Free fallin’ - the guys who don’t see dis­rup­tion coming

Taranaki Daily News - - Business - MIKE O’DONNELL

It’s been a bad year or two for rock mu­sic en­thu­si­asts, with some huge in­flu­encers pass­ing away. Lou Reed, David Bowie, Leonard Co­hen and Amy Wine­house to name just a few.

Last week the list got longer af­ter South­ern rock ex­po­nent Tom Petty suf­fered a car­diac ar­rest in Santa Mon­ica.

Petty was just 10 years old when he met Elvis Pres­ley on a film set. The en­counter re­sulted in him de­cid­ing to be­come a mu­si­cian, with the mu­sic pro­vid­ing an es­cape from a drunk and abu­sive fa­ther.

Petty first’s big hit, Break­down, charted in 1977, the same year that Elvis died. From there his ca­reer took off, with his South­ern rock style fall­ing just out­side of main­stream, gain­ing Petty a rep­u­ta­tion for au­then­tic in­de­pen­dence and artis­tic edgi­ness.

In 1989 he at­tacked his own record com­pany, MCA, when they hiked the price of his al­bum Hard Prom­ises to a level where Petty thought cus­tomers were be­ing ripped off and the record com­pa­nies cut­ting their own throats.

Fa­mously, he threat­ened to go on strike, not­ing that with the rise of dig­i­tal mu­sic, record com­pa­nies ‘‘just didn’t get it’’, and need to be woo­ing fans rather than alien­at­ing them.

I heard sim­i­lar con­cerns be­ing tabled at a busi­ness sym­po­sium I spoke at last week. Man­agers were not­ing the lead­ers of their or­gan­i­sa­tions still hadn’t re­alised how dig­i­tal dis­rup­tion could change or even kill their busi­ness. They just didn’t get it.

It was a bit of a sur­pris­ing state­ment, given the lo­cal busi­ness events of the pre­ced­ing month or two. That very day, gar­ment com­pany Kim­ber­ley’s an­nounced it was go­ing into re­ceiver­ship af­ter build­ing a na­tion­wide net­work of stores over 34 years in busi­ness.

De­spite a good brand, well­lo­cated stores and a rea­son­able on­line pres­ence, Kim­ber­ley’s had failed to get suf­fi­cient rev­enue to cover costs.

A few weeks ear­lier, fash­ion re­tailer Top­shop an­nounced it was clos­ing its doors. With a lo­cal li­cens­ing com­pany part-owned by Karen Walker and Bark­ers menswear, it sounds like the busi­ness model was based around the Down Un­der stores be­ing forced to on-sell un­pop­u­lar old stock that had failed in sell in Europe the pre­ced­ing sea­son.

Not a great model when lo­cal cus­tomers can ac­cess the pop­u­lar stock on UK web­sites, and at slightly lower prices, thanks to the fall­ing British pound.

Look­ing back over the pre­ced­ing months there’s been plenty of other ex­am­ples of dig­i­tally charged dis­rup­tion spear­ing op­er­at­ing mod­els, in­clud­ing Sky Tele­vi­sion and Orion Health.

Twenty years ago, Clay Chris­tiansen wrote The In­no­va­tor’s Dilemma. Us­ing the steel in­dus­try in the US as an ex­am­ple, Chris­tiansen noted how dis­rup­tive in­no­va­tion starts in small pock­ets but in­tro­duces new tech­niques that fun­da­men­tally change the eco­nom­ics of an in­dus­try.

In his ex­am­ple, it was a new way of man­u­fac­tur­ing steel re­in­forc­ing bars for the build­ing in­dus­try – the mini mill. Mini mills melt scrap in small elec­tric fur­naces with few over­heads.

As a re­sult, mini mills al­lowed the prod­uct to be sold at about 20 per cent less than the big in­te­grated mills.

The big Amer­i­can steel com­pa­nies in Michi­gan and Ohio sim­ply re­fused to lower their prices, ef­fec­tively choos­ing to opt out of a niche area that made up only a frac­tion of to­tal rev­enues.

In less than 10 years, the mini mill oper­a­tors owned the re­in­forc­ing bar mar­ket glob­ally. Then they fo­cused on the next niche and har­nessed in­no­va­tive man­u­fac­tur­ing to rip out mar­gin. Then the next and the next. Fast forward to 2017 and the Amer­i­can steel in­dus­try is al­most over, save for car bod­ies, and they im­port a lot of them from China.

Dig­i­tal dis­rup­tion also har­nesses in­no­va­tion to rip out mar­gin but time pe­ri­ods are way shorter, which has led to re­duced life­span. Sixty years ago the av­er­age age of an S&P 500 com­pany was 60 years.

To­day it’s less than 20 years, ac­cord­ing to Credit Suisse.

It’s also chang­ing the mar­ket cap­i­tal­i­sa­tion of stock mar­kets. In 2001 the five big­gest listed com­pa­nies in the US were Gen­eral Elec­tric, Cit­i­group, Exxon, Wal­mart and Mi­crosoft.

Fast forward to 2017 and the five big­gest listed com­pa­nies are Ap­ple, Al­pha­bet (Google), Ama­zon, Mi­crosoft and Berkshire Hath­away. All but one of are tech com­pa­nies dis­rupt­ing through in­no­va­tion, and Face­book is rac­ing up to steal Berkshire Hath­away’s spot.

Plac­ing that lens on New Zealand com­pa­nies is in­for­ma­tive. The five big­gest com­pa­nies (by mar­ket value) on the NZX right now are Auck­land Air­port, Merid­ian En­ergy, Spark, Fletcher Build­ing and Fisher & Paykel Health­care.

Only one of them is a dig­i­tal com­pany, Spark. Which raises an in­ter­est­ing ques­tion or two.

Is New Zealand over-ex­posed to non-tech com­pa­nies which we can ex­pect to be dis­rupted?

And are those com­pa­nies do­ing enough to dis­rupt them­selves be­fore they get dis­rupted by dig­i­tal chal­lengers?

Time will tell, but I reckon Tom Petty’s line about MCA might be apt; for many, they just don’t get it.

And if they don’t eat them­selves, then some­one else will be happy to do it for them.

❚ Mike ‘‘MOD’’ O’Donnell is an eCom­merce man­ager and pro­fes­sional di­rec­tor. His Twit­ter han­dle is @mod­sta and he reck­ons The Wait­ing is the best Tom Petty song.

PHOTO: REUTERS

Tom Petty once threat­ened to go on strike, claim­ing his record com­pany was charg­ing too much for his mu­sic.

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