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POINTERS FOR RIDING THE DISRUPTIVE WAVE

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nvestor worries in the present marketplace edges beyond macro pressures. A wide gamut of disruptive forces are influencing businesses that directly sets the course of their growth, productivity & profitability. We analysed 500 companies to gauge and articulate the impact of these disruptive forces across key industries. Disruption doesn’t always guarantee success on one hand but the disrupted don’t always loose on the other… we observed this in the 2000’s and from the mobile revolution, the episodes of Nokia & Motorola. Data from the European markets lead us to understand that ‘Old school’ companies have outperformed ‘Newer’ peers by approximately 350 basis points annually since 1980. A similar trend was observed in the US IPO’s too. Naming the forces of disruption..In our macro study we identified 3 dominant forces viz:

a. New Age Market Leaders: The emergence & boom of the Chinese market in the mid-term and innovation transition (R&D and GIC1) within India in the long term

b. Technology: Advent of the new age technology pools such as Artificial Intelligence, Industry 4.0, Uberification of services, 3D printing etc. These innovations directly influence consumer & industrial markets and open ways for products & services at much cheaper prices-many a times leading to extinction of incumbents

c. Compliance & Regulation: Our position on this remains very strong and hence we call this as a ‘game changer’ for quite a few sectors especially consumer markets (health, home, food and personal care), auto, financial services & energy sectors. (1. Global In-house Centers)

Although ‘Technology’ has often taken the hot-

seat to define disruption, including the recent

highlights from the World Economic Forum, we

believe there are a multitude of disruptive forces

that are impacting the marketplace currently and

in the foreseeable future. While the emerging

disruptions come across as a global and broad-

spectrum phenomenon, our research led us to

believe they are not unheard-off in the past. Albeit,

some of them demonstrate dynamics which have

never been seen before. We hence pulled

Figure 1: Anagram Consulting Perspective – Global Industries that are at high and low levels of disruption risk Source: Anagram Consulting Analysis & Credit Suisse Research, Thomson Reuters

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together a birds-eye-view of the disruptions that

impacts at the sector levels:

Figure 2: Disruptions that matter - Sector Level

Technology led disruption is acts as a common

thread impacting most industries and turning tides

against a wide gamut of incumbents. There

are a number of reasons why the impact of

technology as a competitive advantage

enabler or as a threat is different to that of

globalisation. Of the many reasons, there

two worthy of its mention:

1. China’s upsurge: largely impacts bulk of

the developed markets incumbent business

models. Some of the high-profile examples

are in the realms of digital payments, credit

scoring & ecommerce integration.

Significant growth of digital payments using

existing platforms and networks in China

has brought with it a much wider range of

digital financial services that are both

expanding financial inclusion and economic

opportunity for individuals and creating

valuable new business models for the

companies.

While the pressure in the market continues to gain

steam from China’s dominance in the ‘cheaper

version’ space, technological innovation is

allowing for production of new products and

services to eradicate incumbent offerings. This

suggests that the traditional tactic of reduced

prices/COGS alone wont help companies

succeed in the disruptive market place. Today’s

competitive market place demands higher R&D

Spend and readiness to expand CAPEX budgets.

2. Uberification of service : Owing to quantum

leap in computational power and hyper

compression in the cost of computing, the doors

are now wide open for potential disruptors to

access technology on a scale bigger than ever

before. Be it a website development business or a

engine that enables sharing spare rooms in a

apartment, the ‘Sharing Economy’ phenomenon

Figure 3: Disruptive innovation in the Chinese Digital Finance Platforms Source: Better than cash alliance Apr 2017

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has started penetrating deeper and wider across

industries.

Investing in new technologies:

In the recent times, new-age / disruptive technology investments have gained momentum although the deal flows have been quite controlled. With exponential growth in valuation and lack of clarity in to return models, investing communities are often posed with the common challenge – How to ride the disruptive wave? For example, based on media reports (e.g. Forbes.com Dec-2015), Uber's latest venture capital funding implied a valuation for the firm of US$68bn, up from US$52bn in June 2015 and just US$5bn in 2013. To put this into context, it would likely make Uber one of the 50 most valuable companies in the S&P500. While we understand this elevated interest surrounding the potential for such disruptive technologies / services on one hand, on the other we have observed historically that new technologies have failed to carry the momentum in the long term. Some of the quotable examples are from the wave runners of the 90’s & 2000’s such as Cisco, Nokia & MySpace. Despite the attractiveness of emerging technologies, investors should always be wary of the long-term impacts such disruptive technologies can cast upon incumbent / present

day business models. The fact that some of these models despite not appearing as a viable long-term success model, the equity investors cannot afford to neglect. There have been promising high return models for short-mid-term gains. Business models that support strong cash-flow

returns often indicate success rates in the

investment and our analysis points that there is

only a hand full of sectors where the median cash

flow returns for older companies have been higher

than for new entrants. These often roll back to

traditional sectors such as baking & Insurance,

Media, Healthcare and Lifesciences. This made

us believe that older companies usually generate

lower cash flow returns than their new

counterparts. Subsequently, we also observed

that older / traditional companies may not always

outsmart their newer competitors when it comes

to bottom-line performance as they often deliver

returns that are stable & with less returns

cyclicality.

0 5 10 15 20 25

Household Personal Products

Media

Software

Food, Beverage & Tobacco

Banks

Health Care

Business Services

Pharma

Retail

Consumer Goods

Technology Hardware

Manufacturing

Median Cash-flow Returns By Industry (%)

<10 Years 50+

0 2 4 6 8 10 12

Household Personal Products

Media

Software

Banks

Energy

Health Care

Business Services

Pharma

Retail

Consumer Services

Technology Hardware

Manufacturing

Volatility of Cash-flow Returns By Industry (%)

<10 Years 50+

Figure 4: Median Cash-flow Returns Vs Volatility of Cash Flow Returns by Industry Source: Anagram Consulting Analysis, Thomson Reuters & Credit Suisse Research

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The Technology Conundrum – Turning

Science in to Scalable Business Models:

Technology companies be it during their early

investment stage or at a mid-term often fall in to

one or more of the 6 traps that jeopardises their

growth & scalability:

Getting your judgements right on

‘Technology Disruption’

Across the technology landscape, be it

disruptive or not, it all starts as a small

experiment. As successful disrupters keep their

focus on getting their business model right

rather than merely transforming their ideas in to

product form, many investors struggle to

validate if the model is scalable & if it is, the

question that always follows is - how soon?

Investors and executives even with a good

degree of understanding of the disruption

theory many a times tend to overlook at some

of its intricate threads during decision making.

In our view there are 3 key neglected threads:

1.Disruption is not an event but a

phenomenon: Post validation, the next hurdle

is to manage the movement from driving these

organizations from the bottom of the market /

new market in to mainstream. Although this

step often challenges early stage investors, the

real challenge for mature investors will be to

help drive these disrupters to effectively absorb

incumbents market share and then drive

profitability along with scale. This process is

time consuming and draws incumbents to

demonstrate aggressive and creative strategies

to counter. Notwithstanding, disruption in its

usual course takes time, it also helps to explain

why disrupters fail to fall on the radars of

incumbents in many cases. For example, the

case of Netflix as it launched in 1997. Netflix’s

early proposition wasn’t very attractive to most

of the customers who were glued to

blockbusters as they usually rented new movies

via physical hand-ins (DVD’s & VCD’s via US

Mail) often with a baked in lead time for delivery

from order. This behaviour positioned Netflix as

a go to option for a small segment of customers

who weren’t obsessed with the new releases.

At the time Netflix took their position not to

serve the broader customer segment, it wasn’t

necessarily a mega mistake for the

blockbusters to ignore them. The two entities

addressed very different needs for their

Figure 5: Disruption – Challenges – Turning Science in to Scalable Business Models Source: Anagram Consulting

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customers. As familiarity to the technology and

service grew and transition took strength

towards streaming, only then did Netflix gain

popularity and made its way in to the preferred

basket of the Blockbusters customers. This was

an archetypal disruptive path. For a minute if we

assume that Netflix would have initiated their

business trying to address the mass market like

in the case of Uber, Blockbuster’s would have

devised and perhaps succeeded by deploying

a counter attack that is built on the strength of

their understanding of the segment and the

market.

2. Disruptive models are unconventional:

Consider the primary healthcare practice – A

patient who has some symptoms visit the

General Practitioner without knowing the issue

he/she faces with their health. General

Practitioners then leverage their years of

experience, combine that with pathological

diagnosis to arrive at the root cause and

recommend the course of curative

actions/medication. We call this as a “Person

Centred Model”. In contrast, a new wave of

disrupters such as Babylon are now adopting a

“Process” model to their business model to

address a gradually ascending volume of

disorders using a remote GP process

leveraging a finely standardised set of

protocols. With such disruptions customers

(patients in this example) are swiftly embracing

the new model as a model of choice for primary

care.

3. Mortality rates of Disruptors is still very

high: If we look at the ecommerce landscape

from the 90’s only a fraction of them made it

past 2000’s and a handful ascended to a billion-

dollar mark. The failures are not just indications

for the gaps engraved in the disruptive theory

but stand as a framework for the applicative

dynamics of the theory. So, watch out for signs

of exclusivity dilution, attribution crisis etc

without being carried away by the disruption

mania in the market place.

Disruption is a ‘evolving journey’ for everyone:

We observed in our analysis, that globally

companies, executives & investors adopt a very

elusive route to respond effectively when it

comes to disruption. The key to financial returns

at times of disruptive change is not simply by

means of higher risks or by investing for longer

terms. The key is to manage strategic

technology disruptions in an organizational

context where small orders create energy, rapid

low-cost helps venture in to under-defined

markets and where the overhead are small

enough to deliver profits even in low-spend

volume heavy markets. We believe companies

fail to deliver when positioned around solid

financial goals not because they make wrong

moves or decisions, but they make right

decisions for scenarios that soon become

irrelevant in a fast-changing marketplace.

Jeremy Milward is a Founding Managing Partner at Anagram Consulting Partners and with

over 20 years of major business and technology transformation consulting experience working across multiple

industries, Jeremy has advised fortune 100 organizations on Operational and Technology strategy with a strong

onus on operating model change and cost reduction initiatives. Recently he has focused on helping boards &

executives leverage their “digital” agenda to drive sustainable business change.

Jeremy is an Alumni of University of Oxford and works within our London office

E: Jeremy.Milward@anagramconsulting.com

Srikanth Sridhar is a member of the founding team and a Director at Anagram Consulting and

heads the performance improvement practice Srikanth’s industry expertise spans across Retail, Consumer,

Industrials (both cyclicals & non-cyclicals), Technology & Private Equity.

In the past decade, Srikanth has led a wide gamut of engagements spanning strategy formulation (Growth, Go

to Market, Operational), Operational improvements including cost reduction, Technology advisory & Investment

case rationalization. His experience spans working with the C-Suite & Boards of Fortune 500 clients to Mid-size

enterprises as well as delivering value to leading Private Equity clients across their portfolios. Srikanth

emphasises on simplification and outcomes by combining deep industry knowhow and speed of execution.

Srikanth is an alumni of the London School of Economics (LSE) and works within our London office

E: Srikanth.Sridhar@anagramconsulting.com

Our Experts:

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About ANAGRAM CONSULTING

Anagram Consulting is a specialist management consulting firm with deep sector and sub sector know-how. We engage

with business executives to simplify and solve their challenges, empower their decision making and drive sustained high

performance.

With our headquarters in London, we leverage an experienced team – that challenges conventional thinking, embraces

disruptive ideas (e.g. design thinking and advanced analytics), to arrive at quick results and realise sustained outcomes.

Anagram Consulting is a subsidiary of Business Integration Partners S.P.A (Bip). Bip is a global management consulting

firm focused on advisory, research and in supporting organizations during the adoption of disruptive business models and

technologies. Bip has more than 1600 consultants spread across 11 countries and experience of driving >3000

engagements world-wide.

Visit us at: www.anagramconsulting.com to see how we can help our clients achieve quantum leap in their performance.

For more about ANAGRAM CONSULTING, contact info@anagramconsulting.com

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