THE INCUMBENT’S DILEMMA: RESPONDING TO DISRUPTERS

What leading corporations are doing and how they are doing it

The pace of change is faster than ever before

Over the past decade, there has been explosive growth of new technologies and businesses. The new digital economy has dramatically accelerated the speed of innovation, user adoption, and information sharing, as technologies evolve faster and permeate more broadly than ever before.

This rapid new technology adoption imposes massive disruption to the status quo of industry leaders — in a short period of time — from competitors that aren’t on incumbents’ radar. As a result, competition is tougher and it is harder for companies of all stages across all sectors to stay relevant.

Innovators emerge as new leaders

The auto industry offers a clear illustration of the impact of technological change and disruption. GM and Ford had enjoyed a long period as established market share leaders in the U.S. since they were founded in the early 1900s. Despite their entrenched leadership positions and a one-hundred year head-start, the combined market value of these two incumbents is now less than the combined market value of Uber and Tesla — two startups that didn’t exist only fourteen years prior.

GM and Ford could not have predicted these new competitive threats from one company that neither owns nor sell cars and another company that has never engineered a gas tank. This massive-scale upending of incumbents isn’t limited to the auto industry. Disrupters are capitalizing on billion dollar opportunities in all sectors of today’s digital economy.

Incumbents face growing risk of obsolescence

As this new class of innovators gains strength, incumbents are struggling to deal with the increasingly challenging competitive environment. Consumers are quick to adopt new technologies, business models, and service offerings, leaving existing corporations in a position where there is little time to adapt.

The increase in turnover among the biggest corporations illustrates how the pace of change has proved to be too fast for many incumbents to manage. Of the list of Fortune 500 companies in 1955, just 12% remained on that list sixty years later in 2015 — a figure that is projected to continue to decline.

With all of the challenges facing corporations and the onslaught of innovators quickly eroding market share, what are companies doing to remain competitive?

Corporate leaders adapt to the evolving environment

Top companies realize that looking outward is a strategic imperative. Even the most innovative of leaders, like Google, Amazon, and Facebook, have adopted aggressive investing strategies for acquiring external resources.

M&A alone is not enough

Traditionally, M&A has been the main weapon in the corporate arsenal for strategic investing. While M&A has led to extreme successes in some cases, in other cases the anticipated benefits of deals never come to fruition. And sometimes the M&A that doesn’t happen is as bad as the M&A that does. Missing the right M&A opportunities can be the difference between survival and bankruptcy. See Blockbuster, who was presented with an opportunity to acquire Netflix for $50 million in 2000, and passed. Today, Blockbuster is bankrupt and Netflix is worth $45 billion.

M&A is insufficient when it comes to managing the rapidly occurring change that corporations can’t fully predict. Today, corporate leaders are increasingly turning to investment methods outside of the traditional M&A arena and pursue their strategic goals through direct investing programs and investments in sector-focused funds.

A boom in strategic initiatives focused on direct investing and fund investing

Within the last several years, we have seen a growing number of corporate development teams launch direct investing programs as a new mechanism to tap into emerging businesses and technology. In 2015, 85 new corporate VC units made their first investment — with that same figure expected to surpass 100 in 2016. As a result, deal volume and invested capital from corporate VC programs has grown considerably over the last five years.

A handful of the corporate leaders that have developed large-scale direct investing programs include General Electric, Cisco, Comcast, and Microsoft. One particularly successful direct investing program is the UPS Strategic Enterprise Fund. UPS used the SEF to build a substantial pipeline of relationships with promising emerging players in its sector. In addition to generating financial returns, UPS states that it gains strategic benefits from developing partnerships and knowledge returns from its investments.

Since the program’s founding in 1997 it has invested over $380 million in capital across 40+ investments. Recently, the SEF experienced high-profile success with its investment in CyPhy Works, a drone maker, which provides UPS with new technology and capabilities for furthering commercial drone services. It doesn’t hurt that CyPhy Works has also grown its post-money valuation in the last three consecutive fundraising rounds.

Although direct investing can generate value, it is also a resource-intensive route that requires extensive internal talent and capital. As a result, many corporations are choosing to invest through sector-focused funds. These companies are outsourcing the investing to external fund managers for a more capital-efficient method to access those strategic benefits and financial returns.

Campbell Soup Company pursued a fund investing strategy through a $125 million commitment to Acre Venture Partners, a venture capital firm that invests primarily in food technology, food startups, and agriculture. Cisco, for example, has invested in brand-name funds such as Sequoia, Benchmark, Kleiner Perkins, and OMERS, as well as emerging sector-focused and geography-focused managers such as McRock Capital and Georgian Partners. Both large corporations and mid-sized companies are increasingly adopting the fund investing strategy.

Conclusion

The fast pace of change and rapid adoption of new technologies has led to growing power of new disrupters and fierce competition. In the fight to stay relevant, more corporations have sought out innovative new ways to compete through direct investing and fund investing initiatives.

Ben Gordon, CEO of Cambridge Capital and BGSA. Investor in logistics and supply chain technology. Published at Fortune and CNBC. http://bengordonpalmbeach.com/

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