Too Big to Fail: What Lessons Banks Should Learn From Disruption of Nokia

We can all agree that iPhone changed the world in which we live. But, in November 2007, just a few months after the presentation of the iPhone, Forbes appeared with the title on the cover: “Nokia. One billion customers — can anyone catch the cell phone king?” Nobody was expecting what would happen in the next 10 years.

by Alex Kreger, CEO/Founder of UX Design Agency

Capitalization of Apple prior to the iPhone launch was $80 billion, Nokia being $100 billion. After five years, Nokia’s capitalization fell to $10 billion, and, in 2014, the Nokia Devices and Services unit was bought by Microsoft for $6 billion to sell it in 2016 for $350 million. The capitalization of Apple today is $815 billion.

There are many versions of how and why this could have happened with Nokia. But, we would be interested to see if this could happen to the large companies in the financial industry as well and, if so, what could be done.

I believe the most interesting theory explaining such situations is provided by Clayton Christensen, Harvard professor and businessman, in his famous study, “The Innovator’s Dilemma,” which “deeply influenced” Steve Jobs. In accordance with his theory, there can be two types of innovation: sustaining innovation and disruptive innovation.

The main idea is that any industry develops along the path of constant improvement, and consumers of these improvements are always the most demanding customers, and the most profitable. The problem is that the mechanisms for creating value in an organization are inherently hostile to change. Therefore, leading companies focus on meeting the most demanding customers implementing sustaining innovations.

Disruptive innovations at the beginning of their journey cannot meet the needs of major consumers because they are not developed that well, resulting in poor performance. But, disruptive innovations are becoming interesting to niche customers who prefer them based on specific criteria. e.g., price, operating conditions, key features, simplicity etc. Disrupting innovations begin their course with satisfying the needs of these small niches. Then the technology begins to develop, improve, and, at some point, they begin to approach the traditional solutions in quality. At that moment, a market disruption takes place.

Nokia was definitely an innovative company, so they achieved success. The problem was that their innovations were sustaining only. They became so powerful that they believed the market was completely under their control. Мaybe they even saw themselves as trendsetters who determine where the market would go tomorrow.

If you look at the banking industry from this point of view, you will understand how a dangerous trap could appear. Huge bank resources, combined with a large number of different digital innovations they are working on today, could create the illusion of market control and future success. At the same time, truly disruptive innovations can go unnoticed and suddenly change the financial market completely.

To find out what can be done, we need to understand what disruptive financial innovations there could be. I hope Professor Christensen will not object to helping us, so further reasoning will be based on insight from his book, “The Innovator’s Dilemma,” which I highly recommend.

1. Disruptive innovation is hard to integrate

The problem is that disruptive technologies offer simpler and often cheaper solutions.

For example, the team of Fintech startups offers cross-currency P2P wire money transfer app with nearly no fees. Compared to existing bank services, there is no need to fill out long forms, wait several days for manual processing of the operations or pay for these large fees. Disruptive P2P technology provides fast and automatic service.

Unfortunately, for the common bank, it is difficult to integrate and offer such a service to its customers. First of all, it is absolutely unprofitable because it will not even cover the cost of the bank’s infrastructure. Second, this does not correspond to the technology that banks are using, existing work processes and banking regulations. Third, such a product could look unusual and even incomprehensible to the majority of active banking users.

We saw this in 2007 when the smartphone from Apple was given critical reviews and doubts about device success from major experts and media. Only innovators were enthusiastic about the first iPhone, but they also didn’t fully understand the new phone’s capabilities and advantages. At that time, an army of fans who constantly used other Apple products significantly helped to garner interest in the company.

The future-oriented organization should look closely at those innovations that simplify service and reduce costs, and there is still a solution for the inability to integrate them into the existing business. You need to start to develop potentially disruptive technology as a separate business, which will have a chance to fly when this breakthrough solution captures the market.

2. Disruptive innovations live on micro markets

For large companies, it is important to get a significant amount of revenue from a sizable market, to show the expected growth to shareholders and cover the costs of a huge team.

If we look at the example above, even realizing the promise of this technology to the bank, it will be difficult to take advantage of it. The scale of the bank, the culture of work and the decision-making mechanisms do not correspond to the small size and flexibility requirements of the growing micro market. That’s why small startup teams of several people are more likely to succeed there.

Fintech startup is more flexible, faster and innovative than a large bank with its legacy formalities, regulations and internal competition. Of course, in this situation, a bank can wait until the market grows to enter into it. But, according to the observations of Professor Christensen, this strategy often fails.

The same approach works here as in the previous scenario. A large company can vigorously develop a potentially breakthrough market only by running an independent and small team on it.

3. Disruptive innovation can’t be calculated

Fintech startups usually follow a strategic vision and change the service, technology and processes on the go to ensure the most rapid and effective formation of a disruptive technology. As we understand, it is impossible for a large bank to do and not only because of the inertia of its internal processes, which is obviously high.

Decision-making in large organizations is based on numbers and forecasts. This is the only way to lead these huge liners to the target and save them. But, in the case of breakthrough innovations, this does not work, because it is terra incognita. There are no data and no clues to predict the exact model of the market. That is why the trailblazer gets a significant advantage here and, in the future, will become leaders of new markets.

Realizing this, a large organization must abandon traditional methods of evaluation and planning in case of disruptive innovation. The decision is to create small “startup-like” experimental teams for the work on disruptive markets. Development and management of these teams have to be based only on insights obtained and verified on the go.

4. Disruptive innovations do not grow on old yeast

Processes and approaches in a large company are focused on its highly profitable products in traditional markets. However, they are not fundamentally suitable for disruptive innovations. Often, not only a different approach is required, but an entirely different way of thinking.

Therefore, it is impossible to create a laboratory of disruptive technologies from the enterprise employees that don’t have it in them. The disruptive team should consist of people who are not influenced by the existing banking culture and are unfamiliar with traditional banking processes. And the management of such a structure should be carried out by an independent agent of change, not connected to the traditional approach.

This is the only way to develop and master new principles, culture and foundations that will later become the basis for success in the disruptive market, as well as a source for possible organization transformation.

Despite the fact that Apple was already a large corporation, Steve Jobs formed a separate and passionate team driven by a culture of innovation to create the iPhone. They didn’t have a legacy in traditional telecommunications. In fact, Jobs used his vast experience of developing successful, disruptive products.

5. Disruptive innovation does not fit into the market

Usually, the potential of disruptive technology is very difficult to detect. It is because, at the current stage, it can’t correspond to the existing level of market infrastructure and, therefore, has limitations in its use.

For example, at the start, the experience from the iPhone was limited by the internet speed and coverage, as well as a small number of useful applications. But, at some point, the necessary infrastructure was formed, and the advantages of the new technology became apparent to all.

This means that disruptive technologies usually look inappropriate and raw at the outset. From the mass consumer point of view, they do not provide sufficient quality and do not meet the existing customer needs. Moreover, favorable conditions for explosive growth of disruptive innovation should be formed in the market.

The use of sustaining innovations to keep leading positions causes the quality of products to outperform the market request, leading to an increase in product price. At this moment, a window of opportunity opens for disruptive innovation, which could offer consumers a lower-quality niche solution at a cheaper price.

Imagine that you ask users about popular Fintech products and why they prefer them instead of their banks. Suddenly, you find that many of them are attracted by simple solutions, without over-featuring. This is despite the fact that banks created and developed this functionality to please customers with ultra-excessive opportunities. And, suddenly, we face the fact that some users prefer to use only a few cropped, but fast, easy and cheap functions. This is how the window of opportunity for disruptive financial technology could appear, to become the standard of the industry with the engaging majority of users.

What can be done here? Track promising technologies that offer fundamentally new and somewhat more accessible solutions for users. Take these technologies seriously and test them in narrow niches, releasing experimental products.

Instead of conclusion

You may ask where a financial market disruption could come from. Honestly, we can’t know it for sure; that’s why it is called disruption. It could be full-market decentralization caused by blockchain combined with P2P technology, absolute digitization provided by powerful tech companies or appearing on the global open banking platform connected with banks through API and managed by AI. Or, maybe all of this is just a background for the real disruption that will be delivered from such tech giants as Google, Apple and Facebook.

We also need to take into account challenger banks, that are so small today, as Facebook or Google were years ago. No one takes them seriously yet. We should track multiple probabilities, but who knows? Something we know for sure is that banks are no longer incompatible as they were before the digital age. And, as we learned from the iPhone scenario, the world of finance could change dramatically in the next 10 years. So, keep your eyes open and step aside from outdated patterns so as not to miss out on your future.

P.S.: Apple shot the market, but it did not shoot the Nokia

In the end, I would like to rehabilitate Apple (although they certainly do not need it) and offer another point of view on what happened 10 years ago with Nokia. Of course, the iPhone changed the phone market, and this influenced Nokia’s position. But, Nokia had a chance to keep some market share by choosing the right strategy at the start of the market disruption. They did not use it, but Samsung did instead.

Unlike the iPhone, Samsung’s strategy more closely resembles Nokia’s — a huge selection of devices for different segments and at different prices. Perhaps, when looking at capitalization, they are not as successful as Apple, but, by the number of sold devices, Samsung is even slightly ahead.

Could Nokia be in this place? It seems obvious to me that they had a perfect opportunity if a touchscreen disruptive innovation was taken seriously. So, I think this is a good lesson for any company, especially in the financial industry.

This article first appeared on UXDA blog.

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