The Upside Of Disruption – Megatrends Shaping 2016 And Beyond by EY
From Disruption To Megatrends
As disruption becomes an everyday occurrence, we explore its primary causes and the megatrends that are shaping our future
Disruption is fundamentally changing the way the world works. Today’s businesses, government and individuals are responding to shifts that would have seemed unimaginable even a few years ago. Artificial intelligence and robotics are reinventing the workforce. Drones and driverless cars are transforming supply chains and logistics. And changing preferences and expectations — most notably in the millennial generation — are altering consumption patterns and demand for everything from cars to real estate.
We have looked at the root causes of these transformative trends and, consequently, have identified three primary forces behind this current wave of disruption: technology, globalization, and demographic change. By understanding the interaction between these forces, we’ve identified eight global megatrends which are shaping the future. These are large, transformative trends that define the present and shape the future by their impact on businesses, economies, industries, societies and individual lives.
The eight megatrends generate key questions to answer:
- Industry redefined. Is every industry now your industry?
- The future of smart. What intelligence will we need to create a smart future?
- The future of work. When machines become workers, what is the human role?
- Behavioral revolution. How will individual behavior impact our collective future?
- Empowered customer. How will you change buyers into stakeholders?
- Urban world. In a fast-changing world, can cities be built with a long-term perspective?
- Health reimagined. With growing health needs, is digital the best medicine?
- Resourceful planet. Can innovation make the planet resource rich instead of resource scarce?
EY On Disruption
See the connections, not just the dots
The march of disruption is unrelenting and this can leave today’s decision makers and leaders grappling with tremendous uncertainty and a broad array of challenges. Responding to disruption has become a central issue for incumbent organizations everywhere.
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 value networks driven by technology or business innovation. However, the evidence is growing that it can come from public policy, macroeconomic trends, geopolitical events and other developments. At the same time, disruption upends more than business models and value networks; it can transform political systems, regulatory regimes, social compacts and much more.
Just as important, the perception of disruption is shifting from that of threat to opportunity. Incumbents have begun to embrace disruption to take advantage of the rapidly changing environment.
At a time when there are so many unknowns and no easy answers, we believe we must ask better questions. As people are becoming less afraid of disruption and more accepting of its inevitability, the better question becomes: How do you seize the upside of disruption?
Section 1: Understanding disruption
1. How did disruption become mainstream?
Disruption has worked its way into every sphere of our lives. The rapid acceptance of disruptive innovations has led to a growing awareness in the business community that disruption is ubiquitous and accelerating.
To highlight how commonplace the idea has become, we charted the number of media articles mentioning “disruptive innovation” between 2010 and 2015. Our research found an increase of more than 440% during this period (see Media mentions of “disruptive innovation”, below).
However, despite growing commercial awareness, only a handful of companies have successfully disrupted their own business models. For instance, Netflix switched its business model from one built on DVD home deliveries to one built on streaming. More recently, auto giant Daimler have begun experimenting with moves into car-sharing and ride-sharing.
Meanwhile, hundreds, perhaps thousands, of firms — from Blockbuster Video to Waldenbooks and Zenith Electronics — failed to adapt in time, and ended up either shadows of their former selves or out of business altogether.
2. How is our understanding of disruption changing?
In the past two decades, the definition of disruption has expanded far beyond its textbook meaning — the transformation of business models 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 stem solely from technology or business innovations — it is also influenced by demographic shifts, globalization, macroeconomic trends and more.
It is also evident that the effects of disruption are beginning to extend far beyond the business world. For example, “sharing economy” start-ups such as Uber and Airbnb are already disrupting regulatory frameworks. Meanwhile, some of the most disruptive technologies on the horizon (e.g., AI and robotics) will not only disrupt corporate business models, but also society as a whole — realigning income distribution, altering relationships between governments and citizens, and perhaps even calling into question 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 of populist political movements — is that it resonates so well with much 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 in successive waves, and it is these new waves that generate new megatrends. Understanding the next waves of disruption — and the interactions 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 rather than a longer list of effects. It also widens the field of vision, since focusing on new waves of primary forces reinforces that any list of megatrends is by definition incomplete and will expand over time.
The three primary forces of disruption are:
1. Technology. While we usually think of disruption in the relatively recent context of IT, advances in technology have been disrupting business models for centuries. The Industrial Revolution, for instance, eliminated guilds and created massive labor displacement. In our lifetime, successive waves of the IT revolution (PC, online, mobile, social) have democratized data, empowered consumers and spawned scores of new industries. The next waves — the Internet of Things (IoT), virtual reality, AI, robotics — promise to be even more revolutionary.
2. Globalization. Like technology, globalization has been upending the status quo for centuries, going at least as far back as the 15th century launch of the Age of Discovery and colonialism. Globalization has accelerated in recent decades, thanks to trade liberalization and emerging market growth. These trends disrupt existing business models by creating new competitors, reordering supply chains and lowering price points. The next waves — including the emergence of Africa and a more multipolar world — will increase complexity and require flexible business models to respond to global shifts.
3. Demographics. Throughout human history, demographics have determined destiny. In the decades ahead, relatively high birth rates will make Africa and India engines of economic opportunity. Aging populations will transform everything from health care to real estate. Millennial-dominated workforces will reinvent the workplace. Urbanization will increase cities’ economic and public policy clout, even as it strains their ability to grow in sustainable ways. Migration and immigration will have profound impacts on workforces and economic development.
All these demographic shifts will require new strategies and business models.
The continued evolution of these primary forces — and interaction between them — leads to the disruptive megatrends outlined in section 2.
4. Why is responding to disruption so critical?
Business’ response to disruption is perhaps the most important strategic imperative facing companies, for three reasons:
1. Everyone is affected. The pace of disruption is accelerating and impacting a growing list of sectors. The next wave of digital innovation — harnessing AI, robotics and virtual reality — will transform activities long considered safe from disruption. Indeed, these developments are already starting to disrupt sectors such as legal and professional services in ways that would have seemed unimaginable even a few years ago.
Meanwhile, disruption no longer emerges from Silicon Valley alone. It can just as easily come from emerging markets. Today’s leaders need to be aware of the game-changing threats and opportunities bubbling up in markets around the world.
- If you think you won’t face disruption, it’s not because you won’t — it’s because you don’t yet know how it will happen.
- What are you doing to understand the myriad ways in which your organization could be disrupted?
2. It’s easy to underestimate the pace of change.
“In retrospect, all revolutions seem inevitable. Beforehand, all revolutions seem impossible.” That observation, attributed to Michael McFaul, former US Ambassador to Russia, is just as applicable to business and economic revolutions as it is to political ones.1 It’s easy to declare in hindsight that the collapse of the Soviet Union was inevitable, but in the summer of 1989, even amid the rumblings of perestroika and glasnost, one would have been hard pressed to find anyone predicting that the Berlin Wall would fall just a few months later.
In 2012, when Google announced that it had been testing driverless cars on US roads and had already driven over 200,000 miles in everyday traffic conditions, the news reverberated like a shock wave across the world. Driverless cars — a staple of science fiction just a few years earlier — had become reality faster than most of us expected. Time and again, we underestimate the significance and speed of disruptive innovation.
- Time is not on your side.
- Are you embracing disruption quickly enough?
3. Smart strategy and execution are not enough. It may sound counterintuitive, but organizations get disrupted not by doing the wrong thing, but by doing the right thing. The long list of companies that have fallen victim to disruption includes firms that dominated their industries for decades. They were often ruthlessly competitive, relentlessly focused on the market and led by competent strategic thinkers. In many ways, they succumbed to disruption not despite, but because of, that focus. Organizations are typically structured and incentivized to focus on fulfilling the needs of their existing constituents — blinding them to disruptive opportunities, which often do not initially meet those needs.
- The strategy that got you here may not be the one you’ll need for the road ahead.
- How are you realigning incentives and structures around disruptive innovation?
5. Why is it so difficult to respond to disruption?
Incumbent companies typically fall victim to disruption. The reasons for this have been well documented in Clayton Christensen’s classic book, The Innovator’s Dilemma.2
Incumbents dismiss the initial disruption of their industry because it appears inconsequential relative to established products/services and fails to meet the needs of existing customers. However, a small core of customers embraces the disruptive offering, giving market entrants a toehold, and the offering improves more quickly than incumbents expect. Its capabilities soon surpass those of the prevailing product or service — at which point existing customers, who have so far resisted 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 significant network effects or switching costs. Time and again — whether with the 1980’s PC revolution that disrupted mainframe computers or the more recent disruption of standalone GPS devices by smartphone apps — the same pattern occurs with predictable regularity.
6. How do businesses seize the upside of disruption?
Fortunately, as disruption becomes mainstream, organizations have become more proactive in addressing the challenge.
With the right response, disruption offers tremendous upside to firms that can harness its forces. Discovering the upside of disruption requires both learning from those who do it well and being aware of the constraints that companies face in formulating their responses.
Companies in the technology sector are laser focused on creating disruptive opportunities. For example Alphabet, the parent company of Google, has its famous “20% time” policy, which encourages employees to spend as much as a fifth of their time on any idea they consider promising, even if completely unrelated to their regular work projects.
More generally, the title of the late Andy Grove’s 1999 book is part of the DNA of technology firms: Only the Paranoid Survive. Without exception, the titans of technology are obsessed with getting into each other’s business because they understand how real the threat of disruption is.
Sometimes these ventures are successful, sometimes they aren’t — but technology firms know that this single-minded focus gives them their best shot at remaining relevant in the long term.
However, companies outside tech face constraints that are not an issue for tech firms. Investors are often willing to give technology firms more leeway — until recently, Amazon never posted a quarterly profit and Apple sat on a US$200 billion stockpile of cash without issuing dividends, and neither firm’s stock price suffered as a result. But investors aren’t always as forgiving of firms from sectors that don’t have the same disruptive innovation aura and credibility around efforts to disrupt their own business models.
Companies looking to disrupt their business models need to begin a process of rigorous self-interrogation. To start the conversation, we offer a few better questions at the end of this report. See How do you seize the upside of disruption?
7. How does disruption lead to megatrends?
The three primary forces — technology, globalization and demographics — are evolving in a succession of waves including AI, robotics, global urbanization, aging populations, millennial workforces and more. As these new waves of technology, globalization and demographics interact, they give rise to a range of megatrends.
For instance, just as global demographic shifts (population growth and an increasingly urban world, a trend explored on page 40) are straining resources and fueling an urgent need for sustainable solutions, the rise of technologies is providing an answer — something explored in The future of smart, page 24. The same basic interaction between demographic-driven resource constraints and technology-empowered sustainable solutions is at the heart of two other megatrends — Health reimagined, page 44 and Resourceful planet, page 48 — which examine industryspecific implications.
Meanwhile, sectors themselves are being redefined, as information technology lowers entry barriers and challenges driven by demographic change and globalization, such as climate change and chronic disease, attract companies from far-flung sectors to develop innovative solutions. This blurring of boundaries — explored in Industry redefined, page 20 — is also being driven by the rise of the empowered customer, a product of digital disruption and the changing expectations of the millennial generation.
There are two final megatrends that will fundamentally reshape our future. The next wave of technology is transforming the future of work, page 28, with disruptive implications for businesses, governments and society. Meanwhile, a budding behavioral revolution, page 32, is allowing behavioral economics to solve urgent challenges such as climate change and chronic disease as digital platforms enable real-time, real-world behavior modification.
Exploring these megatrends in depth can give companies the power to understand a rapidly changing world and adapt accordingly.
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