Why Incumbents Fail – And What that Means for Sustainability

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The core assumption and focus of people who work to drive sustainability through markets – as corporate leaders, investors, NGOs or thought leaders – is that we need to convince existing companies and their shareholders that sustainability is first good for their business, and secondly, they can successfully transition to a sustainable business model.

But what if both of these are wrong? As someone who has spent over 25 years in that world, I’m starting to think they both might be. If so, it calls into question the very basis of the work literally millions of us are engaged in. So, it is at least worth a discussion!

The first point is the foundational question – that sustainability is broadly good for business. Not business as a concept, but business as specific institutions.

Having been a corporate sustainability “insider” for two decades I can see how the idea emerged. It came from a time when action on sustainability was primarily about improving efficiency and cutting pollution while treating your people and communities well. These were good things to do, and they really were good for all businesses in the 1990s.  They lowered costs, reduced risks and gave companies a sense of purpose.

But the world has changed. Today sustainability is an existential threat to the global economy and that means the scale and speed of change required is profoundly different.

We are now up against time bounded needs that can only be addressed through radical innovation in technology and business models – inevitably resulting in disruptive change across the market. Anything less will see issues like climate change, pollution, inequality and resource constraint pose system wide threats to global economic and social stability.

Given this, sustainability is only “good for business” for today’s major companies ifthey can transform – either dramatically in how their business operates or in some cases (e.g. oil majors) transforming into different companies entirely.

This raises my second question. Can incumbents transform? The question can’t be answered in theory or conceptual potential, but in practice – in the reality of how markets work, and how businesses are run. For this we have a great deal of evidence of previous and ongoing transformations and disruptions.

As I introduced in my last column, the essence of the answer lies in recognising that markets are defined by a process of “creative destruction” – old and slow companies are taken over and replaced by new and fast ones. Not always destroyed but made so small they slip from sight.

We see this throughout economic history as the key driver of change within the market system and, critically in the sustainability context, the fastest. It doesn’t just apply when the driver of change is inherently disruptive e.g. digital technology or renewable energy. It then happens faster and more dramatically, but history tells us it happens anyway. In fact, it defines how markets normally operate. The only difference today is that it is getting faster.

Consider the latest research by growth strategy advisors Innosight (co-founded by innovation guru Clayton Christensen from Harvard Business School). The numbers are startling, arguing that “the 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027.” That means about half the companies on the S&P 500 will fall off it in just 10 years! This shows “creative destruction” is endemic to the market. Of course, it is not a universal rule, but it is the dominant market tendency and shows how rare true transformation is.

This calls into serious doubt the foundational assumptions made by people and organisations who have spent many decades driving corporate sustainability – including myself! If most major companies will die or at least shrink to irrelevance and be replaced, why do we try to change them?  And what does this mean for sustainability focused investors and policy makers?

The key questions to understand are why incumbents fail – and can this be addressed – and what can be done to accelerate the success of the disruptors? I will be focusing my work on this issue over the coming year at the University of Cambridge Institute for Sustainability Leadership, via this new research programme I am supporting.

This research will explore my hypothesis on what the current evidence suggests:

  1. Incumbent businesses, no matter how good their intentions, rarely deliver disruptive change. When they do – often by buying disruptors – they are driven more by the threat from disruptive players than their own insights or strategies. Fear of loss is the driver for incumbents, not opportunity. There is a live example today with Tesla and the auto industry.
  2. Disruptive players usually win because they are not held back by the assets, culture and risk aversion of incumbents. There are exceptions (and whythey are is very important), but they do not define how the system behaves.
  3. Capital follows opportunity and growth, but rarely prices risk accurately. Thus, markets crash, carbon bubbles pop and boom/bust cycles are inevitable in disruption. But over time, markets get it right. The dot com boom correctly sensed the possibilities and the dot com crash didn’t prevent tech companies from dominating today’s stock markets.
  4. Markets are ruthless and unsentimental. They have no ideology except self-interest and will happily for example, destroy the oil industry and do so quickly when they act.

This all suggests that, given the scale and speed of change needed on sustainability, many and perhaps most of today’s major old companies, simply won’t get there. Not because they couldn’t in theory, but because they won’t in practice. They have some combination of products, assets, culture and values that means transitioning is simply too difficult, too expensive in the short term or just isn’t going to happen in time. They will instead be replaced by new companies – a process profoundly beneficial to the economy.

If this is right, it calls into question the very foundation of the global movement for corporate sustainability. We need to have that discussion.

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9 thoughts on “Why Incumbents Fail – And What that Means for Sustainability

    • Inga Fisher Williams

      This discussion leaves out the critical role of incentive structures created by policies and laws which subsidize wasteful, unsustainable and often toxic industries and thus remove any incentive for a shift to a sustainable economy transformation. In the USA, the takeover by radical Libertarian thought, money and policy makers guarantees a continuation of the status quo, which even ridicules and falsifies data on sustainability. That is why “incumbents” SHOULD fail and be replaced by progressive candidates who embrace the shift we [and the planet] need. Inga Fisher Williams, Portland, Oregon, USA

  1. Chris

    I’m seeing direct proof of your hypothesis within a small company I’m trying to help diversify. We recognize that all of our recent growth is tied to the oil and gas market. We see a massive disruption coming in the next 5 to 20 years (timing hotly debated internally) with the emerging trend of the electrification of everything currently running on oil and gas.

    Our CEO has prioritized diversification efforts, but our sales and engineering resources are swamped with day to day maintenance efforts and have little bandwidth to spare. People actively resist change, for a variety of reasons, the biggest, in my interpretation, being the decision resulting from weighing the personal cost benefit analysis between the perceived risks presented by change activities, and the sheer amount of work to engage in those activities. In other words, as an individual, if I choose to work on diversification efforts, I will have a high amount of new unfamiliar work (lots of late nights, 60-80 hour work weeks), and I will have a high risk of failure (even though our CEO claims we have wide freedom to fail, in reality, we still have to be a profitable company). The alternative is to keep doing the work I already know how to do, ongoing maintenance and incremental improvements to existing products and processes (in our flat, near EOL markets), work a safe 40 hrs a week, and have little exposure to high-risk efforts.

    We talk about the risk of not diversifying, and can see the train-wreck coming, but our management has decades of experience managing our existing successful business. We have no experience managing or responding to external existential threats. We are actively trying to learn how to do this, and a few of us see a reasonable way forward, but we are not in the right decision making positions to directly make this change.

    Our internal culture is nearly totally immune to change. We have individuals in key positions that are active climate deniers. I’m not convinced we deserve to survive, honestly. I am convinced we don’t have the skills or knowledge to design our way into the future. Whether we will recognize this in time, and go get people or acquire companies that can help us get there is an open question.

  2. Paul, in the past three months there’s been a lot of excitement in Australia about new rules applying to corporates, mandating that they fully incorporate climate risks into both their risk management strategies and in their appointments to Boards. We are being advised that this is a huge game changer, in that it applies not only to private corporations but to administrative entities such as local government.

    https://www.smh.com.au/business/markets/companies-failing-to-deal-with-climate-change-risk-20180313-p4z46a.html

    This may be somewhat tangential to your thesis but I’m wondering what your take is on these new mandates being a real game changer with regard to corporate attitudes and prioritisation, if not to their decision making.

  3. Chilli Raveh

    An obstacle to change is the composition of the board of most established companies. More young men and women of diverse backgrounds would help guide the path to the future.

  4. Paul Gilding

    This is in behalf of Philip Sutton who had issues posting:

    Why help companies transition? Because some might survive and it’s not always clear which
    ones will. Also in the effort to transition, the incumbents will often do useful R&D and product
    development. If the transition succeeds then that builds momentum and if it doesn’t then
    some of the useful resources (business units, IP, people, etc.) from the failing companies will
    move into new businesses that are creating the new economic wave.

    But I guess the key question for business change agents is: is it better to commit ones own
    time to the incumbents or to helping emerging businesses to grow? I’ve got a gut feeling that
    major business disruptions are underway so I suspect that the momentum is shifting now to
    building businesses that can be clear drivers of the new economy.

    But building the new has interesting dynamics too. Not all innovators will survive to dominate
    their markets. But once again, even in fauilure, useful ideas, IP, people and viable business
    units will often be recombined into the new market leaders.

    I think the key thing now, given that we need to change the economy at emergency speed
    (because of issues like climate change), is to find roles where we can work on leading edge
    processes and products, regardless of whether it is in incumbents or emerging new economy
    companies. But if our work in focused on timid incremental change (regardless of whether
    we are working for an incumbent or an emergent company) then our efforts might not be
    contributing that much of value to society.

  5. You’re so right Paul! Highly recommend David Fleming/Shaun Chamberlin’s ‘Surviving the Future’, for a thoughtful, even shocking exploration of where this important thinking will have to lead.

  6. Sören Andersson

    Spot on Paul!

    Report after report (The latest one from the UN coming in October) is showing that regardless how tough restraints we put on the market and current companies, including tough CO2-tax etc. it is not enough to avoid overuse of our planetary resources. The infinite economic growth paradigm quickly erases whatever benefit increased resource-efficiency etc. is achieving. And of course GDP as a “driver” is fatal to our chances.
    Blogpost in Swedish (translation-button at the bortom)
    https://www.thefuture.se/2018/09/17/gron-tillvaxt-en-omojlig-framtid/)

    With this said, the challenge ahead will need such a “revolutionary” change and speed that the current version of free market-models needs to be significantly changed or made obsolete. Very few of the incumbents have the insight, internal power and leadership to make such a transition. And companies with a public ownership/shareholders built on ROI expectations have a very special challenge.
    I have been following one of our Swedish companies, IKEA – they are by far further into a transition than most others, partly due to good leadership but also because of their ownership-structure (Not listed)

    One big challenge is to communicate this paradigm-change to the business-world, and even more challenging, to each specific company. As you say Sustainability is still regarded by far to many in the business-community as an existential threat to the economy – when in reality it is totally the other way around…

    I suppose Buckminster Fullers qoute: “You never change things by fighting against the existing reality. To change something, build a new model that makes the old model obsolete.” Is more true than ever.

    Rgds / Sören

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