Lights Out

This article originally appeared on Forbes.com.

If you're a CEO trying to figure out where the next killer technology will emerge to upend your business model and how to respond, here's a small comfort: Your problem isn't new.

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Consider Thomas Edison. His goal in perfecting the electric bulb wasn't to bring light where there was darkness, it was to disrupt an established industry that gas lighting companies had controlled for more than 50 years. He carefully studied the cost of gas lighting to ensure that his safer, cleaner technology could match or beat the gas utilities' price. Ultimately, the electric light bulb did force every gas company out of the lighting business—but not before Edison's own direct current (DC) technology was supplanted by superior alternating current (AC) technology. Even the most inventive capitalist can be swept aside by insurgents offering a better proposition.

One of the most challenging roles for CEOs is figuring out how to respond to emerging threats. Edison fought the future vigorously. He eventually ceded control of his company and watched resentfully from the sidelines as it merged its way into the AC business to ensure survival. Yet many of the gas companies he attacked live on today because they realized their core strength wasn't lighting but gas distribution, which to this day turns out to be one of the best options for heating and cooking.

In our research at Bain & Company, we have found that a key characteristic of outperforming companies is that they maintain or regain their insurgency, their sense of being at war with the industry on behalf of underserved customers. Those with an insurgent mindset are future makers: They have faith they can capitalize on disruption and innovation.

Too many incumbent companies, by contrast, become future takers with the tacit permission of their CEOs. They either view the future passively, which means they have no power to shape it, or they view it defensively, which means they must fight or delay it. They benefit enormously from the current industry rules, profit pools, pricing structures and value chain, and so they seek to protect current profits even when prices are falling for their core offerings. Meanwhile, insurgent competitors bombard customers with superior offers.

The modern examples of Edison's gas and AC/DC fights are familiar: Kodak vs. digital cameras, the music recording industry vs. digital music, brick-and-mortar booksellers vs. Amazon, taxi companies and hotel chains vs. Uber and Airbnb. Smaller fights against the future take place in companies every day, and can have just as big an effect over time: Telecommunications and energy companies keep their customers locked into long-term contracts significantly above current market pricing; packaging companies resist efforts to be more environmentally friendly in order to reap a few more years of better margins.

Getting bigger does not automatically turn a company into a future taker. On the contrary, increased size can create an advantage for innovation and response to disruption. Larger companies have more resources and a larger customer base from which to learn.

Yet absent intervention by the CEO, incumbent companies do tend to fight the future. They refuse to respond to a price war, they ignore innovations from competitors, or they shrug off new legislation.

Incumbents must make decisions every day about whether or not to respond to the latest widget or development in the marketplace. To some extent, that's fine. You can’t run a business if you change your propositions monthly or panic with each piece of proposed legislation. But if more than 20% of your time and your senior team's time is spent fighting the future, you're in trouble. You will lose the loyalty of customers, employees and business partners, and you open the door to insurgents. Here's a simple set of future-proofing questions to ask yourself:

  • Are we doing the right thing for our most important customers? One acid test: If employees discover that competitors are offering better propositions to our customers, do they have the power to respond aggressively?
  • Are we the cost leader? If not, why not?
  • Are we gaining share in growth channels? Customers are deciding where and how to buy. They are moving to the channel that fits their needs. Too often, I see incumbents proudly talking about their leadership of a losing channel.
  • Do we act fast? The obvious advantage incumbents have is their relative scale, but we don't talk enough about relative speed—that is, their ability to respond quickly and with agility.
  • Are we still the best place to work for the talent that matters most to our customers? Do we still get the pick of the best engineers and sales people, or are they exiting to more exciting insurgents?

The 20% rule of thumb suggests that you could probably survive with a "no" answer to one of these questions. Equally, you should be able to respond "yes" to the rest. And if you’re a future maker, an attractive competitive target might be a company that does not pass this test. You just might be able to knock out their lights.

James Allen is a partner in Bain & Company's London office and a co-head of the firm's global Strategy practice. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).