“Industrial companies are becoming customer service companies. Consumer products companies are becoming Internet companies. Energy companies are becoming information companies. And media and entertainment companies are becoming logistics companies”

Reasons businesses may fail in the face of digital disruption

Capgemini outlines five reasons businesses struggle to respond to digital disruption

1. Slow decision cycle:Technology cycles are becoming shorter than corporate decision cycles and organisations are finding it increasingly difficult to keep up with the rapid pace of change.
2. Complacency about business models:Companies cling on to their old successful business models for too long. While Blackberry continued to focus on its lead product, which it thought was untouchable in the enterprise mobile segment, Apple continued to innovate and reinvent what a mobile phone could be.
3. Fear of cannibalising existing business: Companies are reluctant to go to market with innovative new offerings for fear of cannibalising existing business. Kodak failed to commercialise its patents for digital photography, and, instead, other firms such as Fuji licensed and commercialised it.

   “Kodak continued to focus and invest in film-based technologies in the 1980s and 1990s while Fuji was systematically extracting itself from film-based photography and shifting massive resources to new and unproven digital technology.”

4. Lower margins in the transition:Lower margins in digital business often puts companies off. The newspaper industry was so largely dependent on traditional advertising revenue it was a big leap for newspapers to transition to digital where the rates are a fraction of what they are on print.
5. Key resources unaligned to opportunities:Organisations try to retro-fit new opportunities into existing organisational structures. Political challenges also present hurdles to successful innovation.

How are established businesses responding to digital disruption?

The disrupted are becoming the disruptors

While the emergence of digital disruptors has caused concern for many established organisations, rather than continuing to fear the digital wave, many large enterprises are now flexing their muscles and riding the surge of disruption.

Global enterprises; including Proctor & Gamble, Disney and GE are beginning to leverage their vast resources and capital not just to react to technology disruption but also to drive the disruption themselves, transforming from digital followers to digital leaders, and embracing digital in an effort to not only disrupt current markets but also to move into new ones.

GE’s billion dollar ‘industrial internet’ initiative generated more than $800 million in incremental income in 2013 and that number was expected to reach $1 billion in 2014, and again in 2015. - HBR, 2014

GE launches billion dollar industrial internet initiative

General Electric, a company that for over a century, made most of its revenue selling industrial hardware and repair services recognised that it was at risk of disruption and losing many of its top customers to non-traditional companies such as IBM and SAP. In response, GE launched a billion-dollar initiative called the ‘industrial internet’, adding digital sensors to its machines and incorporating cloud software, crowdsourced product development and advanced analytics and data capabilities to transform the company’s business model. GE’s billion-dollar ‘industrial internet’ initiative generated more than $800 million in incremental income in 2013 and that number was expected to reach $1 billion in 2014, and the same again in 2015.

Companies like GE recognise that digital should not be looked upon as a threat, but as an opportunity for what traditional companies can become in this new digital age.

The disrupted are acquiring the disruptors

Acquisition of a potential disruptor is a tactical response many large companies take to deal with disruption. A large company may acquire a smaller start-up that it identifies as a potential disruptor, and this can go one of two ways.

The larger company may choose to do nothing with the disruptive acquisition and stick with the status quo, however this is a protective mechanism that may only work for so long, as other disruptors are likely to be following fast in the footsteps of the initial disruptor. A better approach, if a company is going down the acquisition route, is to take the innovative qualities and technology of the acquired disruptor and use them to grow the business.

“36% of companies relied on acquiring companies as a tactic to access disruptive technology/innovation” – Capgemini

Avis acquires Zipcar to tap into the sharing economy

Avis acquired car sharing service ZipCar in 2013 but rather than eliminating the brand as a threat, it recognised the strength of Zipcar and continues to support it with the two brands continuing to operate as separate businesses.

With a network of one million members and the growth of the sharing economy, Avis recognised Zipcar as a disruptor in the car rental market and the potential of the Zipcar business. By acquiring Zipcar, Avis positioned itself to serve a greater variety of customer needs.

The goal was to apply Avis’ experience and efficiencies of fleet management with Zipcar’s customer-friendly technology to accelerate the growth of the brand. It also recognised strength in Zipcar’s mobility solutions which could be applied across both brands. Following the acquisition of Zipcar in 2013, Avis’ market value tripled to $6billion in just three years.

Zipcar’s marketing mix of digital, social and mobile, aligned with offline efforts, has seen its membership grow to more than 900,000 worldwide and both usage and membership revenues are at record levels.

Zipcar continues to expand its fleet and locations, and in 2015 it added seven more additional airport locations to its network — doubling the number of airports covered by Zipcar in 2013.

“By combining with Zipcar, we will significantly increase our growth potential, both in the United States and internationally, and will position our company to better serve a greater variety of consumer and commercial transportation needs,” - Avis CEO Ronald L. Nelson commenting on the acquisition of Zipcar in 2013

The disrupted are relying on regulation

When faced with digital disruption, one reaction across industries is to use regulation to fend off the disruptors, and in many cases this may work, albeit temporarily, to buy some time. Digital disruptors, by their very nature, are built on new business models and technology that most current regulation will not cover.

However, where one digital disruptor rears its head you can be sure two or three more disruptors are preparing to follow, meaning regulation in most cases may slow disruption but not stop it altogether.

Consider Uber for example, it is certainly one of the most high profile digital disruptors in the transportation industry but it is not alone in what it does with companies like Hailo, Lyft and GetTaxi all presenting similar offerings and built on similar business models.

While regulation may have slowed the expansion of these disrupters initially they’re simply not going away.

Certainly, regulation offers some protection from digital disruption but this can only last so long as the customer will ultimately determine how the world does business. Organisations reliant on regulation to protect themselves from disruption will be in for a rude awakening. Technology is impacting customer behaviour and the world around us. It’s time to adapt and transform for business survival.

“32%of successful companies have resorted to using the legal route to slowing down disruption” - Capgemini Digital Transformation Review

Uber powers on despite wave after wave of legal action

When Uber launched in 2009, the taxi industry went into uproar with striking in many major cities across the world.

Its innovative new business model was set to massively shake up the global taxi industry and the first reaction in every city that Uber set up was to try and ban its existence. In some cities, reliance on regulation to fend off Uber has worked, at least so far. In Spain a local court ruled that Uber was illegal and it had to suspend operations in the country.

Uber cannot operate in Miami where existing laws were drafted to protect taxicabs from competition even from other licensed services. In Toronto city officials charged the company for dispatching rides without a license and in Quebec the Minister for Transport declared Uber illegal. Uber has also fought charges, fines and bans in San Francisco, Chicago, Massachusetts, New York and Washington D.C.

Despite this, the company is currently valued at $50 billion and holds the distinction of being the world’s most highly capitalised startup, with growth, seemingly, accelerating at breakneck speed.

Airbnb feels the pressure from the hotel industry

Hoteliers are reacting in the same way to another high profile digital disruptor: Airbnb.

As Airbnb grows, cities and states are realising how much revenue they stand to lose through not paying taxes or business rates and the brand has faced judicial action following lobbying from hotel groups.

A New York judge found that one Airbnber was running an illegal hotel and fined him $2,400.

In Quebec, plans are being made to crack down on rentals through Airbnb with a bill being put in place that will subject Airbnb hosts to the “same obligations” as hoteliers and their guests in an effort to level the competitive playing field.

How to weather the storm of digital disruption:

Don’t be afraid to innovate your business model According to Serguei Netessine, Chaired Professor of Global Technology and Innovation at INSEAD, “… business model innovation is the key to surviving disruption”, yet only 5% of companies practise it. New companies such as Uber, Airbnb and Alibaba have come on the scene with no new products or technology.

They are instead capitalising on innovative new business models that more effectively facilitate supply and demand without the need for actual ownership of inventory or physical assets. The fresh business models of digital disruptors highlight the need for all organisations to continually focus on innovation.

To continue to compete with digital disruptors, established organisations must constantly evaluate and reinvent their business models.

Technology is not sitting still, nor should your business. The strategy and playbook that has worked for your organisation for years needs to be audited and evaluated to ensure it is not outdated. What is a competitive advantage today may be a burden tomorrow.

Organisations have to constantly question the status quo and apply ‘what-if?’ questions to their core operating model.

Although 94% of senior executives from the most innovative companies have engaged in business model innovation to some degree, only 27% said their organisations were actively pursuing it.

Amazon – the digital business that continues to disrupt before being disrupted

Amazon is a company that constantly questions the status quo. It relentlessly analyses its business model, innovates, acquires and disrupts markets before being disrupted by others.

Starting out as a US-centric, web-based book store, Amazon has never failed to question what the organisation does and how it does it. From the time he founded the company, Amazon CEO Jeff Bezos was aware that its business model might become outdated, but over 20 years on and with an acute focus on the customer, he continues to support innovation of Amazon’s business model with the goal of meeting and exceeding customer expectations wherever possible. Bezos originally founded Amazon as an online retailer of books, at first outsourcing supply of the merchandise to multiple distributors. Bezos soon realised that Amazon’s distributors were not very good at fulfilling book orders and were actually causing dissatisfaction among Amazon’s customers at which point he decided to bring all operations in-house and invested in massive warehouses to cater for the demand. Having developed a good system for marketing, selling and distributing books, Amazon began selling this as a service to other retailers and went on to expand to other products.

Amazon has expanded globally via the acquisition of online book retailers in other regions. It snaps up competitors and rivals in order to expand its product offering and give customers more of what they want through the Amazon brand.

It launched its own marketplace where independent sellers can sell their goods via Amazon. It has changed up its pricing model time and time again to meet changing consumer expectations and ensure it retains its highest value customers, for example, via its Amazon Prime offering. Amazon has taken risks, fallen victim to the dotcom bubble burst, and survived and reinvested nearly every penny of profit in the growth of the company.

It’s a brand that learns from its own and others’ mistakes, and when it gets something right it licenses this to the masses.

“Amazon is still the greatest tech story of the 1990s; it’s also one of a few contemporaries still run by its founder. Nobody else reinvests almost every cent of profit in growth, as Bezos still does. Amazon is immensely valuable today, and almost all of its value comes from the future. The journey ahead for Jeff Bezos is just as great now as when he first set out in 1994.” - Time Magazine, The 100 Most Influential People, 2014

Collaborate with other disruptive forces

While technology companies are disrupting traditional industries, one way established businesses can respond to the threat is by collaborating with those disruptors or with others. Organisations that aren’t in a position to acquire disruptors can instead work with them to offer current customers more of the services they’re looking for.

Zopa partners with Metro Bank

An example of disruptive collaboration is the partnership between Metro Bank and peerto-peer (P2P) lending platform Zopa whereby Metro bank will now provide loans to users of the Zopa platform. Peer-to-peer platforms are digital sites that match lenders to borrowers directly, in a more efficient way than traditional banking and with lower fees.

The partnership is the first of its kind and is a great example of how disruptive challengers can collaborate to provide additional value to customers and remain competitive. What’s different about this new collaboration is that the peer-to-peer lending sector has, until now, been limited to referral-type relationships where established banks such as Santander and Royal Bank of Scotland refer customers to a peer-topeer platform where those customers do not meet the strict lending requirements of the banks. In this instance Metro Bank is going a step further and lending itself through a peer-topeer platform.

Of course, this relationship brings into question the very concept of ‘peer-to-peer’ lending as Metro Bank cannot be classified as a ‘peer’. By competing with individuals to lend money, Metro Bank could be said to be itself disrupting the disruptive peer-to-peer lending market.

This should be good news for borrowers as it creates a more competitive and efficient platform to lend money.

Both companies stand to benefit from this collaboration. Zopa provides about £45m of consumer loans a month but could substantially boost that by bringing in institutions. For Metro Bank, the partnership broadens its customer base as the group seeks to accelerate lending growth. The bank has about £3bn in deposits but only lends about half that amount.

Recommendations for approaching digital innovation

• Act now, or get left behind
• Focus on people first, not technology
• Don’t be afraid to think outside the box and shake up your business model
• Create a top-down digital vision
• Don’t fear digitalisation. Embrace it

Focus on people first, not technology

Too many businesses approach digital innovation from a technology perspective, but it is human behaviour and the customer that is driving the digital world of today. Businesses must take note of customer behaviour and how it is evolving in light of the latest digital innovations. How are your customers currently using technology to accomplish things such as shopping, researching, communicating or travelling, and more importantly, how are they going to use technology to accomplish these things in the future?

Act now, or get left behind

According to research by Capgemini, 74% of companies respond to digital disruption only after the second year of their occurrence, and 38% responded after the fourth year. The majority of companies that went bankrupt only responded when the digital disruption had already firmly taken hold. The lesson here is that the time to act is now. Don’t wait for digital disruption to take hold. Get started with your digital innovation strategy today.

Don’t be afraid to think outside the box and shake up your business model

It’s important to constantly look out for inefficiencies in your current business model. Look for where there is a mismatch between what customers want and what your company is actually delivering, and see where digital innovation can help solve this. Where is your business failing to meet customer expectations? What is a constant source of frustration for your customers? Sign posts for vulnerability to disruption can include large fluctuations in financial performance, underutilised resources or excessive inventory. Conduct regular business model audits to identify weaknesses in your current business model, and experiment with new business model ideas in order to accurately predict success of the innovation.

Don’t fear digitalisation. Embrace it.

All businesses must position digital innovation at the heart of their business and use it to optimise the customer experience. New channels and technologies offer rich customer information for those that can gather and analyse it effectively. By harnessing digital platforms to your advantage you can anticipate new growth markets and identify untapped resources. Start with your customer pain points and identify how technology can help you solve them. Leverage technologies like social media, mobile and analytics to enhance the customer experience and serve customers in the way they want and expect.

Create a top-down digital vision

Create an innovative digital vision that the senior management team is fully engaged with so everyone in the organisation understands what the company is trying to achieve, whether it is focused on operational effectiveness or delivering exceptional customer experience. Employ an open innovation model for your business that invites innovative ideas. Invest in hiring and nurturing digital skillsets and encourage employees to identify innovative new practises and opportunities for business success. Many companies are now setting up innovation labs and incubators to facilitate this.

Conclusion

The digital world we live in should not be looked upon as a bleak landscape characterised by the threat of new start-ups at every turn.

Digital is shaping the way the world operates today and, in order to serve customers better, businesses must understand how to leverage digital to innovate and better serve them. Indeed, new start-ups and budding entrepreneurs are leveraging digital technologies to build ubersuccessful businesses that are delivering on and exceeding customer expectations. However these digital technologies also present golden opportunities for established organisations to transform their businesses and become disruptors themselves.

Every business today needs to be a digital business. Digitalisation is not about how you incorporate technology into your organisation, it’s about how you use technology to create new opportunities for your business, ensuring your company serves the customer of today and tomorrow. Digital presents businesses of all sizes with opportunities to innovate, retain and capture more market share in current markets, enter new arenas and streamline the way their organisation currently works – systems and processes are becoming faster, smarter and waste-free with the help of new technologies.

Think outside the box, look at how your customers are behaving and get to know them, then look at how you can leverage digital technologies to meet their needs and exceed expectations.

This is all possible, but what is required is for businesses to act now and embrace and leverage innovation.