How is digital disruption affecting industries?
Although digital disruption affects different industries in different ways and with varying levels of intensity, all industries have experienced some degree of digital disruption in recent years.
Even if your service or product is consumed personally, or your business is a practical one with little room for digitalisation of processes, you will find that digital disruption has changed things such as distribution, marketing and operations. The impact can be profound and should not be underestimated.
Although digital disruption impacts industries unevenly, no-one can afford to underestimate the way in which digitisation gives start-ups the opportunity for exponential growth. Research published in the Journal of Political Economy found that when industries are shaken up in a fundamental way, the number of businesses operating within the industry peaks before falling by between 70 and 97 per cent.
McKinsey partner Chris Bradley makes the point that it's important to filter the noise from the reality. "When these disruptions affect some of the deep wiring in the industry, you know it’s real, but a lot of the [digital] trends operate at the surface level".
His colleague, senior partner Angus Dawson, adds that resource allocation is key. "Response to these [deeper] trends needs to be substantially elevated on all those dimensions, and spend real time on it because it’s still not like in the midst of all that you know exactly how it’s going to play out. You’ve got to stay continuously vigilant and pick up all the signals and work out when the acceleration is going to happen."
What does this all mean? It means that within industries that are experiencing major digital disruption, businesses that cannot keep up with the scale and speed of innovation are extremely unlikely to survive.
What is the innovation-execution gap?
A large number of businesses operating today have a similar problem when it comes to innovation. They have plenty of ideas for innovations, but actually putting these into practice is where the challenge lies.
Leaders have become preoccupied with strategy, according to the Cass Business School’s research on the topic. The researcher explains that far too much emphasis is put on creating detailed strategies while inadequate levels of focus are put on the actual execution.
A common issue is the lack of commitment from large incumbents to emerging technologies. While smaller, more responsive new competitors are adopting new technologies to help them grow rapidly, incumbents are developing hybrid approaches, combining the new with the old. This approach leaves them wide open to competition from agile start-ups with more confidence when adopting new technologies.
Unfortunately, organisations can no longer afford to take a linear approach to innovation, which traditionally involved executing ideas that have a reliable outcome, following in-depth research, for example. Prof. Feng Li at the Cass Business School explains: “Traditional linear approaches to innovation and execution, rooted in a level of certainty and pre-defined outcomes, are no longer fit for purpose.”
Instead, a range of successful approaches to innovation have now emerged. Some of the largest, most successful organisations, which are often long-standing incumbents within their industries, but are succeeding in the face of digital disruption, are adopting one or more of the following approaches:
Taking ‘big bets’ to disrupt their industries
Use their deep understanding of the market to develop solutions
Make incremental innovations to defend their core market
Dominate adjacent markets by using their core capabilities
Drive advantage through business model innovation
Business model innovation
Those of us looking not only to survive but to thrive in the ‘exponential economy’ need to stop putting limits on our goals and targets and instead consider how new business models could unlock the potential to grow exponentially.
Let’s focus on the retail industry, which is ripe with examples of incumbents dropping like flies in response to factors such as changes in customer behaviour, to which digitalised rivals are far better equipped to respond. A recent large-scale research projects carried out by the World Retail Congress and OC&C Strategy Consultants, found that only 3 per cent of the retailers they spoke to said their current proposition was sustainable for the next five years.
Instagram has just announced that it is planning to embed a checkout and shopping bag function on the site, which would enable its users to buy items through the app. Instagram is already an effective way to promote brands, with its figures showing that 80 per cent of the platform’s 1 billion users follow at least one brand. As instagram offers ecommerce services, those retailers able to execute their ideas for using the platform quickly enough stand to open up a whole new source of exponential growth.
Multi-channel wine retailer, Majestic Wines, is responding to the changing retail environment by taking the brave move to sell its Majestic Wines arm, and focus entirely on its online Naked Wines business model. The brand has always been innovative and its CEO, Rowan Gormley explained: “Majestic Wine started life with a disruptive model that challenged the status quo, now is the right time to do it again under the Naked brand.”
When business owners and senior managers consider business model innovation, buying and selling businesses can form part of a business model or set of business models. One strategy being employed with success among organisations hoping to flourish in the exponential economy, is the ‘portfolio model’. Digitalisation means that businesses can now adopt a larger number of business models than they could previously, so some are adopting several at once in order to make them more robust in the face of digital disruption.
The portfolio model can take one of several forms, including the ‘market portfolio model’, involving the adoption of several business models to target different market segments, or the ‘product portfolio model’, whereby a business offers a range of niche products monetising each at various stages in their development.
To sum-up, whether you are a start-up or an incumbent in your particular industry, it’s time to stop spending so much time strategising and start risk-taking when it comes to innovation. Industries are, on average, still only 40 per cent digitised. However, digitisation isn’t going to stop, or slow down, and innovation - and in particular business model innovation - may be your strongest weapon against the onslaught from the digital natives.
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