Around 70 executives attended an IMD Discovery Event hosted by the Global Center for Digital Business Transformation. The purpose was to shed light on strategic responses to digital disruption, including analyzing the three value drivers and how to create “combinatorial disruption.” In a dynamic exchange, all the presenters stimulated an interactive and energetic discussion of the opportunities and challenges of digital disruption to all businesses, not just “traditional” tech companies.
Few businesses today can refuse to “go digital” – the internet, social media, mobile solutions, big data and other innovation technologies have rapidly transformed entire industries and continue to do so. Digital, according to the Global Center for Digital Business Transformation (DBT Center), is the convergence of multiple technology innovations enabled by connectivity. And digital disruption refers to the effect of digital technologies and business models on a company’s current value proposition and its resulting market position. It not only affects start-ups but also has the potential to overturn incumbents and reshape markets faster than perhaps any force in history.
In a recent DBT Center survey of 941 business leaders in 12 industries around the world, respondents reckoned that an average of 3.7 of today’s top 10 incumbents in each industry by market share will be displaced by digital disruptors in the next five years. Nevertheless, in about 45% of the companies surveyed, digital disruption was not seen as worthy of board-level or CXO-level attention. Only 25% were actively responding by disrupting their own business in order to compete. The remainder either did not recognize or were responding inappropriately (43%), or taking a follower approach (32%). Event participants had rather more positive views.
Understanding the impact of digital disruption
The Digital Vortex is a graphic way to show how digital disruption is redefining industries. An industry’s position relative to the center reflects the extent of potential competitive disruption that a firm in that industry will face within five years as a result of digital technologies (see Figure 1). Of the 12 industries surveyed, the number one spot is occupied by technology products and services. Industries on the periphery of the Digital Vortex are more asset-intensive, as opposed to the data-intensive industries close to the center, and are therefore likely to experience the most time before digitization becomes disruptive to their industry. But this does not mean that they are safe.
The automobile industry (No. 8) is an example from the periphery that will see unprecedented change in the next five years, with increasingly connected cars – including battery technology, connected tires, selfdriving cars, and the like. Already, major tech companies such as Google, Apple and Tesla are working hard to build driverless vehicles. And if this evolving technology is widely adopted, it is not only the auto industry that will be disrupted.
Industries in the traditional automotive value chain, such as automobile manufacturing, auto repair and parts, public transportation and taxis, will obviously be affected. Some adjacent industries, such as package delivery, hotels, airlines and parking garages, will also feel the effects. Seemingly unrelated industries could also feel the pinch: insurance (with accidents projected to be down by 90%, demand may drop); retail (e-commerce will benefit from ease and low cost of delivery); energy; and media and entertainment (the driver no longer needs to pay attention to the road). Finally, unexpected industries may also be impacted, including real estate, healthcare, law enforcement and education. Selfdriving cars could trigger serious upheavals for many industries, which will have to shift strategy in order to compete.
Three categories of value drivers and combinatorial disruption
Digital disruptors create value for customers in at least one of three ways, and each of these has five different business models (see Figure 2). The three drivers are:
- Cost value – competing by offering the customer a lower cost or other economic gains
- Experience value – competing by offering the customer a superior experience
- Platform value – competing by creating network effects that benefit customers
The strongest digital disruptors – Amazon, Google, Uber and others – do not focus on just one type of value. They employ combinatorial disruption, which is so potent because the three values are mutually reinforcing. For example, Starbucks is not successful because it has better coffee – it is selling a superior experience, beyond the coffee. And now it is trying to provide platform value with its own pre-pay mobile app, which has $1.4 billion of coffee drinkers’ cash earning interest.
The DBT Center has identified two competitive realities facing firms today – the value vampire and the value vacancy.