Digital disruption – drivers, symptoms and scenarios

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).

Symptoms Examples
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).

  1. The global bazaar – industry and geographic boundaries blurring due to internet and mobile
  2. Cautious capitalism – data security concerns limit firms’ ability to monetize consumer data
  3. Territorial dominance – regional industry boundaries persist, with tight regulation
  4. 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. 13.1 Digital disruption scenarios

As you can see, these are just my preliminary thoughts, and I would strive to develop on them subsequently.

Comments, feedback, and experiences welcome.

How to build a platform business?

In his recent convocation address at our institute (Indian Institute of Management Bangalore), Mr. Nandan Nilekani stressed on how platform firms have come to dominate the Indian (and global) markets, and the need for our graduating students to understand them well (see http://www.iimb.ernet.in/convocation-2016). In this post, I would focus on categorizing different types of platforms, and some key issues in building a platform business.

Platforms are firms that operate in multi-sided markets. Unlike firms where products and services flow in one direction (remember, Porter’s value chain?) in a pipeline fashion, and money flows in the opposite direction, platform business models connect multiple sets of users. In the traditional sense of the word, a railway platform helps passengers find their trains and vice versa. The train station manager sets the rules, provides the infrastructure, and enables a smooth discovery and transaction between the different sides (trains and passengers). Imagine trying to find and board trains like you would board a taxi in the streets of Mumbai or New York! Generalizing this, the firm that provides the infrastructure is the “platform provider” and the one that sets the rules and norms is called the “platform sponsor”. In some cases, the platform provider and sponsor could be the same firm (like in the case of a railway platform); and in some other contexts, the platform provider could be different than the sponsor (like in the case of Uber or OYO rooms, where the cabs/ rooms are owned by independent entrepreneurs and the rules of the exchange/ transaction is set by the aggregator).

Platforms match different sides of users. In their role as matchmakers, they provide different value propositions – discovery, quality assessment, norms for interaction, setting expectations, and provide feedback – for each of the sides. Let me discuss how to build each of these value propositions (when you are setting up a platform business model) in detail, with examples from established platforms.

Discovery

This is in fact the first thing to focus on when you set up the platform. Setting up the infrastructure to facilitate interactions is the easiest thing to do. The most difficult part of process is the populating the sides with users. Here is where new platforms encounter the classic “penguin” problem, where users on one side postpone adoption till such time there are enough users on the other side. How would you like to be the “first” person to be listed on a dating site, seeking to find a date? You would affiliate with a dating site only when you are sure that there are already enough members on the other side. Platforms need to overcome this inertia by incentivizing one side to affiliate, in anticipation of affiliation by a large number of right kind of members on the other side. Various platforms have solved the penguin problem differently. For instance, Facebook solved the penguin problem by starting small and being focused on Harvard University students and alumni. Practo  solved it by building and selling their practice management software (Practo Ray) to clinics before opening the patient interaction platform.

Having solved the penguin problem, i.e., having built enough members on both sides, platforms have to ensure that the discovery engine is powered to ensure quality, current, and relevant results. For an interesting take on how Indian ecommerce firms stack up on search results, see this post by Aditya Malik.

Quality

In a platform where products/ services/ information are provided by independent parties on one side, it is imperative that the platform ensures quality. It would require verifying the genuineness of the information provider as well as the veracity of the information. For instance, Quickr.com (an Indian C2C marketplace for used goods) positively discriminates posts with pictures of the items being offered for sale than those posts without pictures while sorting the search results. IndiaMART (the B2B marketplace for industrial goods) certifies the sellers with a TrustSEAL, by verifying the antecedents of the seller’s businesses, including their legal compliance, manufacturing facilities, and product range. Verification of quality comes with a cost, and provides the platform with high credibility and enables loyalty of users.

Some platforms use user-ratings and reviews as indicators of quality (like zomato.com, the restaurant discovery platform). Crowd-sourcing of ratings and reviews might provide higher credibility to the platform, but has to be used cautiously. These could be gamed by users. More on this later.

Norms and rules

As a platform sponsor, it is important to set the norms for communication and interaction among users across the different sides. These norms should set the boundary conditions for interactions, like the terms of sale (delivery charges, delivery times, returns policy) in ecommerce marketplaces.

In pure discovery platforms like JustDIal.com (an online yellow pages) or Quickr.com (marketplace for used goods), indiscrimately providing mobile numbers could be abused. Quickr.com has in the past few months introduced a secure chat service whereby sellers and buyers could chat with each other within the platform without having to provide each other’s mobile number. Even when the agreement is reached and the transaction has to be completed, Quickr allows for an anonymous delivery service (Quickr doorstep), where the users need not know each others’ personal contact details.

BharatMatrimony (the online matrimony match maker) allows only paid members to initiate communication with others. What this does is to ensure that brides and grooms who are actively seeking matrimony to become paid members, as the other side is unlikely to respect someone who is “not even willing” to pay for discovering his potential partner!

Setting expectations

The platform should allow for users on both sides to clearly set expectations apriori, to ensure that there are no surprises during the transaction. More the information sought and shared during the discovery phase ensures smooth transition to the transaction and fulfilment phases in the platform. Here is where the platform should ensure that there is a mimimum amount of high quality information available about the entity/ prodcut/ service being matched. Imagine trying to book a hotel room on a travel website without information on the hotel location, types of rooms available on that particular night(s), and the rates! It is therefore an important consideration that platform designers need to keep in mind when designing the infrastructure and rules. For instance, dating sites like trulymadly.com ensure that users provide their facebook pages during the registration process. While actual verification of each users claims on the dating sites might be difficult, linking their facebook account to the trulymadly account ensures that they do not lie (too much!) with respect to critical information about themselves (like marital status). Now you know why the job search portal you just signed in wanted you fill in pages of information, and links to your LinkedIN profile.

Providing feedback

Even after ensuring quality, defining the norms, and setting expectations, there could be some errors. The platform architecture should therefore provide for immediate feedback on all four parameters – quality of the entity/ product/ service/ information; relevance/ adequacy of information; currency of information; and the quality of the discovery, transaction, and fulfilment processes. Cab aggregators like OLACabs request for feedback on the quality of the cab and driver as soon as the ride is completed. However, there is no provision (not that I could find) to provide feedback on all the discovery stage of the platform – the time it took for the app to find me a cab/ auto, or the accuracy of the location services within the app.