Facing new technologies? Avoid the fate of traditional players

In April 2010, Nielsen reported that CNN had lost roughly half its prime-time viewers in the first quarter compared with a year earlier. It is easy to forget that CNN, which launched 30 years ago (1 June 1980), was once revolutionary - it was the first to bring real time war coverage into our living rooms. However, as a recent article in the New York Magazine pointed out, bastions of old media are discovering that "it is practically impossible to refresh an entrenched brand at the speed required by our rapidly metastasizing digital culture (and wait till we're all watching videos on our iPads!). CNN took two generations to go from vanguard to rearguard. It should consider itself lucky. AOL and Yahoo, both now in the throes of their own frantic rethinks, only got one."[1][1]

More and more people are ditching their newspaper subscription, switching off the TV and turning to the Internet, smart phones and iPads for their daily news - and why wouldn't they? It's faster, cheaper and interactive. They can subscribe to the feeds of digital journalists and bloggers they like, search news by region, category or timeline and thanks to social networking, be informed the instant news happens.

In a world where technical progress and new business models are changing entire industries at a rapid pace, corporate inertia can be deadly. History has demonstrated repeatedly that established companies tend to struggle - and more often than not - fail - when confronted by discontinuous change.

While CNN is no longer the juggernaut that it once was, it still is a prominent player thanks in part to how it has adapted to new technologies. For example, iReport is CNN's public journalism initiative that allows people from around the globe to contribute pictures and video of breaking news stories from their own towns and neighbourhoods. CNN is also an active player in the social media space - it has over one million followers on its main Twitter feed.

However, not all traditional players are able to survive. Take a recent example from Germany - the Brockhaus encyclopaedia. While the educated classes 10 years ago bought a 20-volume Brockhaus encyclopaedia for several thousand Euros, they now increasingly use the free online encyclopaedia, Wikipedia. The consequences have been dramatic for Brockhaus: after the 21st edition sold far worse than expected, the encyclopaedia business was sold to Bertelsmann in late 2008 and a 200-year-old success story came to an end. Many of the traditional book publishing outlets - hard hit by internet providers like Amazon - also find themselves in a difficult predicament.

Similar stories can be found in many other industries where established players failed to respond appropriately to radical changes in their environment.

The challenges that established players face when confronted with discontinuous change raise two important questions. Firstly, how can established companies protect themselves from the dangers of radical innovations and secondly, how can they develop radical innovations, thereby opening up new markets?

Adapt or die

In a series of studies that taken place over the past five years, extensive research has been conducted by IMD with managers and experts from the mobile, book, music and tourism industries, as well as the retail sector. All these industries have been affected in some way by discontinuous change. In all of these industries, most established players reacted either too late or not at all. And even those that did react often failed because they used tried-and-trusted methods, which generally proved to be completely inappropriate.

Such was the case with the established music majors, which reacted far too late to digitization and new internet-based business models. Initially, illegal file-sharing platforms such as Napster or eDonkey captured large parts of the online music market. Even after they had demonstrated through their successes that online music would be the future of music distribution, it was the PC manufacturer Apple, then a complete industry outsider, which took over large parts of the online music market.

This phenomenon is not unique. In fact, the pattern repeats itself over and over again in corporate history - when not one, but an entire raft of established players, are ousted by a group of small, seemingly powerless start-ups.

Four cardinal sins, five recommendations

When faced with radical changes that threaten the foundations of their business, established players tend to have troubles in different areas.

At the outset, they might have problems detecting the relevant changes happening around them. If detected, it becomes a challenge to assign the appropriate importance. Furthermore, even if the established players do recognize the threat posed by these changes, they still do not allocate any or sufficient resources to address them. And finally, even companies that decide to invest heavily are often stuck in old mindsets of operating their business.

While these challenges are daunting, IMD research and that of many other scholars in the field indicate that there are a number of actions established players can initiate to respond more effectively to these changes:

• Look beyond your traditional reference group. Discontinuous innovations are typically not launched by those companies you have been competing with for the last 20 or 30 years, but by an outsider. Think of Apple and the music industry.
  
• Re-evaluate incentive mechanisms to accommodate discontinuous innovations that might take longer than a year to work out. Think of middle managers who will have to push these innovations. Why would they be interested in doing so?
  
• Remain in frequent contact with those members of your organization who are in close touch with current market developments. It might take years before the signals that are clearly understood by your sales managers who are working at the front line find their way to corporate headquarters.
  
• Be willing to accept trial and error - discontinuous innovations usually don't work the first time around.
  
• Establish dedicated units for managing these projects. Protect units that commercialize the discontinuous innovation from the demands of "daily traditional business". Typically, these opportunities will require different metrics to measure success (at least initially), as well as different organizational structures and people who are not held hostage by the "that's how we have always done it" syndrome.

Rapid technological developments and the interlinking of the global economy will provide fertile ground in the future for further change. New players which see the gap in unexplored markets and traditional players which disregard years of "modus operandi" and embrace new ways of doing things will succeed with discontinuous change. Be it a defence mechanism or a fully fledged offensive, only those companies capable of adapting their strategies to a world where discontinuous change rules will meet the challenge successfully. It is why CNN is still in existence, while the Brockhaus encyclopaedia is now only a collector's item.

[1][1] Hirschorn, Michael. New York Magazine, New York Media LLC, 2010