Freek Vermeulen | 26 January 2017
“Digital is coming and it’s coming fast”; “No industry sector is immune to disruption”; “One thing is certain about digital transformation: It will be a big change for your entire organization”; “Digital will disrupt your industry.”
Judging by the headlines and opening lines of recent articles and business books, digital is about to disrupt your industry and you with it – unless you act now (and buy the book).
And, in fact, I don’t disagree – at least not entirely. It would be terribly naïve to assume that nothing in your business will need to change. However, some of the most common beliefs about how this will happen, repeated by conference speakers, self-proclaimed gurus, and consultants, have been oversimplified, misunderstood, or misapplied. In most “normal businesses,” the impact of digital will be different than for digital behemoths like Amazon, Google, and Facebook. Here are four to watch out for.
The first common misconception is that in a digital world, the winner takes all. Many business models that make extensive use of digital technology have network-type properties. This means that the more users and content-providers you sign up, the better the business model will work. People flock to Facebook, for example, because most of their friends and family are on it, which in turn allows Facebook to collect a large amount of data about us, and attract advertisers. Given these network effects – as many proclaim – markets get “winner takes all properties”: the largest network will win, crowding out the remaining competitors (like MySpace and Google+). That’s the reason a company like Uber needs to grow big, fast – and why it’s investors didn’t worry about losing money early on. And they are losing money: Uber’s losses in just the first half of 2016 totaled over $1.27 billion.
That logic sometimes holds, but more often it does not. That is because networks are rarely exclusive. Travel to Singapore, for example, and you will see why. Every taxi driver has at least two mobile phones in her window: if a ride comes in on one network, she will click “accept” and turn the other off. Taxi drivers are invariably part of multiple competing networks. Similarly, most riders have at least two apps on their smartphone. When they require a ride, they will quickly check both apps and then use the one where a taxi is available quickest and at the best rate.
It is a misconception to think that network effects inevitably and always lead to a winner-take-all market. Sometimes that may be true, but there are at least as many network-type markets that can easily sustain a variety of players.
A second misconception about digital disruption is that new technology will inevitably substitute old technology, rendering it obsolete. And indeed, we have witnessed e-mail replace the fax machine, flash memory supersede diskettes, and Wikipedia supplant the Encyclopaedia Britannica. However, industries with perfect substitutes are the exception to the rule; more often than not, digital will offer a new complement, rather than be a substitute. And this leads to a very different dynamic in the market.
Consider my own field of higher education. Many have been proclaiming that online learning will render lectures obsolete, that physical colleges will be replaced by online universities, and that MOOCs will be the new norm. However, this is not what seems to be happening, any more than the invention of the printing press supplanted in-person sermonizing in the 15th century.
Business models and competitive advantages are complex systems. This means that they consist of multiple elements – some of them tangible; some intangible – which interact with one another, meaning that it is their combination that makes it work. In many markets, digital will just add one new factor to the mix or replace one element, but not often all of them. This means that in many businesses, digital technology will complement and alter the incumbents’ existing resources and capabilities, but it certainly won’t always entirely replace them altogether. Therefore, when making strategy, the focus should be on identifying complements, rather than assuming complete substitution.
A third common misconception about how digital disrupt is the assumption that geographic distance has lost relevance since we can now communicate instantaneously with anyone, anywhere around the world. Closeness still matters, however, even though we may not realize it (research tells us, for instance, that people tend to underestimate the value of face-to-face communication).
Consider the management consulting industry. It has been a stable and quite homogeneous industry for many decades. The top firms have been doing pretty much the same type of thing for many years: matching consultants with clients. As a firm, McKinsey finds consulting projects and then matches them with people they have recruited and trained. And that’s how they have always done it.
Recently though, some new companies have figured that, in today’s digital age, there are other and perhaps more efficient ways of matching clients with consultants: online, through search terms, and by building rich databases. Some started digital platforms where supply and demand could match themselves. Others began databases of freelance consultants where they searched for suitable people for the projects they secured. However, most of these upstarts haven’t been able to scale. What they have underestimated is the relevance of human interaction. In consulting work, the ability to read each other’s emotions, intentions, and personalities is paramount, not only in terms of how consultants work with clients, but also for who gets matched with whom. In fact, you cannot successfully do consulting without them.
A company that understood this well is Eden McCallum. They too developed a business model based on a pool of freelance consultants, but rather than rely on a database, a matching platform, or some other digital search function, they understood that in their business – high end strategy consulting – there was no substitute for really knowing people. Therefore, they made the strategic decision to not rely on digital technology, but rather invest heavily in old-school getting-to-know-people: they developed a team of about 20 partners who maintain relationships and interact on a regular basis with about 700 consultants and over 300 major clients. They have opened up offices in London, Amsterdam, and Zurich and were recently highlighted in the Harvard Business Review by Professor Clay Christensen as the prime forerunner of a pending wave of disruption in the consulting industry – albeit with a completely non-digital business model. Eden McCallum shows that not all disruption need to be digital. Digital technology is more likely to make headway in industries and parts of your industry’s value chain where face-to-face interaction is less relevant.
One of the characteristics of the digital era, people continue to say, is that change is fast. And because the world is changing so fast, companies have to change fast too.
The first part of this claim – that the world is changing faster than ever – is in fact already dubious. Academic research suggests that the rate of change has not been increasing at all. Yet, even if your business is undergoing rapid change, this does not mean your company also has to change rapidly – quite the contrary probably.
If in a fast-changing industry you change equally fast, you’re likely to be jumping onto all sorts of fads. Remember “Second Life”? The virtual world in which people could live through an avatar? It was supposed to be the next big thing. Dutch bank ING decided to act swiftly, and rapidly assembled a large team of dedicated executives who would explore the new technology, develop applications, and market its products in the virtual world. ING was determined to not miss the boat. But the boat never took off; Second-Life turned out to be a short-lived fad, which disappeared again after a few bleak years; and ING’s big investment came to nothing.
Sometimes it is better to deal with contextual change and uncertainty by not changing at all – at least not immediately – but by giving things time to play out. If your company is in an environment in which new technologies come and go quickly, you may need to slow down rather than speed up. Given the level of market uncertainty, you will really only be able to distinguish the fads from the more substantial developments after some time has passed. It may sound paradoxical, but in an environment of rapid change, sometimes trying to match that speed can backfire.
Digital is changing the nature of competitive advantage in many businesses – just like major technological developments have done before. However, the change will not be uniform across all industries. Digital technology is affecting and will affect different businesses in different ways. Miss these nuances and your strategic decisions could lead you seriously astray.
Originally published on hbr.org on 3rd January 2017. The original article can be accessed here.