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Digital Disruption

Digital disruption is a transformation that is caused by emerging digital technologies and business models. These innovative new technologies and models can impact the value of existing products and services offered in the industry. This is why the term ‘disruption’ is used, as the emergence of these new digital products/services/businesses disrupts the current market and causes the need for re-evaluation.[1]

The term “digital disruption” is believed to have come from the disruptive innovation concept, which was introduced in The Innovator’s Dilemma, by Clayton Christensen. The standard definition of digital disruption is the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services. The front runners in our most current round of digital disruption are mobile and the Internet of Things (IoT), according to Bill Bodin, CTO at Kony, Inc. “With mobile, we now have an expectation for enterprise to deliver multi-channel solutions,” Bodin says. “Employees and consumers alike expect a premium experience no matter what device they’re using. With the IoT, we see distributed computing and applications taken to a new level of convenience and personalization.”[2]


Digital disruption is the result of a rising class of disruptors who exploit digital tools and platforms to offer new value to customers. Previously known as a threat only to easily disruptable businesses like music or newspapers, now every major industry is about to be digitally disrupted. It’s powered by companies like Amazon which has exploited its singular technology knowledge and infrastructure to offer cheap and disruptive tools to digital upstarts that want to sell their own products, publish their own books, or deliver new services at low cost over the company’s web services offering. These kinds of digital tools enable every industry to dabble in and become persuaded by the inevitability of digital disruption, sounding alarm bells in even unlikely industries such as healthcare and financial services, which have traditionally assumed that their heavily regulated status would insulate them for years to come.[3]


Digital Disruption can be seen as both a threat and an opportunity:[4]

  • ICT-induced change happens at a pace and scale that impacts on existing business practice in disruptive ways, threatening and invalidating existing business models.
  • Digital technologies offer new opportunities for the creation of innovate business models for entrepreneurs to compete with established business practices in a wide range of industries.

Digital Disruption can occur on various levels:

  • Disruptions to individual life practices (example: Mobile connectivity disrupts established work-life boundaries)
  • Disruptions to work practices (example: Narrating work via microblogging in the workplace changes what counts as (valuable) work)
  • Disruptions to business practices (example: Workplace social media disrupts the way information travels in the organisation and induces shifts in power relationships)
  • Disruptions to industry structures (example: Digitisation of media content and user-generated content disrupts traditional value chains of content production and delivery)
  • Disruptions to societal systems (example: Social media participation disrupts traditional practices of public opinion making)

While the above examples point to profound changes to established business practices, they do not fully illustrate what exactly makes these changes truly disruptive.


10 business models behind Digital Disruption[5]

  • The Subscription Model (Netflix, Dollar Shave Club, Apple Music) Disrupts through “lock-in” by taking a product or service that is traditionally purchased on an ad hoc basis, and locking-in repeat custom by charging a subscription fee for continued access to the product/service
  • The Freemium Model (Spotify, LinkedIn, Dropbox) Disrupts through digital sampling, where users pay for a basic service or product with their data or ‘eyeballs’, rather than money, and then charging to upgrade to the full offer. Works where marginal cost for extra units and distribution are lower than advertising revenue or the sale of personal data
  • The Free Model (Google, Facebook) Disrupts with an ‘if-you’re-not-paying-for-the-product-you-are-the-product’ model that involves selling personal data or ‘advertising eyeballs’ harvested by offering consumers a ‘free’ product or service that captures their data/attention
  • The Marketplace Model (eBay, iTunes, App Store, Uber, AirBnB) Disrupts with the provision of a digital marketplace that brings together buyers and sellers directly, in return for a transaction or placement fee or commission
  • The Access-over-Ownership Model (Zipcar, Peerbuy, AirBnB) Disrupts by providing temporary access to goods and services traditionally only available through purchase. Includes ‘Sharing Economy’ disruptors, which takes a commission from people monetising their assets (home, car, capital) by lending them to ‘borrowers’
  • The Hypermarket Model (Amazon, Apple) Disrupts by ‘brand bombing’ using sheer market power and scale to crush competition, often by selling below cost price
  • The Experience Model (Tesla, Apple) Disrupts by providing a superior experience, for which people are prepared to pay
  • The Pyramid Model (Amazon, Microsoft, Dropbox) Disrupts by recruiting an army of resellers and affiliates who are often paid on a commission-only model
  • The On-Demand Model (Uber, Operator, Taskrabbit) Disrupts by monetising time and selling instant-access at a premium. Includes taking a commission from people with money but no time who pay for goods and services delivered or fulfilled by people with time but no money
  • The Ecosystem Model (Apple, Google) Disrupts by selling an interlocking and interdependent suite of products and services that increase in value as more are purchased. Creates consumer dependency.


Digital Enterprise Framework
Deloitte’s Digital Enterprise Framework provides a structured approach to discussing and identifying the major effects that digital maturity and technology evolution can have on a client’s business. Framing these issues is the first step in understanding the overall impact of digital disruption in order to seek out opportunities and develop appropriate solutions for the future


Digital Distruption
source: Deloitte


What to Look Out For - Examples of Digital Disruption[6]
Most people like to trot out the Kodak example (where digital cameras decimated their photo processing business), which is still relevant even though the world has moved on. This highlights the importance of having someone in the organisation asking, constantly, what are our competitors doing to disrupt our business and our business model, and what can we do to stay ahead knowing that digital disruption has impacted, destroyed and transformed industries? Here are some examples from recent times that might provide some guidance on the type of things to look out for:

  • Monopolies can be toppled: Just because you have a monopoly, don’t assume someone can’t use digital to change the business model. Take Uber for example, this taxi app is very quickly disrupting the monopoly that Cabcharge has enjoyed in the taxi market for many years. And it’s global.
  • Keep an eye on your competition: You may be able to charge a premium today, but be aware that technology may force you to squeeze your margins to stay competitive. Make sure you’re able to cope when this happens (how lean are you?). Take Liquid Space for example. This is an app which allows every office suite with any spare space to make money by renting that space by the hour, week, month etc. and may very well put an end to some of the high end serviced office offerings that charge incredible amounts of money for a casual desk and phone in your capital city.
  • The “Internet of Things”: Do you have someone who understands what the “internet of things” is and how it might impact on your business? Commodity businesses continue to see value being added by bringing together technology. Let’s face it, the iPhone was just a phone, music player and camera converged into one device – each item existed on its own before Apple created iPhone and it became the market leading media generation and consumption device. LIFX is another company making great strides in the digital arena and who is changing the way we think about the humble light bulb. LIFX has an energy efficient light bulb that can be controlled from your smart phone. If your core business is selling light bulbs, you now need to look at a whole different skill set in order to compete. This company is using the internet to add significant value to an item that was previously considered just a commodity. Digital Keys is another organisation doing something similar with door locks.
  • Understanding New Competitors: How is someone going to redirect revenues that have traditionally come to your business, on to their business and how do you make sure that simply doesn’t happen? Hello Real Estate is putting the sale process for real estate back into the hands of the seller. REA Group began a similar process with realestate.com.au but from a slightly different angle, concentrating their offerings on buyers and building a huge advertising business - severely curtailing the amount of money spent on newspaper advertising.
  • Leveraging Innovation: How can you leverage your expertise and digital innovation to tap into a new revenue stream that will keep your business growing? Wearable devices such as Google glass, Fitbit, Catapult sports and others. There are new businesses being created all the time and generating revenues in ways that have never been thought about before.


Strategies to Respond to Digital Disruption[7]
How can established businesses resist upheaval by new entrants? Below are 7 generic strategies that industry incumbents – those large, legacy businesses – can use to fight against digital disruptors. These 7 strategies will most often be used in combination, and there is a logical flow to their use. Companies that have managed to survive or thrive in a digitally disruptive environment have almost always utilized more than one strategy. These examples include Fujifilm (as opposed to Kodak), Barnes and Noble (as opposed to Borders), and Apple (as opposed to Nokia).

  • The Block Strategy: The Block strategy involves the incumbent utilizing all means available to inhibit the disruptor. These means can include claiming patent or copyright infringement, erecting regulatory hurdles, and using other legal barriers. Blocking works well as an opening strategy, and has been used effectively by payment providers to block new entrants such as PayPal, and by movie companies to block YouTube and other video sites. If not used, or when used incorrectly, the results can be disastrous, as has been the case with the music industry. The advantages of this strategy are that it provides a relatively inexpensive way to preserve markets, and builds on the market power and extensive web of industry relationships that most incumbents enjoy. The major disadvantage is that it is only effective in the short to medium term. The Block strategy only buys time to develop and implement other strategies.
  • The Milk Strategy: This strategy involves extracting the most value possible from vulnerable businesses while preparing for the inevitable disruption. The Milk strategy has three sub-components. First, harvest, or maintain margins as high as possible for as long as possible. Second, elevate, or raise the perceptions of value in the minds of average consumers. This elevation can be achieved by adding features and investing in brand building. Third, rationalize, or plan for the necessary cuts and layoffs, and execute them ruthlessly when the disruption arrives. The advantage of this strategy is that revenues and margins for the vulnerable business can be maintained much longer if managed carefully. The disadvantage of the Milk strategy, like the Block strategy, is that it is hard to maintain over a long period of time.
  • The Invest in Disruption Strategy: This strategy involves actively investing in the disruptive threat, including disruptive technologies, human capabilities, digitized processes, or perhaps acquiring companies with these attributes. The invest strategy prepares for the disruption head on, but may lead to strong internal resistance from legacy business areas. It can also be expensive, and comes with an uncertain payback. Amazon and Microsoft have both been very active in developing or acquiring capabilities that carry the potential to disrupt their core businesses. The Invest strategy can be implemented in conjunction with the Block and Milk strategies.
  • The Disrupt the Current Business Strategy: This strategy involves launching a new product or service that competes directly with the disruptor, and can be very effective as it allows the incumbent to leverage inherent strengths such as size, market knowledge, brand, access to capital, and relationships to build the new business. The disadvantage is obvious – the new lines can severely cannibalize existing businesses. However, if timed correctly, self-cannibalization is a much better outcome than business lost to a competitor. Clearly, timing is critical when disrupting a core business, and the likelihood of internal resistance is significant. For these reasons, this strategy is rarely used, leading to damaging disruption in many industries such as mapping, cameras, and retail. However, there are occasions when it has been used successfully, by companies such as Intel (with the Celeron chip cannibalizing the Pentium), Apple (with the iPhone 5c cannibalizing the iPhone 5s), and Amazon (with the Kindle app cannibalizing the Kindle reader).
  • Retreat into a Strategic Niche: This strategy involves focusing on a niche segment of the core market where disruption is less likely to occur. The Retreat strategy often results is a much smaller market size than the legacy core segment. However, these smaller niche markets can remain profitable, and existing capabilities can be used to serve them. Examples of companies that have used this strategy are travel agents switching from generic travel services to focus on complicated travel itineraries and corporate accounts, Barnes and Noble moving into college bookstores, and Kodak offering high end printing services. By itself, this strategy will result in massive restructuring due to the smaller market size, but in conjunction with other strategies, it can provide a profitable niche business.
  • Redefine the Core Strategy: This strategy involves building an entirely new business model, often in an adjacent industry where it is possible to leverage existing knowledge and capabilities. On the plus side, this strategy side steps the challenges and constraints of the disrupted legacy business. On the negative side, it is extremely difficult to redesign an organization to compete in an entirely new business area. Nevertheless, there are some examples of organizations that have pursued this strategy successfully. Fujifilm took their capability in attaching chemicals to film and entered the cosmetics industry, and IBM moved a large part of their business from hardware to services and consulting.
  • Exit Strategy: The final strategy involves exiting the business entirely and returning capital to investors, ideally through a sale of the business while value still exists. Most companies that fail to avoid disruption wait too long and end up capturing only a fraction of their legacy value. Examples of companies in this category include Blockbuster, Borders, and Radioshack. However, some companies have managed to extract substantial value for disrupted businesses, like Nokia selling its handset business to Microsoft, and MySpace selling itself to News Corp. Strong brands and an effective Milk strategy can maintain value for longer periods of time, allowing the Exit strategy to become a viable one.


Digital Disruption vs Disruptive Technology[8]
The term Digital Disruption is often confused with Disruptive Technology. Digital disruption is different from the term disruptive technology. Coming to digital disruptions vs disruptive technology, the former is just a disruption caused by technological evolution affecting certain business types while the latter is a complete revolutionary technology that changes the way people work – forever. Thus, the effect of disruptive technology is not just a few entities or a sector but a huge base. Uber and Netflix are examples of digital disruption, they affect a particular segment of market. Following example of disruptive technology will tell you how it is different and more dangerous than digital disruption. The strongest example of disruptive technology was invention of PC. It was not simply a digital disruption but a disruptive technology that changed – forever – the way people work – across all market sectors. While Netflix example (digital disruption) affects only the entertainment sector as of now, the PC (disruptive Technology) changed the style of work in all sectors of the economy. Other examples of disruptive technology are Email (replaced conversation style from paper to electronic) and smartphones (killed traditional phone business). Another example is while smartphones are digital disruption technology, apps like WhatsApp are digital disruptions to phone carriers as these apps provide calling and texting at much lower costs – thereby cutting into their market segment significantly. In short, the digital disruption may be considered an obstacle that can be eliminated by changing few processes of a business. While disruptive Technology causes people to overhaul their businesses completely or close down.


References

  1. What is Digital Disruption? Oxford College of Marketing
  2. The Digital Disruption Revolution IT BusinessEdge
  3. The Onslaught of Digital Disruption The Financial Times
  4. Understanding Digital Disruption The Big Opportunity
  5. 10 business models behind Digital Disruption Digital Intelligence As covered by Jo Caudron and Dado Van Peteghem in their book Digital Transformation
  6. Digital Disruption - 5 examples to help understand what to look out for with your business. Craig Broadbent
  7. Strategies to Respond to Digital Disruption IMD Professor Michael Wade
  8. The Difference Between Digital Disruption and Disruptive Technology The Windows Club


Further Reading

  • Digital Disruption: Understanding how technology is transforming industries and how leaders and organizations can respond.McKinsey&Co
  • A View into Digital Disruptions Gartner
  • Digital disruption isn’t disruption anymore: Why it’s time to refocus your business CMO-IDG
  • Navigating a World of Digital Disruption BCG Perspectives
  • 7 Emerging Truths Of Digital Disruption Forbes
  • 9 Successful Digital Disruption Examples IT BusinessEdge - Slide Show