Disruption Can Be More Damaging than Actual Disruption

Business leaders are always worried about disruption. Some high-tech rival might, after all, do to their sector what smartphones did to the photography industry, what e-commerce is doing to retail, and what financial technology (fintech) is threatening to do to consumer banking. In PwC’s 2017 survey of 1,379 chief executives around the world, 60 percent said that technological advancements had significantly changed or completely reshaped competition in their sector in the last five years, and more than 75 percent anticipated they would do so before 2022.

And yet, in a recent study tracking the real-world impact of competitive upheaval, we found that the fear of disruption is exaggerated. Although we have no crystal ball to predict exactly how much disruption will take place during the next five years, we have found that companies facing disruption generally have longer to respond than they expect, and an effective response is available to them. When disruption does affect a company, it’s frequently because the enterprise was already vulnerable in some fundamental way; moreover, many incumbent companies accelerate their decline through their efforts to forestall it. Panic-driven efforts to avoid or combat disruption can easily lead to hasty, reactive, short-term-oriented decisions that move a company in many directions at once, distracting its management and squandering its resources. The fear of disruption can thus be worse for a company than the actual disruption itself.

Of course, complacency or inaction can be just as problematic. Technological changes, and other external competitive forces, affect many business realities. Proactive measures are often needed. But they should be well thought out and center around those advantages that you already have and that you already control — your own strategy and strengths — rather than representing a rash overreaction to external forces largely outside your influence. Instead of letting anxiety about disruption lead your strategy, concentrate on making the investments that can build an identity for your company that is strong and resilient in the face of change.

Disruption’s Pace and Impact

To better understand the real pace and impact of disruption, our research group at Strategy& (the global strategy consulting team at PwC) set out to measure disruption in multiple industries over significant period of time. Because there is no readily available metric for disruption, we settled on a reasonable proxy: major changes in relative market capitalization among a sector’s 10 leading companies. When the prevailing business model of an industry is threatened — by innovations from a player within the sector, by startups, or by competitors invading from another industry — the inevitable result is a shift in enterprise value from one group of companies (the incumbents) to another (typically the upstarts, or on occasion incumbent companies that disrupt themselves). For example, when Apple disrupted the recorded music industry in the mid-2000s, a shift in enterprise value was visible — away from the incumbent market leaders, such as the Sony, Warner, and Universal music groups, and toward Apple (and eventually to other tech entrants, such as Spotify).

We therefore measured total enterprise value (EV) for the largest 10 companies worldwide in each of 39 key industrial sectors over a 10-year period ending in 2015, tracking the share of that total EV held by each company. This allowed us to recognize when major shifts in EV occurred, and thus to identify major cases of disruption (see “Measuring Disruption”).

When we tabulated the results, we found that most industries have not been dramatically disrupted; the turnover in sector dominance, when measured this way, is relatively low. The industries undergoing the largest EV shifts were Internet software and services, IT services, and biotechnology. These three sectors are heavily dependent on technological innovation and subject to turbulent change. But even here, the changes in EV share of the top 10 players averaged only 8 percent over the full 10-year period. Significantly, several industries widely seen as threatened by outside technological competitors — such as aerospace and defense, diversified telecommunications services, media, and specialty retail — registered among the lowest levels of disruption found in our study. There was technological change, to be sure, and the industries faced pressure, but there was no significant shift in the roster of leading companies.

Our research also showed, contrary to conventional wisdom, that the rate of disruption — the annual shift in enterprise value — is not increasing. The average disruption level across these 39 industry segments showed only a miniscule increase over the 10-year period from 2006 to 2015, from 2.2 percent for the first five years (2006–10) to 2.3 percent for the second five years (2011–15). The single outlier was the Internet software and services industry, where disruption levels increased by 3.1 percentage points after 2010. There were 21 other sectors with increases in disruption, albeit much smaller ones (none over 1.6 percentage points), while 17 had decelerating disruption (higher levels on average before 2010). This finding reinforces our belief that there is time to prepare for disruption and that disruption will not hit every single sector overnight. (For the five-year churn calculations, we used two-year averages of share [for example, 2006–07 versus 2009–10] to reduce the impact of any one-year outliers. The 10-year churn calculations are the sums of the two five-year churns for that industry segment.)