Why do big companies change so slowly and die? They dramatically underestimate innovation velocity.
Innovation velocity is the speed and direction of growth that an innovation creates. Small disruptive organisations have very high innovation velocity and this is why they kill big slow incumbents.
In a VUCA reality, disruption happens in a non-linear and often exponential manner. This means that incumbents are blissfully unaware of what is going on until it is too late and the aggressive disruptor has captured the market. The key issue is that the incumbent is far too complacent and fails to create the sense of urgency that is essential for creating the innovation that will beat the disruptor. How can this be? How can smart and capable leaders get it so wrong? Because it’s really hard to understand the power of exponential growth that innovation creates. Let’s see if you can get your head around it.
Imagine a situation where you own 100% of the market and suddenly a new disruptor launches and gains 1% of the market. Now you have 99% and they have 1%. However, because they are very innovative and aggressive, they will double their market share every year. How many years do you have until you lose? Have a quick guess. The answer is 7 years. Yes, within 7 years, this puny disruptor will have broken you and in 8 years it will utterly destroy you; that is the power of non-linear growth. As you can see in the images below, exponential growth is difficult to comprehend, even for the most seasoned of leaders.
This is not a theoretical exercise, just ask Nokia. The iPhone launched in early 2007 and by the end of 2013, 7 years later (!), Nokia was bought by Microsoft and it was all over. Of course, it wasn’t the iPhone alone that killed Nokia, it was Apple and Android together. 2 disruptors who experienced non-linear growth and obliterated what was once the world’s mobile phone titan. The graph below shows the exponential growth of Apple and Android and the concurrent exponential collapse of Nokia. This provides a key insight to disruption; it’s not going to be 1 disruptor that kills the incumbent, it will be multiple aggressors who together create the kill.
Nokia (green Symbian line) was utterly destroyed by Android's & Apple's exponential growth
A key point to recognise is that up to year 5 there is nothing scary for the incumbent, they still hold 84% of market share. However, on current trends, the incumbent will utterly die in 3 years! This is exactly what happens to complacent incumbents who are ‘managing change’. Only after the year 6 numbers come in, when the disruptor suddenly gains 32% market share, does management panic. They desperately seek a solution but of course it’s far too late because the disruptors grow much faster than the incumbent can change. The disruptors build on their innovation velocity to capture market share faster than the complacent and stagnant incumbent. By year 7 it’s clear that the game is over for the incumbent. Management is in shock, they say things like “we didn’t do anything wrong, but somehow, we lost” Stephen Elop, Nokia CEO. No, you lost because you weren’t paying attention to innovation velocity. Nokia didn’t understand innovation velocity and the exponential growth it creates. Its management team was too complacent and as a result Nokia died. However my reader the real question here is this… will you make the same mistake?
To help you avoid this mistake I suggest a simple thought exercise.
In summary, we have discussed the critical important of innovation velocity; the speed at which disruptors will capture market share from the incumbent (remember there will be more than 1 disruptor!). The key issue is that the disruptors will always have faster innovation velocity than the incumbent and this is what causes the incumbent to lose. The disruptors gain market share faster than the incumbent can change. Specifically, they gain market share at an exponential rate. However, the incumbent will not realise how much trouble it really is in until it’s too late due to the nature of non-linear, exponential growth (it only panics at year 6). If the incumbents are to survive, it will be up to leaders like you to sound the alarm now and call the organisation to innovate before it’s too late. If you need help getting started, let me know.