If you are in a market that is going through wild, disruptive change where nobody knows how it will play out, you might be thinking:
“We have seen this movie before.”
Markets go through fundamental disruptive change in fairly predictable phases.
Here are the 7 acts in the Creative Destruction play. These stories have played to packed audiences in markets such a recorded music, newspapers, books, telecom, magazines, software (again and again and again) and are now playing out in markets that used to be boringly stable such as finance/banking, accounting, legal services, government and healthcare. This is what happens when software eats the world.
The Creative Destruction 7 Act Play
Although history does not repeat, it often rhymes. You can spot these patterns throughout the history of disruptive waves of change. We call this cheat sheet the Creative Destruction 7 Act Play. It helps you to spot where your market is today.
Note: The Play is written from the point of view of the incumbents. Many readers work for these incumbents today or are considering working for one of these incumbents. For those readers,understanding the Creative Destruction 7 Act Play is how you avoid being trapped in Blockbuster before streaming video went mainstream or Kodak before digital cameras came to every smartphone. This incumbent centric viewpoint is also useful for startup teams, because the position of the incumbents is the market reality that startup teams need to come to terms with.
- Act 1. The Old Guard Dominate.This is when a few big companies dominate a market that has not fundamentally changed for decades. Mergers, debt leveraged acquisitions and “roll-ups” have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no investor would back them. With so many waves of changing hitting at the same time (Blockchain + AI + IOT + Mobile etc), there are very few markets like this any more and it depends on how you frame the market. For example, the oil business is in Act 1, but if you view the oil business as one segment of the energy market, it is more like Acts 4 and 5. For those entering the workforce, this is to be avoided. For the nervous incumbents, only act now if you have a compelling alternative, there is no immediate threat. For those reentering the workforce, these behemoths can still survive for 10+ years so if that is your time horizon they can be a good bet, but be aware that these companies rehiring laid off executives as consultants/contractors will be your competition.
- Act 2. Straws In The Wind. This is when a few visionary/crazy entrepreneurs see opportunity. Occasionally VCs get active at this stage, but all too often VCs are part of the established order and do not see enough reason to believe that the times are changing. It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”. This is where ICOs, a Blockchain innovation, is changing early stage capital and that is further accelerating change because it is easier now for entrepreneurs to raise capital. Bitcoin, for example, was in this phase around 2011 and Ethereum was in Act 2 in 2015. For those entering the workforce, Act 2 is great if you can work for a great entrepreneur, but this is a high risk early stage. For the nervous incumbents, this is an early warning sign and you should get out now if you are reasonably young. For those reentering the workforce, Act 2 is good if you can find a great entrepreneur who will value (pay for) your experience of how the market works today.
- Act 3. Denial. The changes are now real and the old guard management can see it, but they don’t know how to react so they reach for high pressure management to make the numbers work. In some cases, management also reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed (known as fraud in most circles). This Act can go on a long time as most investors work on surface numbers. A famous example of the Denial Act 3 was subprime mortgages that blew up in the Global Financial Crisis in 2008. For a long time the surface numbers looked good until a few nonconformists looked below the surface (watch The Big Short movie for an entertaining take on that story). A more recent example in Finance was the Wells Fargo fake accounts scandal (which was going on for a long time before it was uncovered). For those entering the workforce, Act 3 is a great entry point; you just need to find a great entrepreneur to work for. For the nervous incumbents, this is where you can see the signs internally that the outside world cannot easily see, so this can be a great time to act. For those reentering the workforce, avoid the incumbents in this phase as their behaviour will be unpredictable; it will all look calm on the surface, while the reality is chaos.
- Act 4. The weird turn pro. The crazy entrepreneurs who started at Act 2 are now gaining real traction and major amounts of capital. They are experimenting frenetically to find what is really sustainable/scalable. This is the time “when the going gets weird, the weird turn pro” (quote from Hunter S Thompson, who was certainly weird but also professional enough to write best-selling books). During this Act there are lots of stories in the media about these strange entrepreneurs but, as the old guard numbers still appear to be OK, the accepted wisdom is still that nothing will fundamentally change. For those entering the workforce, Act 4 is the best risk-adjusted entry point. For the nervous incumbents, Act 4 may already be too late; keep an eye out for the mass layoffs heading your way. For those reentering the workforce, the entrepreneurs who are weird turned pro are ideal clients/employers; they have the budget to pay you and know that the devil/god is in the details that you know.
- Act 5. Blow up.When corporate pressure hits the reality of disruptive change, we get Act 5 BlowUp. This is when reality can no longer be glossed over. This can lead to investors taking a cold hard look at the numbers and when the new numbers do finally appear, it can trigger a stock crisis, often with a restatement of earnings and a change of CEO. At this stage the reality can no longer be denied and we see real crises in big companies. These crises may lead to radical transformation, or they may lead to bankruptcy restructuring and fire sales. Before that happens we see the kind of behaviour we just saw with Wells Fargo (which went on a long time during Act 3, Denial, when hardly anybody was paying attention). This is new for banking, which has not had a major headwind like this in hundreds of years. However, bankers can study other markets that got hit by the digitization truck – for example Media. For those entering the workforce, Act 5 is a bit late but there are very good jobs on the right side of disruption. For the nervous incumbents, this is already too late, just get the best lay off terms you can. For those reentering the workforce, there are a lot of opportunities among those scaling fast.
- Act 6. Reconstruction. This is when a new power structure starts to emerges. This is when we see IPOs from the visionary entrepreneurs who started in Act 2. Sometimes they stumble post IPO and never recover. Sometimes they stumble post IPO, recover and grow to strength – that was the famous story of Priceline after the Dot Com Nuclear Winter. For those entering the workforce, Act 6 is good if you want a relatively low risk job; the companies that started in Act 2 are now hiring a lot and have decades of high earning years ahead of them. For the nervous incumbents, this defines your job search. For those reentering the workforce, it is hard but not impossible to show value for your legacy experience.
- Act 7.The new incumbents. Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made it to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along. For example, in the Centralized Internet era we have GAFA (Google, Apple Facebook, Amazon) and BAT (Baidu Alibaba TenCent) who deposed analog media and bricks and mortar retailers and will dominate until the decentralized Blockchain Economy gets to prime time. Until that happens, don’t bet against GAFA and BAT. For those entering the workforce, Act 7 is low risk/low reward. For the nervous incumbents, your target list of future employers is smaller and each has a tough hiring process. For those reentering the workforce, the new incumbents will pay for specific knowledge/experience but there is little upside.
The Play then starts again the next day (or in reality, next decade). The markets dominated by the new old guard (Act 7) become Act 1 the next day/decade.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).