Avoiding the ‘Existential Threat’ of Disruption in the Middle Market

Hal Conick
Marketing News
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Key Takeaways

​​What? Every business will likely be disrupted by technology at some point. The middle market is no exception.

So what? Businesses may not be ready for this disruption. Although 43% of middle market execs say their industry is quite or extremely vulnerable to disruption, only 18% see their own company as vulnerable to disruption.

Now what? Organizational theorist Geoffrey Moore says middle market companies must treat disruption as an opportunity, not a threat. Adopt disruptive technology according to what makes the customer’s experience easier and better.

​Sept. 1, 2017

Most midmarket companies will experience disruption, but that doesn’t have to mean an interruption of business

 

Amazon disrupted retail. Uber disrupted cabs and limos. Twitter disrupted an entire presidential election. Disruption has societal implications, forcing businesses to change from the outside-in to meet consumer needs and keep up with competition. 

The middle market is no exception, says Geoffrey Moore, an organizational theorist and author of Crossing the Chasm. Manufacturers, doctors and lawyers will be disrupted by technology just the same as bookstores, New York cabbies and the American electorate. 

The disruption of digitalism is akin to the move from the Agricultural Revolution to the Industrial Revolution, Moore says. Instead of new farming techniques bolstering a larger and healthier population, the Digital Revolution is increasing business efficiency, easing communication and giving consumers push-button gratification. 

“You just can’t imagine any industry not eventually having this digital layer built into it,” Moore says. “It’s probably a 50-year journey for the entire economy, but there’s no going back.”

Midmarket executives know disruption is coming, per Capital One’s “2017 Disruption in the Middle Market” report. Nearly three-quarters (73%) of those surveyed say they expect to experience disruption in the next three years, pointing to Big Data analytics and the Internet of Things as the main culprits. However, many executives don’t see their businesses as being susceptible; although 43% say their industry is quite or extremely vulnerable to disruption, only 18% see their own company as vulnerable to disruption.

“One reason for this discrepancy is that an overwhelming number (79%) view disruption as an opportunity, not a threat,” the Capital One report finds.

Is Disruption an Existential Threat?

Midmarket companies must first know what disruption is before understanding if it presents a threat or an opportunity. Bob McCarrick, the head of midmarket banking at Capital One, says he defines disruption as an event that can impact a company’s client base; he believes the Digital Revolution is the main disruptor. Moore, however, says disruption goes deeper: “[It’s] when a new technology takes the marginal cost of something that used to be expensive and hard to deploy and makes it virtually free and trivial to deploy.” 

Businesses may be able to take advantage of this new, virtually free technology. However, Moore says that when a business model is based on an older, expensive version of technology that is now nearly free, disruption can be a big threat. In most cases, newer technology can’t simply be plugged into the old model, so companies either become an early adopter of the new model and scrap the old technology or keep using the old model. The problem with the latter case is that companies based in this new technology and entering the market for the first time will have an advantage and immediately attack old-model businesses. 

These attacks, Moore says, can be an “existential threat” that midmarket companies cannot ignore: “A disruption creating an existential threat to our business, meaning if we don’t get out of the way, we are going to get run over and there’s no defense against it,” he says. “You have to figure out some way to work around it.”

 

 Geoffrey Moore, "Crossing the Chasm: What's New, What's Not"

 

​​“Existential threats” may be a reason why so many executives in smaller companies resist disruption. Capital One’s report finds that companies with annual revenue between $2 billion and $3 billion are more likely to see disruption as an opportunity and pursue disruptive strategies of their own, while midmarket companies in the $100 million to $499 million range tend to see disruption as a threat to avoid.

Financial resources may be the biggest factor in how midmarket companies react to disruption, McCarrick says. The Capital One report says 75% of executives believe they’ll need additional capital to stay competitive in the heat of industry disruption, which means they’ll need to find funding for R&D or digital adoption. However, Moore says middle market companies are more likely to divert funding from one operating expense to another. Both Moore and McCarrick agree that it is essential for midmarket executives to assess their company’s capital resources before planning for disruption. 

How the Middle Market Can Prepare for Disruption

The least companies can do to prepare for disruption, McCarrick says, is habitually think about it by asking questions like: What’s disruptive in their market? What could ruin their company? How could the company get left behind? Retailers, for example, should be thinking about how they can sell products online like Amazon. Many midmarket businesses seem to be OK with “the least” they can do, as Capital One’s report shows 89% are taking one or more measures to defend against disruption, but only one-sixth of midmarket executives feel quite or extremely unprepared to deal with a disruptive event. 

“Maybe the strategy is to do nothing right now and then see how this morphs because you think the demand for your particular product is not strong enough,” McCarrick says. “But if you’re not thinking about it at all and you don’t have some dedication to try to figure out what’s happening in the market, you’re at a much higher risk of being disrupted.”

Even though many executives feel underprepared for disruption, Moore says midmarket companies have an advantage to dealing with it because they can “dodge faster” than Fortune 2000 companies. Midmarket companies serve a smaller customer base, which can offset technological disadvantages. However, Moore says midmarket business owners need to start a piecemeal move toward the Digital Revolution if they hope to keep the doors open.

“The thing you can say is, ‘Look, we don’t have to outperform Amazon or Apple or these incredible disruptors. All we have to do is show our customers and our future prospects that we’re on the same path,’” Moore says. “‘We will listen to and observe what these people have done and we’re trying to absorb those lessons in a way that we can afford and that doesn’t throw our business into a tailspin.’ ”

In other words, companies should adopt disruptive technology according to what makes the customer’s experience easier and better. Moore suggests taking two or three tasks that both make the customer experience more attractive and move the company into the Digital Revolution. 

When to Be Disrupted 

Thus far, 15% of middle market companies have faced a disruption that sapped finances, per Capital One’s report. These companies likely didn’t have a choice, but others may. Moore says a business may find competitive advantage in adopting new technology early. However, midmarket companies also have a difficult time hiring high-quality talent for digital transformations, increasing the chance that a technological overhaul will fail. 

“My advice to most middle market companies is, don’t try to go early,” Moore says. “Then the question is, do you go when you have to go?” 

Companies in sectors under “direct digital assault” of disruption should do what they can to adapt to changing times, he says, as waiting to adopt new technology in these cases can put a company out of business. Dealing with disruption becomes a balancing act of not moving too soon, but certainly not moving too late, either. Most middle market companies, Moore says, are trapped in the middle. “One dramatic failure in a mid-market company is usually catastrophic.”

No matter which way a company moves into the Digital Revolution, it must stick with a single adoption strategy. Moore wrote in a 2016 essay for the National Center for the Middle Market, titled “Disruption Demystified: A Strategy Guide for Middle Market Companies,”​ that picking one strategy and sticking to it gives midmarket companies a better chance of survival than trying to juggle two or more strategies.

Even when disruption goes well, midmarket companies may find themselves in a conundrum: New efficiencies may mean eliminating old jobs. Moore says this is something every middle market executive will need to think hard about, as they are likely very familiar with their employees.

“You have to be very thoughtful about what that means,” Moore says. “Many companies don’t lay off [at all], then they shut their doors because they just couldn’t make ends meet. You have to be very thoughtful by saying, ‘If that’s the situation we’re in, laying off some people in a timely manner is better than shutting our doors and laying everybody else off.’”


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Author Bio:

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Hal Conick
Hal Conick is a staff writer for the AMA’s magazines and e-newsletters. He can be reached at hconick@ama.org or on Twitter at @HalConick.
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