How incumbents survive and thrive

Article originally appeared in Harvard Business Review, January-February 2022, Pg. 37-42

By Julian Birkinshaw

What/Focus

Despite the popular narrative that old-economy companies are falling to the creative destruction of big tech, comparing the 1995 and 2020 Fortune 500 and Global 500 lists shows this is not generally the case. Digital disruption is not happening in every sector, nor as quickly as expected, and established firms can adapt. The author first tells the real story behind the myth of widespread tech disruption, and then offers three other strategies for survival apart from beating a tech disrupter at its own game.

How (Details/Methods)

A look at the Fortune 500 by sector shows that the only sectors seeing significant churn between 1995 and 2000 were TMT (technology, media, and telecom) and retail (which includes restaurants and hotels). The other sectors—energy, materials, and chemicals; industrials, automotive, and aerospace; consumer products; health care and pharmaceuticals; transportation and travel; and even financial services and insurance—all show high levels of inertia and look surprisingly stable. Most incumbents have transitioned into the digital age quite well and while there have been new arrivals on both 500 lists, they are still largely made up by mainstays.

The first adaptation strategy described in this article is fighting fire with fire – by setting up a competing digital unit, building an incubator or accelerator, or pursuing digital transformation. Alternatively, a company can double down by playing to its existing strengths. Disney, for example, built on its proven record in moviemaking to create a string of blockbusters (including the Marvel franchise) instead of competing in the new streaming market in the 2000s. It was only later that it launched a streaming service of its own. In such cases, assets like a trusted brand, long-term relationships, and worldwide reach create entry and mobility barriers that are extremely hard for new entrants to overcome. A third option is to retrench. This is a defensive move in which old firms yield ground to new firms for continued survival, including by consolidating through mergers and acquisitions. For example, the camera makers Konica and Minolta agreed to merge in 2003 when faced with the rapid growth of the digital market. Another tactic is seeking help from government and regulators – as traditional taxi firms did when Uber first appeared on the scene. Finally, companies can move away or migrate to new opportunities where they reapply existing competencies as Fujifilm did. Once Kodak’s biggest competitor, Fujifilm is now a successful health care, imaging, and materials firm.

So What

The approach a business chooses should reflect its circumstances. For example, for a company with strong assets the market still values, doubling down is a good choice. However, if digitisation is a threat the company can’t counter, it should move into new, more defensible areas. Firms can hedge their bets for a while and pursue a few strategies, but then they need to commit to a strategy, whether defensive or offensive and focusing on existing segments and markets or new segments and markets. Additionally, regardless of the chosen strategy, firms need to embrace digital technology to improve operational effectiveness. Finally, it is important to remember that despite the generalisations, some creative destruction has happened in technology, retail and media but not so much in other sectors. It is also important to take the time to make the right choice – effects happen across decades, not years.