As the Third Wave approaches, many long-established, stable, profitable corporations will be in jeopardy. A 2015 report from Reuters noted that “the top executive of many a corporate giant must feel like the fictional character Gulliver, waking up to find themselves under attack from modern-day Lilliputians, small start-up companies which overwhelm their established rivals with new technologies.” Many of these industries were somewhat immune to technological changes in the first two waves of the Internet and may, as a result, face this next wave with complacency. They do so at their own peril.
Plenty of companies will sit on the sidelines, assuming all will continue to be fine. They follow a long line of businesses, once heralded, that failed to adapt and then failed to survive.
Perhaps that’s why business leaders said, in a 2015 survey by the Global Center for Digital Business Transformation, that nearly half of the top-ranked companies in their industries will be gone by 2020. But the Third Wave is not just a fait accompli that corporations must defend against; the best leadership teams will recognize it’s something they can take advantage of. As Peter Diamandis, founder of the XPRIZE nonprofit, put it, “It isn’t that entrepreneurs are smarter than companies, it’s that they are trying more crazy ideas, taking more shots on goal.” There will be some corporate leaders who will develop a strategy to take more shots on goal — to get in front of these opportunities rather than chasing them from behind.
The conventional wisdom may be that startups are the future, while established corporations are all relics of another world. But many of the world’s biggest companies are teeming with talent and resources, creating new and innovative products all the time. In 2014, for example, Johnson & Johnson spent more than Google on research and development. And though the most rapid growth in R&D is happening in the software and Internet industry, as of 2014, less than 10 percent of total corporate R&D came from tech companies. Most of the world’s biggest ideas are still hatching elsewhere.
Consider the self-driving car, a technology that has captured the imaginations of executives at Google and Uber, who are competing to develop a street-legal vehicle that will help us redefine our commutes. But the idea of a self-driving vehicle was not first born in the tech sector; it was born in the agricultural sector. Plenty of farmers were operating self-driving tractor technology before Google ever entered the space. Illinois-based John Deere was developing GPS navigation systems for its tractors more than twenty years ago — before Google was even founded.
John Deere executives may not have appreciated what they had, and they were likely not in a position to build a commercial self-driving car division from scratch. But what if they had created a spin-off company to commercialize their self-driving technology, or licensed the technology to a partner? Perhaps John Deere, a nearly two-hundred-year-old company, could have become one of the leaders in Third Wave transportation.
In some industries, the most successful Third Wave companies may also end up being the most established. They’ll be the companies that took the Third Wave seriously enough to get ahead of it. But what does that entail, exactly?
Managing the Coming Wave
It starts with developing a point of view — a hypothesis that the world is changing. Just the simple act of a CEO embracing and articulating such a world view is critical. It’s a way of delegating a mix of paranoia and curiosity, making people a little nervous and getting them out of their comfort zones. It’s also a way of expressing optimism, rather than dread, about the future — which naturally gets employees to pay more regular, focused attention to what is happening around the edges of your industry, with an eye toward what may happen next. It’s about lifting up the people in your company who are seeing around corners, and giving them the support — both emotional and financial — to innovate.
Incumbents often fail because they underestimate the speed at which the future is approaching. People at startups think about the future every day. Venture-scale investors are seeking companies with the potential to reach at least $100 million in revenue and go public. In the startup world, staggering sums of money are chasing some of the world’s biggest ideas. It’s only a matter of time before the right entrepreneur with the right idea connects with the right venture firm. The corporate mind-set is often to avoid mistakes, but in a world that changes rapidly, doing nothing can be the biggest mistake. Sometimes waiting for all of the facts can be riskier than taking a leap of faith.
Incumbents also fail because of the size of their organizations themselves. Frequently, large companies have a decision-making process where many people have the power to stop an idea, but very few have the authority to green-light one. This creates an environment where there is a strong bias toward “no.”
Objects in the mirror are closer — far closer — than they appear. One of the biggest mistakes companies make is overlooking the impact of nascent technology. Too often corporate executives are too shortsighted to understand how technology that is disrupting a different industry might be adapted to do the same to their own. Uber might be disrupting taxi services today, for example, but as they move into the delivery business, will Uber disrupt FedEx or UPS tomorrow?
Second, corporate recruiters need to be working overtime hiring and retaining and celebrating and protecting the innovators within their walls. There is a mythology in the tech world that the best talent gravitates toward startups. But many of the smartest, most creative people in the world can be found working at some of its biggest, oldest companies. Siemens employs 90,000 research scientists. Monsanto employs some of the sharpest agriculture technology minds on the planet. GE’s research labs are filled with brilliant PhDs. The raw talent is there; the question is how it is organized and whether it can be mobilized to innovate. It’s not enough to employ these kinds of thinkers. They need to have a voice, along with the resources and protections that will enable them to commercialize their ideas. They need a level playing field to stay in front of their startup competitors.
The challenge for Fortune 500 CEOs is to leverage scale advantages, while injecting a tempo of speed and a culture of risk. At Facebook, engineers are encouraged to “move fast and break things,” not because Mark Zuckerberg is reckless, but because he understands that innovators need the space in which to take risks. At most large companies, innovators are often discouraged from even sharing their ideas. That’s self-destructive — and self-reinforcing — behavior.
What these transitions will ultimately require is companies willing to self-disrupt. As Steve Jobs once put it, “If you don’t cannibalize yourself, someone else will.” Yet the challenges of doing so are substantial for entrenched companies, and have been made famous by Harvard professor Clay Christensen in his book The Innovator’s Dilemma. As he writes, the greatest challenge for successful companies is focusing on customers’ current preferences while preparing for their future preferences. In a CBS interview, Jeff Bezos said it plainly: “Amazon will be disrupted one day. I don’t worry because I know it’s inevitable.”
Some companies have proven successful at self-disruption. Apple’s unprecedented growth has required the destruction of some of its most profitable products. The iPhone hurt iPod sales. The iPad cannibalized the MacBook. Amazon, too, has moved swiftly in this way. Having built its reputation and revenue on selling printed books, Amazon recognized that the ebook industry would rule the future. So they built it themselves — the hardware and software — and now they own the past and the future.
Of course, even when there is a desire to challenge the status quo, CEOs are often penalized for leaning too far into the future — making too many investments or taking too many risks. At PepsiCo, CEO Indra Nooyi pushed a diversification strategy, recognizing that a shift in food preferences could have bad long-term consequences for a company known for selling sugary drinks and high-calorie snacks. But doing so caused a revolt among some shareholders, who were convinced that Nooyi’s attempt at transformation was hurting the stock price in the present. Where Nooyi survived, DuPont CEO Ellen Kullman did not. Just a day after Bloomberg Markets named her one of the most influential people in business, Kullman was forced out after a long battle with an activist shareholder who was frustrated that, among other things, the company was investing $2 billion a year in R&D.
The same kind of problem plagued Kodak. The conventional wisdom is that Kodak didn’t see digital coming. That’s just not true. In fact, the first digital camera was actually invented at Kodak in 1975 by Steven Sasson. The company was doing a lot of things right early, including a partnership with AOL. They knew that digital presented a threat to their core business in the long run, but executives were more concerned about the short run. According to New York Times reporter James Estrin, when Kodak executives asked when digital could compete with film, Sasson told them it could take twenty years. “When you’re talking to a bunch of corporate guys about 18 to 20 years in the future, when none of those guys will still be in the company, they don’t get too excited about it,” Sasson told Estrin. Sadly, Kodak filed for bankruptcy in 2012.
Big companies have more power than they think. They have scale, they have partners, they understand policy, and often they have global reach. These are all highly valuable assets in the Third Wave (much more so than in the Second), and they will give the world’s biggest corporations the chance to play offense with confidence. Take a lesson from the Wayne Gretzky playbook; he was a great hockey player because he didn’t focus on where the puck was, but where it was going.
If You Can't Build the Future, Invest in IT
Finally, companies would be better positioned if they figured out how to better engage with entrepreneurs so that they can invest in them and own a piece of the action. Some legacy companies have developed internal venture funds, in part to have an early-warning radar system for emerging ideas, some of which may end up leading to profitable partnerships. Others have created a “SWAT” team of people whose only job is to be a connector with startups, serving as a concierge of sorts to help build bridges between executives and entrepreneurs. It’s a way of making sure that clever entrepreneurial ideas find their way to the right person in the company — and that the company has a chance to invest in a future it cannot build on its own. Ultimately, major corporations should see the Third Wave as both an extraordinary opportunity and an existential threat.
The most successful executives will embrace it with speed and agility. They will break down silos within their company, drive collaboration across divisions, and look beyond their industry for partnerships. And it is from there that they will have the perfect view of once vaunted competitors collapsing under the disruptive forces of Third Wave entrepreneurship.
From The Third Wave by Steve Case. Copyright © 2016 by Steve Case. Reprinted by permission of Simon & Schuster, Inc. All rights reserved.