Create Early Warning Systems to Detect Competitive Threats

Eighteen months ago, a massive earthquake struck off the northeast coast of Japan. The tsunami it unleashed caused devastating damage whose effects are still being felt. But it could have been even worse. Instead, a mere three seconds after the earthquake struck, a sophisticated early warning system kicked in. The system then triggered a series of messages via TV and cell phone warning about the impending tsunami that came about nine minutes later — which, as a Time magazine reporter noted, "can be just enough time to take cover, drive a car to the side of the road, step back from getting on an elevator or stop medical surgery."

Corporations should have early warning systems to detect emerging competitive threats that have long-term potential to affect their business. Just as seismologists used research to determine what to watch for and then distributed networks of sensors to identify the right signals, strategists can look back at past transformations to inform their own analyses.

Strategists need to understand how tomorrow's industry could be structured. The work of two of the most important scholars in the field, Clayton Christensen and Richard N. Foster, suggests considering five questions:

1. How willing are customers to continue to pay for further improvements in performance that historically merited attractive price premiums? One of the key tipping points in a market occurs when a company, in Christensen's language, overshoots a given market tier by providing them performance that they can't use. Your television remote control probably serves as a daily reminder of overshooting. Each of those buttons can do wonderful things, but would you pay extra monthly fees for yet another button? Probably not. When overshooting begins to set in, industries can change rapidly.

2. Are customer preferences and habits changing due to enabling technologies and/or changing social norms? Companies often miss important shifts because they start not among mainstream customers, but at people at the fringes of the market. But remember, the quirky behavior that teenagers follow today (100 text messages an hour!) becomes mainstream just a few short years later.

3. How active are startups at the industry's edge? For much of the 1980s and 1990s, many parts of the startup ecosystem focused on communications, technology, and health care. In the past few years, there have been significant investments in markets like data analytics, 3-D printing, renewable energy, and financial services. Executives in market leaders in those sectors need to watch these developments carefully, because the seeds of transformation are being sown as we speak.

4. Are competitors with disruptive strategies having a material impact on portions of the industry? Christensen's research shows clearly that transformation often comes in the form a disruptive innovator that makes consumption simpler, convenient, and more affordable. When a company with a lower-cost business model or one based around radical simplicity gains traction, it augurs significant change. Disruption is moving from a dream (or nightmare, depending on your perspective) to a reality in the financial services industry. Jack Dorsey's Square is processing millions of dollars in payments a day with its simple but powerful solution. Wonga's payday loan offering continues to grow rapidly. And companies like Google, Apple, and even telecommunications titans are eying the industry. Executives that dismiss these developments do so at their own peril.

5. Will current or pending changes in government action shift the basis or competition or make life easier for entrants? The government is often portrayed as an inhibitor to innovation, but that's not fair. Many commercial innovations, including the Internet, mobile technologies, and countless lifesaving drugs, have their roots in government research. Nonetheless, in Seeing What's Next we described how governments can curtail both the motivation and ability of innovators to drive disruption. When governments change the rules, or focus their ample buying power in new directions, executives need to stand up and take notice.

Companies need to do more than analyze early warning signals. They need to make sure they organize and act in ways that maximize their chances of responding accordingly. And they need to recognize that, all too often, the right time to start is before they feel the need to response. Good early warning systems provide the data to help inform these decisions.

(One increasingly important component of a company's strategic early warning system is sniffing signals in social media. Doubting companies should look no further than seismologists. Remarkably, the Twitter Earthquake Detection system detected a recent earthquake off the coast of the Philippines before advanced equipment. It is another sign of how breathtakingly fast our world is changing.)

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