Henry Ford once said: "If I had asked my customers what they wanted, they would have said a faster horse." Henry Ford understood, that innovation is about knowing the market reality.  Ford knew  (the transportation industry was ready for transformation, horse to automobiles). His beliefs and his proper interpretation of the market realities enabled the Model-T to be transformative.

It is not uncommon for large organizations with dominant market share to find themselves in the fallacy box and be upended quickly and decisively,  examples are abound; In the retail industry, great innovative companies have been surprised by e-tailers as witnessed  by their rapid stock and valuation decline. Picture development was replaced by digital photography, in the automotive sector carburetor fuel delivery was replaced by fuel injection, and brick and mortar video distribution was replaced by video streaming. We are at the cusp of witnessing the replacement of vehicles with internal combustion engines by electric autonomous vehicles.

How can innovative companies in the Fortune 500 list be shaken to their core? It’s because they are living in fallacy world which we coined as the “fallacy box.”  We can define from management construct how organizations actually end up in a fallacy box by understanding the organizational beliefs and their understanding of reality.

The fallacy box is one of four knowledge states in the knowledge space. The knowledge space is derived by mapping the market reality which we coined as “Relative reality” against personal, group or organizational beliefs. The knowledge journeys start with ignorance (a.k.a. blind spot) progress to awareness, then to knowledge and potentially end-up in the fallacy box. Fallacy box is the state in which persons, groups and/or organizations believe that they have the most current, relevant and superior knowledge and in “Relative Reality” this is not the case.

Innovative companies with first-mover advantages find themselves in the challenging predicament of no longer being market leaders and their knowledge being outdated; they find themselves in the fallacy box. The effects of falling in the fallacy box can be devastating or even catastrophic; examples in the retail, enterprise software, mobile telephony and video streaming industries provide compelling proof.

Why does this phenomenon happen to so many companies and why is it accelerating?

The root cause of this phenomenon is the timely and correct understanding of “Relative Reality.” Reality is defined as “the world or the state of things as they actually exist at a point in time.”  Relative comes from the Latin term relativus “having reference or relation.” Because the world is in a state of constant change, it is virtually impossible to capture a snapshot of reality, thus we view reality in reference or relationship to the constant change we live in…thus the actual state of things becomes relative, or interpreted reality. What is reality today may not be the reality of tomorrow.

We conclude, that the companies often know their organizational beliefs… i.e. we have the superior value and experience for the customer… but fail to have people, processes and technology that timely and correctly understand their “Relative Reality” they eventually end-up in the fallacy box, defenseless against their known and unknown competition.

This phenomenon is exacerbated by the fact that the relative reality (the world or the state of things as they actually exist at a point in time) is changing and its rate of change is accelerating due to digital transformations. As a result, many companies find themselves in the fallacy box and the proof is that only 61 of the fortune 500 companies listed in 1955 are still listed in 2015. By 1980, the average tenure in the S&P 500 had fallen to about 25 years (down from 61 years), and in 2012 it was just 18 years. At the current churn rate, 75% of today’s S&P 500 companies will be replaced by 2027!

Our next blog will outline the key behaviours that are critical to the timely and correct understanding of “Relative Reality”and design of successful digital transformations.

Check out our on-demand webinar to see how ITC  transformed  Toyota Financial.  If you’re ready to connect with us to learn more, contact your account executive. Interested in achieving your most ambitious innovation and growth goals by transforming your organization? Find out more on our website

This blog post was written in partnership with Jack Ferraro, Salesforce ITC Program Executive.