Short fuse, big bang: 4 ways that digital disruption will change your industry
Kodak did not keep pace with the rapid digitization of photography, traditional travel agencies were battered by their online competitors, and the music industry is floundering in its second or third disruptive period.
The impact of digital disruption is significant. Newcomers’ clever use of new digital technology can often turn a market completely on its head. And if experts are to be believed, not a single industry will escape digital disruption in the long term.
In this article, I will describe what digital disruption is and why it is so pertinent right now. I will also provide indicators that show when a market is susceptible and some guidelines on how your organization can tackle it. We will provide more detail in a follow-up article.
Emergence of ‘digital disruption’
The term digital disruption is used in professional literature and at conferences only for the last couple of years. Before that, the term disruptive innovation was mainly used for innovations that threw overboard the rules of the game for an existing market and created entirely new markets and value networks at the expense of the existing market.
More than ever before, today’s digital capabilities are the driving force behind radical innovations. The technical jargon has now acquired the logical concatenation of the terms digital and disruption.
Figure 1, Digital Disruption in Google Trends
Although the underlying theory goes back decades, it is not correct to label digital disruption as an old idea parading as a new one. The impact of digital disruption on a market is very much greater than from traditional disruption, and the market swings are much more rapid (see Figure 2). The power of the Internet and existing mobile and social media infrastructure can rapidly broadcast disruptive ideas to a very large audience.
A start-up with a relatively simple app may have the potential to shake a traditional market to its very foundations in a very short period of time. An example is FitNow whose Lose It! app responds better to consumer needs than traditional diet and weight loss experts. The app keeps track of what you eat, has smart gamification elements, and also has other options such as a network of connected buddies. Any time a consumer’s urge to raid the kitchen is too much for them they can contact a buddy.
And this appears to be effective. Lose it! represents a significant threat to established organizations such as Weight Watchers, which has helped millions of people lose weight since 1963. And this will be a certainty if Weight Watchers does not find an answer fast enough.
Figure 2. Traditional disruption versus digital disruption, Forrester Research 2011
Newcomers entering a market often have disruptive business models that would have been impossible without the current digital infrastructure:
- Using rather than owing: Spotify, Netflix
- Freemium: Skype
- Peer-to-peer commerce: AirBnB, 99dresses.com
- Creativity of the crowd: threadless.com
- Mass personalization: chocstar.nl, shirtbyhand.nl
According to Forrester Research, digital disruption is relatively new. Currently, only a few industries have experienced this phenomenon. The most obvious example is the music industry where due to digital disruption total sales reduced from 14 billion in 1990 to 6.8 billion (including digital) in 2010. In the meantime, the Spotify business model has again turned the music industry on its head.
Digital disruption has had a similar effect in other media sectors. No matter how analog it is, each sector is susceptible to digital disruption. It is not a question of whether it will happen or not, but when and who will cause it.
The driving forces behind digital disruption
These are challenging times for industries and organizations that are attempting a digital transformation. Never before have so many different trends occurred simultaneously to pave the way for such radical digital innovation. Together these trends constitute the driving force behind digital disruption:
- Everyone is online
- Buying online is generally accepted
- Online communication is now the norm
- Internet is available anytime, anywhere: penetration of the smartphone and tablet
- Data storage costs have plummeted
- High processor speeds and data analysis methods
- Software as a service (cloud technology)
- Presence of platforms like Apple’s iTunes store, Facebook, and the strongly evolving Amazon.com network
- Reliable digital payment systems
- Products are increasingly connected to the Internet (Internet of Things)
Which sectors are ripe for disruption?
Every sector is susceptible to digital disruption, but some markets are more sensitive than others. In Australia, Deloitte used two dimensions based on 13 factors and 26 indicators to show the vulnerability of 18 sectors to digital disruption:
- the extent of the impact (the bang)
- the threat due to the change (the length of the fuse).
Figure 3. Digital Disruption Map, Deloitte, September 2012
Short fuse, big bang – in the short term, the following sectors can expect to encounter significant digital disruption: financial services, retail, business services, media, and telecommunications. These sectors together make up about one third of the Australian economy.
Long fuse, big bang – in the longer term, the following sectors can expect to encounter significant digital disruption: education, health care, transportation, and government services. These sectors also make up a third of the Australian economy.
Long fuse, smaller bang – in the longer term, the following sectors can expect to encounter a lower level of digital disruption: industry, mining, etc.
To determine the impact of digital disruption on a sector, factors such as the following were examined:
- The extent to which products and services are physically delivered
- The extent to which customers use digital channels
- The importance of computing and broadband infrastructure in running the business
- The penetration of mobile usage by customers and employees and their average age
- The importance of social media and innovations such as cloud computing
- How digital innovation can be constrained by the government, regulations, or other factors
In addition, the size of the market and its competitive structure play a role. Markets where (extremely) large profits are realized are more sensitive than markets where margins are small. This is especially true when high margins are earned for work that customers can do themselves.
Brokers and insurance agents have already experienced this phenomenon and soon so will notaries, doctors, and lawyers. In this digital age, customers no longer accept fees of 200 euros or more for relatively simple administrative tasks such as preparing a will or marriage certificate.
If this research had been carried out in Europe, a similar picture would probably have emerged. Drilling down a little deeper in each sector is revealing. The impact within a particular sector does not have to hit each segment within the sector with equal force. Research by GfK 2012 showed that some products within the retail industry are much more responsive to e-commerce than other products.
Figure 4, anticipated online share by product group, GfK 2012
Responding to digital disruption
Research by Forrester Research shows that the right people foresee that digital disruption will affect their business sector, but do relatively little about it. Of the respondents, 86% recognized that digital opportunities could significantly affect their business sector, but only 36% of the companies implemented a specific course of action. From our own research, (The New Digital Reality, Jungle Minds 2012) it appears that the most significant reason is due to the top management in organizations. Of the respondents in our study, 40% indicated that the need to invest in a digital future had not hit home with management.
Timing is a significant dilemma with respect to digital disruption. Investing prematurely in a digital innovation can incur huge costs and not provide any results. This happened a lot during the Internet bubble of 2001. But more than anything, you can cannibalize your own business. As the market leader, you therefore carefully consider your course of action before you start competing with your own profitable market share. According to research by D. Charitoe, established companies responded in five different ways to disruption in their business sector:
- Response 1: invest even more in the traditional method
- Response 2: ignore it, consider it as a different market
- Response 3: counter-attack by disrupting the disruption
- Response 4: adopt the innovation and play both games simultaneously
- Response 5: embrace the new innovation and increase the scale
According to the researchers, the response strategy chosen in practice depends on the organization’s ability to adapt and the motivation to do so. However, it is clear that the first two strategies are not sensible in the long term. Established organizations are obligated to continuously adapt to changing market conditions. As innovation guru Clayton Christensen aptly states: “If a company is going to cannibalize your business, you will almost always be better off if that company is your own.” It is better to make yourself redundant before someone else does it for you.
Tackling digital disruption head-on
How an organization deals with digital disruption is strongly dependent on the situation and its business sector. There is one movement that says you should tackle it head-on with a thorough and large scale approach by using digital transformations. No business process will go unscathed in this approach. The large consulting and IT companies are currently ready to carry out such major transformations for their customers.
A comprehensive approach is not wrong. However, the question is whether this approach allows you to respond decisively enough. At Jungle Minds, we are convinced that large established organizations can survive digital disruption by learning to think and act again as a start-up (e.g. see The Lean Startup). This means continuously inventing new business models, developing better customer experiences, and working in an agile and multidisciplinary manner. In our experience, this works best with a mix of experienced experts, young digital talent, flat hierarchy, and by providing lots of room for creativity. And above all, do lots of experimenting to achieve the shortest possible time to market: think, create, improve. At the end of the day, it is always more expensive to be too late than too early.[Photo: Kevin Krejci, Flickr]
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