In today’s fast-changing business environment, companies need to react quickly and decisively to disruptive market changes. Yet many enterprises lack the ability to respond swiftly to these competitive threats.
For example, rapid change is transforming the auto market, which is witnessing a potentially dramatic shift in the locus of value creation away from global OEMs and towards companies that are supplying technology for self-drive, connected and electrified vehicles. It’s unclear who will prevail, especially as a number of tech companies are making big investments in auto technology suppliers.
How do companies reorient themselves to be vigilant and reactive to such transformative threats?
After studying numerous current and historical cases in multiple industries, we believe that companies need to take a more structured approach to identifying and dealing with market changes. They need to assess related business challenges and opportunities as well as the impact and role of supply chain during industry transitions.
Our research at MIT CTL identified three main types of developments that can trigger the emergence of new business models in an industry: commoditization of the core business, changing customer preferences, and innovation.
In each case, the supply chain management function can be a key enabler of the response. We identified several common responses to disruptive changes, and the consequences for those companies involved.
Paralysis. Inaction, or deferring a reaction to a market change, causes companies to lose competitive ground. FedEx was caught flat-footed when its arch-rival UPS acquired the shipping chain Mail Boxes Etc. in 2001.
Partial channel integration and partnering. This course of action brings capabilities needed to navigate a period of change. When consumer demand for non-carbonated beverages increased, soda manufacturer PepsiCo acquired two of its largest bottlers. The move enabled the company to develop new products faster and in smaller batches, thereby competing more effectively in non-carbonated drinks markets.
Full channel integration and transformation. By gaining complete control of the supply chain, a company can fend off competitive threats. Zara has effectively created a new dominant design in the fast fashion/apparel industry by vertically integrating almost all elements of their supply chain.
Capability-based diversification. Companies under threat from market changes can counter by finding ways to leverage existing competencies. Fuji Films reacted to the digitization of the market for film by using its expertise to penetrate other markets.
Looking for answers
How can companies choose which action to take – assuming they are on the lookout for competitive threats and receptive to change? Based on our research, we believe that enterprises can start to prepare themselves for disruptive change by answering a set of interrelated questions.
- How can your industry be disrupted? Study the characteristics of the market, paying attention to its dominant design (the product functions and components that dominate a market).
- How can you disrupt your industry and other industries? In what ways could you disrupt the dominant design?
- What would you like to/can achieve? Consider your current capabilities and business objectives to determine what new product offerings can be accomplished.
- Who is your target customer? Identify and define prospective buyers for the potential new offerings.
- How would you characterize product/service offerings? What product portfolio will meet the needs of customers, and what is the market size and earnings potential?
- How would you design and configure a supply chain to support the disruptive changes? What supply chain strategy will you need to execute the changes you have identified for the potential new product portfolio, and how do existing structures and processes meet these requirements?
- Which competencies and capabilities do you need? For example, will you need to go outside your organization to acquire new expertise?
- When should you act? Timing is everything – which is why this is one of the most difficult questions to answer. An issue to watch out for is action inertia; the inability to act when a change signaling transformation becomes evident.
Taking the initiative
Answering the questions listed above helps to highlight potential threats and activate the response mechanisms every company needs to develop. In addition, the exercise highlights the important role the supply chain needs to play when companies enter new markets and must respond to unpredictable demand. In today’s marketplace, speed matters.
This post was written by James B. Rice Jr., Deputy Director, MIT CTL, and Mario Dobrovnik, Research Associate, Vienna University of Economics and Business. For more information on the research contact Jim Rice at: firstname.lastname@example.org. The post is based on the Innovation Strategies column published in the March/April 2017 issue of Supply Chain Management Review.