The specter of digital disruption has quickly become one of the most concerning issues for business leaders around the world. In 2015, less than one percent of executives believed digital disruption could have a transformative impact on their industry. Now, Airbnb is more valuable than Hilton, Tesla is more valuable than Ford, General Motors and BMW, and Amazon‘s takeover of Whole Foods just put tremendous pressure on competing grocery chains’ stocks.
These tangible examples have moved digital disruption from a secondary concern to a top-of-mind issue at the board level. According to new research from the Global Center for Digital Business Transformation, a joint IMD and Cisco initiative, more than three-quarters of executives now believe the impact of disruption on their industries will be “major” or “transformative.” What a difference two years can make.
Which industries are most vulnerable?
Executives who thought â€“ or still think â€“ they are safe from disruption will face a rude awakening. No industry is safe.
The media and entertainment industry is seeing the greatest disruption as the level of competition among industry incumbents intensifies thanks to inroads from Amazon, Facebook, Snapchat and Netflix.
Only slightly behind media are technology products and services, retail, financial services and telecommunications. The businesses in these markets share several characteristics that make them particularly exposed to digital disruption. For one, their core products and services are highly information-centric and can be readily digitized.
How can companies respond to the forces of disruption?
Despite the increased awareness about digital disruption, 40 percent of survey respondents still feel their leaders do not understand the threat, or are responding inappropriately. There is still a large gap between acknowledging the need to transform and actually achieving transformation.
When faced with a disruptive competitive threat, it can be hard to know what to do because you are on unfamiliar terrain. However, four distinct strategies can provide a framework to conceptualize your options.
This is a defensive strategy designed to maximize gains from a declining business or market. Domino’s has been employing this tactic by driving greater efficiencies through digital technologies. Despite strong performance through the 1990s, Domino’s struggled in the early to mid 2000s. However, the company’s leadership determined an online presence that was both user friendly and efficient could improve the customer experience and yield more sales. By 2015, the company was processing approximately half of all orders online, sales were 30 percent more than in store purchases, and labor costs decreased due to efficiencies created by the technology.
The Harvest strategy is about maximizing value in threatened segments. However, when the costs of maintaining a business clearly outstrip the benefits, companies should focus on strategic retreat. This strategy emphasizes withdrawal into a market niche that serves a small subset of existing customers with specialized needs. For example, when General Electric faced intense competition in its consumer appliances business, it shed GE Capital’s assets and sold its appliances division â€“ exiting a business that brought in $19.6 billion in 2015, or nearly 17 percent of GE’s total revenue. GE is now using the proceeds of these sales to focus on its industrial internet strategy.
While Harvest and Retreat are defensive strategies, incumbents can go on the offensive and become disruptors themselves. When a market opportunity that can be profitably exploited is detected, companies should focus on creating new value for customers using digital technologies and business models. Look no further than Otto for an example of a disruptive strategy. The company, which was recently acquired by UBER, disrupts the freight industry by automating trucking. Currently, labor represents 40 – 75 percent of operational costs for the industry. If Otto can completely automate its trucks, it will be able to offer its services at a drastically reduced price and cut out the competition.
Although the disrupt strategy represents catalytic activities that introduce market disruption, the Occupy strategy focuses on sustaining the competitive gains associated with that disruption. Occupy rejects the “build it and they will come” approach, and is premised on the reality that the company that introduces a disruption may not end up winning in the end. Walmart has employed this strategy to succeed in retail. Over the past few years, Walmart has invested billions in multi-channel capabilities to combat ecommerce competitors like Amazon. In executing this strategy, Walmart’s stores become a key asset as nearly ninety percent of Americans live within ten miles of one.
The pace of disruption is accelerating across industries as a result of faster digital technology innovation cycles, an explosion of well-funded start-ups and the emergence of Chinese giants such as Alibaba, Tencent and Baidu. Digital transformation requires action. Just talking about digital change, hiring a chief digital officer or starting an “innovation hub” won’t save your business. A true, holistic change to your business model is needed to survive and thrive in the digital era. The time for strategic action is now â€“ because no one knows what the next two years will bring.
Commentary by Andy Noronha, a visiting scholar for the Global Center for Digital Business Transformation, director in the Cisco Digitization Office and co-author of Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game. Follow him on LinkedIn.
Disclosure: Domino’s, GE, Uber and Wal-Mart are clients of Cisco, however, Andy Noronha has not worked with them in any capacity.
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