk through actuarial statistics about gender, age,
and location of residence—and thus getting only a rough statistical view of the
habits and risk levels of individual drivers—they now use data collected from
in-car diagnostic devices. This allows them to design more profitable products
that return more savings to customers. MetroMile, a startup launched in 2012,
provides a free device for cars that tracks mileage, driving patterns, and
locations; it pays for this service with insurance policies targeted at urban residents
who drive less than 10,000 miles a year and who pay by the mile. Progressive
Insurance, a more established auto and home insurance company, uses its own
in-car monitor called Snapshot to gather data, and rewards safer drivers with
lower premiums.
The
power generation sector—an industry that is controlled by large, semipublic
semi-monopolies—is also facing dematurity because of new production
technologies. Today, utility customers buy electricity directly from the
companies that generate it. But the centralized, expensive infrastructure that
has long been a strength of the industry is also a source of costs,
inflexibility, and disaster risk. In particular, the hurricanes and other
weather catastrophes of the past few years, especially the tsunami that hit the
Fukushima Daiichi nuclear power plant in Japan in March 2011, have provided a
wake-up call for many companies. Losses related to those events, coupled with
the falling costs of fuel cells, solar panels, personal wind turbines, and
other storage and power-management technologies, will probably lead many power
companies to embrace alternative power systems and the digital grid over the
next few years.
How
do we know this long-awaited shift will finally happen now? Because the
technology is crossing a threshold of effectiveness and cost efficiency. It
also helps to recognize the complement of new customer habits: When large
companies such as Google use renewable technologies to power installations like
large server farms, it gives other commercial building owners and nearby
homeowners more reason to change their habits as well. When the change reaches
critical mass, the winning electric power companies will be those that move
away from selling supply, and toward selling wind turbines, gas generators, and
other means of production.
Another
good example of production technology breakthroughs is digital fabrication.
This newly prevalent technology is altering the foundational practices of most
manufacturing industries. Fabrication machines use software to control 3D
printers that can build components and products by placing hundreds or even
thousands of layers of material—usually plastic polymers or metals—in specified
shapes. As with many other technological advances, each year brings devices
that are faster, cheaper, and more varied in their capabilities than those of
the year before.
The
technology has now reached a tipping point. More than two-thirds of 100
U.S. manufacturers surveyed by PwC in 2014 reported deploying 3D
printers in some way. Many of the machines are used to prototype new
products. Early adopters report that their product development cycles are
shrinking as they quickly design, build, and redesign products before launch.
The technology also makes new supply chain value propositions possible.
Companies can produce discontinued parts as needed on a 3D printer. Some
manufacturing experts anticipate that the use of 3D printing will cause a
US$3.4 billion annual drop in materials transportation costs, by enabling
manufacturers to construct components entirely on site instead of assembling
them from smaller parts made by multiple suppliers.
New Lateral Competition
There
was a time when a family doctor had a near monopoly on primary care services.
The doctor knew the patient, knew the family history, and was present whether
in treating the flu or deciding a twisted ankle needed an X-ray. The only
problem was the time it took to get an appointment, or the three-hour wait for
the doctor to be free.
Today,
the demand for accessible, quality healthcare delivered in a timely way has
created an explosion in convenience providers. CVS’s Minute Clinic, Walgreens’s
Healthcare Clinics, and urgent care chains branded to major health networks are
offering relatively inexpensive, rapid, and accessible medical care. These
cover basic preventive services such as immunizations, flu shots, and diabetes
tests; treatment of sudden conditions such as burns, sprains, splinters, back
pain, and migraines; and chronic needs, such as the management of asthma and
high blood pressure.
A
traditional family doctor might look down on these clinics as providing an
impersonal, transactional service, but consumers don’t seem to mind. Visits to
retail clinics in the U.S. tripled between 2008 and 2013. One recent study by
the PwC Health Research Institute found that 45 percent of consumers across all
age groups are willing to use alternative providers for a range of basic health
services. Their options to do so will rapidly expand. CVS and Walgreens
together have close to 1,000 clinic locations in the United States, and Walmart
is getting into the game through an experimental partnership with Kaiser Permanente.
These new healthcare actors are giving primary care providers and even hospital
emergency rooms competition as the source of choice for quick, simple medical
services.
The
emergence of healthcare convenience chains is just one example of the dematurity
that occurs when a new type of competitor appears—one with products and
services that substitute for those of incumbents. Usually these involve lateral
moves, the transfer of capabilities and business models from one sector to
another, where the first sector has a completely different (and better) way of
solving the second sector’s problems. Though they’re considered to be
disruptive, lateral moves are not always that abrupt and clear-cut; they often
occur in incremental fashion, with some incumbents (in the healthcare clinic
model, Kaiser Permanente, for example) taking part. Thus, when you see a
lateral competitor emerge, even in nascent fashion, it’s a good predictor of
more widespread system change. Indicators visible today include the use of
mobile phones for paying bills, and the increasing popularity of prefabricated
buildings, which may revitalize some aspects of the construction industry, even
in urban settings like New York.
New Regulations
Changes
in government regulation patterns have an enormous impact on the type and
intensity of competition in many markets. The passage of the Affordable Care
Act, for instance, is adding millions of patients to the healthcare system in
the United States. This places new competitive pressure on payors and
providers, challenging both types of companies to raise the effectiveness and
cost-effectiveness of their offerings. Suddenly, old players and new entrants
alike see opportunities to keep patients out of the doctor’s office with
fitness and nutrition tools like MapMyRun and MyFitnessPal, and diagnostic
tools such as at-home strep throat testing kits. This kit has the potential to
prevent 78,000 doctor’s office visits per year, valued at $94 million in physician
revenue. Some of these diagnostic tools have prompted new regulations. For
example, the U.S. Food and Drug Administration halted operations for the
direct-to-consumer genetic testing company 23andMe, pending review of its
saliva sample DNA test service.
Financial
services, energy, education, transportation—all these industries and others are
subject to new and revised government rules, each with its own form of
regulatory push and pull. New payment systems such as bitcoin for online
markets, or prepaid cards for physical use, are undergoing scrutiny by multiple
agencies around the world. The carbon tax seems to be gaining momentum as one
tool in the effort to curb industrially produced greenhouse gas emissions. And
recent U.S. government relief for people with outstanding student loan debt may
be just the beginning of efforts to use regulatory means to make a college
education more affordable and to make evaluations of colleges more useful and
accessible.
In
general, emerging regulations give you a good way to anticipate change, even in
areas where imminent change seems unlikely. For example, loosening regulation
on the use of autonomous flying vehicles like drones will have an effect on
investigative journalism, law enforcement, and insurance, along with the
effects of their use in war and defense. Similarly, when regulatory relaxation
appears imminent for self-driving automobiles, we can expect a major dematurity
wave to hit mass transit systems, taxi services, the car rental industry, and
presumably many other transportation-related endeavors.
New Means of Distribution
The
advent of digital infrastructure has already thoroughly dematured media and
entertainment—affecting formerly established business models for music, motion
pictures, publishing, periodicals, advertising, and communications. Now it is
dematuring the physical world as well. For example, consider what the online
taxi dispatch service Uber is doing for personal transportation. Anyone who has
been caught trying to hail a cab on a rainy evening in New York City knows that
the system is in desperate need of an overhaul. As of 2014, there were fewer
than 15,000 yellow cab licenses (called medallions) in operation in the city,
and great peak pressure on demand: Everyone wants to use the supply of taxis at
the same time. This is a classic distribution system overload problem.
Uber
sets up a new distribution system that overcomes the limits of the old one. It
allows riders to log in to the system and indicate where they are and where
they are going. The Uber app then responds with a wait estimate and often a
fixed price. Uber has moved the distribution off the street corner and into the
mobile device, which tells riders how much their ride will cost based on
real-time demand, weather, distance, and current traffic conditions—take it or
leave it. Instead of wondering how long it will take to hail a cab, taxi riders
feel the sense of certainty that a better distribution system often brings.
Whatever happens to Uber the company, we can be certain that taxi management
systems like the one it has developed are here to stay.
Business-to-business
environments are similarly affected by emergent distribution shifts, like the
one signaled by Monsanto’s 2013 acquisition of the Climate Corporation. Climate
is an agricultural service provider that sells crop insurance and delivers it
in conjunction with in-depth analysis derived by crunching data pertaining to
such variables as weather and soil composition. Agricultural clients get
real-time advice about when to plant, weed, or fertilize. Seemingly small
adjustments can have a huge impact on farm yields. If Monsanto chooses to
bundle its seeds with insurance or data services as a result of this deal, it
will change the distribution system for agricultural insurance.
Leading in Dematurity
One
of the few certainties in business today is that dematurity is coming to your
industry, and soon. Responding effectively requires that you throw out old
assumptions about how value is built and sustained in your markets. You need to
ask questions about your industry that others believe have already been fully,
inexorably, answered: What makes for efficient scale? Who is the competition?
Who are the customers? What do customers want? Who owns what? Where is the
risk?
If
asking these questions and pursuing untraditional answers seems like an
unlikely path to success, consider this fact: More than 80 percent of the
self-made billionaires who are profiled in my upcoming book, The
Billionaire Effect, made their billions in mature industries that they
reinvigorated by tackling one or many of the factors identified above. They
either introduced a product attuned to new consumer habits, changed the
technologies of production, adopted ideas from another industry, adapted to new
regulation, changed the distribution system, or made some combination of those
moves. Elon Musk, CEO of Tesla Motors and SpaceX, challenged the internal
combustion engine’s dominance in the auto industry by developing a
customer-friendly electric car. Farallon Capital Management founder Tom Steyer
worked laterally: He created an investment vehicle for university endowments
and changed how those customers defined profitable investing. Alibaba founder
Jack Ma created one of the largest e-commerce sites in the world by taking
advantage of production and distribution changes inherent in the Web to provide
platform and infrastructure services to thousands of small businesses.
Although
dematurity is inevitable, your business can be the one that benefits most. Half
the task is recognizing the facets of impending change early enough to prepare.
The five indicators in this article provide you with a starting point, a way to
begin honing your judgment and identifying the real threats to your industry.
The other half of the task is to respond in a way that makes you stronger: by
assembling and integrating the capabilities you’ll need in this new,
rejuvenated marketplace. The right capabilities will probably be a combination
of what you already do well and what you must learn to do from scratch. If you
can set your company up to sense and respond to dematurity ahead of time, then
you’ll be one of the first to catch the big wave of small changes—before
everyone else in your industry gets on board.
John Sviokla is a principal and U.S. advisory
innovation leader with PwC. He also leads the Exchange, a think tank for
business leaders. He is the coauthor of The Billionaire
Effect: What Extreme Producers Can Teach Us about Breakthrough Value (with
Mitch Cohen; Portfolio, forthcoming).
http://www.strategy-business.com/article/00270?gko=42973
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