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Business Strategy In An Era Of Digital Disruption

Is your firm a digital economy survivor?

15Sep

The threat is real

According to Geoff Colvin of Fortune Magazine, successful incumbents are 'more likely to follow the trajectory of Kodak.' Or have what Geoffrey Moore likes to call a 'Kodak Moment.' For this reason, Geoff says it should come as no surprise that Fortune 500 CEOs say their single biggest challenge is 'the rapid pace of technology change'.

Can incumbents respond?

Responding effectively, Geoff claims, requires businesses with the ability to 'continually disrupt themselves from within'. Geoff believes this requires business leaders that can see their businesses as disrupters see them. Clearly, businesses built-to-last can never stop their engine of self-disruption.

Are there examples of incumbents that have proactively practiced self-disruption? Jeanne Ross of MIT CISR has actually researched incumbent enterprises that have taken concrete steps to respond to the emerging digital economy’s mandates. Jeanne Ross initiated this research after finding successful incumbent enterprises that believed their success was not guaranteed in the digital economy.

Jeanne found that digital strategies that work are inspired by the capabilities of powerful readily available technologies including social, mobile, analytics, cloud, and the Internet of Things. Typically, she says incumbent responders use these to create a rallying point for their strategic plan. They want to be the Amazon or Uber of their industry. Jeanne believes the fact that there is not much distinction between rallying points is okay. Jeanne claims this is because competitive advantage is not going to be about strategy but instead it will be about business execution. And more importantly, she believes firms that are about being the best at execution will eventually be taken in different directions than other market participants.

Competitive advantage today requires executing integrated capabilities

Jeanne says today no competitive advantage comes from a single business capability. This, she says, is why Uber has so much competition. But for incumbent companies, advantage comes from integrating established set of capabilities. 'Competitive advantage comes from taking capabilities that others may or not have and integrating them in ways that make something extraordinarily powerful'. This in Jeanne’s mind is how 'established companies can best startups because startups can only do one thing well'. Integrating business capabilities provides a whole value proposition that is hard for others to copy.

Jeanne says that there is one more thing that existing companies need to get good at. They need to become responsive. Startups are constantly monitoring and learning what to do next. She says think about Christopher Columbus landing in the New World and what an established company and a startup would do. The startup would pivot and learn how to do something differently. Established companies need to learn in her opinion how to do this too.

Two go forward strategies

In the digital economy, Jeanne sees two strategies as possible. She says that established companies must choose one.

  • Customer engagement
  • Digitized solutions

Customer engagement requires that every day, you wake up trying to figure out what you can do next to make customers’ love you. The great example of this is Nordstrom. Jeanne says that Nordstrom a few years ago was clearly being disrupted by Amazon. And Nordstrom responded by creating personalized shopping experiences. These were enabled by combining capabilities around a transparent shopping experience and transparent supply chain. This, of course, is layered on top with predictive analytics. This has allowed Nordstrom to predict what customers need and how to get it to them regardless of channel.

The second strategy is digitized solutions. Here you figure out what customers need that they may not know they need. GE is doing this today as an industrial company. They are moving the value from the physical asset to asset performance management. According to Vijay Gurbaxani of the University of California Center for Digital Transformation, businesses need to reimagine their product offerings. They need to ask how digital capabilities (software) can be added, especially to physical products, in order to change their value proposition to customers. At the same time, businesses must look for opportunities to redesign their existing business models and revenue sources. Vijay believes that 'companies that win going forward need to be software companies.'

Bill Ruh of GE agrees with Vijay. He says GE sees with analytics and data, the value of their offerings is transferred from the things they build to the services that surround the things we build. For this reason, the center point for all of their businesses is becoming their digital service businesses. Today, we see 'the game is about creating the most efficiency around an asset--a machine, a factory, etc.' Bill says to continue to have value and not get eclipsed, GE has needed to own the software that surrounds its products. Software today is how value is derived from an asset.

Teaching elephants to dance

Geoffrey Moore suggests that leaders at 'incumbent enterprises' are not stupid. These companies are making investments in their future. What these incumbent enterprises face, Geoffrey believes is a 'crisis of prioritization'. They experience a battle for resources, especially in their go-to-market functions. Geoffrey says the problem is they typically they try to make sure every credible disruptive innovation gets its fair share of support. This leads incumbent enterprises to peanut butter their resource allocations rather than 'playing to win' on a strategic investment area.

It is for this reason that Geoffrey says that startups typically beat existing companies - startups are not conflicted in their approach. All the enemies are outside for a startup. Meanwhile, incumbent enterprises are pulled in too many directions at the same time. Given this, Geoffrey suggests when it comes to making a big bet on the next big thing, an existing enterprise can pick only one transformative bet at any one time to rollout. This is how to avoid a crisis of prioritization.

Parting remarks

As we have reviewed, the risk of disruption is real and tangible. It has to be considered now rather than tomorrow. To do this well you need to think more like a startup but create value through integration. There are two strategies going forward. Once we you have your strategy, you need to just take one innovation at a time forward if you want to dance as an elephant. 

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