Digital Business Disruption – into the Vortex


Into the Vortex

by Prof. Michael Wade & Andrew Tarling

Introduction

Digital Disruption is overturning incumbents and reshaping markets faster than at any time in history. It is a perfect storm of rapid technological change, business model innovation and the blending of industries, which has impacts not just in Germany, but across the globe, dismantling territorial boundaries and existing business wisdom.

At the Global Center for Digital Business Transformation (an IMD and Cisco initiative based at Lausanne) we liken Digital Disruption to a vortex in that it pulls everything around it into the center. Entire industries are drawn inwards and change becomes more rapid and more radical – whatever can be digitized, is digitized. But Digital Disruption is not simply digitization, it doesn’t just imply improvements to existing processes and business models – it can sweep them away entirely.

Michael Wade QuoteSo which industries are most at risk? The DBT Center set out to gain critical insight into Digital Disruption and the outlook for a range of industries by surveying a thousand business leaders from across the globe in twelve industry sectors. The group of top executives were asked to estimate the likelihood of disruption in their industry based on four key variables: Investment, Timing, Means and Impact.

The results gave a ranking, based on susceptibility to disruption, and located them on the Vortex – with those nearest the center most at risk. Industries poised for greatest disruption are almost inevitably those in which the most digitization is taking place; those on the periphery being less vulnerable.

However, even where products and services themselves seem immune from digitization, disruptive business models can alter accepted dynamics and overturn established customer-value relationships. Innovative examples abound, with aero-engine suppliers moving to selling ‘fl ight time’ rather than propulsion units and even compressed air being offered as a service. While those most commonly cited examples of ‘extreme’ disruption, Uber and AirBnB, both deliver entirely non-digital services.

Signifi cantly, it is not technology per se that drives the Digital Vortex, the dynamics are much more complex. Many of the forces driving these changes are fundamental—for customers of all stripes, getting more value for less outlay; or for institutions, finding ways to make public goods and services like healthcare, energy, or education more affordable and more effective. Human ingenuity and a pervasive desire to make life better are powering the Digital Vortex. Note that moving towards the center of the Vortex is inherently neither good nor bad, simply inevitable as digitization increases. And of course, many companies will benefit enormously from this. Others will not. The real question then is ‘which organizations will succeed?

Cause for Concern

The results of surveying 1,000 business leaders were surprising – revealing startling concerns about the potential for disruption, and incumbents’
readiness to adapt.

For example, executives predicted that up 40% of today’s top ten incumbents across twelve industry sectors will be displaced by digital disruption in the next five years. That’s four out of ten of the current best performing companies struggling to cope with the new digital reality.

But despite this prediction, Digital Disruption was not on the board agenda in nearly half of companies across all industries. In addition, 43% either did not acknowledge the risk of Digital Disruption, or had not addressed it sufficiently – for example, merely appointing a Chief Digital Officer (CDO) while not addressing the core issue. Nearly a third are simply taking a ‘wait and see’ approach, while only 25% describe their approach as ‘proactive’— actively seeking and engaging with disruptive strategies of their own in order to compete.

However, as an ever-growing list of casualties, from media empires to taxi firms and book-shops attest – doing nothing is not an option.

Of course Digital Disruption is not a negative force in its own right, and for every incumbent struggling to cope with seismic changes, there is an upstart disruptor agilely bringing new forms of value to eager customs. Our executives acknowledged this, the vast majority agreeing that ‘Digital Disruption’ was a form of progress and that it was delivering value to customers. And who could argue with marketplaces like Etsy, or food ordering
apps like the Berlin-based Deliveryhero that serve customers across the globe. In the financial services sector app-focused German online banks like Fidor.de or Number26 are enabling innovative access to banking services on the fly. New tools are not just providing value for customers either, but providing businesses with new workplace capabilities that help them recruit, retain and effectively deploy staff across multiple projects in an increasingly complex environment. So although leaders may see troubled times ahead for some incumbent businesses, with stalwarts of industry being displaced, put out of business, or limping along, consigned to the dustbin of history – they also acknowledge the size of the opportunity being presented.

Andrew Tarling QuoteDisruption for all

The key difference between the disruption of the Vortex and traditional competitive dynamics is twofold: the velocity of change and the high stakes. Disruptors innovate rapidly, and then use their innovations to gain market share and scale far faster than those still clinging to predominantly physical or traditional business models.

Although the Technology Services sector sits close to the center of the Vortex, Digital Disruption is not just an issue for high-technology firms, the impact is being felt across industries. In home-styling for example, German unicorn Rocket-Internet has mentored the hugely successful pure-player Home24 as a rival to traditional furniture stores. At the same time, in low-cost fashion, online enterprises such as Otto and Zalando have prospered. Euro-retail incumbents like Zara have redefined omnichannel – successfully merging online and physical experiences. The hospitality business has been disrupted twice, firstly by successful
re-intermediators such as Booking.com and Hotel.de but more critically, a second time by AirBnB (now the world’s largest hotel chain) offering a completely new model leveraging platform value and the power of the P2P economy. In travel we see the rise of asset-less, online enterprises like Skyscanner, Waymate, RentalCars and Trivago – re-intermediators who have rapidly established huge businesses without the necessity of acquiring physical assets. And in the pure B2B space, the on-demand economy is spawning a network of technology-enabled, digitally-savvy service suppliers.

To counter these potentially existential threats companies need to change, but not just change, they need to transform. Digital business transformation is a journey to adopt and deploy digital technologies and business models to improve performance quantifiably – the first step of this journey is to grasp the need for transformation.

Digital Business Models

How to respond is the issue that most preoccupies market incumbents as they contemplate Digital Disruption – and it is encapsulated in the three questions we are most frequently asked:

■ How are digital disruptors going to attack my
company?
■ What steps should I take now? And,
■ What capabilities do I need, not only to
respond but to go on the offensive?

There is of course no single answer to these questions, but our research does indicate strategic approaches and capabilities that companies need to develop to counter digital threats. It is important to recognise though that transformation is not a series of individual or isolated actions, which tend to focus on tinkering with existing value chains to compete with traditional, well-understood foes. Rather, transformation is an holistic re-imaging of the entire enterprise to focus on the value delivered to customers. The answer then to ‘How’ digital disrupters will attack your company is through just that – supplying the value customers want through innovative digital business models – frequently, and most dangerously, in combination.

Digital business models fall into three categories, delivering: cost value, experience value, and platform value. The components of digital value can be readily combined as disruptive business models that knit together different types of capabilities and deliver customer value in new ways. The most successful disruptors of recent years — Amazon, Apple, Alibaba, Google, Netflix, Uber and others—employ what we refer to as “combinatorial disruption,” in which multiple sources
of value—cost, experience, and platform—are fused to create disruptive models and exponential gains. Combinatorial disruption builds on the decomposition of value sources into constituent digital parts that are then recombined—enabling the invention of not only the next generation of technologies, but also breakthroughs in the form of new business models.

When a company’s most formidable competitor might be a start-up or a firm from another industry that uses digital technologies and business models to create ‘combinatorial disruption’, minor changes to existing processes and models will not be sufficient.

Digital Business Agility

To respond to competitive digital threats, companies must be agile and dynamic enough to understand and react swiftly. Through the DBT Center’s research and experience advising companies on how to transform, we have come to understand that companies need to develop an essential meta-capability we have termed ‘Digital Business Agility.’ Companies that possess Digital Business Agility respond quickly and effectively to emerging threats to their business, and seize new market opportunities before their rivals even notice them.

It has three main pillars: hyperawareness, informed decision-making, and fast execution. These pillars are not technologies, but rather technology-enabled capabilities. Moreover, whilst they can be understood as discrete, they actually form a complex, interacting foundation for the entire enterprise.

Hyperawareness

Hyperawareness is a company’s ability to detect changes in its business environment. By ‘business environment’, we mean both the internal and external factors that impact the company’s opportunities and risks.

Hyperaware companies are less likely to be caught off guard by the sudden arrival of new competitive threats, and are hard to disrupt because they
are aware of their vulnerabilities and adjust models and processes accordingly. They understand what customers truly value about their products, as opposed to how those products are delivered through the current value chain. They also anticipate which non-traditional competitors could threaten their market position, and the models they could use to disrupt.

Informed Decision Making

Informed decision-making is a company’s ability to make the best decision possible in a given situation. To do this, data collected as part of company hyperawareness processes must be analyzed, scaled, packaged, and distributed throughout the organization. To excel in informed decision-making, companies must develop mature data analytics capabilities that augment human judgment. In the Digital Vortex, decisions based purely on “gut feel” or past experience have little chance of success.

Instead, companies must make decisions based on insights gleaned from data analytics, and ensure that experts both inside and outside the organization have access to these insights. Diversity of perspective and corporate inclusion are major contributors to informed decision-making.

Fast Execution

Fast execution is a company’s ability to carry out its plans quickly and effectively. Unfortunately, it is a rare capability, especially in large companies
where execution is slowed by organizational complexity, cultural inertia, turf wars and a reluctance to invest in resources. As it grows, complexity becomes the bane of the incumbent. Almost invariably start-ups out-execute incumbents in areas such as time to market, experimentation, and risk-taking – all core capabilities that are essential to success in the Vortex. To cut through complexity and accelerate execution, savvy incumbents can emulate the strategies of start-ups through venture partnerships, sponsored hackathons and incubator labs.

Conclusion

Digital Business Agility – creating and nurturing hyperawareness, informed decision-making, and fast execution capabilities – is at the heart of digital
business transformation and competitive success in the Digital Vortex. It forms a large part of the answer to the question ‘What capabilities do we need not just to survive, but to go on the offensive?’

Younger companies are not inherently more competitive. As disruptors themselves mature they too can fall prey to new disruptive players, and with innovation costs plummeting, agile disruptors (including incumbents) have more opportunities to create disruptive offers and business models. As a result, established players can tap into exciting new paths to customer value, leveraging their access to markets, brand values and incumbent status muscle. Whether this is good or bad for an individual firm comes down to how effectively and efficiently it can create new models and ‘reset’ its position, essentially whether it is capable of transforming. This in turn hinges on the level of Digital Business Agility it possesses: the more it has, the greater its ability to thrive and compete in the Digital Vortex.


Michael Wade

 

Professor Michael Wade,
IMD Lausanne,
Center for Digital
Business Transformation

 

 

 

Andrew Tarling

 

Andrew Tarling,
IMD Lausanne,
Center for Digital
Business Transformation

 

 

 

The DBT Center

The Global Center for Digital Business Transformation (DBT Center) is an IMD and Cisco initiative that brings together innovation and learning to explore disruptive business models for the digital era. The DBT Center is a global research hub at the forefront of digital business transformation, where executives engage to solve the challenges created by massive market transitions. The DBT Center seeks out diverse viewpoints from a wide range of organizations – start-ups, incumbents, and disruptors – to bring new ideas, best practices, and disruptive thinking into the process. The collaboration combines Cisco’s technology leadership with IMD’s expertise in applied research and developing global leaders, focusing on the organizational change required for digital transformation.

 

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