From drug development to finance, the potential of AI for business is enormous, but effective safeguards are needed....
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Over the past two decades, the astronomic growth of relatively new companies like Tesla and Facebook has prompted some corporate leaders to question whether legacy firms – often bogged down by bureaucracy, internal power plays and slow decision-making – will manage to survive and stay relevant in an age dominated by small, nimble, digital disruptors.
The demise of former household names like Blockbuster, Kodak, Pan Am and Saab compounded the unease that size, once an asset, had become a liability.
Yet all is not lost for established firms. Having conducted a three-year study of global companies across a variety of industries, we identified 38 organizations that had successfully fended off challenges and continued to thrive. The companies had to meet six criteria: age, market share, financial performance during downturns, ability to adapt their core business, ability to create a second engine of growth and resilience in the face of negative events. What set these firms apart from more passive rivals was an ability to convert their age, size and tradition into the advantages of market power, trusted relationships and deep insights – a mindset we call Strategic Incumbency. Instead of resting on their laurels, strategic incumbents were able to reinvent themselves and their strategies, revise their business models and create new opportunities to defend against upstart competitors.
They did this through a constant questioning of their customers’ needs, a recognition of competitive threats from non-traditional players and identifying the factors that might cause brand loyalty to shift, allowing insurgent brands to grab share.
They also drew upon their corporate muscle and long-standing relationships with customers to give them an edge over competitors. This included an ability to manage complexity, to maintain a long-term focus and to leverage relationships to expand into adjacent spaces.
A vital step for strategic incumbents is learning how to scale disruption. Too often passive incumbents take a defensive approach. They devote most attention to the “D” in R&D to making incremental improvements to existing products and services which can guarantee quick returns. In contrast, strategic incumbents invest in long-term research-orientated innovation. Securing investment for these ideas can be difficult as the business case is often hard to prove, and the associated risks are significantly higher. This risk-aversion means R&D is often spread too thinly across multiple projects or companies take too long to act on an emerging trend.
Even when the R&D team is adept at identifying new trends, the innovations are toned down to match what the company can do with current assets. The R&D head at a multinational company told us: “The way we do new things is we’ll analyze for three years, we’ll write endless memos, and then go for a one-shot deal in a big way. Of course, when you spend $100 to $300 million on something, failure is unthinkable.” So the people involved start covering up to keep pet projects alive that should have been killed long ago. Companies end up throwing good money at bad projects to try to get innovation to succeed through brute force. There is also the issue of constantly shifting focus in a start-stop-repeat approach to innovation. Here, the expectation is to have “perfect innovation at scale” and “100% successful entrepreneurship”. Should the new product, service or solution fail to meet the scale or margin expectations within a short time frame, they are killed. Patience for a breakthrough is sadly lacking.
We find that the least attention is paid toward developing disruptive value propositions and business models. Even when it is done, the standard approach is to create a clear ideological and physical separation – a new unit dedicated to disruption with a flexible structure under a new leader, supported by diverse talents, with different performance metrics (for example, incubators to seed ideas, venture funds to prove the new concepts, or partnerships with startups). The logic for this separation is to protect the fledgling ideas from being crushed by the incumbent mindset, business model, and operating processes. Such separation only underlines how large companies are hostage to incumbent liabilities. The disadvantages of separating invariably hit home when companies attempt to scale the innovations by integrating back into the core business.
Our research highlights that strategic incumbents succeed in scaling disruption by following a reverse playbook, while continuing to tap into the advantages of incumbency. Three principles underscore how they turn conventional thinking on its head: bridging versus separating; risk-making versus risk-taking and championing rather than sponsoring.
Recruit’s experience shows how incumbents do not need to die a slow death. Here are four main action points to keep in mind when trying to activate your company’s strategic incumbency:
Too often, passive companies are overly focused on maintaining the existing structures that they have built and view innovation as a way to drive efficiency rather than transform the current system. Innovation is kept separate from the main business, pushed into an incubator or venture fund staffed by different people who may not be familiar with the rest of the organization. Strategic incumbents recognize that the best innovations come from sharing expertise and experience across the company, joining together to solve problems and address external opportunities. They adopt a learning mindset and actively look for how to create new business models.
In passive companies, decision-making is often seen as a binary choice. Risk-averse executives are paralyzed by rigid thinking, putting too much emphasis on the aspects a company has to lose over what it might gain. In contrast, strategic incumbents show cognitive flexibility, exploring the opportunities that might come about because of transformation. In the case of Recruit, it anticipated the shift to online sales in the beauty industry. Once it had completed this transformation, it addressed customers’ pain points by creating a suite of digital tools that could make reservations and payments easier and cut waiting times. These innovations were then deployed across the hospitality, restaurant and travel industries, increasing its revenues.
The process of scaling disruption requires leaders to be comfortable with the idea that the new business will come into head-on competition with the core business. Rather than setting out to create a new business, executives should seek to transform their existing business by building something new. Recruit’s former CEO and president, Masumi Minegishi (now Chairperson and Representative Director of the Board) stated: “We recognize the need to cannibalize ourselves… [even though] it is extremely difficult to destroy and rebuild a system that we have meticulously built and rewrite the rules of the game.”
Another aspect of disruption is dealing with ambiguity; innovators start with a one-page mandate to build the next $1 billion business without fully comprehending what they have set out to build. There is no “right answer” until they figure what works for their company. Instead of working in formal structures, they seek to inspire the individual passion of employees to voice ideas and chart a new path. As Recruit’s Masanori Michimoto explained: “I want our young people in their 20s, to look back at this period in time and say, ‘The work that I did back in my 20s impacted thousands of SMEs and raised the level of the industry’.”
A prime example is Recruit Holdings, one of the largest publishers of print magazines for the staffing, housing, automobile, travel, bridal, dining and beauty industries in Japan. The Tokyo-headquartered company managed to leverage its incumbent advantages by following these three principles, disrupting itself no less than four times in the space of 25 years to become a digital powerhouse for advertising, media, and recruitment in Japan and the world’s fourth largest staffing firm by revenue in 2020.
So how did it do this? Recruit’s mantra for serial disruption was to anticipate and respond by leveraging incumbent advantages.
With the advent of the internet, Recruit’s core business was in danger of becoming irrelevant. The company decided to transition its marketing magazines to online portals. However, it had to deal with strongly entrenched views in favor of remaining a print business. Many argued that online entry barriers were much lower; anyone could curate information to launch a website. Recruit’s leaders made a concerted effort to convince employees that a steep digital transformation was imperative. Over the years, Recruit’s leaders maintained a fine balance – steadily extending the envelope on change, but not so much that the organization would buckle under.
In the early 2000s, despite the advent of the internet, beauty in Japan remained a high-touch, offline business comprising small and medium-sized salons. But Masanori Michimoto, head of Recruit’s beauty division, anticipated that, “The beauty industry will evolve like travel where consumers have already shifted to transacting online.” Instead of waiting for the online beauty market to emerge, Recruit decided to create it from scratch. Michimoto worked closely with his counterpart in the travel business to frame different options and hypotheses around what it would take to develop the right propositions for the SMEs and their customers. In 2007, Recruit launched its “Hot Pepper Beauty” online platform providing search functionality and online reservations (for hair stylists, nail technicians, relaxation treatments, etc). But how could it shift the SMEs to the online model?
A major advantage for Recruit was the strong relationships built by its sales representatives who had served tens of thousands of salon owners for decades. Michimoto leveraged this advantage to pitch the new online proposition. Although Recruit expected resistance, counterintuitively, it proved to be an easier sell. Recruit could demonstrate higher online return on investment (by tracking page views and click-through rates for reservations). However, onboarding SMEs on to their platform was not enough. How could it add superior value at scale to both sides of the platform, beyond optimal matching? What would Recruit’s next disruptive move be?
Once again, the answer lay with its 1,000-strong sales force – an unfair advantage from its legacy advertising business – that a digital native platform would not have. The sales team visited SMEs to identify the areas of inefficiency, dissatisfaction, and inconvenience. Success would hinge on Recruit’s ability to connect this domain insight with technological expertise to solve the right customer problem at scale. However, Recruit faced challenges in “productizing” these field insights because the IT engineers, data scientists, and AI experts who would drive the next level innovation were too far from the frontline.
Recruit bridged this divide by deciding that the engineers would accompany the sales team to visit and observe the SME operations. Joint problem solving enabled them to crack the code to the next disruptive idea – industry-first, groundbreaking digital tools. The engineers quickly took the lead on prototype development and in 2012 Recruit developed its first app for beauty SMEs – Salon Board, a cloud-based management system. However, successful scale-up depended on the SME employees’ ability to learn how to use the digital tool. To make this happen, Recruit transformed the role of sales representatives, from pushing advertising to becoming advisors/consultants. Revenue for the beauty business saw sustained year-on-year double-digit growth, to reach ¥ 81.6 billion in FY2019 (fiscal year ended March 31, 2020), with 75,000 clients and 350,000 reservations daily nationwide, compared with under 100 reservations per month at inception.
By 2019, Recruit had built a range of digital tools – including point-of-sale (AIR Regi), reservations (Air Reserve), waiting time management (AIR Wait), and payment services (AIR Pay) – which were deployed across other verticals such as restaurants, hospitality, travel, etc. The successful adoption of these tools and the consequent digitalization of SMEs’ businesses provided Recruit with yet another unique leverage – data. By analyzing the data, Recruit could advise SMEs (for instance, more attractive menus for restaurants, table management techniques and inventory management), resulting in higher footfall, revenue and customer satisfaction. In the process, Recruit effectively transformed its own DNA, from a passive information provider to an active service provider, successfully digitalizing highly fragmented service industries that would never have been able to digitalize as fast and as effectively on their own. This is significant because SMEs make up over 99% of Japan’s enterprises, according to an article in Japan Today. This sowed the seeds of its next disruptive move.
In 2019, Recruit launched its software-as-a-service (SaaS) business model with a bundled suite of cloud-based solutions built upon the Air Business Tools to support day-to-day management and operations including reservations, CRM, POS system, payments, accounting, settlement, shift management, hiring, and others. With this move, Recruit disrupted itself once again to become a genuine SME partner, enabling every step of their value chain. Today, Recruit is an internet behemoth and Japan’s answer to LinkedIn, Zillow, Yelp, eHarmony, Booking.com, Square, and multiple others, all rolled into one.
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