Observation Deck

The “C” Word

Forget disruption—convergence is what really has corporations fearing for their lives.

Disruption Final Flat 03

These days, the trendy word “disruption” casts fear into many business leaders’ hearts. As the Internet has reordered commerce with startling speed, mighty companies have found themselves upstaged by tech newcomers, from Spotify to Amazon to Uber, which see a fresh way to meet an old demand. As this revolution gathers pace, however, there is a second word that deserves more attention than it currently gets: “convergence.”

The “c” word is generally understood in geographical terms—the Internet links disparate parts of the world, and so economies are drawn closer together. But there is a second, equally important meaning: the collapsing together of product categories and business sectors. In this sense, convergence poses a huge headache for incumbent companies, particularly those with big bureaucracies that rigidly resist change.

To understand the phenomenon, look at Sony’s legacy in consumer music. Two decades ago, the Japanese company’s Walkman was so popular that it not only sold extraordinarily well, but also defined an entire product category. (This is the holy grail of consumer marketing, achieved by only a few other brands, such as Hoover and Band-Aid.) Most observers assumed Sony would parlay its success in analog devices into domination of online music. After all, Sony seemed to have everything it needed to create a digital Walkman: departments specializing in computing, consumer electronics, and brand design—and an in-house music label to boot.

But there was one hitch. Sony’s units operated as silos because the business sectors to which they pertained traditionally had been distinct. There was so little collaboration among the company’s corporate tribes that when it started experimenting with the concept of a digital Walkman, engineers from different departments worked discretely. As a result, in November 1999, Sony launched two competing versions of the product. (Just to add to the confusion, it would eventually create a third.) Unsurprisingly, these items cannibalized each other on the market and failed.

Into the fray leapt Apple, with an innovative approach. The company saw that the businesses of software, hardware, and content (in this case, music) were converging rapidly, so it created a single team to develop a holistic product. The result was the iPod-iTunes combination, which stormed the market in 2001. Sony was left in the dust.

Viewed in 2016, this saga might look like ancient history, particularly in a corporate world obsessed with quarterly earnings. Yet it has profound implications for companies that today seem as powerful as Sony once did.

In the automotive sector, for instance, leaders are touting record sales as Americans rediscover their love affair with the car and people in emerging markets purchase more vehicles too. Behind the scenes, however, the hot topic is whether the likes of Ford and Toyota will be disrupted by Silicon Valley. For as the Internet makes it possible to build self-driving smart cars and other new transportation technologies, entrepreneurs at Google and Tesla are muscling into territory once controlled by the behemoths of Detroit, Germany, and Japan.

But disruption is only part of the story. Convergence is happening here too. Information technology (IT) no longer exists as a sideshow in the auto sector. Cars are becoming tantamount to computing devices that have as much to do with software as they do with chrome. This is changing how consumers and urban planners imagine transportation systems, as is the rise of Uber and Lyft, which make it possible for people to be on the road without ever buying cars. The spread of electric vehicles, moreover, is raising policy questions about fossil fuels that will require firms to bring “green issues” out of “corporate and social responsibility” and place them at the heart of business plans.

The auto industry is scrambling to respond. In the past decade, GM and Ford have opened departments in Silicon Valley charged with developing new ways of embedding software into cars. Auto giants are also hiring anthropologists to study the nature of transportation from the consumer’s perspective; researchers watch how people behave in cars to ascertain how they feel. Whereas an engineer might view a car primarily as an efficient mode of travel comprised of metal and horsepower, a consumer might also see it as an entertainment system or home office. The research goal is to figure out the features, comforts, and connectivity that consumers crave, and then build machines that have them.

Even as companies try to think outside the box, however, they are bedeviled by the question that torpedoed Sony: Can a deeply entrenched bureaucracy ever stop viewing its departments as separate, if not rival, spheres? Corporate divisions have long competed for resources and clout. One reason why Sony’s units were unable to cooperate was that each had its own profit and loss statement (P&L), and senior managers were paid relative to those numbers. At Apple, by contrast, Steve Jobs would not let divisions have their own P&Ls and demanded that his managers collaborate with other teams. To introduce similar rules into hardened bureaucracies would be radical—an earthquake that would undoubtedly be met with dissent.

To be sure, some veteran corporations are trying to adapt to the era of convergence. General Electric, for instance, is seeking to include software innovation in every part of its business, cutting across vertical departments with horizontal teams. It announced in January that it is taking the drastic step of moving its headquarters from Fairfield, Connecticut, to Boston to be near research centers at Harvard and MIT. It is one thing, however, to acknowledge the need for convergence and strive for it. It is quite another to actually smash the old way of doing things, particularly when certain structures and methods made a company successful in the past and are still favored by employees.

The fate of corporations—doomed to fall ever further behind newcomers, or capable of embracing and profiting from convergence—depends on the minds that populate them. But it hinges even more strongly on the mettle of leaders: how far they’re willing to go to recapture the edge their firms once had. To promote brands the public can trust (and maybe even see as cool), corporate titans will first have to realign their own ranks, fighting and winning all the internal battles that
might require.

A version of this article originally appeared in the May/June issue of FP magazine.

Illustration by Matthew Hollister

Gillian Tett is U.S. managing editor of the Financial Times and author of The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers. Twitter: @gilliantett

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