Video games giant Nintendo may have triumphed over rival Sega throughout the late-80s and early 90s, but it would soon face an even greater threat from a new player: Sony. The electronics company disrupted the industry in 1994 when it launched the PlayStation, a machine boasting better graphics and enhanced gameplay than rival consoles.
The threat from Sony – and later Microsoft, which released the Xbox in 2001 – forced bosses at Nintendo to think creatively about a challenge that presented both a threat and an opportunity. They eventually came up with the Wii, a fresh take on the gaming console. Launched in 2006, the machine introduced motion control gaming, where people of all ages could play videogames using interactive controllers.
By 2013, Nintendo had sold more than 100 million Wii consoles. The Japanese gaming company’s story is a shining example of how organisations can outwit disruptive rivals with innovative products or business models, according to Costas Markides, Professor of Strategy and Entrepreneurship at London Business School (LBS).
Professor Markides, who teaches Strategic Innovation, a second year MBA elective at LBS, says: “There are several ways to respond to a disruptive business model. The most lethal is to disrupt the disruptor. Nintendo introduced the Wii, which redefined who the typical videogames customer was and the benefits they got from the product.
“Nestle is another example. The company developed the Nespresso machine, allowing you to make quality cups of coffee at home, in response to the rise of Starbucks and the decline of the instant coffee market.” Between 2012 and 2015, Nespresso sold more than 27 billion capsules of espresso worldwide.
Bosses of organisations facing disruption should take note of the following three lessons if they hope to replicate Nintendo and Nestle’s success.
Lesson 1: Treat disruption as both an opportunity and a threat
The biggest mistake organisations can make is to see disruption as a threat or an opportunity rather than both, according to Professor Markides. “When we see something as a threat, it creates a sense of urgency and galvanises us,” he says. “But these benefits come at a cost: we become short-term oriented, reactive and incapable of thinking clearly.
“On the other hand, when we see something as an opportunity, we become long-term oriented, proactive and can think strategically. But this also comes at a cost – we lack urgency and fail to mobilise our resources. It is therefore imperative to see disruption as both a threat and an opportunity, as this gives us the urgency needed for action, but also allows us to approach the task in a long-term, proactive and strategic way.”
Lesson 2: Think like an entrepreneur
In trying to decide how to compete in the markets created by disruption, established companies need to ‘forget’ their core business and think about the new market like an entrepreneur. They should ask themselves: “If Sir Richard Branson or Mark Zuckerberg were to enter this market, what would they have done to ensure success?”
Take the airline industry: Easyjet and Ryanair created a bolt-on market when they launched low-cost services to destinations across Europe. For established players such as British Airways (BA), the rise of no-frills operators in the 1990s was a major disruption. Professor Markides says that BA launched its own budget service, Go, to protect itself from low-cost rivals. To do this successfully, the airline’s management had to ignore all the attributes that made its core business successful. Go was launched in 1998 and sold three years later to private equity firm 3i for £100 million.
“Think like an entrepreneur, develop your strategy and then consider which competencies from your existing business can be transferred to the new market you’re launching in,” Professor Markides says. “The worst thing you can do is to start by looking at your existing competencies and analysing how to transfer them into the new market. Such an approach makes you myopic.”
Kodak’s demise is an example of such faulty thinking. The global camera film company filed for bankruptcy in 2012, after failing to adapt to the rise of digital photography, driven by industry disrupters. It tried to compete, spending billions of dollars on a digital camera that still used film. But consumers had no interest in paying for printed photos when other digital cameras allowed them to store images electronically.
“Was Kodak slow to move into digital, did they underestimate the market or invest too little?” Professor Markides asks. “Absolutely not. They simply approached the digital market by starting with the components that made their existing business a success rather than approaching it like an entrepreneur.
“What kind of company thinks about producing a camera where the customer needs a film and has to print the photos? The answer is: a company whose thinking is dominated by its existing film business. Kodak’s mistake was to constrain itself by relying on what it already had – and was afraid to lose.
“What the management should have done was to think, ‘If I was an entrepreneur, what would I do to be successful in the digital camera market?’ Had they done that, they would never have produced a digital camera that required you to print the photos.”
Lesson 3: Get ready to defend and attack
When facing industry disruption, established businesses have to defend themselves from attack while finding a way to hit back. The best approach is to develop two strategies: one to protect the core business and another to exploit opportunities in new markets led by the disrupters.
“Defending against attack while going on the offensive implies that it’s impossible to have just one strategy to achieve both at the same time,” Professor Markides says. “You need two, which is what Nestle had when it developed Espresso. The company developed one strategy to protect the core business and a second to create a new venture that capitalised on the new market opportunities created by the likes of Starbucks.”
Why companies fail when facing disruption
In Professor Markides’ experience, executives often fall into the knowing-doing gap: they show willingness to act when told about the dangers of industry disruption, but few rarely do. Often, the way a threat or opportunity is presented determines whether or not someone takes action – a concept that extends to life in general.
Medical professionals attending the Global Innovation Outlook conference in 2004 made a startling revelation – a person rarely changes their bad habits and behaviours, even when a doctor tells them they’ll die if they don’t. People who smoke, drink too much alcohol and eat fatty foods tend to live a healthier lifestyle for a short period in response to medical advice – but 90% of them fail to maintain it in the long term.
So why do people continue to live dangerously? Professor Markides says the way doctors frame their advice has a major impact on whether or not someone changes their lifestyle. “Nine in 10 people go back to doing the wrong things after their doctor tells them they’ll die unless they change their behaviour,” he says. “In this instance, the doctor framed the advice as a threat. The patients changed their behaviour for six months, but then returned to their old habits.
“The one in 10 people who completely changed their lifestyles were asked whether they wanted to spend the rest of their lives without pain. Did they want to be able to go on long walks without needing oxygen every 10 seconds, or play with their children without having to rest all the time? If so, they had to change their behaviour. The doctor didn’t make threats; they explained the risks of continuing with their current lifestyle and the benefits of being healthy.”
The same applies to businesses dealing with disruption. Threatening company bosses by telling them they face bankruptcy unless big changes are made is a mistake. Equally, encouraging them to adapt to become the best in the industry is also flawed, according to Professor Markides. “When you do that, you frame your advice as an opportunity,” he says. “What you need to do is say, ‘We have to change to avoid going out of business, and to become the best in the industry.’ It’s about offering a threat and an opportunity – it’s the ‘sweet and sour’ strategy.”
Whether executives facing disruption embrace change or continue as normal is down to them. But Professor Markides is clear on what organisations have to do to both survive and thrive – “Success comes not to those who know many things, but to those who act on that knowledge.”