Business Disruption: Inside the perfect digital storm

Digital Transformation driving business disruptions

“A perfect storm is a confluence of events that drastically aggravates a situation.” This wiki definition is an excellent description of what takes place in many industries today. The storm is affecting established players finding themselves in new competitive situations with eroding margins, virtualized products or massively larger companies entering with enormous scale simply pushing them to the side.

Digital Transformation (you may also want to check my blog: The Digital Transformation – watch the rug you are standing on!, posted on 30. July 2018) is affecting many industries and, as capabilities in software and hardware increase, is turning them upside down. They get disrupted.

Key elements of Digital Transformation

While disruption has become the hot term of the season, at its core, it brings revolution to many businesses and is much more than a fad. Whether the word used will remain the same or another one is invented, is irrelevant: massive changes are happening. Disruption is not new. Henry Ford did it to other car manufacturers and horse breeders, the rifle disrupted bow and arrow and the ability to control fire meant a massive advantage for those who could. What has changed today though, is the speed at which companies and whole industries change, decline or even disappear. Compared to the time it took to build them, the effects can be considered instantaneous. 

Key trends

While Moore´s law held true for several decades, it appears to have slowed down recently. So, as incremental computing power growth is slowing, business transformation speed is accelerating. Various versions of the below infographic are on the internet showing the timeframe of adoption to reach 50 mills users Digital platforms create an enormous increase in adoption speed. 

(Kudos to who created it, I could not identify the original source).

I am not saying that when your revenues decline or key customers are cancelling contracts or don´t renew in normal intervals that you are subject to a disruption based on Digital Transformation. But the odds that you are, are significant. 

Root Cause analysis

There are various techniques to find out, unless it is obvious and you can move right on to counter measures. However, to my experience, a formal problem analysis is almost always revealing causes not identified before and dramatically improves the response and therefore chance of success. 

One basic rule is to start with the customer, or where ever else you have observed the issue, and work your way backwards through your value creation chain. Do this for your existing value chain first. And always, always walk the chain. Don´t look at your ISO9000 documents and assume they are an accurate representation of what goes on. Also, don´t take Paula´s or John´s word for it based on the understanding that they own the process and know. You will be surprised.

Value chain concept, simplified model comparing cash distribution vs mobile payment

The next thing to do is to talk to your ex-customers. Yes, those, who chose a different solution. And if you are not good at making contact, hire someone trustworthy to do it for you. And don´t let those do it, who should have identified the problem some time ago. Interview 3-5 of them to find out what they did, why they did it and how. What was their experience, what did they learn?

This will do three things for you:

1.    You will find out what is wrong with your offering.

2.    This will earn you great respect from your ex-customer...

3.    ... which may lead to them considering coming back in case the grass wasn´t so much greener than originally expected and you can adapt your offering to be a closer match. And that does not focus on price, but on capability.

The next question is: are you being disrupted?

Business disruption occurs when the product or service or the way these are made available changes, at least in the eye of the customer. There is a myriad of models about business disruption on the web. I have found the model below to be useful. It breaks the competitive activities businesses engage it into four different areas.

·     Customer perception

·     Availability increase

·     Better customer experience

·     Cost reduction

Key areas and major elements of business disruption

Customer Perception

Depending on industry segment and application, B2B applications offer two fundamental strategic approaches: cost or performance leadership. In order to include B2C products and offerings, I have expanded the concept to commodity and differentiation. In case your customer perceives your offering as mission critical as opposed to a commodity, the level of attention and evaluation will shift dramatically. The focus is shifting from price to either value or potential damage as the guiding factor. Disruption occurs, when an offering is effectively shifting customer perception on a bigger scale. A good example at the moment is the IT industry. Larger competitors such Amazon or Microsoft turn application hosting into a commodity increasing pressure on established players forcing them to identify new ways of positioning them and to learn new trades to enhance their offering to remain differentiated.

Availability Increase

Space and time used to be the two domains in which to improve the availability of goods. Longer shop hours and more shops. Whether your product is digital in nature or physical, Digital Marketplaces have taken over the B2C world and are increasingly creating B2B off-springs. Communities can increase economies of scale and thus purchasing power while crowdsourcing may combine a globally dispersed audience into an attractive segment of common requirements. Linking groups within the same food chain can create ecosystems of common business value chains adding capabilities needed to fulfil customer requests.

Better customer experience

Personalizationhas been considered the holy grail of product or service offering. Creating products and services to individual needs can be a very strong differentiation, especially for assertive B2C brands. While tailoring to needs is essentially a good thing, it can become a creativity limiting factor hampering innovation in the longer term. 

Empowermentrelates to the fact that digital ecosystems today offer a much improved two-way communication. Customers are not just told any longer, they can take charge, vote up or down and provide feedback and improvement ideas. 

Automation:The advancements of artificial intelligence will drive increased replacement of laborious manual tasks performed by humans. Automation will accelerate responsiveness and reduce errors. Voice bots and speech recognition have come a long way in the last 10 years. Looking at the acceleration discussed earlier, we can expect a much larger improvement in half the time coming.

Instant Gratification:Amazon established the benchmark of next day delivery for physical merchandize. In the digital domain, the IP protocol stack and high speed ubiquitous access enabled the instant use of apps allowing customers to enjoy instantly newly purchased capability. Horse power on demand in trucks climbing hills can not only reduce emissions and cost for fuel or taxes, it reduces cost of operation and forces truck manufacturers to develop digital systems to enable pay per use models (to be covered also in the Cost Reduction section.

Cost Reduction

While Cost Reduction breaks down into four different aspects, the really interesting element is that new entrants most often eliminate parts of the value chain. This value cannibalization leads to a shrinking market overall at the expense of incumbents, who see revenue and margin erosion. While incumbents could respond, in many cases even employ people pointing out these cost reduction opportunities, they don´t capitalize the opportunity, because they don´t perceive cannibalization as an opportunity. If you don´t have an understanding and at least a plan how to cannibalize your own business, you will be subject to disruption rather sooner than later without any opportunity to respond.

Increasing the impact

Disruption becomes far more impactful when different disruptive components as discussed are combined. This also makes the task to copy more challenging and makes the new service or product unique for a longer period of time.

What to do when being disrupted?

Clarification

The first step is to realize and acknowledge what is happening. This is trying to give structure, data and significance to your gut feel or increasingly red KPI table. Assess the situation and identify where and how your business is being attacked.

Disengagement from past obligations

This is the hardest thing to do. You have probably given promises to customers, employees and shareholders. Now, previous investment may not pay back as planned. Instead, it may have to be written off. It may daunt on you, that your organization lacks significant skill. How can this be acquired? Will team members be impacted? Some companies are staying ahead of the game by taking your current income to strictly invest in new opportunities: company acquisitions, attracting new talent, creating a strategy options engineconstantly evaluating trends, opportunities and requirements.

Create New: Listen to customers and employees. Explain to shareholders

The majority of businesses is occupied with daily management tasks. The number one reason why being disrupted is so common. When you are in this situation, you need to tap into your customers and employees. Customers: What are they doing, what are their motives, how are their buying criteria changing? Employees: What requests are they getting? How frequently? How do they solve problems?

Shareholders are essential for businesses and depending on the type of their engagement have either a short term or a medium-term interest. Clearly, any communication must involve a sound strategy offering a reasonable return even when this means to take a hit on the road to success.

Seek to disrupt

When you are facing a disruption, it is cut, transition or being phased out – that simple.

Cut: This is the most ruthless or desperate move to protect a core that has potential. Most often, it is creating the biggest damage to your reputation and it should really be worth it.

Transition: Define what winning will look like in your new world – not what you think is achievable in a quarter. Once that picture is clear, the gap analysis is easy and the resulting mitigating actions are obvious. Very often, this is a variant of your existing business requiring a lot of skills you already have. Loyalty and support in the organization will increase during well managed transitions.

Whether you are reading the weather forecast in a calm see or you are already in the middle of the perfect storm, delaying preparations or decisive action can quickly lead to being phased out. Understand the nature of the disruption and develop your response. It may mean that you and the team have to learn new tricks, but it can be done.

Stay curious - stay relevant.

@mktginouterrim

Who am I?

I specialize in consulting to small and medium enterprises. If you need to react quickly to declining revenues, defecting customers or struggle with new, mostly bigger, competitive entrants in your markets, we should talk. 

The Digital Transformation bundles smaller, niche markets to larger segments attractive for bigger companies with deeper pockets. They drive commoditization of previously specialized products and solutions and continuously disrupt these established markets by introducing capital intensive shared profit models.

At the same time, smaller agile software developing entrants create solutions based on Artificial Intelligence or software-based automation. This opens up new opportunities for all players. It takes guts and decisive, quick action to adjust, change and learn new traits to grow in transition business opportunities. 

I don´t outsource or send junior people and understand that solutions have to be unique to be successful. 

Send me an email, if you would like to bounce some observations, facts or ideas. I don´t charge for that: win@mktginouterrim.com