No, Tech Start-ups Aren’t Taking Over the World

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Welcome to the HBR IdeaCast from Harvard Business Review. I'm Alison Beard. There's been a big fuss made about disruption in recent years. Tech-enabled startups are taking over the world and old economy companies just can't compete. Look at what Netflix did to Blockbuster, what Amazon did to department stores. Our guest today says that narrative ignores one thing. Over the past 3 decades, many industries haven't been disrupted at all. In fact, his research into the Fortune 500 and Global 500 shows that lots of large and longstanding businesses are not just surviving, surviving but thriving in today's digital world. How are they managing it? Julian Birkinshaw is a professor at London Business School. He's the author of the HBR article, "How Incumbents Survive and Thrive." Julian, welcome to the show.

Thank you very much, Alison. Nice to be here.

First, could you just explain why this narrative around disruption is so wrong? What did you find in your analysis to show that incumbents are actually going really strong?

So I'd always had this nagging worry that the narrative of disruption where the big established companies were dinosaurs was overplayed. So I went back to the data. I simply took the Fortune 500 list, which as you all know is the top 500 companies in the US by sales. And I asked myself, how many of the companies on that list today did not exist 25 years ago. So 25 years ago is 1995, and that date is chosen not just because it's a convenient quarter century, but because '95 was the year when the, the internet really became a kind of a commercial endeavor, when you could actually start buying and selling things. And so the thinking was, that's a long enough period for these digital upstarts and tech companies to really kind of tear through traditional industry. The answer to the question, how many of those companies in the Fortune 500 today didn't exist 25 years ago, is 17. One-seven. There are only 17 of them. And that is the Netflix and the Googles and the Amazons and the Facebooks and a bunch of others. The other 483 companies are all long-established companies. Now, some of them have been renamed. Some of them are companies which existed before, but not in the Fortune 500 and have gradually grown into the Fortune 500. So I'm not saying there's no turnover in the Fortune 500. I'm saying when you look under the hood at the number of companies which have genuinely come out of nothing to become members of that club, it is a tiny number.

And so is it just that the stories about the Amazons and the Facebooks and the Googles have become so dominant in business coverage that we ignore everything else that's happening? Why are we obsessed with this idea of corporate disruption and destruction?

I mean, there's 2 or 3 things going on, right? One is absolutely when you pick up the business press, it is full of these big companies. There's a couple of other points going on as well, which is that they are not just big, they are also reaching across a number of different industries. So there's this sort of hypothesis that Amazon, for example, or Google, are not content just to stay in their chosen sector. They want to kind of move in and disrupt a bunch of other sectors. So it's very easy to see how an argument can kind of be propagated that says no industry is immune. And of course, I can't completely disprove that that's going to happen. I'm just saying, let us take a little bit of a sense of history here. Let's remind ourselves of the conversations we had, for example, in the late '90s, when many people were predicting the imminent demise of banking and goodness knows what other industries. And it did not happen then. So let's be cautious before we predict that it's going to happen this time.

And which companies are some prime examples here? You know, what are the old school companies that are doing just fine even in the face of competition from the likes of Amazon, Google, Facebook, Netflix, et cetera?

So in some ways it's a very boring list I'm going to give you. I mean, there's a few categories of established companies that are doing well. Some of them are literally just everybody's favorite stories. And I can mention JP Morgan. I can mention Procter Gamble. I could mention the New York Times, and so forth. I mean, these are big established companies who haven't just survived because they're big, but they've actually done some really cool things in order to continue to adapt. And then, of course, you do have other companies which perhaps were not quite so well known before, who have become famous for kind of dramatically reinventing how they work. I live in Europe. ING Bank in the Netherlands, for example, has become very famous for its phenomenal kind of rethinking of its internal processes using agile methods. If you live in China, or if you spend time in China, you know the stories of Haier, the white goods company, which has completely rethought how it is an incumbent is going to operate. And it's done very well as a result. But you see, this in some ways, it kind of misses the point to say here are the one or two exemplars. Because in fact, behind the scenes, most of these large established companies are feverishly re-engineering, delayering, simplifying, trying to get closer to their customers. There's a lot happening which doesn't make the headlines, which is actually a huge part of the story of almost like internal creative destruction.

So it's not that they have a stranglehold on competition in their sector or there are regulations that are working in their favor. It very much is that they are changing their strategy to face this digital threat.

That's right. It is actually true that these companies are doing a number of different things at the same time. And sometimes they are absolutely falling back on regulation as a sort of a defense mechanism, and sometimes they are absolutely building on some of their existing strengths. But they're also trying to take on the upstarts and the big tech companies at their own game.

So let's talk about, you know, those different strategies for combating all the threats that are coming at you. You talk in the article about 4, so maybe we should go through them one by one and talk about the pros and cons of each.

I mean, for me, the starting point is my colleague Gary Hamel. He coined this phrase back in, you know, the first dot-com era. He said, you know, out there, there's a company who's forging a bullet with your name on, and your only option is to shoot first. In other words, you know, if you are Walmart, let's say, your only strategy, they would argue, is to fight fire with fire, to take Amazon on at its own game. And so of course, we do see companies that have done this. And a great example nowadays is indeed the New York Times, which, you know, has somehow succeeded in getting to, I think, roughly 8 million online subscribers. It has now become more successful as a digital company than it was in the old paper-based world. Now, it's taken them a long time to get there, let's be clear, but there are many, many other strategies out there which don't involve that direct fighting back strategy.

And so what are some other things we might do?

I've arranged this in the, in the way I presented in the article as a sort of a 2x2 matrix. So the other, shall we say, proactive strategy— if fighting back is clearly a proactive strategy, it's fighting fire with fire. The other very proactive strategy, where you are deliberately trying to push the insurgent into a corner, but you're doing it on the basis of your existing strengths rather than playing the game of the insurgent. And I simply call that doubling down. And doubling down says, we are a successful company in our own right. We have assets, that this new company cannot possibly match. And if we continue to really invest in those things, we will actually be able to not just sort of survive, but actually to some degree, you know, actually reinforce our position. So Disney is the great example of that, right? We all know the Netflix story now. And this is told so often. But there is actually a side to that story which not everybody knows, which is around 2005, 2006. This is, of course, when Netflix was really starting to ramp up its streaming service. It became really possible for us to watch movies on demand. Disney could have said, we're going to get into streaming at that point, uh, but of course it was a very uncertain market. They didn't have the capabilities in streaming. But what Disney did, and what Disney does to this day, is they doubled down, they reinvested essentially in content. And most people will know that they bought, they bought Marvel, they bought Pixar, they bought Lucasfilms, all of which were essentially ways of, you know, building out their stable of high-quality content production and of course, a huge library of materials that every streaming service desires. So, I mean, it's a long story, but essentially For the first decade of Netflix's existence, Disney really didn't bother to actually take Netflix on at its own game.

Yeah.

And then all of the streaming services had to start creating their own content to compete with the amazing creative engine that Disney became.

Indeed. And indeed, I mean, the tussle continues today between the content creators on the one side and the streamers, distributors on the other. And it's become a bit of an arms race, as we all know.

Yeah. So those are the proactive strategies, which would obviously seem to be the best course of action. But incumbents have survived by not being proactive?

Yeah, so of course, everyone wants to tell a good, positive story. And perhaps we come back to this at the end in terms of how you tell your shareholders what's happening. But there are absolutely two completely legitimate defensive strategies that I have observed. The first is what I call retrench. This is an incumbent company recognizing that there is an insurgent, there's a new upstart who is eating into their existing market. Retrenchment says, I accept that that is happening. And I realize that I don't really have the skills to compete with them directly. But it is a heterogeneous, large market in which I operate. And retrenching means sort of pulling back a little bit, consolidating our existing position, possibly through merger acquisition, lobbying, through regulation, a number of different tactics. That help me to shore up or defend my existing place in the market. If you take, for example, you know, the, the well-known story now of, of the demise of Kodak and Polaroid and so forth, you know, when digital imaging took off, all the big manufacturers of traditional cameras— and I'm talking about Konica and Minolta and Canon and those guys— What did they do? I mean, they could see that their market was being attacked. They didn't give up. They just basically merged with one another in order to create economies of scale to try to sort of shore up position. And then I think perhaps an even better example actually is the world of retail banking today. When we look at any retail bank, it could be JP Morgan, it could be Citibank, it could be Barclays or Lloyds in the UK, their strategy in the face of fintech insurgents is, of course, to continue to be what they've always been, which is the very secure, trustworthy home for your primary bank account. We see some mergers happening. We see consolidation happening. We see them pushing back against, for example, blockchain technology by working with regulators to keep blockchain at bay. We see them doing a number of other things, for example, working to build capabilities in some of these new areas, but with a sort of an understanding that actually their biggest priority is to make sure that they maintain their existing market share amongst their existing customers. I mean, it's, you know, it's a multi- multifaceted strategy, but ultimately, I see this as a retrenchment. So that's retrenchment. That is the third strategy. The fourth strategy is, in some ways, the least desirable. I call it moving away or migrating away. I mean, you can call it giving up if you like. But it is absolutely a pragmatic look at a difficult situation where I can see that my market The business I used to be successful in is kind of disappearing before my eyes. And you can think of poor old Kodak in the early 2000s, where they had nothing left to offer as the world migrated to digital imaging. And of course, they'd tried for many years and they'd failed. So what does one do if the market which you used to see as your own is shrinking and is being taken over completely by digital players. Well, moving away is a strategy which says, as long as I'm smart and proactive about it, and as long as I have a little bit of luck going with it, I can find a way of almost like sort of rebalancing my portfolio, taking resources out of the things which are being destroyed and moving them into areas where I have a shot. And so by getting on the front foot and moving almost like before everybody else realizes there's a problem can, in fact, be a good strategy. It's very rare that that happens. I mean, I'll be honest. Most of these migrate away or move away strategies are kind of a last ditch effort to survive.

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How do they choose which path to take?

Everyone wants to know that answer, right? What, what should I do? And of course, the truth is it's, it's complicated. The truth is that as an emerging technology takes hold and some upstart companies start using that technology to, you know, find their way into the sector, there's a huge amount of ambiguity, and the right way forward is not clear. And we've seen that story played out time and time again. And right now, for example, we could absolutely say, how is blockchain technology shaking up financial services? What is the right strategy for a bank? And nobody has the right answer to that. You can also look at the automotive sector, and you can look at electric vehicles and hybrid vehicles and fuel cell vehicles. And you can say, what is the right strategy for a major automotive company? I don't mean Tesla. Tesla's strategy is very, very clear. But for all the incumbent automotive companies, what is their strategy for coping with that sea change away from internal combustion engine? In the period of ferment, the period of ambiguity, the best advice I can offer is that actually, you have scope to experiment with a number of options. I mean, doing all 4 things at the same time feels like overkill. You've got to have at least a point of view on the merits of each of those things, given your specific situation. But there's absolutely scope, for example, to create a unit whose job is to fight back directly, whilst having another unit which is feverishly kind of reinventing itself or re-engineering itself in order to consolidate its existing position. But at some point, you have to put your bet on the horse, the main horse that is going to see you through here. Because strategy is always about choice. The essence of strategy is making choices by default, doing something which involves taking money away from certain things and doing other things. And of course, the trick is knowing when to switch from doing a little bit of everything to putting almost all of your energy and commitment and political capital around the transition to some sort of new world.

So this is sort of bad news for startups. You know, it seems like a bunch of early tech companies made it through and, you know, achieved sort of Fortune 500, Global 500 status. And now all the old established companies are sort of getting digital transformation or figuring out their reinvention. Is there still room for disruption from all these unicorns we're hearing about or smaller companies?

Yeah, look, there is absolutely. And let me, to avoid anybody criticizing me on false grounds. I mean, both narratives are true. In other words, it is absolutely the case that disruption is happening. And that some of these unicorns will actually ultimately become hugely successful companies in their own right. And alongside those sort of 5 or 6 big tech companies that everybody talks about, a few of them will make it through. But the point is that most of them will not. That is just the natural order of things that getting to unicorn status, you know, a billion dollars of putative market value, it sounds like you're assured, but in fact, you're absolutely not.

Yeah. I know you haven't studied this, but do you think that there's more disruption in sort of the small to medium-sized business area?

Yes.

So one of the criticisms— I present this all the time to executive groups— and one of the criticisms I will hear is, look, of course, you're focusing on the top tier of the market. And that's always the most stable bit. And what you're missing, they will say, is the lower tiers. And of course, there is some truth to that. And I don't have hard data. It is always going to be the case that in any stratified market, the bigger, most successful companies will always be the kind of the last to be really hit. I will put aside the world of retail because retail is such a low-margin, fragile business that some of the normal rules don't apply to retail. But in every other sector, it is absolutely the case that some of these mid-sized companies are losing out. But again, let's think about what losing out means. Losing out generally does not mean bankruptcy. Losing out generally means being bought out by another company. You know, when you go back right to the start of our conversation, and I said, look, you know, the changes in the Fortune 500 have been much less than people think. Well, there's actually been quite a lot of turnover in the lower reaches of the Fortune 500. Because many of the old members of the Fortune 500 just simply got bought out by the bigger ones, you know, A company like JPMorgan or Citibank has over the last 20 years acquired 10, 20 regional banks each. And of course, those regional banks used to be members of the Fortune 500.

What does this mean for the economy, for consumers, for employees? You know, this idea that once large companies are large and have a lot of money and a lot of people to think about how to beat disruption, that they're going to keep dominating. And that is true for big tech now, for those companies that have broken through, it's true for them as well.

That's right. I mean, there is this nagging worry in terms of sort of welfare and job creation that somehow the amount of inertia that I see in the system is unhealthy. And I kind of see those arguments, but I'm much more optimistic actually that the process of creative destruction of having— and this is the US and the UK particularly. I mean, other parts of the world have tighter labor markets, probably more restrictive rules about startups. But in the parts of the world I know best, there is a vigorous marketplace for new ideas. There is a vigorous marketplace for corporate control. And those allow the startups to come through. And it also keeps the incumbents honest. Now, I think that's absolutely the case for these big incumbents. I see them working very hard all the time to re-engineer and to layer and try to stay relevant. And they're doing a better job than most people give them credit before. I do completely concede the point that unfortunately, there are some sectors of the economy where the big tech companies have become so dominant using some of these new sort of increasing returns to scale that are sort of central to the digital economy, that actually, they are now almost unassailable in competitive terms. I do actually think that, that there is a huge role for regulation, actually, in setting the terms of engagement a little bit more narrowly, because we are now looking to 5 or 10 years of absolute dominance amongst certain parts of the economy by Google, Facebook, Amazon, Microsoft, strangely, I think Apple is less of a threat in terms of absolute dominance, but that's a personal view. And not Tesla either, by the way. I mean, it's a separate conversation, but I don't see any scenario where Tesla dominates its sector in the way that Google, Facebook, Amazon, and Microsoft will dominate their sectors.

So you're not worried about the old economy companies that have managed to survive and thrive? They've done it in a way that's healthy for the economy. But we're worried about those disruptors that broke through and are now the big players.

Indeed.

We're worried about them.

They are, the big tech are now the 6 most valuable companies on the planet. Yeah, because almost by definition, the old economy companies are companies that live in a world of what we often call diminishing returns to scale, which were susceptible to all the old regulatory systems which were invented in the classic industrial era. And we understood the rules of the game there around what a dominant position was, what the necessary sort of regulatory rules were to stop any company becoming too dominant or to dump their prices too much and so forth. So I'm pretty sanguine about all of that. I mean, you know, it is true that, say, healthcare and financial services are industries where we see some possibilities of established companies gaining unassailable advantages, for example, through returns to scale through information. But I don't see any evidence of that just yet.

As you're advising companies, is there one set of executives in one sector or industry that you would say, hey, it's really time to watch out, you know, which, which sector are you most worried about and do you think needs to start considering these, you know, 4 strategies and quickly?

It's a good question. So the way I now think about it is that disruption of industries happens on both, shall we say, the, the demand side and the supply side. So a demand side disruption is technology enables the user experience to change dramatically. Digitally. And that is, of course, streaming of movies. That is, for example, consumption of news. That is taking pictures and sharing them with friends, right? Those are the sectors where the threats are the most visible because the changes happen quickest. And those are the sectors where incumbent company executives have to be most attuned and most proactive. But you've also got disruptive changes on the, shall we say, supply side. And by that, I mean things like the traditional big pharmaceutical companies being disrupted by biotechnology, which obviously is a very different way of creating drugs, but has no implications for how drugs are actually marketed and sold globally. And it's also interestingly, the automotive sector, where ultimately, a car is actually still going to be a hunk of metal with 4 wheels, whether there's a battery-powered engine inside it or whether it's an engine powered by an internal combustion. And so actually, these so-called supply-side disruptions are typically much slower moving. The incumbent companies typically have so much power in the retail side of things and in the brand and the reputation that they— no one should ever rest on their laurels, but that they actually have time to adapt quite successfully. So, so when I talk to people in the automotive industry or utilities or pharmaceuticals, I, I absolutely talk about many of these things, but I'm conscious that they've actually got time on their side because you take any of those industries I've just talked about. And to the extent that we've seen disruption, it has played out over decades, not over years.

Terrific.

Well, Julian, thank you so much for talking with me today.

You're most welcome. It's been a pleasure.

That's Julian Birkinshaw. He's a professor at London Business School and the author of the HBR article, "How Incumbents Survive and Thrive." If you like this interview, you might also like episode number 823, It's called Tech's Exponential Growth and How to Solve the Problems It's Created, featuring Azeem Azhar. You can find that wherever you listen to podcasts. This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Thanks for listening to the HBR IdeaCast. I'm Alison Beard.