This is an article I originally wrote for the IoD Magazine here

If you want to turn a competitor’s advantage into a weakness, start by widening your sources of inspiration

As long ago as 1934, Joseph Schumpeter, the Harvard economist, observed that organisations move in a natural cycle between exploring new opportunities and exploiting old certainties. Businesses in the explorative phase are designed to seek out opportunities, experiment, and learn fast. Exploitative businesses on the other hand tend to value efficiency and optimisation, placing a heavy hand on standardisation and a light one on experimentation. As their existing markets mature, companies typically attempt to shift from exploitation to exploration, as continuing to leverage old certainties ultimately leads to stagnation.

But is moving from one phase to the other serially enough to survive, let alone thrive, in the business world? I don’t think so. Principally because in today’s fast-moving markets, the exploration would simply come too late. Businesses today have to be both exploitative and explorative, at once.

Simultaneously showing exploitative and explorative traits is the essence of design thinking as Roger Martin of Rotman Business School explains in his book, The Design of Business. Martin outlines that the approach “enables the organisation to balance exploration and exploitation, invention of business and administration of business, and originality and mastery”. When companies embed design thinking across their organisations, they can unlock huge success.

But, it’s not easy. The two phases demand hugely different approaches across all aspects of a business. Businesses in the exploitative phase find it incredibly difficult to value exploration; their people, processes and structure are often designed to eliminate all variance and unpredictability. This is often reflected in their narrow sources of inspiration—they tend to benchmark their existing competitive set, companies also in the exploitative phase and therefore with little knowledge to impart.

My solution? Remember that your competitive set is any organisation, start-up or multinational, that has the potential to meet similar customer needs to your own. Benchmark yourself against their ability to meet those needs, and spend time being inspired by any organisation with the ability to disrupt its market. Find examples from different industries and look for ways these disruptors could adapt their models to operate in your own market.

Why disruptors? Disruptors centre themselves around consumer needs, they are optimised for exploration and have an incredible knack of turning the incumbents’ perceived advantages into their Achilles’ heals. Disruptors frequently reveal the direction in which industries are headed. Let me share a couple of examples.

Imagine you’re the boss of one of the big record companies a few years ago. You run a finely oiled machine, paying expensive “A&R” (Artist and Repertoire) managers to seek out bands to sign. Once you’ve signed them up with a hefty up-front payment the production machine kicks in allowing you to cash in on your investment through a global system of retailers. You’re benchmarking yourself against the other labels using classic exploitative phase metrics. These might include volume of sales or the percentage of your artists that go platinum. That exercise is no doubt important, but it prohibits you from looking at the disruptors for inspiration until it is too late.

And then, out of nowhere, Simon Fuller and Simon Cowell’s Pop Idol springs up with a highly disruptive model. For those who are not familiar with the format, it comprises a TV show that seeks out new talent. Viewers pay to vote on the talent they like and Pop Idol signs a deal with the winner, publishing and promoting the artist and organising live tours.

The innovation is in the business model. Pop Idol turns the traditionally significant A&R search cost into revenue, and reduces risk by taking proven talent (viewers have already made clear who they like to market). It also enables the talent to be acquired at low cost (terms were agreed in advance of any success) and it finds creative ways to monetise the talent above and beyond traditional music sales (through its tours).

The music industry isn’t atypical. Now imagine you’re the head of a large video rental chain store. Your scale, negotiating power, brand recognition and prime real estate drive wonderful profitability and you’re focused on efficiency and growth (classic exploitative-phase metrics). But you might not have noticed that the industry disruptors are turning your strengths into weaknesses. This is exactly what Netflix’s model did when it entered the market in 1997.

Netflix turned the incumbents’ expensive retail channels into their Achilles heals by distributing via the internet. It then leveraged the strengths of the channel to improve the customer experience, offering tailored recommendations, greater movie choice (at lower cost because of centralised stocking) and greater flexibility. Netflix even smoothes demand by inviting customers to create a list of films they want to watch and the company chooses the order in which they receive them. Netflix owns more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day.

The success of Pop Idol shows us how accepted costs might be turned into revenues and the value of the wisdom of the crowd. Netflix inspires us to view every aspect of a business model through the eyes of the consumer, to continually ask what technologies might allow their needs to be better met, and to question incumbents’ greatest costs in their P&L. Both models show the critical requirement to look beyond the incumbent competitive set.

We are all trained to analyse a market’s incumbents—after all, their demise attracts more attention than the rise of the disruptor and they’re easier to find and benchmark. But in order to build a business’s muscles to explore and simultaneously exploit, watching disruptors in action, regardless of their size or industry, is key to any business’s long-term success.