Breaking Through Disruption

BREAKING THROUGH DISRUPTION 1 Embrace the power of the wise pivot BREAKING THROUGH DISRUPTION

Disruption is an inescapable challenge for all industries. And when companies face it, they typically make cautious moves. They raise barriers to entry instead of extending themselves outward. They rely on what’s worked for them in the past, in lieu of seeking deep change on the inside. They double down on efficiency, rather than committing to real innovation. But while these are instinctual and understandable choices, they don’t work. They keep companies in survival mode and away from actively shaping their future. In fact, playing it safe amid disruption is very risky: Our analysis of 10,000 companies shows that $41 trillion in enterprise value is already exposed to disruption today. 1 There is a better path: We studied how a select group of companies confronted disruption in an unconventional way, by pushing themselves outside of their comfort zone. They took charge of their own destiny, by making what we call an “innovation pivot” to truly change their position, with long- term impact in mind. How can today’s companies chart a successful future? It starts with understanding the distinctive nature of disruption in their industry. And from there, more ambitious, bold innovation moves must replace protective reactions. BREAKING THROUGH DISRUPTION 2 AT A GLANCE To make a Wise Pivot , companies need to reallocate their financial, innovation and talent resources towards businesses of the future, but without neglecting their legacy. In this report, we show how successful companies deploy an innovation pivot to manage disruption effectively, over time.

Omar Abbosh Group Chief Executive, Communications, Media & Technology Group Global Managing Director of Thought Leadership at Accenture Research Managing Director of Thought Leadership at Accenture Research Senior Principal, Thought Leadership at Accenture Research Omar serves on Accenture’s Global Management Committee and was previously Accenture’s Chief Strategy Officer. He has extensive experience in advising C-level and board level members across a wide range of industries. Paul focuses on technology– driven innovation in business and marketing strategy. His research has helped to shape Accenture’s strategic vision as well as its critical imperatives for change, spanning three decades. Vedrana has wide-ranging experience in strategy, management consulting and financial services. She is a thought leader focused on innovation strategy, value creation in the digital age and corporate reinvention. Michael has broad experience in strategy consulting and developing growth strategies for energy companies. His research looks at how companies can understand, harness and scale disruptive innovation in support of inclusive growth. Paul Nunes Dr. Vedrana Savic Michael Moore Our team is at the forefront of helping organizations navigate a path through disruption to become leaders in the New. BREAKING THROUGH DISRUPTION 3 ABOUT THE AUTHORS

CONTENTS At a glance About the authors Decoding disruption The new normal Playing it safe—and faltering How to boldly break away and start your innovation pivot Create your next cutting edge Fund your future bets Find partners to scale with Disrupt from the inside 02 03 05 08 11 13 31 32 33 35 36 37 15 19 23 27 Time for courage The disruptability index What the disruptability index measures How the disruptability index was built References About Accenture BREAKING THROUGH DISRUPTION 4

BREAKING THROUGH DISRUPTION 5 DECODING DISRUPTION At-home augmented reality car shopping. Silicon- based storage systems for renewable energy that can power cities even when the sun isn’t out. Smart speakers that know which products consumers need, even before they do. The way we live today is driven by new innovations that we scarcely could have dreamt of a mere generation ago. While consumers are demanding more personalized and flexible services, business leaders are left to navigate an ever- changing landscape. C-suite mentions of “disruption” during earnings calls, investor conferences, and company announcements have increased significantly over the past decade. And with it, the anxieties of executives across industries. As Jorge Paulo Lemann, co-founder of 3G Capital, put it, “I’ve been living in this cozy world of old brands, big volumes, nothing changing very much, and you could just focus on being very efficient and you’d be okay, but now we are being disrupted in all ways...we are running to adjust.” 2 Top executives are right to be worried. Most of the 10,000 companies we analyzed—71 percent—are currently either in the throes of, or stand on the brink of, significant disruption (see Figure 1). 3 In our previous research , we found that disruption is not completely unpredictable, it can be decoded—good news, since understanding it better makes it more manageable. Based on its current level of disruption and susceptibility to future disruption, each industry can be located in one of four distinct periods—Durability, Vulnerability, Volatility or Viability.

DURABILITY Industries in the period of Durability demonstrate broad resilience and achieve consistent performance, while disruptors remain a distant threat, for now. But instead of purely sustaining the status quo, this is the period where companies have a great opportunity to seek and experiment with new business ideas. VULNERABILITY In the period of Vulnerability, acute weaknesses in industries, from a lack of innovation to insufficient investment, become apparent. It is in this period where incumbents benefit from the continued presence of high barriers to entry; instinctively many rely on these defenses to fend off disruption. This blind spot distracts many from a great opportunity: scaling up new ideas and venturing into new markets. VOLATILITY In the period of Volatility, old sources of industry strength become weaknesses, as large disruptors enter to unlock new sources of value. Most companies focus on resolving pressing issues in the core business; what’s much harder is redirecting investment capacity to grow new businesses. VIABILITY In the Viability period, embryonic or reborn industries try to sustain high rates of innovation and enjoy only short-lived competitive advantage as new disruptors constantly emerge. Here the opportunity lies not only in growing the core business by offering new products in existing markets, but also in expanding the footprint of existing products to new markets. BREAKING THROUGH DISRUPTION 6

Disruptability Index Industry Sector Matrix – 2018 results 0-1 scale (1 = most susceptible/disrupted) Source: Accenture Research Disruptability Index 2.0. FIGURE 1. MOST INDUSTRIES ARE EITHER EXPERIENCING DISRUPTION OR ARE SUSCEPTIBLE TO IT 0.20 0.20 0.80 0.80 0.70 0.70 0.60 0.60 0.50 0.50 0.40 0.40 0.30 0.30 0.51 0.54 2018 Weighted Average 2018 Weighted Average Comms & Media Software & Platforms High-Tech Life Sciences Health Chemicals Retail Consumer Goods & Services Insurance Banking Infrastructure & Transportation Services Capital Markets Travel Automotive Energy Industrial Equipment & Machinery Utilities Natural Resources DURABILITY (11% of companies) VIABILITY (18% of companies) VOLATILITY (33% of companies) VULNERABILITY (38% of companies) SUSCEPTIBILITY TO FUTURE DISRUPTION CURRENT LEVEL OF DISRUPTION BREAKING THROUGH DISRUPTION 7

This year, we created the Disruptability Index 2.0 to understand how the nature of disruption evolved between 2011 and 2018 for 18 industry sectors. Our longitudinal research reveals that industry disruption is a persistent condition—not short-lived. THE NEW NORMAL? LO N G -TE R M DISRUPTION BREAKING THROUGH DISRUPTION 8

BREAKING THROUGH DISRUPTION 9 83% of industry sectors we analyzed spent at least five years in the same period of disruption between 2011 and 2018. Extended exposure to persistent disruption comes with serious casualties, no matter the industry. Between 2011 and 2018, 3,217 U.S. companies from across the 18 sectors went bankrupt. 4 Retail, which has been in the period of Volatility throughout 2011 to 2018, was hit especially hard, with 43 corporate bankruptcies recorded in 2018. Examples range from 125-year-old Sears to Nine West 5 , which is exiting its struggling shoe business, having missed the shift to athletic shoes and sneakers. As these companies discovered firsthand, disruption is measurably on the rise (Figure 2). Looking at incumbents, we find evidence of volatile and declining financial performance, with average 5-year revenue growth lower in 2018 than in 2011 for 10 out of 18 industries. And in examining disruptors, we see competition increasing as venture- backed companies (amongst others) take market share. Aggregate VC funding across all industries increased almost 5-fold between 2011 and 2018. For example, both the Consumer Goods and Services and Retail sectors, experienced more than a 30 percent increase in their level of disruption between 2011 and 2018. This was based on an almost 500 percent increase in the number of unique VC deals between 2011-18, with total VC funding of just under $12 billion in 2018.

BREAKING THROUGH DISRUPTION 10 % CHANGE IN CURRENT LEVEL OF DISRUPTION Comms & Media Software & Platforms High-Tech Life Sciences Health Chemicals Retail Insurance Consumer Goods & Services Banking Capital Markets Travel Automotive Energy Infrastructure & Transportation Services Industrial Equipment & Machinery Utilities Natural Resources MOST DISRUPTED LEAST DISRUPTED RANK OF INDUSTRIES BY LEVEL OF CURRENT DISRUPTION IN 2018 4% 15% 37% 21% 15% 31% 6% 18% 11% -13% 22% 37% 55% -6% -11% -8% -6% 18% FIGURE 2. LEVELS OF DISRUPTION HAVE INCREASED CONSIDERABLY SINCE 2011 Source: Accenture Research Disruptability Index 2.0. Ranking of industries (2018), and percent change in index score (0-1), 2011-18

PLAYING IT SAFE— AND FALTERING Industry participants are acutely aware of the threats posed by disruption. But how are they responding? We addressed this question by assessing an industry’s susceptibility to future disruption; we looked at whether its players are becoming more efficient, or more innovative, or whether they are building stronger defenses. All industries are focused on building greater resilience, with the biggest improvers being the Health and High-Tech sectors. They did this through a range of activities, from cutting operating costs, to improving innovation commitment and saving for a rainy day. Companies in High-Tech, for example, shaved on average 2.6 percentage points off their COGS/Revenue and increased the value of their cash and short-term assets by 40 percent. But they continued to see an increase in actual disruption, due to financial performance pressures and the merciless influx of disruptors. BREAKING THROUGH DISRUPTION 11

BREAKING THROUGH DISRUPTION 12 What explains this paradox? Over time, incumbent companies have built up a reservoir of assets and routines and, unsurprisingly, they lean on those when responding to disruption, rather than staking out new terrain. This leads them down familar paths. They double down on efficiency. They get defensive. For example, as oil prices collapsed following supply- and demand-side innovations like new drilling techniques and energy-efficiency technologies, companies in the Energy sector focused heavily on reducing their asset and transaction intensity. The value of fixed assets (measured as property, plant and equipment) relative to revenue averaged 207 percent in 2016; by 2018, this had fallen to 165 percent. Other industries, such as Infrastructure and Transportation Services, sought to strengthen their defenses, increasing the value of their intangible assets and building cash stockpiles. The proven, familiar strategies may have served incumbents well in the past. But they are not sufficient for prospering through persistent disruption. There is a better path; an unconventional one that enables companies to take charge of their own destiny, by courageously making what we call an innovation pivot. This is the way to truly change (not simply protect) their position, with long-term impact in mind. “Schneider is more than 180 years old. We started in iron and steel and now we are digital solutions for energy, using automation. What we’ve learned is that there are two kinds of pivots: the pivots you initiate, which are good for the company, and the pivots the environment imposes on you. Those are very painful. So our obsession in the past 20 years has been to anticipate, to choose our pivots and transform continuously as a company.” Jean-Pascal Tricoire Chairman and CEO, Schneider Electric

BREAKING THROUGH DISRUPTION 13 HOW TO BOLDLY B R E A K AWAY AND START YOUR INNOVATION PIVOT We know cruising along until a crisis hits, is not a smart strategy. So what is? What can we learn from those who are prevailing in this period of rising and persistent disruption? Which companies have managed to go their own way and outperform their industry peers? We used our time-series data to identify companies that continued to generate value despite their industries’ exposure to disruption. Specifically, we analyzed the way they responded to disruption and how these strategies differed from those of their peers. What we found was that the nature of disruption in your industry should inform, but not constrain, when and how you focus your innovation efforts.

BREAKING THROUGH DISRUPTION 14 FIGURE 3. START YOUR INNOVATION PIVOT: STRATEGIC CONSIDERATIONS WHAT’S THE NATURE OF DISRUPTION IN YOUR INDUSTRY? HOW CAN YOU BREAK AWAY FROM THE NORM ? When your industry wallows in the Viability period of disruption... CREATE YOUR NEXT CUTTING EDGE Embrace new technologies to develop potentially disruptive ideas, in and outside of your current industry. When your industry hovers in the Durability period of disruption... FUND YOUR FUTURE BETS Progressively bolster and allocate your innovation investments so you can test and turn new ideas into commercial realities faster. When your industry struggles in the Vulnerability period of disruption... FIND PARTNERS TO SCALE WITH Commit to scaling new ideas with ecosystem partners who can provide access to technologies and specialized talent. When your industry flails within the Volatility period of disruption... DISRUPT FROM THE INSIDE Establish a specialized entity such as an “innovation lab” or a “digital factory” in order to bring meaningful innovation into your established business.

Create your next cutting edge If you’re in Software & Platforms, Communications & Media, or High-Tech (Viability)... BREAKING THROUGH DISRUPTION 15

BREAKING THROUGH DISRUPTION 16 Financial performance is often strong for incumbents that have captured winner-takes-all markets, but new entrants have their eyes on growing profits. Industries in this period of disruption also have rapid product cycles and fleet- footed customers. So, staying ahead of the curve is an imperative. Surprisingly, relatively few Software & Platform companies are investing in newer technologies such as edge and fog computing, or extended reality technologies. Less than 40 percent plan to adopt any of those newer technologies in the next five years. We found that more ambitious companies go beyond today’s proven technologies to innovate at the next frontier, where they can discover potentially disruptive ideas. Ultimately, they understand that the best way to prepare for the future is to create it. 35% of companies in the Software & Platforms sector expect to adopt quantum computing over the next 5 years. Embrace new technologies to develop potentially disruptive ideas in and outside of your current industry.

C U RREN T LEVEL O F DISRU PTIO N SUSCEPTIBILITY TO FUTURE DISRUPTIO N 2011 2012 2014 2015 2018 0.30 0.40 0.50 0.60 0.70 0.80 0.20 0.20 0.30 0.40 0.50 0.60 0.70 0.80 DURABILITY (11% of companies) VIABILITY (18% of companies) VOLATILITY (33% of companies) VULNERABILITY (38% of companies) BREAKING THROUGH DISRUPTION 17 FIGURE 4. DISRUPTION TREND OVER TIME: SOFTWARE & PLATFORMS SECTOR Software & Platforms has remained in the period of Viability in all eight years that we studied. The industry’s level of susceptibility to future disruption peaked in 2012, amid fierce competition in a fragmented market, but has since fallen back as dominant players have emerged. Nodes represent annual scores for industry sector 0-1 scale (1= most susceptible/disrupted) Software & Platforms Other industry scores

STAGING A SECOND ACT: MICROSOFT How does one of the most successful companies of the 20th century reinvent itself for the 21st? That was the question Microsoft faced as it sought to bring new life to its thriving operating systems business. Since the appointment of Satya Nadella as CEO in 2014, Microsoft has refocused on organic innovation. The company especially seeks to find the place where unmet customer needs intersect with today’s advanced “technology curve.” Nadella notes that “when those two come together, magic happens.” 6 The art of innovation is finding that precise intersection point. The company’s outlay on R&D increased by 43 percent from $11.4 billion in 2014 to over $16 billion in 2019. 7 Microsoft understood that it had to quickly reposition itself from selling incrementally improved “software in a box” to perpetually updated software as a service. In transforming and continually growing its core business, Microsoft has kept up its profitable legacy Windows business. And this has given the company a healthy platform from which to invest in cutting-edge technology. In addition to investing in AI and cloud computing, the company is developing innovations in areas ranging from “holoportation” to instant voice translations, and even an HIV vaccine. 8 Microsoft’s capital expenditure stands at 11 percent of revenue—eight percentage points higher than the industry average. BREAKING THROUGH DISRUPTION 18

Fund your future bets If you’re in Health, Life Science or Chemicals (Durability)... BREAKING THROUGH DISRUPTION 19

BREAKING THROUGH DISRUPTION 20 The relative success of companies in these industries doesn’t mean they’re invincible, especially if fault lines and inefficiencies are ignored. Chemicals companies, for example, are performing strongly, with average annual revenue growth rates of 5.7 percent over the past five years. But investment in the future is showing signs of slowing. This comes at a time of rising threats: unique VC deals in the industry have more than tripled, from 226 in 2011 to 691 in 2018. 9 Leaders in these industries focus on building a pipeline of new ideas rather than sweating their core assets. More importantly, they bolster and allocate the capital necessary to ensure they can commercialize new ideas with future potential before their competitors do. These industries have benefited from decades-old business models that served them well. Unsurprisingly, they aren’t prepared to let go of proven success formulas. Disruptors are kept at bay by the incumbents—for now. 64% of companies in the Chemicals sector allocate innovation investments based on future potential. Progressively bolster and allocate your innovation investments so you can test and turn new ideas into commercial realities faster.

C U RREN T LEVEL O F DISRU PTIO N SUSCEPTIBILITY TO FUTURE DISRUPTIO N 2014 2015 2018 2011 2012 0.30 0.40 0.50 0.60 0.70 0.80 0.20 0.20 0.30 0.40 0.50 0.60 0.70 0.80 DURABILITY (11% of companies) VIABILITY (18% of companies) VOLATILITY (33% of companies) VULNERABILITY (38% of companies) Nodes represent annual scores for industry sector 0-1 scale (1= most susceptible/disrupted) Chemicals Other industry scores BREAKING THROUGH DISRUPTION 21 FIGURE 5. DISRUPTION TREND OVER TIME: CHEMICALS SECTOR Chemicals spent 2017 and 2018 in Durability. The industry’s levels of susceptibility to future disruption peaked in 2012, at which point the industry was in a period of Volatility. In this year, incumbents experienced higher transaction costs, and corresponding margin compression.

MAKING NEW BUSINESSES A REALITY: BASF BASF has been innovating since 1865. From introducing synthetic dyes and fertilizers around the turn of the 20th century, the €65-billion revenue German chemicals firm is now a leader in fields from battery technology and agrichemicals to the circular economy. Organic innovation 10 remains at the firm’s heart: 11,000 BASF employees now work on roughly 3,000 research projects in 70 labs across the globe. But BASF is also keen to look outside for new ideas to acquire and convert into new lines of business. It has set up a venture capital arm 11 , which invests in startups in niche areas of interest. It also partners judiciously, such as with Greentown Labs to advance innovation for the circular economy 12 . And it is willing to be acquisitive when the right opportunity beckons. In 2018, BASF acquired 13 a range of agribusiness assets from the pharmaceuticals giant Bayer. This move consolidates BASF’s strength by bolstering capabilities in areas such as crop protection, biotech, and digital farming. BASF subsequently renamed its Crop Protection division to Agricultural Solutions, giving it prominence as the newly expanded business line. BREAKING THROUGH DISRUPTION 22

Find partners to scale with BREAKING THROUGH DISRUPTION 23 If you’re in Banking, Capital Markets, Industrial Equipment & Machinery, Insurance, Utilities, Automotive or Energy (Vulnerability)...

BREAKING THROUGH DISRUPTION 24 Most industries in the Vulnerability period have the benefit of being well-established and asset-rich. The incumbents in these industries tend to be older than others: 64 years on average, compared with just 42 for those in the Viability period. The new entrants that do emerge, initially attack incumbents at the product and service level rather than competing across the value chain. But for most, the squeeze often isn’t severe enough to inspire substantial action. Incumbents often ponder for too long and lack the risk appetite to invest in new growth ideas early. The Automotive sector has spent six years in the period of Vulnerability. But while incumbents may think they’ve applied the brakes to disruption by revving up capital investment and easing up on operating costs, the industry could face a bumpy ride ahead. 67% of automot ive companies expect to actively engage with ecosystem partners to scale the most promising ideas faster, in the next five years. Platform companies and startups, fueled by an eight-fold rise in VC funding since 2011, are perpetually trying to overtake incumbents. Some innovations, such as ride-sharing, may even knock demand off course. One shared vehicle may replace eight privately-owned vehicles; by 2030, up to 40 percent of the profits in the industry may be picked up by mobility services. 14 With cost of goods sold at 80 percent of revenues across the industry, relying on a core business of pumping out incrementally improved cars looks like a strategy that’s out of road. The opportunity exists for those companies that can see beyond the short-term pressures and set their sights on creating scalable businesses that will matter tomorrow. Large companies have realized that to succeed, they need to commit to scaling new ideas with ecosystem partners who can provide access to technologies and specialized talent. Commit to scaling new ideas with ecosystem partners who can provide access to technologies and specialized talent.

C U RREN T LEVEL O F DISRU PTIO N SUSCEPTIBILITY TO FUTURE DISRUPTIO N 2014 2015 2016 2017 2018 2011 2012 2013 0.30 0.40 0.50 0.60 0.70 0.80 0.20 0.20 0.30 0.40 0.50 0.60 0.70 0.80 DURABILITY (11% of companies) VIABILITY (18% of companies) VOLATILITY (33% of companies) VULNERABILITY (38% of companies) Nodes represent annual scores for industry sector 0-1 scale (1= most susceptible/disrupted) Automotive Other industry scores BREAKING THROUGH DISRUPTION 25 FIGURE 6. DISRUPTION TREND OVER TIME: AUTOMOTIVE SECTOR Automotive has spent all but two years in the period of Vulnerability. Current disruption rose to its highest level in 2018, as ever greater levels of venture capital have flowed into the sector, fueling new competitive threats, and squeezing incumbent margins.

MOVING FAST ON EMERGING POSSIBILITIES: T OYO TA Can an octogenarian company lead the way in an industry that the biggest tech companies have their eyes on? It helps if you have a record of innovation—and a war chest of cash and short-term investments worth $45 billion. But the critical element of the company’s strategy is strong partnerships. Toyota is partnering with Panasonic to develop electric- vehicle batteries at scale and smarter homes. 15 The two companies will commit 3,500 employees to the joint venture, which will sell batteries to other manufacturers as well as supplying Toyota. The company is also working with Accenture and telecoms firm KDDI, to develop an AI taxi dispatch system that predicts consumer demand to optimize usage and reduce customer waiting time. 16 Its ambition for unlocking more value for consumers doesn’t stop there: in 2019, the company launched a subscription driving service, Kinto. What distinguishes Kinto is the introduction of a “gamified” element to encourage good driving. 17 Through IoT and monitoring technologies, the company plans to award points to drivers for “safe and ecological” driving, which can be redeemed in the form of future payments. BREAKING THROUGH DISRUPTION 26

Disrupt from the inside BREAKING THROUGH DISRUPTION 27 If you’re in Consumer Goods & Services, Infrastructure & Transportation Services, Natural Resources or Retail (Volatility)...

BREAKING THROUGH DISRUPTION 28 Industries in the Volatility period of disruption feel the pinch. Financial performance has dropped off, as fault lines that developed amongst incumbents have been exploited by disruptors who are eating their market share. And there is little sign of abatement—the future looks equally difficult as inefficiencies and underinvestment in innovation are exposed. They face difficult prospects, requiring them to make radical choices in their core business. In the Retail sector, ever-growing platform-based competition has forced some hard choices. The historically slow innovation displayed by traditional retail players is changing—$5 billion is expected to be spent on AI technology in 2019. 18 But more than a digital veneer is needed. Many industries here realize it’s time for a rapid re- think. In a separate study we conducted, we found that 80 percent of companies in the Retail and CG&S sectors had altered their strategy as a consequence of disruption. 19 Some of the incumbents in this disruption period show tenacity, while others jump the gun and try to do too much too soon. Leading companies juggle the twin challenges of prolonging the lifespan of their legacy business while also investing in new areas. The former requires a restructuring that supports continual internal disruption in order to mitigate external threats. Establish a specialized entity such as an “innovation lab” or a “digital factory” in order to bring meaningful innovation into your established business.

C U RREN T LEVEL O F DISRU PTIO N SUSCEPTIBILITY TO FUTURE DISRUPTIO N 2014 2015 2016 2017 2018 2011 2012 2013 0.30 0.40 0.50 0.60 0.70 0.80 0.20 0.20 0.30 0.40 0.50 0.60 0.70 0.80 DURABILITY (11% of companies) VIABILITY (18% of companies) VOLATILITY (33% of companies) VULNERABILITY (38% of companies) Nodes represent annual scores for industry sector 0-1 scale (1= most susceptible/disrupted) Retail Other industry scores BREAKING THROUGH DISRUPTION 29 FIGURE 7. DISRUPTION TREND OVER TIME: RETAIL SECTOR Retail has spent the past seven years in Volatility. Peak levels of current disruption occurred in 2017, as growth slowed and bankruptcies proliferated.

Retail in general may be severely disrupted, but Walmart has resisted the trend. Staying ahead on innovation is one reason why. While a spate of acquisitions has boosted Walmart’s online presence significantly 20 , the retailer is not neglecting its physical stores. Walmart continues to solidify its organic growth plans by opening its first AI-enabled Intelligent Retail Lab (IRL) location. Developed by the company’s innovation incubator, Store No. 8, the new store will be used as a testing ground to experiment with emerging technology. 21 CREATING—AND LEARNING FROM—LIVING LABS: WALMART The store is staffed by 100 employees who leverage artificially intelligent sensors and cameras to monitor inventory and replenish stock, which frees up much needed time to spend with their customers. 22 In the words of Mike Hanrahan, CEO of the new lab, “Technology enables us to understand so much more, in real time, about our business.” This is creating a virtuous circle within the company, where what leaders learn from new developments like IRL feeds Walmart’s evolving strategy. BREAKING THROUGH DISRUPTION 30

BREAKING THROUGH DISRUPTION 31 TIME FOR COURAGE No longer can companies assume that disruption is just a passing storm they need to ride out. As Bob Iger, Chairman and CEO of The Walt Disney Company, once said: “We have to be different when that storm clears. We can’t be the same.” 23 Responding to persistent disruption requires a radical departure from familiar strategies. Your path to repositioning starts by understanding the disruption trends: How disruptable is your industry today? How has disruption evolved in your industry over time? It takes shape when you put innovation to work in ways that enable you to set the right pace — whether you create your next cutting edge earlier than others, fund your future bets to turn new ideas into commercial reality, scale ideas faster through new partnerships or develop world-class in-house innovation capabilities. Then your company will not only be different once the storm clears: It’ll be stronger for the next one.

APPENDIX BREAKING THROUGH DISRUPTION 32

BREAKING THROUGH DISRUPTION 33 W H AT T H E D I S R U P TA B I LI T Y INDEX MEASURES The Disruptability Index measures an industry’s current level of disruption as well as its susceptibility to future disruption. To diagnose the current level of disruption, we “follow the money” along two dimensions: from incumbents, where we look for evidence of declining financial performance; and to disruptors, where we search for evidence of new competition. Our research shows disruptors are successful in three ways: they deliver significant innovation in products and experiences for consumers; they break down incumbent defenses and barriers to entry; and, they dramatically lower historic prices through new cost structures. We therefore measure industry susceptibility to disruption along these three dimensions, assessing how innovative, defensible, and efficient incumbent businesses are. The index assesses 18 industry sectors and then 106 industry segments within them. We use a combination of industry-level and company-level performance data, with the latter informed by analysis of the 10,000 largest listed companies (based on revenue).

BREAKING THROUGH DISRUPTION 34 PERFORMANCE Has the financial performance of incumbents declined? Based on industry: • Growth and expectations • Profitability • Volatility MEASURING THE CURRENT LEVEL OF DISRUPTION DISRUPTORS Have incumbents been challenged by new players? Based on industry: • Disruptive startups • Disruptive capital • Disruptive titans MEASURING SUSCEPTIBILITY TO FUTURE DISRUPTION 62 indicators 18 industry sectors 106 industry segments 10,000 companies 2011-18 time series 12m + data points INNOVATION Is there an opportunity to drive superior product and service innovation? Based on industry: • Commitment • Digital effectiveness • Positioning for the future DEFENSES Is there an opportunity to capture market share, or circumvent regulations? Based on industry: • Brand prominence • Openness and strength • Value creation potential EFFICIENCY Is there an opportunity to drive a step-change in efficiency? Based on industry: • Transaction intensity • Asset intensity • Labor intensity

BREAKING THROUGH DISRUPTION 35 HOW THE DISRUPTABILITY INDEX WAS BUILT To develop the framework for the index, we conducted a comprehensive literature review and spoke to subject matter advisors about the nature of disruption. A total of 62 indicators are used to measure each factor in the framework: 24 to measure the current level of disruption and 38 to measure the susceptibility to future disruption. 13 indicators are based on statistics provided by reliable external sources suppliers, including CB Insights, OECD, Gallup, Oxford Economics, IDC, and Brand Directory. 49 indicators are based on aggregated company-level analysis, using a database of the 10,000 largest, publicly-listed companies in each year. This data is drawn from Capital IQ. All 62 indicators are normalized based on a min-max approach. This converts each indicator into a unit-less score ranging from 0 to 1. The closer the score to 1, either the higher the level of current disruption, or the higher the susceptibility to future disruption. The min and max values are derived from statistical analysis of the distribution of the data from across 2011-18, using a process of winsorization that helps account for extreme values. This means that the min and max values stay constant for the computation of the index across the time period, enabling us to compare scores across each year. Framework and indicators: Normalization: Aggregation and weights: The Disruptability Index computation is based on successive aggregation of the normalized scores from the indicators up to the overall scores for current level of disruption and susceptibility to future disruption. After generating normalized scores, we used the indicator weighted average to calculate dimension scores. Weighting adjustments were made to grouped indicators (e.g. average, dispersion, and change), and to ensure no indicator had too much impact based on the variability of the underlying raw data. After generating dimension scores, the arithmetic average generates the current disruption and susceptibility to future disruption scores.

BREAKING THROUGH DISRUPTION 36 REFERENCES 1 Percentage of companies from sectors scoring above the weighted average on ‘current level of disruption’. This equates to 4,889 unique companies with Enterprise Value (market cap + net debt) of $41tn (out of $75tn). Sample comprises the largest (by revenue) 10,000 operating, publicly listed companies, with 471 excluded because they are multi-sector holding companies or in industries out of scope 2 Milken Institute’s Global Conference 2018, ‘Strategy and leadership in an age of disruption’ 3 Percentages denote the proportion of companies in given year that are in an industry that is positioned in the particular disruption period based on the given year’s weighted averages for Susceptibility and Current Level of Disruption 4 Capital IQ data on all US-based companies that have gone bankrupt 5 Washington Post 6 Hearst 7 Capital IQ 8 Microsoft , Skype , Microsoft 9 CB Insights 10 BASF 11 BASF 12 EurekAlert 13 BASF 14 Accenture Research estimates based on interviews 15 Reuters 16 ZDNet 17 TechCrunch 18 IDC 19 Accenture Strategy, Striking Balance with Whole-Brain Leadership . Based on a telephone survey of 200 C-suite executives conducted in France, Germany, Italy, Spain, the UK and the US between February and April 2019 20 Business Insider 21 Walmart 22 TechCrunch 23 Barron’s

About Accenture Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 477,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com About Accenture Research Accenture Research shapes trends and creates data-driven insights about the most pressing issues global organizations face. Combining the power of innovative research techniques with a deep understanding of our clients’ industries, our team of 300 researchers and analysts spans 20 countries and publishes hundreds of reports, articles and points of view every year. Our thought-provoking research—supported by proprietary data and partnerships with leading organizations such as MIT and Harvard Business School—guides our innovations and allows us to transform theories and fresh ideas into real-world solutions for our clients. For more information, visit www.accenture.com/research Copyright © 2019 Accenture. All right reserved. Accenture and its logo are registered trademarks of Accenture. This document makes descriptive reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by Accenture and is not intended to represent or imply the existence of an association between Accenture and the lawful owners of such trademarks.