Digital Transformation and Disruption - The Basics... by Maarten Ectors

How come Netflix disrupted Blockbuster and is doing the same to Hollywood? Why was Kodak bankrupted but not Fujifilm? Who are Amazon, Musk, Google, Netflix and Revolut going to disrupt next? Can you defend yourself from being disrupted? How do you disrupt the disruptors?

Why is disruption happening?

The steam engine brought factories and fast transportation which disrupted any other form of producing products. The Internet brought e-commerce which disrupted physical stores. In the last decade however we have seen an explosion of disruptive technologies.

Cloud computing [rent instead of buy computing capacity when you need it] has been the foundation of many digital businesses. Without "The Cloud", Netflix and most mobile apps would not be possible. Before it would take an average company months to provision more compute power. Via the Cloud it takes seconds, if not less.

Mobile apps and ubiquitous mobile Internet are the other disruptor. An amazing mobile app from a challenger bank means any competitor using branches and call centres is made irrelevant. Old media [news paper, television,...] have been substituted by social media apps.

Artificial intelligence [AI] enables online stores to have an unlimited catalogue and still recommend the best product to the customer. Advertising a product to the right person at the right time, finding the right product even if you do not know what it is called, suggesting complementary products & services, ... are all use cases which AI has enabled.

The speed at which disruptive technologies like Internet of Things [intelligent machines, e.g. Alexa what's the weather], Bitcoin/Crypto & Blockchain [virtual alternative payment methods and lots more], 3D printing [print shapes out of different materials], gene editing [create personalised medicines], green energy [for electric vehicles], cheap space travel [reusable rockets], ... are hitting society is alarming. Organisations that know how to use them in their advantage can disrupt others at unseen speeds.

Why are companies ill-prepared for the digital revolution we are in?

Corporations were built over decades in order to maximise revenues from established products and services. The main focus has been on economies of scale and efficiencies. Those companies who could open more stores/offices/branches/call centres/sales teams/... globally and make them all work as efficient as possible, were sure to become the market leader in the "analogue era".

Unfortunately in the digital age, economies of scale and efficiencies can be easily had from a mobile app. A challenger bank can sign-up millions of customers globally without needing to open any branches. Blockbuster used to invest heavily in stores close to where people lived. They could charge $/£/€3 for renting a DVD for a day. Netflix is asking around $/£/€10 a month to give you access to unlimited films. However, where Blockbuster needed to invest lots of money to acquire a new neighbourhood, Netflix can service hundreds of millions of customers without constructing any building.

The focus on efficiencies means that most corporations have created structures, processes and organisations which are resisting change. This behaviour was positive in the "analogue era" because it prevented quality issues and competitors entering the market. In the digital era however, change is a given and resisting it means loosing competitiveness. The cost of creating and launching a new product thanks to the Cloud and mobile apps is exponentially lower than a decade ago. A digital company can easily launch a new product every day if they want to do so. The problem now is finding market fit. In a world of abundance: "What customer needs, are not covered yet?" That is the question to solve!

Even if you find the perfect solution to this unmet need, your biggest problem is that competitors can very quickly copy you. So the second part to optimise in a digital company is speed. You have to be able to outrun the rest of the market. This is the main reason why corporations are starting to struggle when presented with digital challengers. Thousands of employees structured in departments, which although very efficiently ran by themselves, need to all work together to create, launch and grow a product. Challengers just setup a multi-skilled small team to create and launch a product and quickly grow it digitally. The team that was running WhatsApp was just a handful of people when Facebook bought them but was handling more messages than all telecom operators in all countries combined. Having to make a change in a 10 people team is so much easier than in a 10,000 people organisation. Size is a hindrance in the digital age.

Exponential organisations and ecosystem platforms

Digital companies are organising themselves as exponential organisations which can grow from zero to millions virtually overnight. They often do so by creating a platform business. To understand how a platform business is different from a pipeline business, which most corporations have, let's imagine you have just written a book. In the analogue age you would have to find a publisher, who would know wholesalers, who sold to bookstores, where a reader would buy your book for $/£/€20. You would be lucky if you could earn $/£/€3 on each book. Today, you can go to the Kindle Store, upload your book and put the price to $/£/€5. You would get $/£/€3.75 on each book sold and if you are lucky and amazingly talented, you could sell millions in the next days.

Amazon just has to create one Kindle Store to earn 25% on all books sold. They have what is called a positive network effect. The more books in the Kindle Store, the more buyers will go there. The more books which are sold, the more writers who will publish in the Kindle Store. This virtuous cycle creates an unfair digital advantage for the winner. Amazon is this case has exponentially more books and buyers than number two. This same outcome you can see in many other digital platform businesses. Name the number three competitor of Amazon, Google, Facebook, AirBnB, Uber, ...

If you are an exponential organisation with market fit, then you become a global digital monopoly and the pay-offs are huge. This is why venture capitalists have no problem pumping hundreds of millions, if not billions, into companies who hardly generate any revenues, let alone profits, but offer what everybody wants.

How are corporations trying to protect themselves from disruption?

Many corporations have started digital transformation programmes in which they introduce agile ways of working and use the latest and greatest exponential technologies. Unfortunately a successful digital transformation is no guarantee to success in the digital era. Imagine you were the Chief Digital Officer of Blockbuster. You would use a mobile app for customers to rent a DVD, artificial intelligence to help customers choose the right DVD, bitcoin to pay to rent a DVD, even drones to deliver DVDs to customer's homes. None of it would matter because a Digital Blockbuster would still be bankrupted by Netflix. Netflix did not only innovate in its technology way of working but also in its business model and product offering. Unless corporations are able to launch quickly new digital products which have market fit and scale them overnight, any digital transformation is not going to convert them into the next Netflix.

When Kodak and Fujifilm faced the same digital camera disruption, their reactions could not have been more different. Kodak tried to fight it and lost. Fujifilm on the other hand looked at its core skills and created innovative new products based on what it was great at and left their existing market behind. This business transformation was a bolt move but it paid off. Any digital transformation without a business transformation is unlikely to be successful.

Doing business in the abundance era

The digital era is converting scarcity into abundance. Storing and streaming a movie used to be expensive. Thanks to exponential technologies, the cost of storing and streaming one movie is every day getting closer to zero. When disruptors notice this pattern, they tend to accelerate this move and put the price to zero. The innovation they often bring is to charge for something else. Facebook and Google are a great example. They brought the cost of searching and social networking to zero and charged companies to stand out in a world of abundance via very targeted advertising. "When something is free, you are the product!", has never been more true. The outcome has been that anybody who was still charging for content was disrupted. The news, media and music industry almost overnight saw their margins implode.

What is next?

Which innovations will Amazon, Google, Elon Musk and challengers bring to market next? Nobody knows but the only certainty is that your next competitor is probably working on making your core business irrelevant and often this is a side product of what they are working on. Google did not set out to disrupt the press. SpaceX was not founded to be the next global telecom operator. Tesla wanted to accelerate the adoption of electric cars however they are likely to become soon a disruptive energy supplier and robot taxi service. The only certainty corporations have is that its current best selling product or service will be made irrelevant faster than its previous.

Continuous Transformation

To protect yourself from disruption, an organisation needs to be able to continuously transform. When IBM found that the hardware era was over, they became a services company. Now they are moving away from being a services company to being a Cloud, AI and blockchain company. Any company that wants to survive digital disruption will need to learn how to launch new products continuously and faster as well as cheaper each time.

The company will need to move at three speeds. Speed 1 is for the existing cash-cow business which needs to accelerate and transform digitally. Speed 2 is for the new businesses it is trying to scale up. Speed 3 is for the future ventures which need to protect its future and enable it to grow in the digital era.

How do you disrupt the disruptors (and everybody else)?

If you are an existing medium to large business and you are serious about wanting to be the next digital disruptor, but you can use some help, why don't we talk. Happy to sign an NDA.

For everybody else, I hope you enjoyed this article. If you did, why don't you subscribe to my news letter and share this post with others. Especially if you want to avoid that your current job is made irrelevant by a digital disruptor...

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Maarten Ectors is a strategic innovator who exchanged working with the who is who of high tech to apply disruptive technology and business innovation from the inside in the top UK insurance and investment management company. In less than a year they won the best claim technology solution of the year award and that is just the start...