Afterword: Who’s Next?

This book begins with cautionary stories from the silver halide film, newspaper, and mobile phone industries. In each case, disruption started when the market leaders seemed to be at the very top of their games. Change didn’t happen overnight, but when the full force of the disruption became clear, industry leaders were almost powerless to respond. As the pace and scale of change accelerate, these stories will become increasingly frequent. As we put the finishing touches on this book in late 2016, a natural question, then, is, Who’s next? What industries are facing early signs of disruptive change?

Disruptions are often likened to earthquakes. Is it an accurate comparison? Because of sophisticated equipment and detailed scientific understanding, we’re never completely surprised by earthquakes. After all, we have a good understanding of fault lines, and we know that certain areas are more susceptible to them. And there is always at least some signal before a big quake hits. But generally we have precious little time to react to major earthquake events. Fortunately, although the aftershocks don’t help recovery, they’re always significantly smaller than the event itself.

Disruption has some parallels with earthquakes, with one big difference. As with earthquakes, the fundamental fault lines that make an industry susceptible to disruptive change are readily visible. However, in contrast to earthquakes, the disruptive event itself isn’t the problem; the problem is the aftershocks. Despite hype about so-called big bang disruptions, initial disruptive developments are almost by definition small and isolated in impact. Market leaders don’t really lose their position overnight, because it takes time for new companies to form, perfect their solution, and spread it globally. The shock waves that disruption unleashes, however, reverberate and grow until they reach a point where they can topple even the seemingly safest market leaders.

The forces of disruption affect every industry. For example, mining looks to be an industry that is safe from disruption. But movie mogul James Cameron has backed a startup that plans to harvest precious metals from asteroids. Crazy? Maybe. Worth watching? Definitely. That said, we’re pretty sure Rio Tinto and other mining giants won’t be threatened by asteroid-derived metals in the next few years.

Which industries warrant the closest attention? Our consulting team used an advanced version of the simple questions described in chapter 5 to analyze dozens of industries. We coupled those findings with a survey of members of our community and Harvard Business School graduates who took a course created by Clayton Christensen that features the disruptive model at its core.

Informed by that work, the text that follows details five industries where we see the potential for substantial change in the next few years: consumer banking, shipping, medical devices, automobile manufacturing, and professional services. Make sure to check out dualtransformation.com, where we’ll share our latest views on these and other industries.

Consumer Banking

Historically, data showed that people were more likely to change their spouses than their bank accounts. In modern terms bank accounts are highly “sticky,” as routines harden and automatic deposit and payment mechanisms reinforce the relationship.

Now, however, the cornerstone of many local towns risks being ripped apart by a range of seemingly disruptive developments. Peer-to-peer payments such as PayPal, now almost twenty years old, have started to change the conception of what banking looks like. The rise of the smart phone and the increasing ubiquity of always-on high-speed networks mean that a generation is used to swiping, tapping, waving, or just leaving a car (in the case of Uber) to consummate a payment. Distributed ledger solutions, such as ones that use a technology called blockchain as their backbones, create decentralized transaction registers that are impervious to fraud or manipulation, albeit with legitimate questions about scalability and usability. In the future, will people need to have a central repository that holds their savings, or will what we conceive of as banks increasingly be companies such as Starbucks (whose prepaid cards held more than $1 billion in assets as of mid-2016), Apple, Samsung, and more?

Emerging disruptors in Asia show that telecommunications companies as well as technology upstarts also serve as credible threats. For example, in 2004 Globe Telecom of the Philippines launched GCash, a branchless way for subscribers to manage remittances from family members living overseas. That’s a beautiful foothold market in a country where more than 10 million of its 110 million citizens live outside the country. Over the next decade Globe quietly built a base of more than a million users and increasingly expanded from cash transfers to e-commerce payments, a vital service in a country where fewer than 10 percent of the people own a credit card. As of the writing of this book, almost ten thousand local merchants in the Philippines accept GCash, with Globe increasingly looking set to join the phenomenal success story of Safaricom’s M-PESA offering in Kenya.

In China, e-commerce giant Alibaba launched its online payment platform, Alipay, alongside its e-commerce marketplace, Taobao, in 2003. Like Globe, Alibaba took advantage of the fact that at the time there were only three million credit cards in circulation. Although consumers with bank accounts could pay via bank transfer, many were worried that sellers would not hold up their end of the deal after receiving payments. Alipay introduced an escrow model that takes funds from the buyer’s bank account but releases them to the supplier only after the buyer confirms order delivery, giving Chinese consumers the peace of mind they needed to start shopping online and driving e-commerce adoption against the backdrop of weak consumer protection laws. Alipay also targeted small and medium enterprises as merchants on Alibaba’s e-commerce websites and provided them a wallet where they could easily store the money they received from payments.

Alipay faces fierce competition from another internet company: Tencent. That company used its popular WeChat messaging service to become the payment mechanism of choice for hundreds of millions of Chinese consumers and businesses. In India, Alibaba backed a payment technology startup company called Paytm, whose digital wallets and related solutions promise to bring similar solutions to hundreds of millions of unbanked consumers in India.

As always, disruption presents threats as well as opportunities to incumbents. Market leaders sit on treasure troves of data about the spending patterns of consumers and businesses. Historically, businesses look to banks to finance operations and growth. But what if they were to use the data embedded in payment flows to provide additional value-added services to help businesses realize their full potential? Could they emerge as competitors to—dare we say it—consultants that help clients with these issues?

Shipping

The shipping industry seems to be one of the least innovative in the world. After all, what does it involve beyond putting stuff in a container and putting that container on a ship? Of course, as obvious as it seems now, the idea of the container itself—a standard-sized, stackable box that is plug-and-play compatible with any ship and relatively easy to transport—was an industry-changing notion that allowed companies to make ships bigger and ports more efficient. Large container ships can carry almost twenty thousand containers, in industry parlance twenty-foot equivalent units (TEUs).

Modern ports can turn ships around in a single day, compared with their languishing on docks for weeks at a time in the past. Bigger doesn’t always mean better, however, and the industry slumped significantly in 2016, dragged down by overcapacity.

More ominously, three broad disruptive trends—additive manufacturing (or 3-D printing), drone-based delivery, and smart, connected devices—promise to change the face of the industry. As the name describes, additive manufacturing involves building things from materials up rather than traditional manufacturing, which involves cutting, molding, and piecing things together. Traditional manufacturing works best at massive scale; additive manufacturing can be done effectively at very small scales.

As of 2016, additive manufacturing is used primarily by hobbyists or commercially for customized parts. But it is simultaneously getting better and cheaper. As manufacturing decentralizes, additive manufacturing clearly has the potential to have a huge impact on companies whose entire business model rests on moving something from point A to point B.

So, too, could unmanned aircraft, known colloquially as drones. Drones started, as many new technologies do, in the military. As prices have dropped, use by hobbyists has exploded. Companies—most notably Amazon (in the United States) and Alibaba (in China)—have begun to experiment with drone-based delivery. Imagine a world with localized microproduction delivered by armies of drones. What happens to shipping giants then?

Smart, connected devices, on the other hand, present interesting growth opportunities for shipping companies. The customer’s fundamental job to be done is to confidently move something from point A to point B. The ability to precisely know where things are at any moment creates opportunities both to streamline current operations and to develop new services. The question will be whether industry leaders seize this opportunity or cede it to component manufacturers, telecommunications service providers, or upstarts.

Medical Devices

Chapter 3 describes how the essence of disruption in health care involves moving from centralized to decentralized locations, or moving from expert to self-provided care or both. Emerging technologies present the clear possibility for a radical reconfiguration of many pieces of the health care ecosystem. As semiconductor manufacturers relentlessly follow the Moore’s Law improvement trajectory, computing devices are getting smaller and drawing less power. That has facilitated the rise of so-called wearable technology, ranging from special-purpose wristbands (like the simple Fitbit, which tracks wearers’ footsteps) to more sophisticated devices such as smart watches by Apple and Samsung, or eyewear with advanced technologies like Google’s Glass effort. Not all these efforts will succeed, of course (with Glass being a noted flop, to date at least), but computing will increasingly disappear into accessories, fabrics, and, in the foreseeable future, our skin.

These trends also have allowed companies that sell medical devices to make them increasingly smart and sophisticated, enabling monitoring and diagnosis without requiring visits to a hospital. Further, genetic understanding is similarly advancing rapidly, enabling increasingly accurate diagnosis and precise prescriptions. Companies like IBM are betting heavily on technology’s ability to make sense of the explosion of data that is emerging, through its Watson diagnostic platform.

It isn’t hard to see how these trends could drive a huge disruption in health care. Instead of an industry focused on treatment, there will be booming businesses related to monitoring and prevention. The devices that enable this, such as smart watches and sensors, will surely grow, but history suggests that the people who figure out integrated business models to enable collection, processing, and behavioral nudges will be massive value creators.

Some companies in the broad health care ecosystem are making early moves to take advantage of these disruptive trends. For example, in the early 2000s Nestlé made the strategic decision to shift from being a food company to being more of a health and nutrition company. In July 2016 its Institute for Health Sciences announced a partnership with Samsung to “to better understand the voice of the body and empower millions of people to live well and be well.” Perhaps food and consumer electronics companies will emerge as medical device giants, providing wellness and prevention, not in hospitals but in day-to-day behaviors.

Automobile Manufacturing

Knowing the demographics of most business book readers, we imagine that for you, one of the most meaningful events in life was the day you were old enough to get a piece of laminated plastic that allowed you to drive a car. Freedom! There’s a reason many songs in the 1950s and 1960s were about cars. Heavy investment in a world-class road infrastructure. Cheap gas. Affordable cars. If you combine them, as The Mamas and the Papas sang in 1966, you could “go where you wanna go.”

The world changes, always. Now consumers summon Uber or Lyft from their smart phones to get from point A to point B. Instead of owning a car, they can participate in a fractional ownership program like Zipcar (purchased by Avis Budget Group for $500 million in 2013). Then in 2005, Sebastian Thrun, coinventor of Google Street View, led a team whose robotic car won a $2 million prize from the US Department of Defense. Over the next decade Google invested to further develop the technology behind self-driving cars and to change local regulations to welcome autonomous cars. In 2014 it introduced a new car with no wheels and no pedals. In August 2016, Singapore’s first autonomous taxi debuted on the roads of a cluster of buildings with far-out names like Fusionopolis. Scenes in movies with legions of driverless cars—such as I, Robot and Minority Report—increasingly seem less like science fiction and more like a preview of the next decade. And, of course, that’s to say nothing of the rise of electric vehicles.

The rise of self-driving cars will have systemwide effects. Here are examples.

• Parking consumes significant, and pricey, real estate in urban areas. What happens when we no longer need to worry about parking?

• Companies like GEICO and Progressive make almost all of their money providing insurance to drivers. What happens when cars don’t crash?

• Some governments trace a significant amount of their revenues to fines paid by speeding drivers. What happens when cars don’t speed?

The automotive world will surely be dramatically different over the next two decades. Automotive companies will need to deal with the reality that their core business is likely to contract, and they need to make sure they reconstruct their business model appropriately. And they need to think about the new opportunities that will emerge as cars and computers increasingly converge, in terms of products as well as new business models.

Professional Services

After founding Netscape and Opsware, in 2009 Marc Andreessen cofounded a venture capital firm with entrepreneur Ben Horowitz (who was also part of the founding team at Opsware) called Andreessen Horowitz. In a few years the firm became one of the most influential in Silicon Valley, investing in companies like Twitter, Airbnb, Jawbone, Oculus VR, and many more. In a piece in the Wall Street Journal in 2011, Andreessen summarized one of his key investment theses with a phrase that rings true to entrepreneurs and executives of companies under disruptive assault: “Software is eating the world.”

The first paragraph of a widely shared article in 2015 on TechCrunch summed up the powerful pull of software-based platforms: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”

Historically, providers of high-end professional services, such as lawyers, investment advisors, and, yes, management consultants, seemed impervious to disruption. Yet four trends promise to have a significant impact on professional services.

1. Democratized knowledge. Coauthor Scott Anthony remembers that, when he started his first consulting job at McKinsey & Company in 1996, leadership talked about how the consultancy’s centralized library was a source of competitive advantage, because it was stocked with difficult-to-find, expensive reports. With that kind of knowledge dispersed throughout the world, it’s hard to compete based on knowing more than clients.

2. Platforms. Have a tough business problem that requires a few hours of careful attention? If you go to hourlynerd.com you can, yes, rent a nerd for a short period. To do whatever you want, within reason, of course.

3. Software-based solutions. A significant amount of work that lawyers do is complex, requiring expert knowledge and seasoned judgment. But the dirty secret of many law firms is that much of the work is done by low-paid paralegals. These kinds of solutions can easily be automated, or served by a lower cost business model such as LegalZoom. That company, which was founded in 2001, offers basic legal service at very affordable rates.

4. Artificial intelligence. A provocative report by Oxford University in 2013 found that almost 50 percent of jobs in the United States could be automated in the next fifty years. Those jobs aren’t only mundane manufacturing jobs; the rapid improvement in computers’ cognitive capabilities means that tasks such as providing investment advice, determining key strategic issues for a company, or developing a company’s tax strategy, could also be automated away.

These trends help explain why the professional services industry has seen significant consolidation over the past decade, as companies seek to gain the scale required to lower operating costs. Companies are also experimenting with hybrid solutions. By analogy, computers can now reliably beat even the best chess masters, but a chess master paired with a computer proves impossible to beat, at least thus far. Imagine an Innosight consultant augmented with Watson’s processing power. A scary thought.

The Innovator’s Choice

Table AF-1 summarizes the industries we’ve profiled here, highlighting the underlying disruptive trends and the new growth opportunities we expect to see over the next few years.

This chapter isn’t meant to be a death sentence for traditional market leaders in these industries. Far from it. Remember, disruption grows markets, even as it transforms business models. Leaders who catch the disruptive changes early and respond appropriately will have the ability to thrive in the years to come. Those who don’t, well, Darwin has a way of taking care of them.

TABLE AF-1

Disruption by industry