Whether in business or in life, the tension between established incumbents and new challengers is one that will always remain, the question for the establishment is how best to respond, do you embrace it, fight against it or just pretend it doesn’t exist? My daughter is soon to come up against this same very challenge as she welcomes a sister in October. At present, she has no competition and dominates her environment. This new arrival will bring chaos to the status quo, which she is now so accustomed. She is also unable to prepare herself for what is to come, as the existence of this new challenger is still very much theoretical. The reality of the change she is soon to experience will unfortunately not hit her until it is too late to 'be ready'.
Many large businesses are experiencing this very same discomfort as new disruptors continue to emerge drumming the uncomfortable beat of change. The secret to happy coexistence for both my daughter and these businesses lies in adapting, making adjustments and building relationships.
Why can't things just stay the same?
For many financial services businesses dealing with new and younger competitors is nothing new, however, from our conversations it does feel like we are now approaching a tipping point. Socio-economic trends mean the life of a large traditional business is becoming harder. Consumers are empowered and seek a different type of service and relationship, their behaviour and the things they value are changing – not least the generations who have grown up with technology as a fact of life. Big brands are increasingly seen as the bad guy.
For big business, capital strength, scale and a trusted brand has meant that there has never really been a need to take notice of the start up community, this exacerbated as they have never before posed any real threat. The focus has remained on market share and product in order to deliver increasing shareholder value. The problem is that the focus on the end consumer has become increasing lost.
The new breed of competitor has emerged, in tune with next generation consumers
Agile, technology driven disruptors are changing the playing field all over the world. They single-mindedly focus on their end customer, free of the burdens of legacy systems, costly and complex operating models and large volumes of internal bureaucracy and protracted decision making. They are savvy marketeers and leverage digital to deliver innovative, low cost operating models and service experiences. This, together with a combination of willing investors that bring easier access to funding, more flexible regulations and the power of digital, means their are fewer barriers to entry.
At the same time, consumers are now seeking out more direct relationships, easier and quicker access to products and services and a differentiated experience. They want the best price, the best service and the best experience and they won't put up with anything less and to achieve this, consumers are willing to look around and try something new.
People have warned of apocalypse before and they've not only survived, but thrived. So is this time any different?
Large incumbent financial services businesses are not going anywhere, but they do need to evolve to continue to be relevant.
The solution to all of this lies with customers and the good news for big businesses is that they have lots of them. However, they need to build deeper customer insight. If you understand your customer, you can design products and services they will want and need and if you do this you will get rewarded for it. There needs to be a shift away from product let design to customer led design. Too often the financial services industry focus on developing and manufacturing clever products, they then look at how to distribute those products and only at the very end consider the customer with some half hearted customer research designed to tell them what they want to hear.
Hiring a Digital Director is as futile a response as hiring an Innovation Director
Now I have nothing against Digital and Innovation Directors, indeed I was one of those in a past life. However, on their own they are powerless to respond to the questions posed by new generation of competitors and consumers.
For large organisations, a more fundamental shift in culture is required and this of course comes with some difficulties to overcome. The investment required to improve legacy technology is hard to swallow, there is a lack of true customer insight and like any big ship, it takes a long time to change direction.
Corporate entrepreneurialism is rare because doing nothing is so appealing
Culture is hard coded and even where there is a desire and will to change, the settings continually reset to default. Companies look over the edge and more than often, step right back again. Risk appetite, IRR and pay back periods, impact to share price, impact to core business all come crashing in and it just feels difficult. The problem with internal 'innovation projects' is they try and do too much, they spend too much and they take too long to get to market so surprise surprise - they get shut down.
It is difficult to convince a board that you fundamentally need to change your business when the threat is as yet hard to quantify and things have gone so well for so long. The risk for many businesses does not feel real enough yet to justify taking the drastic action many voices are calling for.
So, what are the options?
To deliver the type of proposition, service and experience customers want isn't easy or cheap for an established business.
In-house innovation and digital teams are now popping up, but often they are without a clear strategy or dedicated budgets of their own and are measured on the same metrics as the core business, within this environment they cannot survive and will not deliver. R&D and innovation by nature is about trial and error, breaking something then building it again, failing cheaply, learning, adapting and then going again.
So if you want to go down the build option it needs real commitment with clarity of purpose together with a talented and agile team who can bring new thinking, have space to breathe and access to capital. This isn't about writing blank cheques, they must be accountable and commercially aware, but there is a need to have a different set of ROI measures and hurdle rates.
This option can be very appealing. Capital is often not the issue and so instead of trying to change your own business, why not just buy someone else’s. The downside here is that new acquisitions are often suffocated by their buyers and through a process of 'brand alignment' stripped of all the characteristics that made them attractive in the first place.
The other challenge is about strategic clarity, is their a real understanding of why the purchase has been made and what is going to be done with it in the future to extract maximum value? Often not.
However, saying all this, buy is a very self aware and credible approach that fast tracks change and mitigates the risk of the disruptive start up. It both allays external criticism of inaction and allows you to set the benchmark for where the rest of the business must then transition towards. It is always easier when you can see what the end goal needs to look like. The buy option requires a difficult balance between integration and separation, a line that can become very blurry.
More pragmatic and allows for the combined strengths of disruptors and incumbents to be utilised. Start-ups need customers, capital, scale and brand recognition while established businesses need more agility, better technology and new thinking.
The challenge here is that for many businesses this feels like admitting defeat. Businesses can do it themselves, so why don't they. Simple answer, speed to market and culture. Build and buy can take a long time while the difference in culture and thinking new businesses bring with them are invaluable.
Corporates need a more entrepreneurial culture in order to make the changes required, and unfortunately too often the people within the organisation with this skill set do not survive, their way of working, thinking and attitude to risk flows against the tide.
The coexistence of, and tension between, big business and challenger brands is healthy and essential. The way they decide to interact will be fascinating and the right answer will be different to different organisations.
The one thing we’re sure of is that 'do nothing' is not a viable option.