Incumbents Strike Back by CDT

“We are living in an age when the risk to industry leaders is greater than ever before,” wrote Richard Foster in his seminal work on innovation. “Not only will technological discontinuities come with increasing frequency…but during these discontinuities the attackers will have the advantage.” Thirty years later, Foster’s words still ring true. At the Center for Digital Transformation’s annual conference at The Paul Merage School of Business at UC Irvine on March 24, executives discussed the state of incumbent play.

According to Richie Etwaru of IMS Health, most C-level positions were set up to run existing systems. They weren’t set up to figure out what Etwaru called “next gen P&L.” That’s his job as chief digital officer within the healthcare industry giant. He specializes in defensive incumbent innovation, which he described as the ideating and incubating efforts of large multibillion dollar market leaders. Innovation can be evolutionary, where four out of five experiments have to work, and revolutionary, where 24 out of 25 can fail—because the one that succeeds will potentially disrupt an entire industry.

Thales is a multinational incumbent in electronic systems for aerospace, defense, transportation, and security markets. “Seventy percent of bank transactions are secured by Thales,” said Dominique Giannoni, CEO of Thales InFlyt Experience. His Irvine-based unit has grown by taking an evolutionary approach, first putting audiovisual screens on aircraft so that flyers could enjoy pre-programmed entertainment, then enabling in-flight connectivity, and now leveraging consumer data to provide an in-flight engagement platform. Like GE, Thales has gone from hardware to software and services.

Telstra is another such incumbent. Australia’s leading telecommunications company for over a century, Telstra found itself landlocked on the island continent with nowhere to grow. It had maxed out the market Down Under at 23 million Aussies and was sitting on capital intensive infrastructure. Telstra’s Charlotte Yarkoni explained how the incumbent had been expanding in Asia, taking ownership stakes in mobile, broadband, and carriage assets as well as data centers in neighboring countries.

Then the Australian government made a game-changing offer: to relieve Telstra of its copper network for AU$11 billion (US$8.5 billion) and to pay for staff re-training. That would give Telstra time and money to wean itself from what had become a commodity business and do what Yarkoni was hired to do: begin offering distinct value on top of the infrastructure.

As a leader, Yarkoni was clear about challenge: disruption would be relentless, coming in 18 to 24 month cycles, and so Telstra needed a strategy not just for surviving disruption but thriving in it over time. As president of Telstra Software Group, she has taken a multipronged approach to building a resilient portfolio:

• growing the talent pool for future services through Telstra’s developer portal
• acquiring software capabilities in adjacencies
• investing in start-ups through Telstra’s start-up accelerator, muru-D

While these new businesses operate in parallel with Telstra’s core operations and have work environments and compensation packages different from the core, Yarkoni has a dual mandate to carry the core along, gradually transforming it and redeploying talent to establish foot prints in growth markets.

So, as much as incumbents must counterattack by investing in disruptive products, services, and business models, they must work with equal energy and deliberation to innovate in organizational design, from the C-suite to the front line.