Close

07/03/2017

Disruptive Financial Technology and the Innovator’s Dilemma

 

I recently reread Clayton M. Christensen’s 1997 book on disruptive technology – The Innovator’s Dilemma. For those unfamiliar with the work, what the book tries to achieve is to understand why so many market leaders and incumbents fail to properly adopt and capitalise on disruptive technology. In fact, the tagline of the book reads, “When new technologies cause great firms to fail”, and many of the great companies that he studied did in fact fail.

The book is split into two parts; Part I examines the reasons for the failures and the management decisions that led to those failures. Part II is dedicated to prescribing the solution to the innovator’s dilemma; “how executives can simultaneously do what is right for the near-term health of their established businesses while focusing adequate resources on the disruptive technologies that ultimately could lead to their downfall.”

What he came to realise, through an abundance of research across numerous industries, was that they did not fail due to poor management or lack of foresight. On the contrary, it was decision making which would have been considered good management under normal circumstances that led to their downfall. In other words, the good management paradigms that allow companies to flourish when working with continuous innovations are the very reasons they reject disruptive innovations.

Towards the later stages of the book, he outlines the conditions under which a few incumbents managed to succeed in the face of disruptive innovation. These conditions were almost ubiquitous across each company who managed to adopt and eventually thrive under the new business models created by the disruptive technologies. The key to all these conditions (and what makes it so pertinent for today’s banking industry) was that each one could really only be achieved by placing the disruptive technology in an autonomous organisation well removed from the main business. 

These new stand-alone entities succeeded because it allowed them to:

  • Find new customers for the new technology. Customers who were perhaps not the traditional customers of the incumbent organisation.
  • Foster a new culture of test and iteration essential for developing new markets.
  • Establish their own cost structures appropriate for the lower profit margins of the new market segment.
  • Create a growth plan around small opportunities which would not have satisfied the growth needs of the larger organisation.
  • Not be encumbered by the resource dependence of the incumbent business.

So what has this got to do with today’s global banking industry?

Almost every bank in the world currently finds themselves in a similar place to the large companies that Christensen studied as part of his work on the book. In fact, every bank on the planet is currently wrestling with some sort of innovation agenda in response to FinTech encroachment and the disruptive innovations they have brought to the financial services market over the last decade.

Some are going down the high-risk route of core platform migrations, some are attempting to clean up their middleware, some have chosen to go on the FinTech partnership journey.

Others have chosen to launch challenger brands, and many are opting for an overall transformation strategy which consists of two or more of the aforementioned strategies.

Based on the evidence of the many industries which went through technology disruption in the past, it would seem that only those banks who have incorporated a ‘challenger brand’ into their overall strategy have learned the historical lessons of managing disruptive technological change.

In order to make the book’s case studies more up to date and relevant, Christensen has published revised editions on more than one occasion since it’s original release.

You have to wonder – when he again updates the book a few years from now, will some of today’s largest global retail banks feature in the updated case studies of once powerful organisations that stumbled into irrelevance in the face of disruptive innovation.

Or will they have learned the lessons of the past and spun off an independent autonomous organisation tasked with creating a brand new bank on cutting edge technology with the appropriate cost structures, culture and autonomy to not only survive the age of Fintech disruption but in fact flourish and become even more relevant and dominant?

Time will tell.  

 

I’m Head of Innovation at Leveris and I really struggle to write about myself in blog bios.

Leave a Reply