19

LEADINGedgeforum

September 2014

Mark Zawacki

David Moschella

Pervasive Disruption? – Silicon Valley’s Unbounded Ambitions

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1

Generational shifts in IT leadership are the norm. ............................................................................2

‘Disruptive innovation’ best explains this pattern .............................................................................3

Silicon Valley’s disruptive agenda is expanding ................................................................................ 4

The Valley is where ideas ‘cross-pollinate’ ...........................................................................................5

A ‘thick’ business/IT infrastructure is emerging ................................................................................6

What does vertical disruption look like? ...............................................................................................7

Industry disruption varies widely, thus far ...........................................................................................8

Mobility has changed everything .............................................................................................................9

Who will control the future of financial services? ...........................................................................10

Vertical disruptors can face many barriers ......................................................................................... 11

The incumbent’s dilemma ......................................................................................................................... 12

A quick culture test ..................................................................................................................................... 13

Large firms are increasing their Valley presence ............................................................................. 14

Disruptive leadership: the first 50 years ............................................................................................. 15

Ten Commandments for incumbents ................................................................................................... 16

Conclusion ...................................................................................................................................................... 17

Contents

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The pattern in the figure above couldn’t be more clear. Each major phase of information technology industry progress has been led by a new generation of firms. Although a few companies – especially IBM, HP and Apple – have played important roles in multiple IT eras, the value of starting with a clean sheet of paper has consistently outweighed the advantages of established company size and resources. The history of IT innovation has been one of serial technology disruptions.

The figure reveals two other noteworthy patterns. Over the last ten years, the number of market-leading firms whose headquarters are in Silicon Valley has spiked upward. While Silicon Valley (‘the Valley’) has been a vital source of IT industry innovation for more than 60 years, its influence and dynamism have never been greater than they are today. It now dominates much of the San Francisco Bay area – to the growing consternation of many residents who are not part of the IT community.

The figure also shows that the nature of disruptive change has shifted. During previous IT eras, new firms succeeded by providing ever better but less expensive horizontal technologies used by customers across every industry segment. In contrast, many of the most important internet companies have targeted a specific industry sector – books, movies, music, lending, media, retail, taxis, lodging, recruitment, etc. Before the internet, this type of vertical disruption was almost unheard of.

Importantly, these vertical disruptions are resulting in increasingly concentrated, winner takes all marketplaces. While previous IT eras have each had their dominant suppliers – IBM, Digital, Intel, Microsoft, Google, Apple, Facebook and so on – traditional internet leaders such as Amazon, Netflix, LinkedIn and Wikipedia, as well as emerging shared economy pioneers such as Airbnb, Uber and Kickstarter, are extending this quasi-monopoly power to particular vertical industry sectors.

These broad patterns – ongoing generational change, an increasingly powerful Silicon Valley, the shift from horizontal to vertical disruptions, and rising industry concentration – are the main focus of this paper. Will these forces continue to strengthen, or is the rate of change being over-hyped? There are few bigger questions facing new and established firms alike.

PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

Figure 1 – Generational shifts in IT leadership are the norm

Mainframe Mini PC Mobile Internet

IBM

Sperry

Burroughs

Honeywell

NCR

CDC

ICL

Amdahl

Siemens

Fujitsu

Hitachi

Cray

Digital

IBM

Data General

Wang

Prime

HP

Sun

Tandem

Oracle

Honeywell

Olivetti

NEC

IBM

Apple

Intel

Microsoft

Dell

HP

Compaq

Seagate

Sony

Toshiba

Amstrad

Lenovo

Apple

Google

RIM

ARM

Palm

Samsung

HTC

Motorola

Nokia

Ericsson

Sony

LG

Google

Amazon

Facebook

LinkedIn

Twitter

eBay

Wikipedia

Netflix

Pandora

Lending Club

Airbnb

Uber

HQ in Silicon Valley

3

Much like ‘innovation’, ‘change management’, ‘core competency’ and other management buzzwords, ‘disruption’ is an often loosely defined term. For the purpose of this paper, we define disruption as the sudden demise – or at least substantial diminishment – of the incumbents in a particular market. This demise is typically brought about by one or more players adopting a radically different technology or approach. True disruptions turn the assets of incumbents – size, customers, know-how, business models, best practices – into potentially life-threatening liabilities.

This definition of disruption was first promoted by Clayton Christensen in his seminal 1997 book, The Innovator’s Dilemma. As shown in the figure, Christensen made the important distinction between disruptive and sustaining innovations: the latter fit well into incumbent market leader strategies, while the former do not. While the rigour of Christensen’s initial research has recently come under sharp attack1, in our view his model of disruptive change simply and effectively explains a great deal of the IT industry’s history, and remains a fundamental IT industry dynamic.

Disruptive change works as follows. When a new capability emerges, it is typically immature, and is thus seen by incumbents as a ‘toy’ that can be safely ignored, even ridiculed. But as the technology improves, the new approach becomes an increasingly serious ‘threat’ that must be resisted or co-opted, often resulting in awkward hybrid strategies. In the final stage, the technology becomes accepted as the ‘obvious’ solution. But by then, it is usually much too late. (If the ‘joke’, ‘threat’, ‘obvious’ cadence sounds familiar, it may be because of its resemblance to Gandhi’s view of non-violent protest: ‘first they ignore you; then they laugh at you; then they fight you; then you win.’)

There are many famous examples of disruptive IT change – digital cameras wiping out Kodak, personal computers replacing minicomputers, Amazon bankrupting Borders, Netflix destroying Blockbuster. The cloud computing and Software-as-a-Service movements are causing similar disruption today. The big question is to what extent these disruptive patterns will spread into new sectors that so far have been ‘safe’?

Figure 2 – ‘Disruptive innovation’ best explains this pattern

Time

Performance

Threat/danger

Joke/toy

Obvious/mainstream Sustaining

innovation

Disruptiveinnovation

1. See Jill Lepore, ‘The Disruption Machine - What the gospel of innovation gets wrong’, The New Yorker, June 23, 2014

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

Silicon Valley has long been recognized as the hi-tech capital of the world. Since the 1970s, it has been developing a ‘technology stack’ that serves as the central nervous system of companies globally. It dominates the worldwide market for computers, applications software, networking equipment, database technology, storage subsystems, operating systems and all manner of semiconductors.

But as shown in the figure, the Valley is no longer just selling a set of tools to companies all around the world. It’s also building businesses that compete with the very industries it is supplying. While many firms in the Valley see your firm as a valued customer who they want to take out for lunch, other firms (sometimes even the same firms) see you as lunch.

The ‘old’ Silicon Valley was essentially an arms merchant, selling each company in a particular industry the same set of weapons so they could do battle with one another. But the ‘new’ Silicon Valley is also a mercenary: it builds elite teams, equips them with the best munitions, and gives them huge incentives to win. Companies such as Apple, Amazon and Google are both arms merchants and mercenaries at the same time. Since these firms are often quasi-monopolies in their core businesses, their skills, resources, market power and ability to make acquisitions can be difficult for established companies to match.

For example, when Apple developed iTunes, Steve Jobs didn’t take EMI out for lunch and try to sell his new music database software. That’s the old arms merchant model. Instead, Apple unleashed iTunes as a competitor, totally reshaping the music industry value chain to Apple’s benefit. Other firms are now trying to transform television (Netflix, YouTube), automobiles (Zipcar, Uber, Tesla, Sidecar, Google), manufacturing (3D printing, robotics), healthcare (testing, quantified self), financial services (Bitcoin, Square), education (Khan Academy, Coursera), retail distribution (same-day delivery, drones) and even food (Soylent, DIY, synthetic foods). Other, perhaps even bigger, disruptions will come from the hard sciences – nanotech, biotech, alternative energy, etc. There are very few, if any, safe sectors.

Figure 3 – Silicon Valley’s disruptive agenda is expanding

‘Hi-tech capital of the world’

‘Industry-disruption capital of the world’

• Makes horizontal technology-based

products and services

• Sells these products to businesses

globally

• Your data

• Arms merchant

• Builds disruptive, vertical

businesses

• Competes with businesses

globally

• Their data

• Mercenary

+

5

While California certainly has its share of problems – crime, inequality, declining schools, overcrowding, immigration issues, high taxation and so on – Silicon Valley remains the envy of citizens, governments and entrepreneurs all over the world, with countless countries, regions, cities and universities explicitly trying to replicate its success. But Silicon Valley remains the Geek Olympics, a unique magnet for the global talent pool. Perhaps someday China or elsewhere will emerge as a major rival, but today no other place comes close to replicating the economic powerhouse that the Valley has become. Why?

If you ask academics, businesspeople or pundits for an explanation, they will list many things that make Silicon Valley tick: innovation, risk-taking, learning from failure, an aggressive venture capital community, Stanford and Berkeley, a culture that believes in the potential of two people in a garage, the vast size of the US domestic market, a global talent pool, and even the weather.

While all of these are important, we think the most distinctive factor in the Valley today is the sheer density of activity and the learning and network effects this enables. As suggested by the figure, in the Bay Area ecosystem today, ideas are continually cross-pollinating, as companies partner with and acquire one another and as individuals frequently change firms. The result is unmatched speed, learning, testing and creativity, combined with all the necessary support and infrastructure services.

Later in this paper, we will describe the various ways that established multinationals are physically setting up shop in the Valley to tap into its resources and culture, but here we will just highlight our own experience. Our annual Silicon Valley Study Tours – where we take 30 to 40 clients to northern California for a week to visit interesting new firms – have sold out consistently in recent years. Many firms are also interested in private Study Tours just for their own executives. Almost every large company these days recognizes that it needs a 650 strategy – 650 being Silicon Valley’s primary telephone area code.

Figure 4 – The Valley is where ideas ‘cross-pollinate’

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

The hi-tech economy that is now emerging is further depicted in the figure above. From a horizontal, arms merchant perspective, Silicon Valley continues to press ahead at full speed. Indeed, of all the major generations of IT, none have been more important than mobile and cloud computing. Mobility is now the most important source of new value creation, while the cloud has made it possible to start and scale businesses as never before. The internet of things will have a similarly great impact.

Leading venture capitalists are even saying that they feel less needed, as the cost of going to market drops dramatically, as new crowd-funding options such as Kickstarter and Indiegogo flourish, and as the recipe for success gets increasingly codified (for example, through the Lean Startup and Business Model Innovation movements). The arms merchant model is anything but mature, and rapid progress – while not entirely linear – is broadly predictable.

In contrast, the outlook for any particular industry’s vertical stack is much less certain. For each of the specific industry sectors shown above, there are really two great IT questions: 1) How fast will each sector be digitized – meaning that information flows will become a (or even the) primary form of new value creation; and 2) Will this digitization prove to be mostly sustaining to incumbents, disruptive, ushering in a new generation of market leaders?

While these questions are not new, they have recently become much more pressing, as the evidence mounts that digitization can radically transform just about every industry. Silicon Valley increasingly controls a thick digital infrastructure – data, software, computing, mobility, payments, peer-to-peer sharing and personal information – that will be the foundation of much of the future economy. Consider the vast intelligence that firms such as Google, Apple, Amazon, Facebook, Twitter and LinkedIn now own, and the nearly infinite possibilities this information can enable.

Figure 5 – A ‘thick’ business/IT infrastructure is emerging

Every industry is being digitized

Banking Automotive Retail Media Healthcare Insurance Education

New business models

Data/appsalgorithms

Social/crowd

Mobile/IoT

Cloud/ SaaS/ telco

7

The overall set of vertical industry dynamics that we see emerging is described in the figure above. The key point is that the boundaries between the IT industry and your industry are no longer clear. These days, almost every firm is a technology company, and this means that many IT industry dynamics – game-changing innovations, cloud computing, pervasive mobility, novel data flows, new business models, open source software, crowd-sourcing/sharing, and many small acquisitions – are spreading throughout the global economy, making every industry more susceptible to disruptive change.

For example, look at Uber. The taxi industry in the US has historically had many well-known problems. During peak times, getting a cab could be almost impossible; taxis often came late or not at all; and the quality of the cabs (and sometimes the drivers) was poor. Various licensing and regulatory requirements protected the status quo. In response, many customers also behaved in ways that undermined service levels – calling multiple cab companies, calling one cab then hailing another, etc.

Uber addresses these problems by collecting and using data in new ways: efficiently matching available cars and passengers, building both driver and passenger reputations, showing each passenger where their taxi is and when it will arrive, and automating the payment/tipping process. It has also greatly expanded the pool of drivers. While some taxi companies have embraced these changes, others have fought them bitterly. Either way, the taxi business will never be the same.

We retell this familiar story because we think that many industries are in analogous situations. Whether one is buying a car, taking out a loan, dealing with an insurance company or seeing a doctor, there is often unnecessary paperwork, complications, regulations, inefficiencies and anxiety. As one insurance company client told us recently: ‘Young people don’t want to buy life insurance; they don’t want to see our agents, and they don’t really want to do business with our brand. Someone is going to figure out a new and better way.’ Can your industry be Ubered?

Figure 6 – What does vertical disruption look like?

• A ‘thick’ digital infrastructure – cloud computing, data, software, algorithms, mobility, internet of things – is transforming how industries operate/innovate

• Every firm is becoming a tech company; mobility alone is changing everything

• Large companies are inherently risk averse, but are increasingly competing with a risk-embracing ecosystem centred in Silicon Valley

• The digital expectations of the customer are rising, while switching costs fall

• New entrants don’t play by traditional rules, and use data in powerful new ways. A single company often dominates each market category

• They offer much greater transparency in pricing and service levels, and a simpler/richer customer experiences

• Incumbents can see threats coming, but struggle to respond; incumbent strategies can be quickly copied and/or parried

• The Bottom Line: the challenges first described in 1997 in The Innovator’s Dilemma are now spreading across much of the wider economy

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

The potential for major internet-enabled industry disruptions has been discussed since the early days of the dot.com era when we saw the enormous impact of firms such as Amazon, Napster and Netflix. But, as shown in the figure above, some sectors have been heavily disrupted, while others haven’t. Why?

We believe that the extent of industry disruption thus far has been determined by two main factors: whether the product or service of an industry can be digitized (bits, not atoms); and the relative severity of that industry’s security constraints. While every industry cares about security, some care much more than others. Using digitization and security as the axes in a 2x2 model results in the four disruptive patterns described below.

Low security, digital businesses (lower right) have clearly seen the most disruption – books, music, film, news, and increasingly, cable and satellite TV. While this might argue strongly for the success of MOOCs, digitizing the teaching experience remains challenging.

Low security, physical businesses (lower left) have been the second most active quadrant, with the successes of Amazon, Uber and Airbnb, and the troubles of Sony and the broader Japanese consumer electronics industry. This is why same-day retail delivery has such strong disruptive potential, as stores and malls remain vulnerable.

High security, digital businesses (upper right) have thus far not been seriously disrupted. But the combination of internet banking/lending, crowd-funding, new payments systems and digital currencies clearly have the potential to disrupt the traditional banking business. We believe the insurance industry may be similarly at risk as it has many outdated processes and inefficiencies.

High security, physical businesses (upper left). While various disruptive scenarios are possible – home energy production, asymmetric warfare, drones – industries in this quadrant seem least likely to change fundamentally over the foreseeable future.

Our conclusion is that while disruptive change will spread, the timing and extent will continue to vary widely by industry sector.

Figure 7 – Industry disruption varies widely, thus far

Little disruption

• Defence

• Aerospace

• Energy

Potential disruption

• Banking

• Insurance

• Professional services

Significant disruption

• Retail, distribution

• Electronics

• Taxis, hotels

Highly disrupted

• Music, books, film, TV

• Software/publishing

• Education/learning

Product offerings

Security/regulatory

requirements

Atoms Bits

Low

High

9

Mobility plays a central role in our analysis of disruptive change because in many ways it is a bridge between the vertical and horizontal worlds.

Today’s mobility industry began with the ability to make telephone calls wirelessly from practically anywhere2. In this sense, mobility has been a major telecoms industry (vertical) disruptor. Many of us don’t often use (or in the case of younger consumers don’t even have) wired telephony services. However, many of the major telephone operators – AT&T, Verizon, BT, and their equivalents around the world – have managed the wired-to-wireless transition relatively well. While they don’t have the power of the old telecoms monopolies, they have maintained a very strong market position.

The main – almost total – telephony disruption has been on the device side of the business. Today’s smart phones are not really phones at all, but handheld computers that can also make telephone calls (often badly). Once-mighty mobile handset makers such as Nokia, Motorola and Sony have been unable to match Apple and Google (Android) who come from a computer, not telephony, background.

But while the vertical disruption story is important, it pales when compared to the emergence of mobility as a horizontal business force. We now live in a mobile-first world where just about every company needs an effective mobile strategy. In many parts of the developing world, the mobile infrastructure is the IT infrastructure. Mobile is not just about making phone calls; it’s about information mobility, and the wealth of data that derives from its use.

These dual vertical/horizontal dynamics make mobility an especially good example of the cross-pollinating ecosystems that exist in Silicon Valley today. As shown in the figure, the Apple and Google (and to a lesser extent BlackBerry) platforms are part of a thick infrastructure of global service providers, major hi-tech firms that use mobility to extend their offerings, traditional multinationals that want to bring mobile capabilities to their customers, and hundreds of start-ups exploring possibilities such as apps, payments, biometrics, fitness/health and countless other areas. There’s nowhere like it.

Figure 8 – Mobility has changed everything

500+ mobile-centric startups in Silicon Valley – like the dot.com era

+

50+ non-Valley mobile companies who have set up a presence in

the Valley

+

Every major Silicon Valley company that needs a compelling/viable

mobile strategy

+

25+ leading telecoms operators globally all with a strategic presence in Silicon Valley

+

Two Silicon Valley juggernauts who have fundamentally transformed

the face of mobile globally

2. Mobile offline devices such as the Palm Pilot and Windows CE machines had some success, but limited utility.

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

Financial services also have dual vertical/horizontal dynamics, which makes it another critical Silicon Valley ecosystem. While New York and London remain the world’s financial capitals, when it comes to fintech, Silicon Valley has clearly taken the lead.

Both the banking and insurance industries today are dominated by very large, very powerful and long-established incumbent firms that are sometimes global, but often nation/region-specific. Either way, these firms tend to have complex legacy and regulatory practices that make them relatively slow-moving and risk-averse. It’s fair to say that these firms also have more than their share of critics, especially after crises/bailouts that began in 2007 with the collapse of Bear Stearns.

As depicted in Figure 7, this situation suggests the potential for vertical industry disruption. Consider the range of retail banking possibilities today: new loan models such as Lending Club, crowd-funding such as Kickstarter and Indiegogo, internet payment systems such as PayPal, crypto-currencies such as Bitcoin, and the increasing standardization of mortgage processing software. Much of today’s banking industry value chain could be sliced away by specialized technology-driven firms.

But as with mobility, the horizontal implications are at least as profound as the vertical ones. Every firm and every customer makes and accepts payments of various types, and thus the fact that transactions are becoming just another internet application represents profound change. The banking industry has historically controlled all of the key payment technologies – cash distribution, paper cheques/checks, credit cards, funds transfer, ATMs, etc. This control appears to be coming to an end.

As shown in the figure, Silicon Valley today is packed with hundreds of firms – new and old – who hope to influence or control their piece of the future financial services industry. Given the complex reliability, security and regulatory issues involved, how this will play out globally is impossible to say; but as payment technology becomes an essential part of our thick business infrastructure, the current banking industry structure seems very likely to change significantly.

Figure 9 – Who will control the future of financial services?

10+ financial services companies who have long

been headquartered in Silicon Valley

+25+ major ‘tech companies’ who

recognize the strategic importance of the

financial layer +

700+ startups broadly in the financial services

space+

20+ financial services multinationals who have

opened a strategic presence in Silicon Valley

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While the potential for disruption in many industries is high, and betting against the power of Silicon Valley is risky, pervasive vertical disruptions are by no means assured. Many of the disruptive scenarios discussed in this paper were also touted during the internet bubble of 1998-2001. Remember how e-learning, e-commerce and pretty much anything with an ‘e’ or ‘.com’ were going to ‘change everything’? Some things changed profoundly, but others didn’t.

Additionally, we should never underestimate the resilience of incumbent firms. While they are not what they used to be, book stores, printed newspapers, record companies and publishers are all still here. To disrupt an industry sector, a new approach must reach critical mass, but as shown in the figure and as discussed below, many hurdles can get in the way:

Regulation/taxation. Uber, Airbnb and other sharing economy services have thus far been largely unregulated and untaxed, but this will change, and may well reduce some of their current market advantages. Regulation/taxation may be a major barrier to potentially disruptive innovations in healthcare, financial services, transport and other areas.

Licensing/credentials/unions. Virtually every industry – government, education, healthcare, etc – has its own work rules that often are not particularly open to innovative approaches.

Privacy. Since many disruptive business models are based on new uses of data, privacy is a potentially powerful gating factor, especially in the light of recent US/UK surveillance activity. Data access, control and ownership are all vitally strategic – and the battles for your data are already well under way.

Global/national. Disruptive change would be greatly facilitated by globally consistent privacy, copyright, antitrust, regulatory and other practices, but national/regional approaches may well prevail.

Insurance/liability. Internet payments, driverless cars, robots, drones and new forms of healthcare all create significant new liabilities, risks and uncertainties that will take time to resolve.

All of these factors might well slow the pace of change. Most incumbents have already had many years to think about the disruptive scenarios that might affect their industry, and they have seen enough disruption of others to not dismiss the risks to themselves. They are determined not to be the next Kodak or Blockbuster.

Figure 10 – Vertical disruptors can face many barriers

Laws/regulations

Monopoly/antitrust

Customerinertia

Lack of cooperation

Patents/copyrights

Vestedinterests

Licensing/credentials

Taxation Unions/labour laws

Insurance/liability

Technologyimmaturity

Risk/uncertainty

Globaldifferences

Lack ofstandards

Tariffs/protectionism

Privacy/permissions

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

Although the dominant pattern in the information technology business has been new players replacing older ones, there are important counter examples. In the early 1980s, IBM (then a mainframe and small business systems company) did as much as anyone to establish the global personal computer marketplace. Apple disrupted its extraordinarily successful iPod with the iPhone. As discussed earlier, many major telecoms operators have made the transition from wired to wireless services.

But successfully responding to the challenges shown in the figure above doesn’t happen automatically; it requires real leadership. Consider that IBM made the then radical move of setting up a separate personal computer division far away from headquarters; many telcos similarly established separate businesses to compete in the wireless industry. These examples have led many to argue that setting up a separate business unit is the best – or even the only – way to match the speed, focus and responsiveness of a well-funded start-up, and certainly this is an option worth considering.

However, setting up a separate business unit hasn’t been the only path forward. Strong leadership can generate disruptive innovations within an existing firm. While it is easy to see Steve Jobs as a very special (perhaps unique) case, his commitment to doing ‘insanely great’ things regardless of short-term business pressures should be an inspiration to every organization. Similarly, IBM’s Watson project has relied on grand challenges such as chess and Jeopardy to spur its important new technology advances.

Netflix provides a less intimidating example. It is easy to forget that Netflix originally disrupted the home video market by delivering DVDs via the postal mail. But as the ability to stream films directly over the internet emerged, Netflix had to disrupt itself. Initially, it set up a separate online business unit, but customers complained loudly. Founder/CEO Reed Hastings quickly (and very publicly) reversed course, putting both the mail and online units into a single business. The rest is history.

The message is clear. New technologies don’t always result in new industry leaders. It depends upon how incumbents respond, as discussed further over the final pages of this paper.

Figure 11 – The incumbent’s dilemma

• Re-envisions how your industry can operate and grow

• Builds a product or service that customers deem ‘much better’ than your current offers

• Tears away your most profitable customers with a better value proposition and/or business model

• Undercuts your cost structure with advanced technology and/or business model innovation

• Outflanks your every response with greater speed and agility

• Is not constrained by company culture, legacy systems, regulatory requirements, and the need for short-term profitability

• Becomes the dominant player, often a near monopoly, in its chosen category

What’s the most unsettling scenario if you’re the CEO of a large incumbent in a mature, slow-growth

industry somewhere in the world?

How about a

focused attack by a richly-funded disruptor that simultaneously …

13

The deliberately provocative questions in the figure above provide a sense of the aggressive, even radical, leadership needed to cope with potentially disruptive change. Of course, the typical response of most established firms to these questions is ‘no’, for the reasons provided below.

Funding. A venture capitalist can be very successful if nine investments fail and one hits it big. Most incumbent firms just don’t work this way.

People. Many executives with a non-technical background are uncomfortable hiring powerful digital leaders whom they cannot easily control.

Learning. While most companies talk about the need to learn by failing fast, Silicon Valley actually does it. In most incumbent firms, good news is trumpeted and bad news is buried.

Commitment. Perhaps the biggest difference between start-ups and incumbents is that the former are committed to taking a chance on something new, while the latter prefer to wait for more evidence.

‘Eating your own children’. Embracing new approaches often requires a firm to substantially undermine its existing business. Most companies, executives and shareholders are unwilling to do this.

While the issues above relate primarily to senior leadership, employee motivation is equally important. The Silicon Valley work ethic is legendary. It stems not just from the desire to get rich quickly, but also from the appeal of working with a team on something really new. In a healthy start-up, employees develop a wide variety of skills, get direct market feedback, and in many cases believe that they can ‘change the world’ (and some do). Since incumbent firms can’t offer the hope of a big IPO or high-priced acquisition, they have to work especially hard to create similar energy and motivation.

Figure 12 – A quick culture test

1. Would you give 20M Euros to a bunch of twenty-somethings in your organization to disrupt your core business? What if the chance of success was less than 10%?

2. Would you hire someone much more digitally-savvy than you who could potentially challenge your leadership position in the firm?

3. Do you talk openly and candidly about your leadership and company failures? With all your company? With your Board? In a public forum?

4. Can you move fast, even in the face of high uncertainty?

5. Are you willing to disrupt your business before someone else does?

14

PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

For many years, technology companies from all around the world have set up offices in Silicon Valley. SAP (Germany), Fujitsu (Japan), Samsung (Korea), Sony (Japan), Business Objects (France), Yandex (Russia) and many others have a long-standing presence. As shown in the figure above, there are a variety of reasons to open a Silicon Valley beachhead, and many different types of operation.

Over the past few years a new trend has emerged: non-technology companies have also established a Silicon Valley presence – Walmart (retail), Axel Springer (media), Standard Chartered Bank (financial services), Hyundai (automotive), GE (industrial) and Électricité de France (energy) to name just a few. Even McDonalds has recently opened an innovation lab in Silicon Valley. Our research indicates there are nearly 400 non-tech multinationals now with a permanent strategic presence in the Valley.

They are setting up shop in the Bay Area for the same reasons that technology multinationals always have: to better anticipate and respond to IT-driven changes. But the addition of these non-IT multinationals is enabling the formation of end-to-end vertical ecosystems (industry clusters) in telecoms, retail, media, automotive, transport, healthcare, education, hospitality and other sectors. Network effects are clearly occurring: when 25 mobile operators set up a presence in the Valley, it pressures even more companies to do the same.

Of course, just opening a strategic presence in Silicon Valley doesn’t necessarily lead to greater innovation. The firms that get the most value from a strategic presence in the Valley are adept at getting their headquarters organizations to listen, understand, mobilize and respond. There is no single ‘best practice’ type of outpost, nor are we recommending that all multinationals open a permanent office in Silicon Valley. Company situations and results vary.

But the bottom line is that the Valley now has a unique mix of big traditional IT firms (Intel, HP, Oracle), specialized vertical start-ups (Pandora, Uber, Airbnb), global multinationals (Toyota, Walmart, GE) and internet giants (Google, Apple, Facebook, Twitter). This raises a very high bar for any would-be Silicon Valley competitors.

Figure 13 – Large firms are increasing their Valley presence

Scouting and strategy development

Build and developstuff

Futureresearch

Venture investing and M&A

Culturevultures

This is the most prevalent approach. Multi-national firms are scouting the Valley for innovation trends, evaluating startups and building alliances, while gaining insights into what new firms are up to.

The focus is on application or product development, prototyping, etc. For example, Deutsche Telekom has 20+ software developers in an office close to Google’s, for Android-related work.

Many companies have set up pure research teams in Silicon Valley working on advanced technologies. These groups often work closely with Stanford and others, and are part of the academic community.

Firms are making direct investments in startups, as much for strategic insights and staying close to innovation as pure financial returns. For example, American Express and Citicorp do venture investing.

Companies seek to identify Silicon Valley best practices for hiring & retention, leadership development, organizational design, innovation, etc. with the goal of injecting the Valley’s culture into their firm.

1515

Figure 14 – Disruptive leadership: the first 50 years

Boe Evans, Gene Amdahl, Ross Perot, Seymour Cray,

Ted Codd, Gordon Moore, Robert Noyce, Andy Grove,

Ted Hoff, Vint Cerf, Ken Olsen, Gordon Bell, An Wang,

Larry Ellison, Hasso Plattner, Ray Kurzweill,

Bob Metcalfe, Bill Joy, Steve Wozniak, Steve Jobs,

Dan Bricklin, Don Estridge, Bill Gates, Mitch Kapor,

Al Shugart, Rod Canion, Ray Noorda, Michael Dell,

Scott Cook, Ray Ozzie, Leonard Bosack,

Tim Berners-Lee, Linus Torvalds, Tom Siebel,

Marc Andreessen, Steve Case, Mike Lazaridis,

Jeff Bezos, Shawn Fanning, Pierre Omidyar,

Marc Benioff, Elon Musk, Larry Page, Sergey Brin,

Janus Friis, Jimmy Wales, Reed Hastings,

Mark Zuckerberg, Reid Hoffman, Jack Dorsey

• 78% US born

• 90% US educated

• 78% College graduates

• 46% Advanced degree

• 76% Firm founder

• 58% Worked in California

• Average age, founder/ inventor – 32

• All men

To better understand disruptive leadership from a traditional Silicon Valley arms merchant perspective, we recently compiled a list of the 50 most important IT industry disruptors of the last 50 years.3 The individuals above have all either developed important new technologies/capabilities or founded/co-founded major technology firms. The demographics of these leaders are shown on the right side of the figure and expanded upon below:

US/California dominance. While 78 percent of these 50 individuals were born in the US, 90 percent were educated at least partially in the US, especially at university level. Over half have worked for a substantial amount of time in Northern California, a proportion that has risen over time.

Declining degree requirements. In the 1960s and ’70s, IT industry leaders were virtually all college graduates, and often had advanced degrees. But since the personal computer era, both of these patterns have changed. Some of our greatest entrepreneurs – Jobs, Gates, Dell, Zuckerberg – never finished college, and the number of disruptors with either a Masters or PhD has dropped sharply.

Youth. Among these 50 leaders, the average age for either making their main technology breakthrough or founding their first successful company is 32; this number has also dropped significantly over time.

All men. This is obviously a sensitive point, but having circulated this list widely, no one has argued otherwise. (We stress that our list consists of technologists/founders, not CEOs/COOs/CIOs.) Whatever the reasons, most major IT disruptions have been led by young men pursuing their hi-tech dreams, and willing to take the necessary risks.

Looking ahead, we would be very surprised if the geographic and gender mix didn’t change substantially. The key question for our clients is how these supply-side patterns relate to their own digital leadership development, especially in regard to age and educational background. Setting up shop in Silicon Valley is one thing, but injecting the Valley’s DNA into an established firm remains much easier said than done.

3. David Moschella, 50 for 50 – The Most Important IT Disruptors of the Last Half Century, LEF Monthly Research Commentary, July 2014

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PERVASIVE DISRUPTION? – SILICON VALLEY’S UNBOUNDED AMBITIONS

• Realize that your competitors may not be who you think they are

• Design motivating jobs and more meaningful work

• Learn the ‘eponymous laws’ of computing and project them to your firm

• Practise open innovation (all the smart people don’t work for you)

• Challenge conventional wisdom and assumptions

• Experiment, pilot and fail fast, but learn from failure

• Look out for your data

• Believe in data science

• No urgency = no strategy

• Take a hard look at your age demographics

Slide 15 – Ten Commandments for incumbents

We close this paper with the ten recommendations below:

1. Remember your competitors aren’t just who you think they are. Traditional incumbents don’t just compete with each other anymore. For example, Google is experimenting in several cities with Google Shopping Express, a home delivery service from local retailers. Facebook is experimenting with mobile payments. Pandora’s music data is being used to predict voting patterns and reading tendencies. Apple is working on clothing. Today’s vertical and horizontal infrastructures enable many new entrants from many new directions.

2. Design motivating jobs and meaningful work. As we discussed earlier, motivation explains much of Silicon Valley’s success, and the ‘war for talent’ has never been more heated. Estimates of the difference between average and top-performing engineers range from 10 to 300-fold. Unless you have a presence in the Valley, it can be difficult for traditional firms to access the critical mass of talent they need.

3. Practice ‘open innovation’. All the smart people don’t work for you. Incumbents must be more comfortable working outside their traditional boundaries when it comes to strategy, innovation, bringing new products and services to market, and joining the sharing economy. Silicon Valley has always been a relatively open ecosystem, but it continues to push the boundaries of openness as multinationals become part of the scene. This openness accelerates the flow and velocity of ideas as well as the speed of their development. The network always wins.

4. Learn the ‘eponymous laws’ of computing and project them onto your business. Moore’s Law remains valid and a great predictor of future processing power. But there are other less well known but similarly useful ‘laws’, including Metcalfe’s Law, Gilder’s Law and Sowa’s Law. While these are not laws in a literal sense, they are very useful in predicting future IT developments and are used routinely in many technology firms. See, for example, Apple’s (grainy) 1987 Knowledge Navigator video.

5. Challenge conventional assumptions. Companies must systematically challenge the core assumptions that underlie their businesses and be on the lookout for the one key assumption – or several in combination – that can create disruptive possibilities. For example, the rental car industry had always

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relied on a few key concepts: rent cars at fixed locations, rent by the day, get a signed contract, and handle keys with care. Zipcar reversed all of these: rent cars anywhere, rent by the hour, eliminate paperwork, and use smart cards instead of keys.

6. Distinguish between pilots and experiments. Pilots are a proven way for incumbents to reduce the risks of complex technology rollouts. Silicon Valley takes a different approach. Rather than major rollouts, it prefers to deploy continuously (Devops), with the emphasis on experiments, not pilots. This is more than just semantics. Whereas a pilot’s purpose is to reduce risk, an experiment’s purpose is to accelerate learning. The catchphrase is that ‘fast failure is fast learning’. By breaking down problems into finer and finer elements and experimenting rapidly, Silicon Valley is getting better answers more quickly.

7. Look out for your data. Data ownership provides another useful lens with which to view the relationship between incumbents and Silicon Valley. When Silicon Valley is operating in ‘arms merchant’ mode, all of the data that your firm captures while using various Valley technologies is yours. But in competitive, ‘mercenary’ mode, it’s Apple, Amazon, LinkedIn, Facebook, Uber, Airbnb, Pandora et al who own and control the critical data flows upon which new forms of value are being built.

8. Believe in data science. Google is not just a giant hi-tech company, it’s also the world’s largest computer science and mathematics department. Similarly, Big Data isn’t just about high-performance computers and the huge volumes of data pouring through organizations. It’s about the ability to understand information and use it in new ways. External data scientists will often see patterns, correlations and new applications that your firm has been blind to.

9. No urgency = no strategy. Time and again, companies have been disrupted because they lacked sufficient urgency. If your firm waits to respond to a potentially disruptive activity until it is clearly impacting your business, it is almost surely too late. Profits are typically a trailing indicator, which is why many firms prefer to keep finance away from their innovation team.

10. Take a hard look at your age demographics. While discrimination based on age is clearly and rightly illegal in most developed countries, the fact is that digital disruptions are much more likely to come from younger workers than older ones. Thus getting ongoing input into the executive ranks of the firm from today’s tech-savvy youth is strongly recommended. This means that companies need to be less hung up on traditional seniority, management hierarchies and advanced degrees (and sometimes even undergraduate ones). This is particularly true in mobile, social, wearable and payment applications.

ConclusionHistory suggests that major IT-enabled disruptions will continue, and that new firms will often replace the old. But history also says that changes in industry leadership are not inevitable, and that firms that have the right leadership can successfully evolve from one era to another. Some major innovations will prove to be disruptive; some will be sustaining; others will create entirely new market spaces. We are entering a period of heightened change.

All that we know for sure is that every industry will be reshaped by today’s increasingly thick vertical and horizontal digital infrastructures. Thus, the leadership challenge of the next decade will be to position your firm to leverage the innovations, business models and value chains of the future. While there are a great many uncertainties, glimpses of the world to come will typically emerge in Silicon Valley first. The Valley’s disruptive innovation ecosystem is just getting going.

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