Everyone is being disrupted by digital, so get on board or be left behind

A new report from the Global Center for Digital Business Transformation suggests many companies are poorly prepared for the digital disruption threatening their existence.

Digital Vortex: How digital disruption is redefining industries” is a collaboration between Cisco and business school IMD.

Joseph Bradley

Joseph Bradley

Report co-author Joseph Bradley said the study’s impetus was the growing focus on the importance of big data, which people are applying in many different ways to digital disrupt many industries.

Often they do not know where to begin, Mr. Bradley explained. They see the number of fin-tech unicorns grow from five in January to 19 in October and they feel a sense of immediacy.

The authors write that it helps to differentiate between digital disruption and traditional competitive dynamics and that comes down to two factors — change velocity and the high stakes involved.

Digital disrupters quickly innovate and use the results to grab market share and scale much faster than those using older business models.

That growth is exemplified by WhatsApp, which was purchased by Facebook in 2014 for $22 billion. Started in 2009, What’sApp hit the 20 billion daily message milestone in 2014. It took SMS messages 18 years to reach that level, the authors said.

logoCisco and IMD interviewed 941 global business leaders from 12 distinct industries to determine the expected level of digital disruption in their world and what plans they had in place to adapt.

One certainty respondents know is disruption is indeed coming to their industry, Mr. Bradley said. On average, they expect 3.7 of the top ten companies in their field to drop out of the top 10 by 2020.

Those are the lucky ones, Mr. Bradley added, for 41 percent believe digital disruption at least somewhat increases their risk of being completely eliminated from operation. The average length of time they estimate it will take for that to happen is three years.

“Clearly these executives have a strong sense that it is coming and it is important,” Mr. Bradley offered.

Yet, even though they acknowledge digital disruption is looming, many have their heads in the sand when asked how they are preparing for it, Mr. Bradley said. Only 25 percent have a plan involving disruption of their own business. Those companies actively discuss disruption — how it will look, who is most likely to do it, and what they as companies can do to get or stay ahead of the curve. They schedule regularly company exercises to stay fresh and to foster buy-in.

Roughly one in three companies are putting a toe in the water in addressing disruption and that is insufficient, Mr. Bradley said. He likened it to the drafting strategy in auto racing where cars will let someone take the lead and deal with the air resistance, while following in behind to save fuel. Such companies wait to to see what front-runner strategies work before adopting them.

In the current business climate of rapid innovation, such a strategy is insufficient, Mr. Bradley added.

The remaining, respondents, 43 percent of them, do not recognize the problem or are responding inappropriately.

ciscoAn important early step in a successful disruption strategy is to have the right person or group behind it, Mr. Bradley said. Ideally, it should have board support, but 45 percent of the time it is not even discussed at that level.

That makes it harder for the Chief Information Officer, the increasingly common Chief Digital Officer to mobilize the resources and broad-based company support needed to successfully complete such a significant transition.

By the time many companies realize the need to internally disrupt, it may be too late, Mr. Bradley said. That is because the closer a specific industry is to disruption, the faster it happens.

This situation is best pictured by imagining a vortex, such as the one that happens when you drain a sink of water. The further you get away from the drain, the slower the items caught in the vortex move around the center. As they approach the drain, the pace accelerates.

There is no predictable pattern for items caught in the vortex either. One moment they are on the outer edges, the next they are down the drain. This is equally true for companies as it is for meatloaf.

A third similarity between vortices in the business world and those in nature (or your kitchen) are there are many objects (companies, sectors) in the vortex at the same time. These elements break up and recombine as they move to the center.

Of the dozen industries included in the report, technology is the closest to the middle, Mr. Bradley said. Media and entertainment along with retail take the next two spots. Financial services came in fourth.

Regardless of where your industry sits in the vortex, the message is the same, Mr. Bradley said.

“Don’t get comfortable. Yellow Cab once thought they were the only game in town.”

No matter where you are in the vortex you have blind spots and you have to find out what those are, Mr. Bradley said. That involves steps like the regular disruption simulations.

“Take a look at a bank’s list of services and you can see the breakout,” Mr. Bradley explained. “Then look at the number of fintechs unbundling the bank and digitizing each component.”

“Scale being important is no longer sufficient as a key enabler of success.” – Joseph Bradley

Do not be surprised if the company that puts you out of business has not even been established yet or comes from another industry, Mr. Bradley said. Because technologies are not emerging in isolation, they are combining to produce distinctive solutions unimagined when they were designed. A product or service initially intended for the technology industry has morphed into an effective alternative for the financial industry too.

Cisco calls this the “Internet of Everything.” This interconnectedness spawns new business models, linkages and products.

The closer they get to the vortex companies eliminate every physical element possible with the goal of maximum digitization.

Those digital business models can be grouped into one of three categories, cost value, experience value and platform value. Cost value companies feature complete price transparency, buyer aggregation and consumption-based pricing. Those delivering experience value manage to combine personalization and automation while increasing customer choice. Platform value providers are seen in the sharing and crowdsourcing economies.

For many in business, this mind shift from long-held industry maxims to something that looks like it is being made up in real time is difficult to absorb, but in the 21st century sticking with the one you brought can be a fatal mistake.

“It’s not what you don’t know but what you believe to be true that causes you to fail,” Mr. Bradley said.

Companies with the “this is the way we have always done it mentality” are watching disrupters like Snapchat grow to 200 million users, or the population of Brazil, in just four years.

“Scale being important is no longer sufficient as a key enabler of success,” Mr. Bradley added.

“Brands are about experiences that can be delivered right now, and which can change quickly. Look at the advantages of startups and that is where incumbents have to change.”

Successful companies must not be afraid to experiment, Mr. Bradley explained. It is not about failing fast it is about improving the learning rate, about being as agile and elastic as possible. Get your product to customers as fast as possible so you can get their immediate feedback and iterate.

“There was only one Steve Jobs,” Mr. Bradley said. “The rest of us have to communicate with customers to find out what they really want.”

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