Free-fallin’ - the guys who ignore disruption threat
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, well-located 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 is the best Tom Petty song.
The US steel industry is almost finished.