A digital-strategy framework
How to make sense of digital disruption
Forward-thinking companies harness new technologies, and rethink their business models— exploiting data, reimagining customer experiences, since digital “makes everything new”— supply, demand, and market dynamics, giving new market makers an opportunity to connect consumers and customers by lowering transaction costs while reducing information asymmetry.
Airbnb has not constructed new buildings; it has brought people’s spare bedrooms into the market. In the process, it uncovered consumer demand—which, as it turns out, always existed—for more variety in accommodation choices, prices, and lengths of stay. Uber, similarly, hasn’t placed orders for new cars; it has brought onto the roads (and repurposed) cars that were underutilized previously, while increasing the ease of getting a ride.
Consumers have grown to expect best-in-class user experiences from all their online and mobile interactions.
Your business model may be vulnerable if:
- Your customers have to cross-subsidize other customers.
- Your customers have to buy the whole thing for the one bit they want.
- Your customers can’t get what they want where and when they want it.
- Your customers get a user experience that doesn’t match global best practice.
When these indicators are present, so are opportunities for digital transformation and disruption. The mechanisms include improved search and filter tools, streamlined and user-friendly order processes, smart recommendation engines, the custom bundling of products, digitally enhanced product offerings, and new business models that transfer economic value to consumers in exchange for a bigger piece of the remaining pie.
(An example of the latter is TransferWise, a London-based unicorn using peer-to-peer technology to undercut the fees banks charge to exchange money from one currency into another.)
On the supply side, digitization allows new sources to enter product and labor markets in ways that were previously harder to make available. P&G uses crowdsourcing to connect with formerly unreachable sources of innovation. Amazon Web Services provides on-the-fly scalable infrastructure that reduces the need for peak capacity resources. Number26, a digital bank, replaces human labor with digital processes.
You may be vulnerable if:
- Customers use the product only partially.
- Production is inelastic to price.
- Supply is utilized in a variable or unpredictable way.
- Fixed or step costs are high.
These indicators let attackers disrupt by pooling redundant capacity virtually, by digitizing physical resources or labor, and by tapping into the sharing economy.
Also you must (among other things) analyze how difficult transactions are for customers. You may be vulnerable if you have any of these:
- high information asymmetries between customers and suppliers
- high search costs
- fees and layers from intermediaries
- long lead times to complete transactions
Companies must understand a number of radical underlying shifts in the forces of supply and demand that blur the boundaries and definitions of industries.
More radical shifts may occur through new or significantly enhanced value propositions for customers, sometimes through reimagined business systems, and sometimes through hyperscale platforms at the center of entirely new value chains and ecosystems.
Attacks may emerge from adjacent markets or from companies with business objectives completely different from your own, so that you become “collateral damage.”
Established companies relying on existing barriers to entry—such as high physical-infrastructure costs or regulatory protection—will find themselves vulnerable.
User demand will change regulations, companies will find collaborative uses for expensive infrastructure, or other mechanisms of disruption will come into play.
New and enhanced value propositions
Companies meet heightened expectations with new value propositions that give people what they didn’t realize they wanted, and do so in ways that defy conventional wisdom about how industries make money.
Giving consumers the ability to choose their own songs and bundle their own music was an early stage revolution. But enabling people to share music with everyone via social media was an enhanced proposition consumers never asked for but quickly grew to love once they had it.
Many of these new propositions, linking the digital and physical worlds to create new ways of delivering value.
Philips gives consumers apps as a digital enrichment of its physical-world lighting solutions. Google’s Nest improves home thermostats. FedEx gives real-time insights on the progress of deliveries.
You may be vulnerable if:
- Information or social media could greatly enrich your product or service.
- You offer a physical product, such as thermostats, that’s not yet “connected.”
- There’s significant lag time between the point when customers purchase your product or service and when they receive it.
- The customer has to go and get the product—for instance, rental cars and groceries.
These factors indicate opportunities for improving the connectivity of physical devices, layering social media on top of products and services, and extending those products and services through digital features, digital or automated distribution approaches, and new delivery and distribution models.
Reimagined business systems
Delivering these new value propositions in turn requires rethinking, or reimagining, the business systems underlying them.
Liberty Mutual developed a self-service mobile app that speeds transactions for customers while lowering its own service and support costs. The New York Times virtualized newspapers to monetize the demand curve for consumers, provide a compelling new user experience, and reduce distribution and production costs. And Walmart and Zara have digitally integrated supply chains that create cheaper but more effective operations.
Digital channels and virtualized services can substitute for or reshape physical and retail networks.
The forces present transform the scalability of cost structures—driving marginal costs toward zero and, in economic terms, flattening the supply curve and shifting it downward.
Indicators of disruption in this zone include these:
- redundant value-chain activities, such as a high number of handovers or repetitive manual work
- well-entrenched physical distribution or retail networks
- overall industry margins that are higher than those of other industries
Companies like Apple, Tencent, and Google are blurring traditional industry definitions by spanning product categories and customer segments. Owners of such hyperscale platforms enjoy massive operating leverage from process automation, algorithms, and network effects created by the interactions of hundreds of millions, billions, or more users, customers, and devices. In specific product or service markets, platform owners often have goals that are distinct from those of traditional industry players.
Moreover, their operating leverage provides an opportunity to upsell and cross-sell products and services.
When incumbents fail to plan for potential moves by players outside their own ecosystems, they open themselves up to the fate of camera makers, which became collateral damage in the smartphone revolution.
Hyperscale platforms also create new barriers to entry, such as the information barrier created by GE Healthcare’s platform, Centricity 360, which allows patients and third parties to collaborate in the cloud. Like Zipcar’s auto-sharing service, these platforms harness first-mover and network effects. And by redefining standards, as John Deere has done with agricultural data, a platform forces the rest of an industry to integrate into a new ecosystem built around the platform itself.
What are the indicators that hyperscale platforms, and the dynamics they create, could bring disruption to your business?
- Existing business models charge customers for information.
- No single, unified, and integrated set of tools governs interactions between users and suppliers in an industry.
- The potential for network effects is high.
These factors invite platform providers to lock in users and suppliers, in part by offering free access to information.
Crossing the Digital Frontier
For a quick guide to assessing your organization’s situation, see “How vulnerable are you to digital disruption?”