No, Tech Start-ups Aren’t Taking Over the World

ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.

There’s been a big fuss made about disruption in recent years. Tech enabled startups are taking over the world, and old economy companies just can’t compete. Look at what Netflix did to Blockbuster, what Amazon did to department stores. Our guests today says, that narrative ignores one thing. Over the past three decades, many industries haven’t been disrupted at all. In fact, his research into the Fortune 500 and Global 500 shows that lots of large and long standing businesses are not just surviving, but thriving in today’s digital world. How are they managing it?

Julian Birkinshaw is a professor at London Business School. He’s the author of the HBR Article, How Incumbents Survive and Thrive. Julian, welcome to the show.

JULIAN BIRKINSHAW: Thank you very much, Alison. Nice to be here.

ALISON BEARD: First, could you just explain why this narrative around disruption is so wrong? What did you find in your analysis, to show that incumbents are actually going really strong?

JULIAN BIRKINSHAW: So I’d always had this nagging worry that the narrative of disruption, where the big established companies were dinosaurs, was overplayed. So I went back to the data. I simply took the Fortune 500 list, which as you all know is the top 500 companies in the US, by sales.

And I asked myself, how many of the companies on that list today did not exist 25 years ago? So 25 years ago, is 1995. And that date is chosen, not just because it’s a convenient quarter century, but because ’95 was the year when the internet really became kind of a commercial endeavor when you could actually start buying and selling things. And so the thinking was, that’s a long enough period for these digital upstarts and tech companies to really kind of tear through traditional industry.

So the answer to the question, how many of those companies in the Fortune 500 today, didn’t exist 25 years ago, is 17. One-seven. There are only 17 of them, and that is the Netflix and the Googles and the Amazons and the Facebooks, and a bunch of others. The other 483 companies are all long established companies. Now some of them have been renamed. Some of them are companies which existed before, but not in the Fortune 500 and have gradually grown into the Fortune 500. So I’m not saying there’s no turnover in the Fortune 500, I’m saying when you look under the hood at the number of companies, which are genuinely come out of nothing to become members of that club, it is a tiny number.

ALISON BEARD: And so, is it just that the stories about the Amazons and the Facebooks and the Googles have become so dominant in business coverage, that we ignore everything else that’s happening? Why are we obsessed with this idea of corporate disruption and destruction?

JULIAN BIRKINSHAW: There’s two or three things going on, right? One is, absolutely. When you pick up the business press, it is full of these big companies. There’s a couple of other points going on as well. Which is that, they are not just big, they are also sort of reaching across a number of different industries. So there’s this sort of hypothesis that Amazon, for example, or Google, are not intent just to stay in their chosen sector. They want to kind of move in and disrupt a bunch of other sectors.

So it’s very easy to see how an argument can kind of be propagated that says, “No industry is immune. The tech industry got disrupted, retailing got disrupted, and your industry is next.” And of course I can’t completely disprove that that’s going to happen. I’m just saying, let us take a little bit of a sense of history, here. Let’s remind ourselves of the conversations we had. For example, in the late ’90s, when many people were predicting the imminent demise of banking, and goodness know what other industries. And it did not happen then, so let’s be cautious before we predict that it’s going to happen this time.

ALISON BEARD: And which companies are some prime examples here? What are the old school companies that are doing just fine, even in the face of competition from the likes of Amazon, Google, Facebook, Netflix, et cetera?

JULIAN BIRKINSHAW: So in some ways, it’s a very boring list I’m going to give you. There’s a few categories of established companies that are doing well. Some of them are literally just everybody’s favorite stories. And I can mention J.P. Morgan, I can mention Proctor& Gamble. I could mention the New York Times, and so forth. These are big established companies who haven’t just survived because they’re big, but they’ve actually done some really cool things, in order to continue to adapt.

And then of course, you do have other companies which were perhaps were not quite so well known before, who have become famous for kind of dramatically reinventing how they work. I live in Europe, ING Bank in the Netherlands, for example, has become very famous for its phenomenal kind of rethinking of its internal processes, using agile methods. If you live in China, or if you spend time in China, you know the stories of Haier, the white goods company, which has completely rethought how it, as an incumbent, is going to operate. And it’s done very well as a result.

But you see this, in some ways, it kind of misses the point to say, “Here are the one or two exemplars,” because in fact behind the scenes, most of these large established companies are feverishly re-engineering, de-layering, simplifying, trying to get closer to their customers. There’s a lot happening, which doesn’t make the headlines, which is actually a huge part of this story of almost like, internal creative destruction.

ALISON BEARD: So it’s not that they have a stranglehold on competition in their sector, or their regulations that are working in their favor. It very much is that they are changing their strategy to face this digital threat.

JULIAN BIRKINSHAW: That’s right. It is actually true, that these companies are doing a number of different things at the same time. And sometimes they are absolutely falling back on regulation as a sort of a defense mechanism, and sometimes they are absolutely building on some of their existing strengths, but they’re also trying to take on the upstarts and the big tech companies at their own game.

ALISON BEARD: So let’s talk about those different strategies for combating all the threats that are coming at you. You talk in the article four, so maybe we should go through them one by one, and talk about the pros and cons of each?

JULIAN BIRKINSHAW: For me, the starting point is, my colleague Gary Hamel, he coined this phrase back in the first dot com era. He said, “Out there, there’s a company who’s forging a bullet with your name on, and your only option is to shoot first.”

In other words, if you are Walmart let’s say, your only strategy they would argue is to fight fire with fire, to take Amazon at its own game. And so of course we do see companies that have done this, and a great example nowadays is indeed the New York Times, which has somehow succeeded in getting to, I think roughly, eight million online subscribers. It has now become more successful as a digital company, than it was in the old paper-based world. Now it’s taken them a long time to get there, let’s be clear, but there are many, many other strategies out there, which don’t involve that direct, fighting back strategy.

ALISON BEARD: And so what are some other things we might do?

JULIAN BIRKINSHAW: I’ve arranged this the way I present it in the article, as a sort of a two-by-two matrix. So, the other, shall say proactive strategy, fighting back is clearly a proactive strategy, it’s fighting fire with fire. The other very proactive strategy, where you are deliberately trying to push the insurgent into a corner, but you are doing it on the basis of your existing strength, rather than playing the game of the insurgent.

And I simply call that doubling down. And doubling down says, “We are a successful company in our own right. We have assets that this new company cannot possibly match. And if we continue to really invest in those things, we will actually be able to not just sort of survive, but actually to some degree actually reinforce our position.”

So Disney is the great example of that, right? We all know the Netflix story now, and this is told so often, but there is actually a side to that story which not everybody knows, which is around 2005, 2006. This is of course when Netflix was really starting to ramp up its streaming service, it became really possible for us to watch movies on demand. And Amazon was starting to play Amazon video game, at that point as well. Disney could have said, “We’re going to get into streaming,” at that point. But of course it was a very uncertain market. They didn’t have the capabilities in streaming, but what Disney did, and what Disney does to this day is, they doubled down. They reinvested, essentially, in content. And most people will know that they bought Marvel, they bought Pixar. They bought Lucas Films. All of which were essentially ways of building out their stable of high quality content production. And of course, a huge library of materials that every streaming service desires.

So, it’s a long story, but essentially for the first decade of Netflix existence, Disney really didn’t bother to actually take Netflix on at its own game. They just doubled down on content, and of course their content is so valuable, that Netflix had no choice but to license that material at a great fee. So that’s doubling down, and there’s as many other such examples, but I think Disney is probably the best one.

ALISON BEARD: Yeah. And then all of the streaming services had to start creating their own content, to compete with the…

JULIAN BIRKINSHAW: Exactly.

ALISON BEARD: … amazing creative engine, that Disney became.

JULIAN BIRKINSHAW: Indeed. And, indeed, the tussle continues today between the content creators on the one side, and the streamers, distributors on the other. And it’s become a bit of an arms race, as we all know.

ALISON BEARD: Yeah. So those are the proactive strategies, which would obviously seem to be the best course of action.

JULIAN BIRKINSHAW: Yeah.

ALISON BEARD: But incumbents have survived, by not being proactive?

JULIAN BIRKINSHAW: Yeah. So of course, everyone wants to tell a good positive story. And perhaps we come back to this at the end, in terms of how you tell your shareholders what’s happening. But there are absolutely two completely legitimate defensive strategies that I have observed.

The first is what I call, retrench. And so, this is an incumbent company recognizing that there is an insurgent, there’s a new upstart who is eating into their existing market. Retrenchment says, “I accept that that is happening. And I realize that I don’t really have the skills to compete with them directly. But it is a heterogeneous, large market in which I operate. And retrenching means sort of pulling back a little bit, consolidating our existing position, possibly through merger, acquisition, lobbying, through regulation. A number of different tactics, that help me to shore up or defend my existing place in the market.”

If you take, for example, the well known story now of the demise of Kodak and Polaroid and so forth. When digital imaging took off, all the big manufacturers of traditional cameras, and I’m talking about Konica and Minolta and Canon and those guys, what did they do? They could see that their market was being attacked. They didn’t give up. They just basically merged with one another, in order to create economies of scale, to try to sort of shore up position.

And then I think perhaps an even better example, actually, is the world of retail banking today. When we look at any retail bank, it could be J.P. Morgan, it could be Citibank, it could be Barclays or Lloyds in the UK. Their strategy in the face of FinTech insurgents is of course, to continue to be what they’ve always been, which is sort of the very secure, trustworthy home for your primary bank account. We see some mergers happening. We see consolidation happening. We see them pushing back against, for example, blockchain technology, by working with regulators to keep blockchain at bay. We see them doing a number of other things, for example, working to build capabilities in some of these new areas, but with an understanding that actually, their biggest priority is to make sure that they maintain their existing market share amongst their existing customers. It’s a multi-faceted strategy, but ultimately, I see this as a retrenchment. So, that’s retrenchment. That is the third strategy.

The fourth strategy is, in some ways the least desirable, I call it moving away or migrating away. I mean, you can call it giving up, if you like. But it is absolutely sort of a pragmatic look at a difficult situation where, “I can see that my market, the business I used to be successful in, is kind of disappearing before my eyes.” And you can think of poor old Kodak in the early 2000s, where they had nothing left to offer as the world migrated to digital imaging. And of course, they tried for many years, and they failed.

So, what does one do? If the market which you used to be, see as your own, is shrinking and is being taken over completely by digital players? Well, moving away is a strategy which says, “As long as I’m smart and proactive about it, and as long as I have a little bit of luck going with it, I can find a way of almost sort of rebalancing my portfolio, taking resources out of the things which are being destroyed, and moving them into areas where I have a shot.”

And so, by getting on the front foot, and moving almost like before everybody else realizes it’s a problem, can in fact be a good strategy. It’s very rare that that happens. I mean, I’ll be honest, most of these migrate way or move away strategies are kind of a last ditch effort to survive.

ALISON BEARD: How do they choose which path to take?

JULIAN BIRKINSHAW: Everyone wants to know that answer. Right? “What should I do?” And of course the truth is, it’s complicated. The truth is that, as an emerging technology takes hold and some upstart companies start using that technology to find their way into the sector. There’s a huge amount of ambiguity, and the right way forward is not clear. And we’ve seen that story played out, time and time again. And right now, for example, we could absolutely say, how is blockchain technology shaking up financial services? What is the right strategy for a bank? And nobody has the right answer to that.

You can also look at the automotive sector, and you can look at obviously electric vehicles and hybrid vehicles and fuel cell vehicles. And you can say, what is the right strategy for a major automotive company? I don’t mean Tesla. Tesla’s strategy is very, very clear, but for all the incumbent automotive companies, what is their strategy for coping with that sea change away from internal combustion engines?

In the period of firmament, the period of ambiguity. The best advice I can offer, is that actually, you have scope to experiment with a number of options. I mean, doing all four things at the same time feels like overkill. You’ve got to have at least a point of view on the merits of each of those things, given your specific situation. But there’s absolutely scope, for example, to create a unit whose job is to fight back directly. Whilst having another unit, which is feverishly kind of reinventing itself or re-engineering itself, in order to consolidate its existing position.

But at some points you have to put your bet on the horse, the main horse, that is going to sort of see you through here. Because strategy is always about choice. The essence of strategy is making choices by default, doing something which involves taking money away from certain things, and doing other things. And of course, the trick is knowing when to switch from doing a little bit of everything, to putting almost all of your energy and commitment and political capital, around the transition to some sort of new world.

ALISON BEARD: Yeah. So this is sort of bad news for startups. It seems like a bunch of early tech companies made it through and achieved sort of Fortune 500, Global 500 status. And now, all the old established companies are sort of getting digital transformation, or figuring out their reinvention. Is there still room for disruption from all these unicorns we’re hearing about, or smaller companies?

JULIAN BIRKINSHAW: Yeah. Look, there is, absolutely. And let me, to avoid anybody, shall we say, criticizing me on false grounds. Both narratives are true. In other words, it is absolutely the case that disruption is happening, and that some of these unicorns will actually ultimately become hugely successful companies, in their own right, and alongside those sort of five or six big tech companies that everybody talks about. A few of them will make it through. But the point is, that most of them will not.

That is just the natural order of things, that getting to unicorn status, a billion dollars of putative market value, it sounds like you’re assured. But in fact, you’re absolutely not.

ALISON BEARD: Yeah. I know you haven’t studied this, but do you think that there’s more disruption in the small to medium sized business area?

JULIAN BIRKINSHAW: Yes. So, one of the criticisms, I present this all the time to executive groups, and one of the criticisms I will hear is, “Look, of course, you’re focusing on the top tier of the market. And that’s always the most stable bit. And what you are missing,” they will say, “is the lower tiers.” And of course there is some truth to that, and I don’t have hard data. It is always going to be the case, that in any stratified market, the bigger, most successful companies will always be kind of the last to be really hit. I will put aside the world of retail, because retail is such a low margin, fragile business that some of the normal rules don’t apply to retail. But in every other sector, it is absolutely the case, that some of these midsize companies are losing out

But again, let’s think about what losing out means. Losing out generally does not mean bankruptcy, losing out generally means being bought out by another company. When you go back, right to the start of our conversation, and I said, “The changes in the Fortune 500 have been much less than people think.” Well, there’s actually been quite a lot of turnover in the lower reaches of the Fortune 500, because many of the old members of the Fortune 500 just simply got bought out by the bigger ones. A company like J.P. Morgan or Citibank has, over the last 20 years, acquired 10, 20 regional banks each. And of course those regional banks used to be members of the Fortune 500.

ALISON BEARD: What does this mean for the economy, for consumers, for employees? This idea that once large companies are large, and have a lot of money and a lot of people to think about how to beat disruption, that they’re going to keep dominating? And that is true for big tech now, for those companies that have broken through, it’s true for them as well.

JULIAN BIRKINSHAW: That’s right. I mean, there is this nagging worry, in terms of sort of welfare and job creation. That somehow, the amount of inertia that I see in the system, is unhealthy. And I can see those arguments, but I’m much more optimistic actually, that the process of creative destruction, of having, and this is the US and the UK, particularly. I mean, other parts of the world have tighter labor markets, probably more restrictive rules about startups.

But in the parts of the world I know best, there is a vigorous marketplace for new ideas. There is a vigorous marketplace for corporate control, and those allow the startups to come through. And it also keeps the incumbents honest. Now, I think that’s absolutely the case for these big incumbents. I see them working very hard, all the time, to re-engineer and de-layer and try to stay relevant. And they’re doing a better job than most people give them credit for.

I do completely concede the point that, unfortunately, there are some sectors of the economy where the big tech companies have become so dominant, using some of these new sort of increasing returns to scale that are sort of central to the digital economy. That actually, they are now almost unassailable, in competitive terms.

I do actually think that there is a huge role for regulation, actually, in setting the terms of engagement a little bit more narrowly. Because we are now looking to five or 10 years of absolute dominance, amongst certain parts of the economy, by Google, Facebook, Amazon, Microsoft.

Strangely, I think Apple is less of a threat, in terms of absolute dominance, but that’s a personal view. And not Tesla either, by the way. It’s a separate conversation, but I don’t see any scenario where Tesla dominates its sector in the way that Google, Facebook, Amazon, and Microsoft will dominate their sectors.

ALISON BEARD: So you’re not worried about the old economy companies, that have managed to survive and thrive. They’ve done it in a way that’s healthy for the economy. But, we’re worried about those disrupters that broke through, and are now the big players. We’re worried about them.

JULIAN BIRKINSHAW: Exactly. Indeed, that’s -  they are the big tech are now the six most valuable companies on the planet. Yeah, because almost by definition, the old economy companies are companies that live in a world of what we often call diminishing returns to scale, which were susceptible to all the old regulatory systems, which were invented in the classic Industrial Era. And we understood the rules of the game there, around what a dominant position was, what the necessary sort of regulatory rules were to stop any company becoming too dominant, or to dump their prices too much and so forth.

So I’m pretty sanguine, about all of that. It is true that, say healthcare and financial services, are industries where we see some possibilities of established companies gaining unassailable advantages, for example, through returns to scale through information. But I don’t see any evidence of that just yet, personally.

ALISON BEARD: As you’re advising companies, is there one set of executives in one sector or industry that you would say, “Hey, it’s really time to watch out.” Which sector are you most worried about, and do you think needs to start considering these four strategies? And, quickly.

JULIAN BIRKINSHAW: It’s a good question. So, the way I now think about it is that, disruption of industries happens on both, shall we say, the demand side and the supply side. So, I’ll be very clear what I mean by that. A demand side disruption is, technology enables the user experience to change dramatically. And that is of course, streaming of movies, that is for example, consumption of news. That is, taking pictures and sharing them with friends, right? Those are the sectors where the threats are the most visible, because the changes happen quickest. And those are the sectors where incumbent company executives have to be most attuned and most proactive.

But you’ve also got disruptive changes on the, shall we say, supply side. And by that, I mean things like the traditional big pharmaceutical companies, being disrupted by biotechnology, which obviously is a very different way of creating drugs, but has no implications for how drugs are actually marketed and sold, globally. And it’s also interestingly, the automotive sector, where ultimately a car is actually still going to be hunk of metal with four wheels, whether there’s a battery powered engine inside it, or whether it’s an engine powered by an internal combustion.

And so, actually these so-called supply side disruptions are typically much slower moving. The incumbent companies typically have so much power in the retail side of things, and in the brand and the reputation, that they… No one should ever rest on their laurels, but they actually have time to adapt quite successfully. So, so when I talk to people in the automotive industry, or utilities or pharmaceuticals, I absolutely talk about many of these things. But I’m conscious that they’ve actually got time on their side, because you take any of those industries I’ve just talked about, and to the extent that we’ve seen disruption, it has played out over decades. Not over years.

ALISON BEARD: Terrific. Well, Julian, thank you so much for talking with me today.

JULIAN BIRKINSHAW: You’re most welcome. It’s been a pleasure.

ALISON BEARD: That’s Julian Birkinshaw, he’s a professor at London Business School, and the author of the HBR article, “How Incumbents Survive and Thrive.”

If you liked this interview, you might also like episode number 823. It’s called “Tech’s Exponential Growth – and How to Solve the Problems It’s Created,” featuring Azeem Azhar. You can find that wherever you listen to podcasts.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.