Blog. How to survive the digital disruption of your company
We are currently experiencing the early stages of what is generally referred to as the fourth Industrial Revolution. Emerging innovations in areas such as mobile, the cloud, robotics, artificial intelligence, the Internet of Things, nanotechnology, biotechnology, quantum computing and 3D printing are disrupting many industries and companies.
Platforms, such as Uber and Airbnb are just two examples of business models that have radically changed the balance of power in the value chain. Kodak and Nokia are examples of well-known brands that became victims of the transition to the digital era.
Many existing companies, the incumbents, apply a wait-and-see strategy. They are not at the forefront of innovation, but follow developments closely and regularly consider when the timing is right to make the necessary changes and investments. This strategy may well work, but only if this is a deliberate choice rather than an excuse for a lack of preparation.
The good news is that digital disruption is manageable. Proactive companies that look beyond the latest successful start-ups and technological gadgets can survive the digital transformation. The first step is to understand why disruption is taking place. As always, the why is more important than the what.
Recognizing threats: it’s all about the customer
You can select a number of starting points for defining your digital strategy and considering future business models, such as the technology, examples of successful start-ups, available data or your current business lines. I’d like to start with the customer experience. A couple of examples.
All new and successful digital business models have one thing in common; they remove barriers for customers, lower transaction costs or fulfill customer needs that were not met before.
Travel sites such as Tripadvisor and Trivago are popular because they make the process of finding and booking a suitable hotel simple and they compare the prices from hundreds of booking sites. They reduce the information asymmetry between consumers and suppliers and save time.
iTunes unbundled music albums, allowing consumers to buy individual songs, while Spotify bundles millions of songs into a single subscription.
Uber and Airbnb facilitate what has become known as the ‘share economy’, bringing spare capacity (unused bedrooms and cars) to the market. Car manufacturers such as BMW, Peugeot and Daimler have launched car-sharing services, turning a peer-to-peer business model into a business-to-consumer proposition.
Customer expectations move beyond satisfaction
Customer’s expectations of any type of product or service are not only based on their experience and satisfaction with your current offerings. They are also dictated by their experiences when using smart phones, social media and shopping apps. This means, for example, that consumers expect your services to be always available, real-time, cross-channel and well-designed. Convenience and easy-to-understand solutions are required.
This means that you may well be vulnerable to digital disruption if your customers could potentially save time or money if you would unbundle your products and services, if you would change the pricing structure (subscription or pay-as-you-need) or if you would be more transparent about other consumer options. The dilemma is whether you cannibalize your own business or wait-and-see until somebody else comes to market with a more user-friendly, better automated and cheaper offering that distorts your business model.
Responding to start-up disruptors: if you can’t beat them, join them
There’s so much talk about start-ups that are disrupting large established companies, that you would forget that only very few of these new entrants really make it big. The difficulty for the incumbents is how to foresee at an early stage which companies will turn into serious competitors. Which ones have the technological capability, the marketing skills, the funding, and the stamina? The initial steps from successful start-ups may be deceptive. If their first product is unimpressive and targets only a small market segment, you will likely disregard them as a threat.
If new entrants are starting to make an impact with their new technology and marketing approach, the first option for incumbents is to also invest heavily in that same technology and capability. Incumbents have a number of advantages over start-ups that they can leverage to grow faster than newcomers and win this battle. Firstly, incumbents have an existing customer base and a trusted brand name. Customers will only change provider if the benefits of switching exceed the costs. Secondly, incumbents have a cash flow from their existing operations that can be used to finance the new investments.
The old saying “if you can’t beat them, join them” also applies here. Rather than investing in building your own technology to beat the new competitor, you may acquire them. It is not unusual for new technology first to be brought to market by new companies and then be bought by a large company that brings more scale and applications. Siri, Apple’s virtual assistant, is a prime example. It was an independent company until Apple bought them.
In wealth management, we have seen many newcomers developing and offering robo-advice for the automated allocation of customer assets in investments funds. In the USA companies such as Betterment and Wealthfront have attracted billions in assets with this technology. However, when the large existing players such as Vanguard and Fidelity adopted the same capability many years later, they surpassed these newcomers very rapidly. The start-up companies that created the market now need to decide if they can survive independently or join one of the firms they were once trying to beat.
Continuous monitoring is critical
Even companies that do everything right may be disrupted by new competitors that have found an alternative way to meet customer demands. Fear of disruptive innovations, however, is not always justified. Disruption is a manageable process and failure is avoidable. It all starts with keeping your eyes open and trying to understand why and how new developments benefit consumers. Continuous monitoring of potential threats and newcomer activity is a condition for any wait-and-see strategy to work.