Most executives worry about it – but could disruption, in fact, be a good thing?
Throughout the year, PwC’s CEO Pulse polls a panel of business leaders. This time, we asked how they’re tackling the challenge of identifying disruption and whether they have a strategy in place for more than one future.
Disruption is often thought of as some sort of seismic event. In fact, most industries experience disruption not from the sudden impact of a single force, but rather, from a collision of interacting forces.
To detect these disruptive forces, businesses should consider five factors:
- Changes in customer behaviour
- New kinds of competition
- Shifting regulation
- New methods of distribution
- Core technologies of production
Together, these have the potential to significantly change the nature of an industry – and the power and profits of players within it.
When it comes to the challenges posed by disruption to the 268 CEOs we surveyed, here’s what we found:
1. Don’t get caught in the headlights of disruption
CEOs tell us they’re experiencing disruption in all parts of their business, irrespective of geography, company size or industry sector. There’s also been a shift in the source of that disruption.
Not so long ago, companies saw competitors and new regulations as the biggest potential disruptors of their businesses. While both those factors still have the power to disrupt, CEOs see the growing influence of customers and the ways in which goods and services are now produced – particularly through digitisation and new technologies – as increasingly disruptive.
One area yet to anticipate major disruption is in the distribution of goods and services. But here potent forces are already at play. The sharing economy and the digital enablement of distribution channels – e.g. supply chains and the internet of things – are shaking up sectors like automotive, retail and tourism.
Observing from the outside doesn’t necessarily prepare you for disruption. It leads many CEOs to assume it will have a negative impact. In fact, over the long term, what was initially perceived as a negative disruption often actually results in a positive transformation. In the early stages of industry disruption it’s easy to be caught off guard: to ignore the small changes, to fail to believe they will affect you, and to end up outpaced by competitors. The solution lies in improving your ability to recognise and respond to the signals of incremental change.
2. Customers are becoming more disruptive than competitors
Our research shows that customers are now the most powerful disruptive force facing business.
Eighty-six percent of CEOs believe customers will demand more from their products over the next five years. Over half of respondents believe it’s somewhat or very likely that customers will replace one of their products or services with an alternative solution in the next five years.
Indeed, customers are transforming commerce on a global scale. Business is transitioning from an era of supply-driven relationships to one dictated by demand-driven relationships. In an age of instant information, better informed, less loyal customers are willing and able to go elsewhere for what they want.
Harnessing this disruptive power by anticipating what customers want is a skill all in itself. With every prospective innovation, look for the early signals of new customer habits. The way people embrace or reject an innovation, and the logic underlying their response, will tell you a great deal about whether it’s the next big ‘thing’.
3. Smarter technology means smarter production
Four in five CEOs think the production technologies their companies use will change in the next five years (this rises to 90% of CEOs in Asia Pacific companies). And three quarters cite investing in new technologies as the most important strategy for managing disruptions in general.
When a new technology changes the way an established business produces its core product, disruption often follows. Take the pricing of car insurance policies, for example. Many insurers now rely on data collected from in-car diagnostic devices instead of classifying customers’ likely driving risk through statistics about gender, age and residence. This kind of real-time, exact feedback on drivers’ performance allows providers to design more profitable products and return more savings to customers.
Technology will continue to be both a source of disruption and an important way of turning disruption into opportunity. The challenge will be how to spot, track, develop, build, acquire and implement the ‘right’ winning technologies.
4. Retaining respect for a familiar foe
CEOs recognise that familiar and established disruptors are still important. This is particularly true when it comes to their competitors.
Over half of CEOs are concerned about a large existing competitor from another industry muscling in on their business. And almost two thirds recognise the threats posed by low-cost competitors.
Of less concern are tech-based non-traditional competitors entering their industries. This is despite prominent examples of that type of disruption in nearly every sector over the last decade. Often the disruptor arrives in the form of a company whose products, services and technology deployed in one sector offer a completely different (and better) way of solving problems in another. This kind of lateral competitor, even in nascent form, is often a sound predictor of more widespread system change.
Then there’s regulation. That (perceived) perennial thorn in the side of big business. Financial services, energy, education, transportation – all these industries and others are subject to new and revised government rules.
Three quarters of respondents (and 91% of those from billion-dollar companies) think new regulations will affect how their industries operate over the next five years. And less than 40% of CEOs anticipate deregulation in their industries.
Amendments to existing regulations can offer a good way of anticipating change. Consider the transportation sector, where regulatory relaxation appears imminent for self-driving automobiles. We can expect a major wave of disruption to hit mass transit systems, taxi services, the car rental industry and, presumably, many other transportation-related ventures. Tighter regulation can bring disruption too: without restrictions on the marketing of tobacco products would we have seen the emergence of e-cigarettes?
5. Keep your head while others are losing theirs
If disruption is so widespread, how should CEOs prepare their companies for change? This is an important but challenging question. For every company that has already experienced future-shaping disruption there are many more yet to feel the full impact on the top line: a surprising 40% of CEOs tell us that disruption had no effect on revenue growth over the past 12 months.
Much depends on the way a CEO views disruption. Do they see it as a helpful influence in their organisation? Are they forward-thinking and adaptable enough to go with the flow of disruptive forces?
The CEOs most pessimistic about disruption in our survey highlight regulation as their most important concern. The most optimistic CEOs, in contrast, are looking to exploit external disruptive forces for the good of their companies.
Overall, 76% of CEOs are looking to invest in new technologies to manage disruption and 70% have a strategy of engaging with external partners to form strategic alliances and joint ventures. Notably, over a quarter of CEOs are collaborating with competitors. And a few even say they’re ready to leave their industry or region due to disruption.
That course of action might seem extreme, but those companies already affected by disruption clearly think the long-term gains from radically changing their businesses outweigh the short-term pains.
The reality for all companies is that nothing happens in isolation. A breakthrough new technology that impacts production may shape and meet new customer demands. But it may also spark new regulation. And too many companies think they can tackle disruption as an external factor when, in fact, the forces of change are so great that a wholesale transformation of company culture is required. Furthermore, business leaders need to think less about what happened in the past and more about what’s emerging now. They need to think about how those disruptions might interact and intensify, and what that means for companies that want to thrive – or even just survive – in the future.
Are you ready for more than one future?
There’s no easy way for companies to fully embrace and prepare for the impact of disruption. Yet, with the right mindset, courage and knowledge, disruption can be truly transformative – it can force companies to reinvent at the core and reposition themselves for success.
PwC’s annual Global CEO Survey canvasses the views of over 1,400 CEOs globally to inform the debate on the challenges faces businesses today. Find out the results of our latest survey here.