Warding Off the Threat of Disruption

How quickly do companies need to respond to innovations that could upend their markets? In “Keep Calm and Manage Disruption,” an article in the spring 2016 issue of MIT Sloan Management Review, Joshua S. Gans argued that companies may have more time than is commonly believed. For example, his research suggested that established companies can often employ a “wait and see” approach, and if a new technology demonstrates its potential, the incumbent can acquire it.

That advice didn’t satisfy at least one reader. Daniel Cohen, vice president of business operations and strategy at Adobe Systems Inc., a software company based in San Jose, California, wrote to explain why he thinks companies need to move swiftly to avert disruption before it affects their performance. What follows is Cohen’s perspective, Gans’ response — and an informative dialogue about the importance of monitoring disruption in markets related to one’s own.

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Why You Shouldn’t Wait

By Daniel Cohen

Managers facing a disruption are often advised to take a cautious approach by creating a separate business unit that can experiment with the new model. However, a cautious approach can be disastrous. While the leadership team first monitors developments and then experiments with new product and business models, upstarts are gaining critical competencies that put them miles ahead of the incumbent companies.

When a company faces transformative changes that disrupt both product offerings and business models, there is no time to waste. Although it can be costly to retool offerings, and business model changes may mean lower prices to existing customers, the revenue decline is a short-term trade-off for long-term growth.

Adobe knows this from experience. With the advent of cloud computing, we faced disruption in the software market. For software companies, cloud computing represents a change in how products get developed and delivered to customers as well as a business model change — from a one-time sale to a subscription model. Even though we were not yet seeing major inroads from cloud competitors, we realized we needed to get ahead of this trend and overhauled our business model in a span of 18 months in 2012 and 2013. The results have been customer growth and stronger customer relationships.

Until 2010, Adobe primarily sold packaged software that ran on desktop computers. Revenue was driven by product releases with enough new features to convince customers to purchase upgrades. Today Adobe’s offerings are cloud based, and the proportion of our revenue that is recurring has climbed from 19% in 2011 to more than 80%.

While it’s important to react quickly, companies can’t respond to every new market trend. Two key early indicators to watch are disruptions in adjacent markets and changes in the growth profile of your own company.

Adjacent Markets Being Disrupted

At Adobe, as we looked across the software landscape in 2010 and 2011, we noted that nearly every software company that was founded in the last decade and reached scale did so with a cloud model.

In fact, when we decided to enter the adjacent market of digital marketing in 2009, we did so by acquiring a cloud computing company, Omniture Inc. While no cloud company had successfully challenged Adobe in creative software, our largest business area, we believed it was only a matter of time before that model would prevail in our market, too. We also noticed that software companies in adjacent markets were moving to subscription models.

Changes to Growth Profile

Adobe had started to observe changes to its growth profile several years before we made the transition to a cloud-based offering. Our growth had slowed, and more concerning, an increasing proportion of our growth was coming from price increases and upselling to existing customers rather than from new customers. We feared that the high initial price for our software was a barrier to millennials entering the workplace.

We also had concerns about our ability to continue to sell upgrades to existing customers. We had high customer satisfaction, but our research found that many of our customers were so satisfied with our current products that they weren’t sure they would have a reason to upgrade in the future. We needed new innovation approaches to rekindle excitement among our existing customers, and we needed to bring in more customers.

In 2008, we began a small pilot in Australia and New Zealand, testing a subscription model that allowed customers to obtain our product with a relatively low monthly fee as an alternative to outright purchase of the software. We found that the new offering brought new customers into the market and encouraged existing customers to buy who would not have chosen to upgrade. In fact, we realized that cloud computing with a subscription model could be a solution both to subscriber growth and to having new types of innovation to offer to existing customers.

After many discussions and extensive modeling and scenario testing, in 2011 we announced plans for the rollout of a cloud-based subscription offering called Creative Cloud. We quickly learned that making a change of this magnitude would affect practically every job in the company. While our initial strategy was to run our traditional model and a new subscription model in parallel, we came to adopt a “burn the boats” strategy to accelerate our transition to the new model; we needed our employees to understand there was no going back to the old way of doing business. The result was, we believe, one of the fastest transitions to a subscription model in the software industry.

There is a lesson here for others, especially those who would wait until they started to see an impact on their own business and only then begin to experiment. There is an experience curve, and even with an all-in focus, it can take years to make the transformation. Companies taking a more cautious approach could fall so far behind a disruptive competitor that they never recover.

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Actually, Adobe Did Wait

By Joshua S. Gans

The idea that companies face a dilemma between acting quickly and being cautious when it comes to disruption lies at the heart of why disruption is such a difficult managerial issue. Daniel Cohen’s account of Adobe’s transformation reflects that dilemma.

Benchmarked against its established software counterparts, Adobe’s choice to move exclusively to cloud-based services was bold. But it also reflected years of studying industry trends. By the time Adobe made its move, it had had about a decade to observe first the emergence and then the growth of cloud computing and a subscription model in other parts of the software industry. Newer entrants in the industry were almost exclusively cloud based — especially those offering productivity tools, such as Google Inc.’s office suite. They were the reason a younger generation was amenable to cloud-based products.

One reason companies have some time to wait and see is that when a new entrant gains traction, the incumbent often has the option of acquiring the entrant. This is precisely what Adobe did in 2009 when it decided to enter the adjacent market of digital marketing by acquiring the cloud-based company Omniture.

Adobe has weathered a technological storm to preserve its strengths and build a more sustainable future. But it didn’t do these things by shifting to a cloud-based subscription model as soon as that model began emerging in the software industry. Instead, Adobe applied caution and calculation to successfully manage what was likely a difficult transition. Cohen’s account of Adobe’s transformation should be read as a call to alertness and then intelligent action — and many executives would do well to keep its teachings in mind.