Spotting the danger signs of ‘slow disruption’

PUBLISHED : Friday, 19 May, 2017, 12:48pm
UPDATED : Friday, 19 May, 2017, 10:14pm

Business disruption today can strike companies quickly, with a “big bang” when a product that is better and cheaper than anything else on the market suddenly becomes available.

But it can also creep up on you slowly. And when it hits, it hits hard. As a character in Ernest Hemingway’s novel The Sun Also Rises asks: “How did you go bankrupt?” “Two ways,” comes the answer. “Gradually, then suddenly.”

The first distinguishing feature of this gradual form of disruption is a prolonged decline in profit margins, even as revenue is increasing

This gradual-to-sudden decline is exactly the problem we identify in several industries today.

Our analysis of the performance of more than 1,200 companies in six of the most asset-heavy sectors – telecommunications, utilities, energy, materials, automotive, and industrials – revealed that incumbents in these industries are falling prey to what we call “compressive disruption”. And the first distinguishing feature of this gradual or “slow” form of disruption is a prolonged decline in profit margins, even as revenue is increasing.

Consider the car industry. Between 2009 and 2013, global carmakers delivered an impressive 35 per cent growth rate, as revenues for the 49 largest manufacturers rose from US$1.34 trillion to US$1.81 trillion. However, industry profits during the same period remained roughly the same. Since then, growth in both revenues and profits have flat-lined. Stagnant revenue growth – in this case, a compound annual growth rate of about 1 per cent – is the second indicator of an industry headed toward potentially rapid decline.

Combine these trends with the potential for industry leaders to believe they are invulnerable to rapid decline – a result of possibly decades of industry stability and perceived high barriers to entry – and you have got a recipe for trouble.

The good news is that companies still have time to act to fend off the potentially devastating effects of compressive disruption.

Companies must both transform and grow their core business, while at the same time beginning to scale an entirely new business

What actions are the keys to success? At the highest level, companies must both transform and grow their core business, while at the same time beginning to scale an entirely new business – a process we call “rotating to the new”. This is an especially challenging task for companies that have not yet recognised the urgent need for change.

An example from the metals and mining industry sheds light on how to carry out a proper rotation. In Australia’s Pilbara region, Rio Tinto is transforming its core business. The company’s use of automation technology has increased haul truck and drill utilisation by 15 per cent to 40 per cent, lowering energy costs and improving operational precision. This forms part of Rio Tinto’s Mine of the Future innovation programme, which is designed to find advanced ways to extract minerals while reducing the environmental impact.

Mining and metals companies must also develop new market offerings to maintain demand. This may mean shifting to new commodities such as lithium, as demand for e-vehicles grow; or moving upstream in the value chain to enter the recycling business – for example, taking scrap metal back from production. Ultimately, the winners will be those that move beyond selling a commodity to those that understand how to meet the evolving needs of their customers.

A case in point is Klöckner & Co, a German distributor of steel products that has set up a digital service platform to connect steelmakers with construction firms and other customers. The platform is basically an Alibaba for the metals industry: it aggregates supply to improve the availability of materials and to bring about price transparency, while also enabling suppliers to optimise their production through demand discovery.

No one wants to be on the path to bankruptcy, gradual or not. And the same is true for companies waking up to the challenge of industry compression. It is time now to assess the situation with clear eyes, and to get back on the road to long-term financial strength.

Gianfranco Casati is Accenture’s group chief executive of growth markets; Omar Abbosh is Accenture’s chief strategy officer