The Upside Of Disruption - EY

2. How is our understanding of disruption changing?In the past two decades, the definition of disruption has expandedfar beyond its textbook meaning — the transformation of businessmodels and value networks by technology or business innovation(see The birth of disruption on page 11).For one, it is increasingly evident that disruption does not stemsolely from technology or business innovations — it is alsoinfluenced by demographic shifts, globalization, macroeconomictrends and more.between governments and citizens, and perhaps even calling intoquestion fundamental aspects of the human experience. Indeed,one reason that the concept has gained widespread traction —appearing in everything from Hollywood movies to the surge ofpopulist political movements — is that it resonates so well withmuch of our shared experience.3. What are the root causes of disruption?Based on our analysis, we see three root causes behind disruption — what we refer to as “primary forces.” These forces —technology, globalization and demographics — are not new. Indeed, they have been around for centuries. But they evolve insuccessive waves, and it is these new waves that generate new megatrends. Understanding the next waves of disruption — and theinteractions between them — gives this root-causes-first approach more predictive power.Our approach also provides a simpler and more balanced perspective. It narrows the field of vision by focusing on three causes ratherthan a longer list of effects. It also widens the field of vision, since focusing on new waves of primary forces reinforces that any list ofmegatrends is by definition incomplete and will expand over time.The three primary forces of disruption are:It is also evident that the effects of disruption are beginning toextend far beyond the business world. For example, “sharingeconomy” start-ups such as Uber and Airbnb are alreadydisrupting regulatory frameworks. Meanwhile, some of the mostdisruptive technologies on the horizon (e.g., AI and robotics) willnot only disrupt corporate business models, but also society asa whole — realigning income distribution, altering relationships1Technology. While we usually think of disruption in therelatively recent context of IT, advances in technologyhave been disrupting business models for centuries. TheIndustrial Revolution, for instance, eliminated guilds andcreated massive labor displacement. In our lifetime, successivewaves of the IT revolution (PC, online, mobile, social) havedemocratized data, empowered consumers and spawnedscores of new industries. The next waves — the Internet ofThings (IoT), virtual reality, AI, robotics — promise to beeven more revolutionary.2Globalization. Like technology, globalization has beenupending the status quo for centuries, going at leastas far back as the 15th century launch of the Age ofDiscovery and colonialism. Globalization has accelerated inrecent decades, thanks to trade liberalization and emergingmarket growth. These trends disrupt existing business modelsby creating new competitors, reordering supply chains andlowering price points. The next waves — including the emergence12The upside of disruption Megatrends shaping 2016 and beyondof Africa and a more multipolar world — will increase complexityand require flexible business models to respond to global shifts.3Demographics. Throughout human history, demographicshave determined destiny. In the decades ahead, relativelyhigh birth rates will make Africa and India engines of economicopportunity. Aging populations will transform everything fromhealth care to real estate. Millennial-dominated workforceswill reinvent the workplace. Urbanization will increase cities’economic and public policy clout, even as it strains their abilityto grow in sustainable ways. Migration and immigration will haveprofound impacts on workforces and economic development.All these demographic shifts will require new strategies andbusiness models.The continued evolution of these primary forces — andinteraction between them — leads to the disruptive megatrendsoutlined in section 2.The upside of disruption Megatrends shaping 2016 and beyond13

4. Why is responding to disruption so critical?Business’ response to disruption is perhaps the most importantstrategic imperative facing companies, for three reasons:1Everyone is affected. The pace of disruption is acceleratingand impacting a growing list of sectors. The next wave ofdigital innovation — harnessing AI, robotics and virtual reality —will transform activities long considered safe from disruption.Indeed, these developments are already starting to disruptsectors such as legal and professional services in ways thatwould have seemed unimaginable even a few years ago.Meanwhile, disruption no longer emerges from Silicon Valleyalone. It can just as easily come from emerging markets. Today’sleaders need to be aware of the game-changing threats andopportunities bubbling up in markets around the world. If you think you won’t face disruption, it’s not because youwon’t — it’s because you don’t yet know how it will happen. What are you doing to understand the myriad ways in whichyour organization could be disrupted?23Smart strategy and execution are not enough. It maysound counterintuitive, but organizations get disrupted notby doing the wrong thing, but by doing the right thing. The longlist of companies that have fallen victim to disruption includesfirms that dominated their industries for decades. They wereoften ruthlessly competitive, relentlessly focused on the marketand led by competent strategic thinkers. In many ways, theysuccumbed to disruption not despite, but because of, that focus.Organizations are typically structured and incentivized to focuson fulfilling the needs of their existing constituents — blindingthem to disruptive opportunities, which often do not initially meetthose needs. The strategy that got you here may not be the one you’ll needfor the road ahead. How are you realigning incentives and structures arounddisruptive innovation?5. Why is it so difficult to respondto disruption?6. How do businesses seize the upsideof disruption?Incumbent companies typically fall victim to disruption.The reasons for this have been well documented in ClaytonChristensen’s classic book, The Innovator’s Dilemma.2Fortunately, as disruption becomes mainstream, organizationshave become more proactive in addressing the challenge.With the right response, disruption offers tremendous upsideto firms that can harness its forces. Discovering the upside ofdisruption requires both learning from those who do it well andbeing aware of the constraints that companies face in formulatingtheir responses.Incumbents dismiss the initial disruption of their industrybecause it appears inconsequential relative to establishedproducts/services and fails to meet the needs of existingcustomers. However, a small core of customers embraces thedisruptive offering, giving market entrants a toehold, and theoffering improves more quickly than incumbents expect. Itscapabilities soon surpass those of the prevailing product orservice — at which point existing customers, who have so farresisted the offering, adopt it en masse.Incumbent firms now scramble to move into this new market,but it is often too late, particularly if the space has significantnetwork effects or switching costs. Time and again — whetherwith the 1980’s PC revolution that disrupted mainframecomputers or the more recent disruption of standalone GPSdevices by smartphone apps — the same pattern occurs withpredictable regularity.Companies in the technology sector are laser focused on creatingdisruptive opportunities. For example Alphabet, the parentcompany of Google, has its famous “20% time” policy, whichencourages employees to spend as much as a fifth of their timeon any idea they consider promising, even if completely unrelatedto their regular work projects.More generally, the title of the late Andy Grove’s 1999 book ispart of the DNA of technology firms: Only the Paranoid Survive.Without exception, the titans of technology are obsessed withgetting into each other’s business because they understand howreal the threat of disruption is.Sometimes these ventures are successful, sometimes they aren’t— but technology firms know that this single-minded focus givesthem their best shot at remaining relevant in the long term.It’s easy to underestimate the pace of change.“In retrospect, all revolutions seem inevitable. Beforehand,all revolutions seem impossible.” That observation, attributedto Michael McFaul, former US Ambassador to Russia, is justas applicable to business and economic revolutions as it is topolitical ones.1 It’s easy to declare in hindsight that the collapseof the Soviet Union was inevitable, but in the summer of 1989,even amid the rumblings of perestroika and glasnost, one wouldhave been hard pressed to find anyone predicting that the BerlinWall would fall just a few months later.However, companies outside tech face constraints that arenot an issue for tech firms. Investors are often willing to givetechnology firms more leeway — until recently, Amazon neverposted a quarterly profit and Apple sat on a US 200 billionstockpile of cash without issuing dividends, and neither firm’sstock price suffered as a result. But investors aren’t alwaysas forgiving of firms from sectors that don’t have the samedisruptive innovation aura and credibility around efforts todisrupt their own business models.In 2012, when Google announced that it had been testingdriverless cars on US roads and had already driven over 200,000miles in everyday traffic conditions, the news reverberated like ashock wave across the world. Driverless cars — a staple of sciencefiction just a few years earlier — had become reality faster thanmost of us expected. Time and again, we underestimate thesignificance and speed of disruptive innovation.Companies looking to disrupt their business models need tobegin a process of rigorous self-interrogation. To start theconversation, we offer a few better questions at the end of thisreport. See How do you seize the upside of disruption? on page 52. Time is not on your side. Are you embracing disruption quickly enough?1 David Brooks, “Fragile at the Core,” The New York Times, 18 June 2009.14The upside of disruption Megatrends shaping 2016 and beyond2 Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firmsto Fail (Harvard Business School Press, 1997).The upside of disruption Megatrends shaping 2016 and beyond15

From primary forces tomegatrendsGLOBALIZATION7. How does disruption leadto megatrends?EMPOWERED CUSTOMERCONSUMERHow will you change buyers into stakeholders?The three primary forces — technology, globalization anddemographics — are evolving in a succession of waves includingAI, robotics, global urbanization, aging populations, millennialworkforces and more. As these new waves of technology,globalization and demographics interact, they give rise to a rangeof megatrends.Meanwhile, sectors themselves are being redefined, asinformation technology lowers entry barriers and challengesdriven by demographic change and globalization, such asclimate change and chronic disease, attract companies fromfar-flung sectors to develop innovative solutions. This blurringof boundaries — explored in Industry redefined, page 20 — is alsobeing driven by the rise of the empowered customer, page 36,a product of digital disruption and the changing expectationsof the millennial generation.Exploring these megatrends in depth can give companiesthe power to understand a rapidly changing world andadapt accordingly.When machines become workers,what is the human role?RESOURCEFULPLANETCan innovation makethe planet resourcerichresourcefulinstead of resource scarce?FUTURETHEFUTUREOF SMARTOF SMARTWhat intelligencereal intelligencewill wewillneedwe needto create a smart future?BEHAVIORAL REVOLUTIONSOLUTIONSHow will individual behaviorbehaviourimpactimpactour collective future?INDUSTRY REDEFINEDDISRUPTIVEIsevery industry now your industry?CONVERGENCEtext to follow text to followtext to follow text to follow?SICPHRAOGDEMThere are two final megatrends that will fundamentallyreshape our future. The next wave of technology is transformingthe future of work, page 28, with disruptive implicationsfor businesses, governments and society. Meanwhile,a budding behavioral revolution, page 32, is allowingbehavioral economics to solve urgent challenges suchas climate change and chronic disease as digital platformsenable real-time, real-world behavior modification.FUTURETHEFUTUREOF WORKOF WORKURBAN WORLDIn a fast-changingfast changing world, can cities bebuilt TECHNOLOGYFor instance, just as global demographic shifts (population growthand an increasingly urban world, a trend explored on page 40)are straining resources and fueling an urgent need for sustainablesolutions, the rise of technologies is providing an answer —something explored in The future of smart, page 24. Thesame basic interaction between demographic-driven resourceconstraints and technology-empowered sustainable solutions isat the heart of two other megatrends — Health reimagined, page44 and Resourceful planet, page 48 — which examine industryspecific implications.HEALTH REIMAGINEDWith growinglimited resources,health needs,is digitalis digitalthe best medicine?Primary forces16The upside of disruption Megatrends shaping 2016 and beyondMegatrendsThe upside of disruption Megatrends shaping 2016 and beyond17

Section 2:Megatrends 201618The upside of disruption Megatrends shaping 2016 and beyondThe upside of disruption Megatrends shaping 2016 and beyond19

1Alphabet is competing hard to winthe race to driverless transport,logging more than 3 million milesper day in simulation and10,000—15,000 autonomousmiles per week on public streets.3IndustryredefinedIs every industry now your industry?Four mobile telecom operatorsThe US retail chain CVS eliminatedtobacco products from its stores,changed its corporate name toCVS Health, and now operatesover 1,100 retail-based healthcare clinics across the country.5recently received licenses fromthe Reserve Bank of India tolaunch payments banks within thenext 18 months.43 “Google Self-Driving Car Project Monthly Report,” January 2016, 0116.pdf4 “Reliance Industries, Bharti Airtel, 9 others get RBI nod for payments banks,” The Financial Express, 19 August 2015.5 Walter Loeb, “Why CVS’ New Health Initiatives Are A Winning Strategy,” Forbes, 18 December 2015, gy/#1e3b333530f020The upside of disruption Megatrends shaping 2016 and beyond1. Disruption is drivingconvergence2. Technology underpinsconvergenceTraditional diversification orconsolidation sees competitors enternew industry categories, even unrelatedones. These models allow a company tomeet its business objectives, whetherspreading risk, adding new revenuestreams, gaining greater control oversupply chains, or more. However, neitherstrategy alters the basic characteristicsof the industries involved. Even thoughnew competitors enter the space,the boundaries of the industry — keyactivities, value chain fundamentals,the customer value proposition, anddominant economic characteristics —remain virtually the same.Technology companies — both start-upsand existing titans like Alphabet andApple — are disrupting industry spacesand uprooting incumbents. Severalreasons are behind this phenomenon:Industry convergence — the blurringof two or more previously distinctindustries and sets of participants —is different. It is about what happensto industries when disruption takesplace. Disruption reconfigures anddemocratizes information, creates newlevels of complexity, and takes place atunprecedented speed. In turn, barriers toentry are lowered. Disruption dramaticallyalters the “invaded” industry’s basicand often long-held characteristics.The converged industry is redefined. The growing software content ofproducts and services confers anadvantage on companies that excel atcode and algorithms as they enter newcompetitive spaces. Opportunities to substitute digitalplatforms for physical world ecosystemscatalyze convergence. Uber hasdisrupted the taxi industry and coulddo the same for packages and preparedfood delivery. Technology companies tend to beasset-light. Industry incumbents aresaddled with legacy costs in real estate,IT infrastructure, supply chains, andother hard assets. Incumbents can lack the digital savvyat the leadership level — both C-suiteand board — to react and competeeffectively when challenged. Incumbents may be burdened withgreater regulatory constraints thansmaller, more agile start-ups.The automotive industry is a clearexample of how technology can disrupt atraditional sector and drive convergence.In the recent past, a handful of global carmanufacturers competed against oneanother to design, manufacture and sellvehicles. Today, value in cars is shiftingfrom being 90% hardware-based to beingmore than 50% software and experiencebased.6 The vehicle has become a rollingsoftware platform able to deliver servicesbased on data, sensors and analytics,allowing technology companies such asAlphabet and Apple to compete directlywith car manufacturers for “ownership”of the dashboard and connected driverexperiences. When cars, trucks andother vehicles become autonomous,the automotive, transportation, andlogistics industries could convergeinto a broader mobility industry. Thisnew sector will likely attract newcompetitors and success will go to thosethat offer the best capabilities for theredefined marketplace.6 Don Butler, Ford Motor Company, “Digital Transformationand the Automotive Industry,” CXO Talk, 8 May tomobilestechnology-platform-don-butler-fordThe upside of disruption Megatrends shaping 2016 and beyond21

INDUSTRY REDEFINED3. Customer empowermentdrives demand for novelsolutionsJust as every company is now atechnology company, every company —whether B2C or B2B — is also a consumercompany. The rise of digital technologieshas democratized consumer access toknowledge, given customers a morepowerful voice, allowed more informeddecision-making, and enabled greaterchoice between providers.Empowered consumers with greaterchoices are helping redefine traditionalmarkets and accelerate the elimination oftraditional boundaries. They are becomingthe center of evolving industries. SeeEmpowered customer, page 36, for moreon this megatrend.One such example is the power and utilityspace. Renewables, smart metering andsmart grids are reshaping the sector. Butcustomers themselves are also redefiningthe industry. The industry was once proneto viewing customers as impersonalratepayers and has traditionally sufferedfrom low levels of customer satisfaction.Today’s enlightened customers demandtransparent and competitive pricing, aswell as energy-efficient, environmentallyfriendly solutions.This has led retail companies fromindustries such as telecommunications,consumer products, security services andtechnology to move into the home energymanagement market. The distributedenergy revolution allows residential,commercial and industrial customers togenerate and store their own electricity,as well as sell it back to the grid. Theformer ratepayers have evolved tobecome actual suppliers to incumbentpower and utility companies.22Regardless of industry, when customersfeel chronically underserved, theywelcome offerings from insurgent players.Industries with high customer pain pointsmay be those most ripe for convergence.4. Companies should seekopportunity beyond theirown industry wallsIn a converging world, all industry spaceswill be hotly contested. As boundariesbreak down, incumbent companies willface competitive threats from start-upswith disruptive business models andfrom formidable companies in previouslyunrelated sectors.While disintermediation capturesheadlines, cross-sector collaboration,partnerships and acquisitions withincontestable industries will be far morelikely. The world is challenged by large,costly problems such as climate change,rapid urbanization and soaring healthcare costs, which are beyond the scope ofany single organization or even industryto address effectively. In the face of suchchallenges, the future of competitionwill shift from company versuscompany in a single industry to crossindustry ecosystem versus ecosystem.Partnerships and alliances will be

EY’s approach to disruption is to amplify the signal rather than the noise, and see the connections, not just the dots. We do this by widening the lens through which we see disruption. Disruption has commonly come to mean a transformation of business models and va