In my blog post, Digital Disruption – Finding a Way Forward through Transformational Change, I talked about three areas that I believe should be addressed by each executive to remain relevant in the context of digital disruption: limiting beliefs, understanding new technology, and improving leadership skills.
Today, I’d like to discuss digital disruption in greater detail.
What is digital disruption?
Disruption has become a buzzword. It is used haphazardly by pundits on CNBC, Bloomberg News, and elsewhere to mean any innovation.
In startup culture, the notion of disruption has achieved cult-like following as entrepreneurs are exhorted to “disrupt everything” and many pursue business ideas with that sole purpose in mind.
Yet, the purpose of innovation is not simply to disrupt existing enterprises.
Innovation is about new value creation.
In his book The Digital Transformation Playbook, Professor David L. Rogers offers this definition:
Business disruption happens when an existing industry faces a challenger that offers far greater value to the customer in a way that existing firms cannot compete with directly.
Professor Rodgers goes on to explain the four key components of business disruption:
· Has a Business Impact. First, we are talking about innovations that disrupt business rather than an innovation that merely impacts culture, law, or politics. For example, the wheelchair was an innovation that changed mobility for disabled persons. It had an impact on politics, law, and culture. But it did not have a disruptive impact on business.
· In the Context of an Existing Industry. For an innovation to be disruptive, it must disrupt something else. Social media, generally, and Facebook, specifically, has been tremendously disruptive to the advertising industry. But, Friendster and MySpace, two predecessor social media companies that had no such impact on the advertising industry.
· Offering Greater Value to the Customer. Whenever disruption occurs, it is because the new offering is suddenly more attractive to customers than the offering that the existing industry provides. Google disrupted the advertising industry before Facebook. But it disrupted the industry in a way that is entirely different. Both Google and Facebook offer new value to advertisers but with very different business models.
· That Cannot Be Competed with Directly. This is another key distinction between digital disruption and traditional competition. In traditional competition, two or more companies compete to offer the customer better product features, lower prices, or better service. When innovation is disruptive, the challenger is not selling a different version of the same product or service. It meets the customer’s needs with a product, service, or business model that the existing industry does not, or cannot, offer.
Innovation is not always disruptive, nor does it have to be. However, disruptive innovation causes a seismic shift in the way that customers behave, impacts business models (i.e., how businesses create value, deliver it to the market, and capture value in return), and the future viability of profitable incumbents.
Why does this matter?
For most of the past 40 years, new computing technologies improved processes. These software-enabled process improvements helped businesses be more profitable.
The cost of these software programs gave a strategic advantage to larger businesses because of the significant investments of time and treasure that were required to obtain and implement the systems.
But the products didn’t fundamentally alter customer behavior, value creation, competition, data, or innovation in the industries or markets where they were used.
Digital technologies, on the other hand, are rewriting the rules of business in each of those domains. Professor Rodgers noted,
“If the Industrial Revolution was about machines transforming nearly every physical act of labor and value creation, we are still at the beginning of a revolution in which computing will transform nearly every logical act of value creation.”
Today, even the smallest companies have access to the same tools used by their largest competitors.
Digitally native companies can use these tools to create, market, and deliver new customer experiences or digital products extremely quickly.
Consider, for example, marketing automation software. For the small business owner, marketing automation software is very affordable (I.e., $100 per person per month).
In a matter of minutes, marketing automation software can be launched and integrated with LinkedIn and Facebook providing immediate access to millions of prospective customers.
Shortly thereafter, this same small business owner can be marketing her products and services, locally, or to prospective customers across the globe.
My point is that very powerful technology products are available to everyone. The technology is not a competitive advantage.
The competitive advantage is in a constantly maturing organization.
New technologies are an important part of the digital story; but, an infatuation with technology is a big mistake.
In the digital era, businesses that focus on digital maturity will be the winners.
Digital maturity is the process of learning how to respond appropriately to the emerging competitive digital environment.
Digital maturity is critical because the democratization of technology means that disruption is constant. Remember, the advertising industry was disrupted first by Google and then by Facebook.
Today, there are few digitally mature organizations. Amazon is arguably the most digitally mature organization, which is truly remarkable given Amazon’s size.
In studying digital transformation, I had assumed that digitally native companies would be more digitally mature.
However, I have been surprised to discover that digitally native organizations struggle with digital maturity also.
Next month, I’ll discuss digital transformation in greater detail and get into the specifics of why digital maturity is the key to success.
In the meantime, do you think your organization is responding appropriately to competitive threats from digital upstarts?