How Old Indutrie ecome Young Again

John viokla, www.trateg-uine.com

Jul 25th, 2014

When contemplating poile threat to their uine, man executive worr aout
diruption. The ee competitor with new technologie poied to capture their exiting
cutomer, and the know it etter to e a diruptor than a diruptee. ut diruption i
often miundertood. In fact, a New Yorker writer Jill Lepore point out (The
Diruption Machine, June 23, 2014), man celerated cae have een le diruptive
than the were portraed a eing. What mot indutrie experience a diruption i
tpicall not a udden change from one ource, ut the accumulated impact of a range
of interacting factor. If ou want to e prepared for diruption, it critical to
undertand the more gradual, prevalent, and multifaceted dnamic that underlie it: a
phenomenon called dematurit.
Dematurit i what happen to an etalihed indutr when multiple companie adopt
a hot of mall innovation in a relativel hort time. Thoe eemingl trivial move
comine to rejuvenate the old mature indutr and make it oung again. The term wa
coined in the earl 1990 Harvard uine chool profeor William Aernath and
Kim Clark. The were thinking of the U.. auto indutr, which wa undergoing a
profound operational renewal, purred Japanee competition, the qualit
movement, and lean management. Toota and Honda, with their uperior production
method, did not full dirupt Detroit. The dematured it. Intead of collaping, the
Detroit Three adopted their rival tool and technique, and the entire indutr
advanced to higher level of qualit and cutomer atifaction.
You can think of dematurit a a crecendo of mini-diruption that add up to great
e ect. It will hit mot indutrie ooner or later; it truck ector a varied a oftware
development, entertainment, and defene contracting. It i happening right now in the
U.. in healthcare and electric power generation. In the long run, dematurit i a great
oon, ut it can alo e terril threatening to individual companie. Nearl all cae of
dematurit have one thing in common: the genuine urprie of executive when it
happen to their indutr. It i all too ea to e caught o guardto ignore the mall
change that appear one one, to fail to elieve the will a ect ou, and to end up at
the tail of the wave, outpaced competitor who aw the poiilitie earlier.
The olution lie in gaining etter enitivitin other word, improving our ailit to
recognize and repond to the ignal of incremental change. Thi i di cult, ut not
ecaue information aout the pending change i pare. Rather, the ignal are too
aundant. New reak of deal, partnerhip, and market entrance or exit. cholar,

commentator, and uine leader talk of looming diruption. ome of that talk i
accurate in it foreight, and ome of it i hperole. It i di cult to know which i
which.
Here, then, to help ou harpen our mental gauge for diruption and dematurit, are
ve often overlooked ut genuinel precient ignal of pending indutr change. The
re ect more than 20 ear of cloe oervation of innovation launche in a variet of
indutrie. Thee phenomena tend to arie when an indutr i on the verge of
dematurit. Look for earl ign of thee ve change, and ou can etter recognize the
impact of toda eventand the trajector of tomorrow.

New Cutomer Hait

In the 1980, mot people who ought telephone intalled them in a ingle location,
connected them to the telephone network with a wire, and ued them excluivel to
communicate via voice. the end of the 1990, moile phone were availale with
analog tranmiion network. Conumer ued them a portale upplement to their
wired voice linea widepread incremental improvement, ut not a dramatic hift in
people hait.
Then digital tranmiion (2G and 3G) ecame availale. In 2002, people ent more than
250 illion text meage. efore long, the egan to integrate other functionreading
magazine and ook, litening to muic, plaing game, nding place to eat in
unfamiliar neighorhood, and o on. Thi new group of conumer hait added up to a
paradigm hift in everda life. The ame peron who might once have carried a cellular
phone, map, ook, camera, Gameo, and Walkman now could have one device
erving all thoe purpoe. 2007, the ear the iPhone wa introduced, it wa clear that
major change were coming in uine and pricing model for a road group of digital
indutrieelectronic, creative content, gaming, photograph, video, muicthat had
formerl operated independentl of one another.
A imilarl powerful paradigm hift i happening now in uine-to-uine IT with
cloud- and Internet-aed oftware ucription, known a oftware-a-a-ervice
(aa). Thi ector did not exit efore 2000. Formerl, nearl all corporate technolog
adopter ought the oftware the needed to run their uinee, and intalled it on
machine reiding in their own facilitie. We-aed oftware deliver model, known
a application ervice provider (AP), truggled to gain enough cale to make mone.
The were holed low Internet peed, non-modular oftware development
practice, and a lack of cloud computing, and their o ering were too frutrating to e
uale. Toda, emploee in companie of all ize routinel acce application ervice
via high-peed cloud connection, a completel new cutomer hait that took hold onl
after incremental improvement in related technologie and practice propelled aa

acro a threhold of uailit. The uine i growing 20 to 30 percent per ear; thi,
plu it clear link to new hait, indicate that it ha onl jut egun to rejuvenate the
oftware indutr.
Not ever promiing technolog foter a cutomer hait. The egwa, a highl
pulicized, technologicall ingeniou elf-alancing electric vehicle, turned out to e
too unwield and expenive to reform hait. It ha old onl aout 50,000 unit ince
it launch in 2001. imilarl, although the odatream home oft drink machine are
widel ditriuted kitchen appliance, it not et clear whether the have enough
popularit to dirupt the caronated everage indutr. Much depend on how man
people prefer the convenience of never running out and the thrill of making oda
themelve to the convenience of a prepackaged can that doent need cleaning.
For ever propective innovation, whether oure promoting it or facing o againt it,
eek out an earl ignal of new cutomer hait. The wa people emrace or reject
the innovation, and the logic underling their repone, will tell ou a great deal aout
whether it a martphone or a egwa.

New Production Technologie

When a new technolog change the wa an etalihed uine produce it core
product, dematurit often follow. For example, man auto inurance provider are
changing the wa the price their policie. Intead of claifing cutomer likel
driving rik through actuarial tatitic aout gender, age, and location of
reidenceand thu getting onl a rough tatitical view of the hait and rik level of
individual driverthe now ue data collected from in-car diagnotic device. Thi
allow them to deign more pro tale product that return more aving to cutomer.
MetroMile, a tartup launched in 2012, provide a free device for car that track
mileage, driving pattern, and location; it pa for thi ervice with inurance policie
targeted at uran reident who drive le than 10,000 mile a ear and who pa the
mile. Progreive Inurance, a more etalihed auto and home inurance compan,
ue it own in-car monitor called naphot to gather data, and reward afer driver
with lower premium.
The power generation ectoran indutr that i controlled large, emipulic
emi-monopoliei alo facing dematurit ecaue of new production technologie.
Toda, utilit cutomer u electricit directl from the companie that generate it. ut
the centralized, expenive infratructure that ha long een a trength of the indutr i
alo a ource of cot, in exiilit, and diater rik. In particular, the hurricane and
other weather catatrophe of the pat few ear, epeciall the tunami that hit the
Fukuhima Daiichi nuclear power plant in Japan in March 2011, have provided a
wake-up call for man companie. Loe related to thoe event, coupled with the

falling cot of fuel cell, olar panel, peronal wind turine, and other torage and
power-management technologie, will proal lead man power companie to
emrace alternative power tem and the digital grid over the next few ear.
How do we know thi long-awaited hift will nall happen now? ecaue the
technolog i croing a threhold of e ectivene and cot e cienc. It alo help to
recognize the complement of new cutomer hait: When large companie uch a
Google ue renewale technologie to power intallation like large erver farm, it give
other commercial uilding owner and near homeowner more reaon to change
their hait a well. When the change reache critical ma, the winning electric power
companie will e thoe that move awa from elling uppl, and toward elling wind
turine, ga generator, and other mean of production.
Another good example of production technolog reakthrough i digital farication.
Thi newl prevalent technolog i altering the foundational practice of mot
manufacturing indutrie. Farication machine ue oftware to control 3D printer that
can uild component and product placing hundred or even thouand of laer of
materialuuall platic polmer or metalin peci ed hape. A with man other
technological advance, each ear ring device that are fater, cheaper, and more
varied in their capailitie than thoe of the ear efore.
The technolog ha now reached a tipping point. More than two-third of 100 U..
manufacturer urveed PwC in 2014 reported deploing 3D printer in ome wa.
Man of the machine are ued to prototpe new product. arl adopter report that
their product development ccle are hrinking a the quickl deign, uild, and
redeign product efore launch. The technolog alo make new uppl chain value
propoition poile. Companie can produce dicontinued part a needed on a 3D
printer. ome manufacturing expert anticipate that the ue of 3D printing will caue a
U$3.4 illion annual drop in material tranportation cot, enaling manufacturer
to contruct component entirel on ite intead of aemling them from maller part
made multiple upplier. (For another perpective, ee A keptic Guide to 3D
Printing, Tim Laeter and Jerem Hutchion-Krupat, +, Winter 2013.)

New Lateral Competition

There wa a time when a famil doctor had a near monopol on primar care ervice.
The doctor knew the patient, knew the famil hitor, and wa preent whether in
treating the u or deciding a twited ankle needed an X-ra. The onl prolem wa the
time it took to get an appointment, or the three-hour wait for the doctor to e free.
Toda, the demand for acceile, qualit healthcare delivered in a timel wa ha
created an exploion in convenience provider. CV Minute Clinic, Walgreen

Healthcare Clinic, and urgent care chain randed to major health network are
o ering relativel inexpenive, rapid, and acceile medical care. Thee cover aic
preventive ervice uch a immunization, u hot, and diaete tet; treatment of
udden condition uch a urn, prain, plinter, ack pain, and migraine; and
chronic need, uch a the management of athma and high lood preure.
A traditional famil doctor might look down on thee clinic a providing an
imperonal, tranactional ervice, ut conumer dont eem to mind. Viit to retail
clinic in the U.. tripled etween 2008 and 2013. One recent tud the PwC Health
Reearch Intitute found that 45 percent of conumer acro all age group are willing
to ue alternative provider for a range of aic health ervice. Their option to do o
will rapidl expand. CV and Walgreen together have cloe to 1,000 clinic location in
the United tate, and Walmart i getting into the game through an experimental
partnerhip with Kaier Permanente. Thee new healthcare actor are giving primar
care provider and even hopital emergenc room competition a the ource of choice
for quick, imple medical ervice.
The emergence of healthcare convenience chain i jut one example of the dematurit
that occur when a new tpe of competitor appearone with product and ervice
that utitute for thoe of incument. Uuall thee involve lateral move, the tranfer
of capailitie and uine model from one ector to another, where the rt ector
ha a completel di erent (and etter) wa of olving the econd ector prolem.
Though there conidered to e diruptive, lateral move are not alwa that arupt
and clear-cut; the often occur in incremental fahion, with ome incument (in the
healthcare clinic model, Kaier Permanente, for example) taking part. Thu, when ou
ee a lateral competitor emerge, even in nacent fahion, it a good predictor of more
widepread tem change. Indicator viile toda include the ue of moile phone
for paing ill, and the increaing popularit of prefaricated uilding, which ma
revitalize ome apect of the contruction indutr, even in uran etting like New
York.

New Regulation
Change in government regulation pattern have an enormou impact on the tpe and
intenit of competition in man market. The paage of the A ordale Care Act, for
intance, i adding million of patient to the healthcare tem in the United tate.
Thi place new competitive preure on paor and provider, challenging oth tpe
of companie to raie the e ectivene and cot-e ectivene of their o ering.
uddenl, old plaer and new entrant alike ee opportunitie to keep patient out of
the doctor o ce with tne and nutrition tool like MapMRun and MFitnePal,
and diagnotic tool uch a at-home trep throat teting kit. Thi kit ha the potential
to prevent 78,000 doctor o ce viit per ear, valued at $94 million in phician

revenue. ome of thee diagnotic tool have prompted new regulation. For example,
the U.. Food and Drug Adminitration halted operation for the direct-to-conumer
genetic teting compan 23andMe, pending review of it aliva ample DNA tet ervice.
Financial ervice, energ, education, tranportationall thee indutrie and other are
uject to new and revied government rule, each with it own form of regulator puh
and pull. New pament tem uch a itcoin for online market, or prepaid card for
phical ue, are undergoing crutin multiple agencie around the world. The
caron tax eem to e gaining momentum a one tool in the e ort to cur indutriall
produced greenhoue ga emiion. And recent U.. government relief for people with
outtanding tudent loan det ma e jut the eginning of e ort to ue regulator
mean to make a college education more a ordale and to make evaluation of college
more ueful and acceile.
In general, emerging regulation give ou a good wa to anticipate change, even in area
where imminent change eem unlikel. For example, looening regulation on the ue
of autonomou ing vehicle like drone will have an e ect on invetigative
journalim, law enforcement, and inurance, along with the e ect of their ue in war
and defene. imilarl, when regulator relaxation appear imminent for elf-driving
automoile, we can expect a major dematurit wave to hit ma tranit tem, taxi
ervice, the car rental indutr, and preumal man other tranportation-related
endeavor.

New Mean of Ditriution

The advent of digital infratructure ha alread thoroughl dematured media and
entertainmenta ecting formerl etalihed uine model for muic, motion
picture, pulihing, periodical, advertiing, and communication. Now it i
dematuring the phical world a well. For example, conider what the online taxi
dipatch ervice Uer i doing for peronal tranportation. Anone who ha een
caught tring to hail a ca on a rain evening in New York Cit know that the tem i
in deperate need of an overhaul. A of 2014, there were fewer than 15,000 ellow ca
licene (called medallion) in operation in the cit, and great peak preure on demand:
verone want to ue the uppl of taxi at the ame time. Thi i a claic ditriution
tem overload prolem.
Uer et up a new ditriution tem that overcome the limit of the old one. It
allow rider to log in to the tem and indicate where the are and where the are
going. The Uer app then repond with a wait etimate and often a xed price. Uer
ha moved the ditriution o the treet corner and into the moile device, which tell
rider how much their ride will cot aed on real-time demand, weather, ditance, and
current tra c conditiontake it or leave it. Intead of wondering how long it will take

to hail a ca, taxi rider feel the ene of certaint that a etter ditriution tem often
ring. Whatever happen to Uer the compan, we can e certain that taxi
management tem like the one it ha developed are here to ta.
uine-to-uine environment are imilarl a ected emergent ditriution
hift, like the one ignaled Monanto 2013 acquiition of the Climate Corporation.
Climate i an agricultural ervice provider that ell crop inurance and deliver it in
conjunction with in-depth anali derived crunching data pertaining to uch
variale a weather and oil compoition. Agricultural client get real-time advice aout
when to plant, weed, or fertilize. eemingl mall adjutment can have a huge impact
on farm ield. If Monanto chooe to undle it eed with inurance or data ervice
a a reult of thi deal, it will change the ditriution tem for agricultural inurance.

Leading in Dematurit
One of the few certaintie in uine toda i that dematurit i coming to our
indutr, and oon. Reponding e ectivel require that ou throw out old aumption
aout how value i uilt and utained in our market. You need to ak quetion aout
our indutr that other elieve have alread een full, inexoral, anwered: What
make for e cient cale? Who i the competition? Who are the cutomer? What do
cutomer want? Who own what? Where i the rik?
If aking thee quetion and puruing untraditional anwer eem like an unlikel path
to ucce, conider thi fact: More than 80 percent of the elf-made illionaire who are
pro led in m upcoming ook, The illionaire ect, made their illion in mature
indutrie that the reinvigorated tackling one or man of the factor identi ed
aove. The either introduced a product attuned to new conumer hait, changed the
technologie of production, adopted idea from another indutr, adapted to new
regulation, changed the ditriution tem, or made ome comination of thoe
move. lon Muk, CO of Tela Motor and paceX, challenged the internal
comution engine dominance in the auto indutr developing a cutomer-friendl
electric car. Farallon Capital Management founder Tom teer worked laterall: He
created an invetment vehicle for univerit endowment and changed how thoe
cutomer de ned pro tale inveting. Aliaa founder Jack Ma created one of the
larget e-commerce ite in the world taking advantage of production and
ditriution change inherent in the We to provide platform and infratructure ervice
to thouand of mall uinee.
Although dematurit i inevitale, our uine can e the one that ene t mot. Half
the tak i recognizing the facet of impending change earl enough to prepare. The ve
indicator in thi article provide ou with a tarting point, a wa to egin honing our
judgment and identifing the real threat to our indutr. The other half of the tak i

to repond in a wa that make ou tronger: aemling and integrating the

capailitie oull need in thi new, rejuvenated marketplace. The right capailitie will
proal e a comination of what ou alread do well and what ou mut learn to do
from cratch. If ou can et our compan up to ene and repond to dematurit ahead
of time, then oull e one of the rt to catch the ig wave of mall changeefore
everone ele in our indutr get on oard.
Reprint No. 00270

Author Pro le:

John viokla i a principal and U.. advior innovation leader with PwC. He alo
lead the xchange, a think tank for uine leader. He i the coauthor of The
illionaire ect: What xtreme Producer Can Teach U aout reakthrough Value (with
Mitch Cohen; Portfolio, forthcoming).