Confronting the disruption paradox

We live in an age of disruption. New technologies are dramatically transforming the ways in which we lead our professional and personal lives. New centers of economic and geopolitical power are emerging. Demographic, societal, and environmental forces are reshaping the world. The pace of change is accelerating, and it is relentless.

It should be no surprise then that the disruptors – those companies that serve as catalysts for so much change across industries – have acquired iconic status. Their share prices enjoy premium multiples. The musings of their leaders are followed by millions and can drive markets. Unlocking their secrets has become a cottage industry for consultants and journalists alike, while identifying the next wave of disruptors consumes many an investor.

But what about those that are faced with the less glamorous task of transforming their legacy businesses in the face of disruption? Much less attention is paid to their challenges, which are frequently more complex than those of new entrants starting with a blank slate.

These challenges do not stem from a lack of perception. This year, 83% of respondents in our survey for the AlixPartners Disruption Index said that they could predict disruption that would impact their organization. However, less than half of all respondents felt that their organization was taking the right steps to confront it. The answers are not simple.

Companies face a clear paradox: they must not only mitigate the effects of disruption but also take advantage of its opportunities. Being too early with a new technology or business model can be worse than being too late. However, given the exponential growth and economies of scale associated with successful disruption, delay presents its own set of problems.

Traditional ROI measures frequently fail to capture the true present value of today’s investments. Necessary steps to protect and mitigate the impact of disruption on legacy businesses seem at odds with the requisite actions needed to proactively navigate the disruptive environment.

What will it take, then, for oil and gas giants BP, Shell, and Total to achieve net-zero emissions (on all direct emissions) by 2050, as they committed last year? How do Google and Facebook grow their advertising revenues as consumers take increasing control over their own data? What does a smokeless future look like for Philip Morris? How can Volkswagen achieve its goal of shifting 70% of its European sales to electric vehicles by 2030? Therein lies the paradox.

Consider the retail industry. Last year was devastating for many US retailers, with 49 companies filing for Chapter 11 protection. Lockdowns and social distancing pushed commerce online, but the costs of providing a smooth omnichannel experience for customers are high. Our research shows that increased online penetration for retailers has correlated to margin compression across the industry.

But the pandemic confirmed the risks of not having these capabilities. Many larger retailers that had invested heavily in their digital customer experience and were prepared for the rapid growth in online sales and omnichannel fulfillment saw both sales and profits expand. In 2020, Target, for example, saw sales growth greater than its growth over the previous 11 years combined and adjusted EPS growth of 47% over 2019.

Companies, therefore, must orient themselves around the compound paradox of disruption. The paradox being: how do they react to disruption’s impact on their existing businesses, while also proactively preparing to capitalize on these same disruptive trends?

Too often, the default choice for too many companies is to do nothing but to wait and see. Why do leaders fail to act when they know they must? In a world where disruption is accelerating, its magnitude is increasing, and the gaps between the winners and losers is growing, such complacency can quickly lead to disaster.

Vigilance in the face of disruption is essential. Nearly 40% of respondents to our survey said that their organization is better off today than a year ago, and those executives were more likely to see the opportunity afforded by disruption. In contrast, those who said their organization was worse off were much more likely to view disruption as solely a threat.

The best-performing companies respond to disruption by focusing on the acceleration of their organization’s transformation and the rigorous execution of their strategies. They have confronted the paradox and in return, disrupted and reinvented themselves at speed.

Such change must begin with business leaders taking back control in the face of disruption. The stakes are getting higher. Define your future and be bold. History continues to show that if you do not, someone will step in to do it for you.

For some of our perspectives on how to address the many challenges of disruption, I invite you to read this year’s AlixPartners Disruption Index.