Success breeds complacency. Complacency breeds failure. Only the paranoid survive — Andrew S. Grove
As FinTech or Financial Technology continues it’s march against incumbents in the banking and financial services arena, the magazine American Banker, this month, reported a surprising development. The chief of The Office of The Comptroller of The Currency (OCC) Keith Noreika confirmed the agency’s fintech charter, if implemented, could be granted to commercial firms like Walmart or Google. This development builds on the fact that FinTech players such as Square and SoFi have applied for banking licenses. Now, it seems the initial FinTech disruptors could be subject to a taste of their own medicine.
It seems, then, in the increasingly complex world of business, there are no rules. Rather, it’s the application of best judgement that could paradoxically come ‘straight from the gut’. This article explores the nature of disruption in business, the four stages of disruption, the possible responses to disruption and ends with a question: How important is paranoia in decision making?
In the summer of 1999, “Pirates of Silicon Valley” — a movie directed by a Canadian film maker Martyn Burke left an indelible impression on my mind. The movie recounts the story of Steve Jobs (Apple) and Bill Gates (Microsoft). Although the movie was very similar to a biopic, it introduced me to two important business concepts — speed to market (that of Windows 95 which provided Microsoft an edge over Apple) and strategic alliances (that of Microsoft with IBM).
Almost two decades later, agile and speed to market have become competitive advantages that incumbents have to master against the new wave of FinTech startups. Surprisingly, strategic alliances have already begun to form between FinTech startups and incumbents within the Financial Services industry.
The question then becomes: have the fundamentals of business always remained the same and is it almost impossible to predict change?
Technology has always disrupted. From the industrial revolution to information technology, human ingenuity propelled by technology has always changed the status quo. If so, is disruption another name for change? This article attempts to find out. In addition, it provides certain frameworks to deal with the inevitable nature of disruption.
2.The Nature of Disruption
Necessity is the mother of invention. Personally, I believe a lot of conditions need to co-exist for a business to start and then thrive. General Electric (GE) was born out of a need to provide light. Ford out of the need for transportation. Today, numerous small businesses and FinTech startups are born to solve a very specific problem but the transferable nature of mathematics and technology has multiplied the application and proliferation of their solutions. This is nothing new-the benefits of the industrial revolution have traveled across the globe.
As a young adult in India, I remember Hindustan Unilever Limited (a behemoth) being challenged by a small business — ‘ Nirma’ in the washing powder product category. I have witnessed the 4 stages of disruption as mentioned in the table below in a non-FinTech space. Now, I can’t help but wonder at the cycle repeating itself.
Often, disruption is unintentional and born out of a genuine need to make life better. Thus, it is a constant human response which cannot be wished away. Intel challenged by AMD and Samsung, Japanese business houses by Koreans etc. Numerous examples will help you reach the same conclusion — disruption is inevitable, predicting it close to impossible. However, inertia is not the answer. Businesses need to do the best they can. The word ‘best’ is very hard to quantify and therefore, diligently making efforts at tackling change need to be measured by the question : did we do our best?
CEO’s will then find that best is relative and a perfectionist’s mindset is required to keep raising the bar higher until disruption becomes embedded in the DNA of the organization. An analogy would be Steve Job’s attempts at pushing Apple’s employees to the brink of insanity to create products that consumers did not think they needed.
One thing is certain-paranoia about speed to market must be ever present especially in centuries old businesses. The challenge then becomes creating a standalone startup under the umbrella of the parent organization very similar to GE’s FastWorks program.
3. Responses To Disruption
a) Studying Mega Trends
Perhaps, Macro Economics of yesterday is the Micro Economics of today considering the world is hyper-connected and the Internet of Things and Blockchains will accelerate this trend. Of singular importance therefore is the study of broad trends shaping the world.
Mega trends are global, sustained and macro economic forces of development that impact business, economy, society, cultures and personal lives thereby defining our future world and its increasing pace of change. Examples include shifting demographics in the form of ageing population that prompts the need for automation, labor market differences which prompts a wave of outsourcing, rise of the internet and web 2.0.
b) Creating and Updating Frameworks
A mid-way between making decisions based on instinct and a state of analysis paralysis is creating frameworks to organize data and thoughts to help decision making. For instance, sales teams may tend to make decisions on discounting based on relationships or instincts whereas business strategy may analyze big data to suggest changes. Neither is perfect in isolation but together numbers and first hand client experience can be powerful in decision making.
Michael Porter’s Five Forces framework or frameworks provided by consulting firms can be a great starting point. More important, though, is applying insights of the firm’s actual clients and regular, healthy dialog with clients and suppliers. This insight coupled with the impact of mega trends will re-shape the framework very frequently. For instance, a hypothetical framework to analyze the FinTech landscape assuming commercial firms may decide to foray into providing credit is illustrated below:
c) Investing in Education
The right kind of education is indispensable. For instance, design thinking in the way the design firm IDEO conceives of the practice — turning designers into anthropologists that can
Another example is GE’s internal startup program called FastWorks which created an internal startup that innovated by crowdsourcing ideas and bringing the products to the market fairly quickly. Such kind of experiential education which also creates Intellectual Property (IP) must be embedded
Another method is to create an independent Think Tank within the company whose sole objective is to ideate and leave the execution to the business to which the idea pertains.
d) Merging With A Rival
FinTech players with complementary offerings in the same industry vertical can choose to scale up by combining with two clear advantages: 1) to better compete with future disruptors by strengthening the barriers to entry and 2) to revive and enhance trust within the existing market to better compete with incumbents. For instance, a rival focusing on the initial components of a value chain can merge with another concentrating on the latter half of the value chain to provide an end-to-end solution that can be rented out of a cloud.
e) Collaborating With Competition
Except for sharing Intellectual Property (IP), a constant collaboration with rivals to understand the threats they see emerging can be valuable to existing players. Wisdom of the crowd is needed in all forms of decision making. If the wisdom happens to be from a competitor, it could prove to be invaluable. Institutions in the financial services arena have many examples of collaboration between rivals such as sharing anonymous data for competitive bench marking.
f) Collaborating With incumbents
This scenario is a reality today with a resurgence in interest by Corporate Venture Capital in FinTech. A lot of incumbents are now realizing the need to collaborate with players with specific expertise in wealth management, robo-advising, Blockchain technology and AI. Acquisitions from a strategic point of view are on the rise.
4. Concluding Thoughts: Inertia or Paranoia?
Perhaps, there are no rules in business and what we consider disruption today is nothing but deliberate and unavoidable change. Change then becomes a game and game theory becomes a framework of choice. Today, the surprising antithesis of disruption in technology could be collaboration or merger with incumbents. However, there is no generic one size fits all approach to every startup, incumbent or established FinTech player. That’s because the game is evolving every day. While inertia or absence of paranoia can prove to be fatal, absolute paranoia can cloud judgement.
The answer, therefore, lies in sourcing talent that thinks within and outside the box. This is easier said than done but it is possible. Perhaps, the only problem that Artificial General Intelligence (AGI) may not be able to solve is to connect the dots in a way only a human can — partly with the conscious and partly with the unconscious mind. A multi-disciplinary approach with the right talent at the helm becomes crucial. Paranoia is needed but it is not sufficient in an age where there is no constant and competition can emerge from the blind side.
Vision or the ability to see things that others cannot is no longer a buzzword. But, vision can get clouded with experience and therefore, every company needs a contrarian. I leave you with an image that will help you with a framework to look at disruption which may be old but is everlasting:
In the end, thinking about most things in life in terms of a natural cycle is the ultimate solution. The catalysts may change but the cycle continues unabated. Cycles are universal and apply as much to disruption as they do to civilizations and human emotions.