My students, colleagues, and leaders in firms who I mentor have been asking me to share my views on digital disruption of businesses. In this post, I try to define the contours of digital disruption and what it holds for the future of businesses, in my opinion.
What is digital disruption?
Disruption refers to a fundamental change in the value proposition of the business. When digital technologies form the basis of such a change, I call it a digital disruption.
Drivers of digital disruption
There are three primary drivers of digital disruption (adapted from this article). First, is the maturity of digital tools and technologies that uncover inefficiencies in traditional business models. Take for instance the sharing economy characterized by business models like Airbnb.com and Uber. These business models highlighted the underutilization of fixed assets in residences and cars, and shifted the consumer behavior from traditional business models of exclusive hotels and owned cars to shared residences and cars. A recent example of this sharing economy is www.flightcar.com, that allows for individual car owners to rent their cars parked idle in airports to other visitors to that city as self-driving cars!
The second driver of digital disruption is the increasing evaluability of performance parameters. In a traditional business like car hiring services, it was difficult to evaluate the quality of cars. In the sharing economy, ratings/ reviews/ recommendations from other users can help evaluate various parameters of the products and services. Uber allows for mutual rating of drivers and riders, alike. Such improvements in technology that increase the evaluability of parameters, hitherto not evaluable can significantly contribute to unique customer value addition.
The third driver of disruption is the increased dominance of mobile apps. What the transition from traditional PC-based software applications to mobile apps contributes is lower costs of customer adoption, richer data collection by the apps leading to better customization of experience, and mobility. Imagine using Uber through only a PC-based or a browser-based communication!
When do you know your business is being digitally disrupted?
The following table describes the characteristics and symptoms of digital disruption with some examples (adapted from this article).
|A proliferation of free or nearly free digital technologies in the value creation process||Digital photography eliminating paper photography|
|Such technologies are provided by multi-sided platform firms||Products like Gmail eliminating the need for organizations investing in their own email servers|
|Conscious shifting of value creating activities outside the firm, including open and user innovation processes||Evolution of 3D printing enabling democratization of design and prototyping|
|Rapid prototyping and product development/ market entry made possible as a result of user/ open innovation||Proliferation of platforms and forums like tech-shops that enable businesses and consumers to rapidly prototype and customize their products in low volume production contexts|
|Use of direct and indirect network effects to leverage economies of scale and scope||Evolution of aggregators and marketplaces like Alibaba.com that leverage network effects for economies of scale and scope|
Most digital disruptions are visible when the industry/ market is characterized by one of more of the above symptoms. If any of these symptoms are visible in your business context, organizations beware. Begin preparing to face/ counter these forces.
Planning for the digitally disrupted future
Prof. Mike Wade from IMD, Lausanne describes four scenarios of digital disruption (read the full report here).
- The global bazaar – industry and geographic boundaries blurring due to internet and mobile
- Cautious capitalism – data security concerns limit firms’ ability to monetize consumer data
- Territorial dominance – regional industry boundaries persist, with tight regulation
- Regional marketplaces – world divided into regional clusters with their own rules and governance, innovation fostered in regions with little or no international competition
The following figure summarizes the four scenarios with examples of firms that will dominate their respective markets.
As you can see, these are just my preliminary thoughts, and I would strive to develop on them subsequently.
Comments, feedback, and experiences welcome.