Surviving digital disruption: lessons from the frontline

John Fallon recalls the highs and lows of transforming a traditional educational publishing company into a digital-first organisation


Disruptors attract a lot of attention, so it might surprise you to learn that, as a recent Harvard Business Review article showed, only 17 of the Fortune 500 companies were actually founded during the last 25 years. As we explore on the new Leading Digital Transformation programme at LBS, many incumbents are having a strong resurgence: some of the world’s leading analogue companies are remaking themselves for the digital age by focusing on the things that made them leaders in the first place.

In October 2017, I was one of 100 global company CEOs drawn from 17 different industries, and accounting for $2 trillion in annual revenues, gathered in Brooklyn, New York. We had come together to share the “big bets” we were making on our digital future. We were all mature, profitable cash generative businesses. We were the market leaders in our fields, with brands and products admired around the world. But we were feeling unloved, undervalued and under pressure.

Phase 1 of the digital revolution had been won decisively by the FAANGS (Facebook, Amazon, Apple, Netflix, Google, Salesforce), which had built out the enabling platforms and spawned an ecosystem of well-funded, highly-valued, and extensively hyped new entrants that were bent on disrupting our industries, destroying our business models and wrenching away our hard-won market dominance. But the story did not end there.

As we discussed the challenges ahead, the mood changed from fear to defiance. This was not going to be our Kodak moment. We weren’t going to suffer the same fate as Nokia or Blockbuster. We would not fall victim to Schumpeter’s law of creative destruction. We knew our customers and our markets well. We had great product, sales, and marketing expertise. We were operationally savvy and financially strong. We gave our meeting a new name. Big Bets became Incumbents Strike Back.

And that’s exactly what is happening across a whole range of sectors. Take publishing, for example. US newspaper revenues declined from over $49 billion in 2005 to less than $26 billion a decade later. Spending on recreational books fell from $25 billion in 2002 to $18 billion a decade later. US college publishing held up better for longer, but the hit was steep when it came: industry revenues fell from $4.5 billion in 2014 to $3.2 billion in 2019.

But it is what happened next that matters. In consumer books, after a decade of stagnation and dire warnings of an industry in terminal decline, revenues are growing again. Premium newspapers such as the New York Times, Financial Times and Wall Street Journal are performing well as they transition to largely subscription-based models, and education is set to follow a similar path. New adjacent markets, such as online and lifelong learning, virtual schooling, and assessment and certification, are now bigger than the textbook publishing operations they grew out of.

As the CEO of Pearson for nearly eight years, I lived through this transition, and I learned a lot along the way about how to survive the process of digital transformation. Here are my seven lessons from the front line of industry disruption.

Lesson 1: Adopting a disruptive mindset: the definition of a first-rate intelligence

Andy Grove, the iconic former CEO of Intel, famously said that “only the paranoid survive.” Incumbents need to constantly challenge long-held beliefs and assumptions that can be an institutional bias to underplay likely disruption. A failure of imagination can cede ground to new entrants. When textbook publishing revenues first started to dip, the corporate instinct was to blame cyclical rather than structural trends. But just because something has the potential to be disruptive doesn’t mean that it will be. It’s easy to lose focus and divert scarce resources to a threat that never materialises. In the summer of 2012, for example, Pearson made a $150m bet to buy the emerging leader in self-publishing, which at the time looked like a major disruptive threat – but wasn’t.

F Scott Fitzgerald wrote that: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” This, in essence, is a disruptive mindset: the imagination to see a disruptive threat in everything you do. You will only know in retrospect which was the right course to take. The ability to run the business as it is today and might be tomorrow is vital.

Lesson 2: “The cross tests”: identity and purpose

A decade ago, when I was being treated for throat cancer, a Benedictine priest shared with me a quote from Martin Luther: “The cross tests.” Moments of personal crisis strip away all the superfluous layers we wrap around ourselves and reveal who we are at our core.

Times of corporate crisis, such as digital disruption, do the same to companies.

Publishing incumbents survived because, in our moments of truth, we understood that our enduring value to customers was neither inherently analogue nor digital: that was just how it was made real. The need for stories, pedagogy, journalism remains great, even if the medium has changed: amidst all the maelstrom and confusion, publishers continued to focus on doing that better than anybody else in the world.

It helps if there is a fundamental belief that what the company does matters to the wider world. Pearson’s purpose – that we empower people to progress in their lives through learning – carried us through our darkest days. If you can convince your people that, say, a digital transformation will enable their vital work to reach a wider audience – they will stick with you through the challenges, the restructurings and profit warnings, that change of this scale inevitably carries.

Lesson 3: Learn, don’t guess: embracing new product and business models

A book can’t easily be disaggregated or personalised (two of the ways in which digital adds value), so for many readers a print book remains their preferred means of consumption. After the initial launch of the Kindle and the iPad, growth in consumer eBooks stalled and accounts for no more than 25% of the market. But, in music, newspapers and education, digital brings much greater scope to disaggregate, to personalise and to actively engage the consumer, which is why we’re seeing much greater changes in product and business model. 

This might all seem obvious in retrospect, but it wasn’t at the time, which is why it’s so important to take experimentation seriously. My advice is, “Don’t guess, learn.” With all the data and insights publishers can glean from how consumers use their products, there is a lot to learn. Newspapers are becoming more personalised and searchable, and textbooks and tests become integrated as digital courseware, highly personalised and engaging, providing real-time feedback and support.

One of my biggest mistakes at Pearson was not to kill plans for a hugely over-ambitious new digital curriculum for American schools that I inherited. We spent tens of millions of dollars, and some years, trying to create a brilliant, beautiful, and fully formed digital curriculum out of the box, which turned out to be way ahead of our customers’ expectations or capabilities, rather than launching smaller, more bitesized digital experiences, which we could get into customers’ hands sooner. 

In the digital world, product development is iterative and messier. But beware, the pendulum can swing too far the other way. In many legacy companies, “innovation” has become a form of performance theatre, with too much loose talk of “failing fast and fixing”. College professors and business executives have little tolerance for failure when it comes to products on which their careers depend. Now publishers are learning to prototype more rapidly and iterate and improve constantly.

Lesson 4: We all need a platform, but not everyone can be the “Netflix of this” or the “Spotify of that”

Everyone talks about their “platform strategy”, using the same words to describe three very different things – re-platforming the company, becoming a platform company, benefiting from a third-party platform. It causes huge confusion when “platform strategy” is used interchangeably to describe all three.

Most major incumbents will need to re-platform their company (to decompose legacy technology and move to the cloud, by which they can dramatically improve the user experience and be able to make sense of the huge amount of customer data/insight sat in their own systems) to be truly digital/mobile first. This is often a huge and disruptive undertaking. 

Some incumbents can also have real aspirations to be a platform in their own right – with large number of users attracted to them for one purpose who can then be persuaded to stay with them for a wider engagement. It is this ambition – and the allure of the capital market valuations that go with it – that lead so many companies to aspire to be the “Netflix of this” or the “Spotify of that”.  But this is a very hard thing for incumbents to pull off.

In the analogue world, where publishers sell through third parties – newsagents, bookstores – it was hard to spot big changes in customer behaviour (for example, students switching quickly from owning to renting physical textbooks) until it was too late. The shift to digital channels and platforms can be beneficial for publishers – not only does it enhance the value of the long tail/ back catalogue or backlist, it also makes for a much more efficient supply chain, improving working capital. 

However, it also consolidates power in the likes of Amazon and Spotify to drive progressively harder commercial terms at the expense of publishers and their artists/authors. This drives industry consolidation to gain greater scale to provide some counterweight. It is, for example, why we merged Penguin with Random House and one of the reasons we sold the FT to Nikkei. It also requires publishers to try to create new platforms and channels that diffuse dependency and, crucially, give them direct access to user insight and engagement.

This is made even more important because of the way in which platform companies, such as Amazon or Spotify, use unique "control points” to control access and thus create the network effects on which they thrive. Kindle is a control point for Amazon, Google Maps is a control point for the Google App Store. Incumbents are often a "supplier" to one of these platforms, and so understanding what those control points are and how they impact you is crucial.

Lesson 5: The pace of the analogue-digital shift is largely out of your control: deal with it.

The pace of the digital shift is uneven, uncertain, and sometimes unmanageable. At times we got too far ahead of our customers – leaving analogue dollars on the table for smaller, less digitally focused competitors to pick up – and at times we hung on too long. Both can be very damaging, at least in the short term.

You must have a clear vision of what the digital-first future for your company looks like, and you need to accept that the customer will play a big part in determining the pacing of that digital shift. It often goes more slowly than you expect for some years before picking up speed. If you're a public company with annual earnings expectations, managing shareholder communications through this transition is hugely challenging. It is often easier to see what the end state of the digital transition looks like than foresee the quarter-by-quarter or year-by-year ups and downs in getting there. What you largely can’t control (pace of customer adoption) is at least as important as what you largely can (your own internal rate of innovation and change.)

For example, in the summer of 2019, I announced the death of the college textbook. For all 1500 active titles, we moved from a text-based edition led cycle every three years to a digital-first model, with insight- and event-driven content and technology updates, often integrated with personalised feedback. We presented it – and the media reported it – in momentous terms. But it was a moment that had been years in the making.

This was the vision we’d been driving to for more than a decade: it enabled us to personalise learning, making it much more effective and affordable, by integrating content and assessment. The timing was right because we had now re-platformed the company to be truly digital-first, we had aligned editorial colleagues and authors around the vision and all the detailed changes it required; and, crucially, customers were ready for it: most students now preferred an eBook.

The pacing went awry in one crucial respect. We knew that the shift would hurt short term revenues, as the print textbook sells for an average of $80 and an eBook for $40, but longer term the shift to an access model would be financially beneficial. In our external guidance to the market, we’d assumed that students would continue to shift to the new model as we phased out textbooks over the next three years.

What we didn’t foresee was that our announcement would drive students to shift from print to digital at a much faster rate. This was good news for the business longer- term but it led to a short-term earnings miss, damaging management credibility.

Lesson 6: If you’re not busy being born, you’re busy dying: make continual change seem natural and familiar

Tom Friedman wrote, quoting a senior IBM executive, that digital change is exponential and human change is linear. At that Big Bets gathering, my fellow CEOs talked about being “bruised from head to toe”, investing billions in digital platforms but feeling that they still had an analogue organisation using them. I knew exactly how they felt. The changes you are making are often a little ahead of it being obvious that the wheels are coming off the analogue business, and it is easy for people to confuse cause and effect. Change can be seen as causing the problem, rather than being a vital part of the long-term solution. People are desperate for the change to be finite.  At company town halls, I would regularly be asked a variation of the same question: “are we finished transforming yet”?

Change requires you to bring in new digital talent – bringing great energy as well as their own previous experiences and presumptions – and marry them with longstanding colleagues, who may feel that their deep knowledge of their customers and their products is no longer valued. And none of the changes you’re making are in a vacuum: the customers you serve, and the markets in which you are operating are also in a state of flux, which often means that the changes you make may soon need to be accelerated, tweaked, or even sometimes reversed in mid-flight. 

In my final email to all Pearson colleagues, I quoted Bob Dylan: he (or she) not busy being born is busy dying. Pearson has been busy being born for 175 years, I wrote, and long may that continue. I thought this reminder that change is constant, our natural state, was the best way I could help my successor. But describing change in grand, sweeping terms can be deeply disempowering for people in the company, especially the middle managers, to whom most of your employees look to for their daily guidance.

Change is disempowering when it seems large, vague, and far away; it can be empowering when the change seems small, specific and near term. So, a change programme needs an overall narrative – the light on the hill that colleagues can aspire to – but it also needs to be broken into as many small, specific, practical actions as possible. 

It also helps to be as open and honest as possible – and to really listen to colleagues at all levels of the company as they describe the fears and frustrations that large-scale change inevitably brings in its wake. You can’t back off from changes that have to be made; but being open and accepting of what’s not working in the process, and engaging with the detail, goes a long way to keeping people with you.

These principles enabled Pearson to endure and, I believe, ultimately prosper through huge, gut-wrenching change. With practice and application, patience and honesty, a compelling vision, and a hunger to survive, human change can be exponential, too.

Lesson 7: Stick with it, however hard it gets

Digital transformations take longer than the tenure of most CEOs. Your job is always to act in the best long-term interests of the company. This, perhaps, is the most important lesson of all: sticking with it, not being distracted, or deterred, recognising that sometimes the circumstances chose you and all you can do is act in what you believe is the best long-term interests of the company, passing it on to your successor in the best possible shape you can.

Growth doesn’t run in straight lines. Incumbents know that success is precarious, that we don’t have a divine right to long term profitability or survival. Of the 29,000 publicly listed companies in the US in the 1950’s, only 22% are still independently listed companies today – although many more exist in a merged or acquired state. 

Survival requires cultural resilience and organisational deftness. By adopting a disruptive mindset, having a clear sense of identity and purpose, embracing new product and business models, thinking hard and implementing well around platform and channel strategy, adjusting to the uncertain and uneven pace of the digital shift, and sticking with it – incumbents are striking back.

Over the next few years, I believe our collective success will become ever more apparent. Company valuations and media reporting will eventually catch up with the next big growth trend: the thunder and the fury as the incumbent herds stampede to the future.

John Fallon teaches on the Leading Digital Transformation at London Business School.

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