Digital Transformation: Disruption Decoded

It is everywhere, the buzzword disruption. We have come to acknowledge and accept that the digital world order is changing everything from business to social environments, from machine to human interaction. It is highly likely that every single industry will over-go a digital disruption within the next decade.

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In an annual study by MIT Management Sloan Review and Deloitte University Press in 2015, nearly 90 % or respondents regardless of the sector they represented, believed that disruption will happen in their industry. The thing that is notable, is that less than half thought that they are adequately equipped to handle the change.

First, it is good to demystify digital disruption. For one, not all digital innovations become disruptors that will revolutionize industries, and not all disruptive technology should be seen as threat to traditional companies. Smart companies, however, stay vigilant and up their game so that they will be less likely to become surprised by disruptive challengers. It is in fact, one of the most important elements of digital transformation, understanding the logic of disruption and building capability in the company to be able to sense and respond to these changes in the rapidly changing digital landscape.

The formula of disruption according to Columbia Business School Professor David L. Rogers is quite simple – creating difference in value proposition that dramatically displaces the value provided by incumbent business (prevailing customer choice of today) and having difference in value network that creates a barrier to imitation by the incumbent. According to Rogers, disruption happens, and only happens, when both of these conditions are met.

Now, let’s decode that formula. The first part of the condition can be met if the challenger’s value proposition is far more competitive or has new elements regarding product or service pricing, accessibility, simplicity, personalization, integration or social experience that attract customers better than incumbent’s value proposition. A new product could have, for example, a substantially lower price than those of competitors or it could offer “freemiums” as lowering entry for new users to the product. It could offer customers a chance to customize the product or leverage social networks by creating a community where customers can share their experience of the product with others.

However, in order for the product to become truly disruptive, the new product also requires a differentiator in its value network, in the components that enables the challenger to create, deliver, and earn value for the customer. These components typically consist of customers, channels, partner networks or anything from brand to skills and processes, IP and data assets. These days, competitive differentiation tends not to rely on technical features anymore, but the focus has shifted to great user experience. This, in turn, could be anything from a unique design or user interface to complete integrated platforms. But it does need to be something unique and different, something that the incumbent business is unable to copy – in other words, simply can’t compete with.

How it is then that traditional companies become disrupted on their own playing ground? Are they not supposed to know everything there is to know about their own customer segments, markets or anything that makes the customer tick? After all, we are in the business to satisfy customer needs, aren’t we? Let’s zoom out a couple of decades to get the full picture.

For a long time in history of modern business and traditional value chains, focus of any company board of directors was growth. Growing size offered many advantages to companies, as big companies were in better negotiation position when it came to bargaining supply costs or getting access to traditional media or other resources. Once you had reached the limits of growth on saturated markets, the next logical thing was to concentrate on operational excellence and productivity.

And true, many large and successful companies have thrived over the years after reaching a high level of operational excellence by focusing on execution and taking pride in serving their customers based on their ever growing needs.

But here is the catch – when you start focusing more on the how instead of the why, over time you tend to become blind sighted by what we call, the productivity bias. This is, when people are asked continuously speed up the process, achieve more in less time, create more products or features on time and on budget and to reduce costs at every corner.

When focus is always on making the next deadline or reaching the next target, companies, yet alone people tend not to question whether they are actually doing the right things anymore. The world around them might be changing but they are too busy worrying about not being able to do everything in the pipeline.

When focus is always on making the next deadline or reaching the next target, companies, yet alone people tend not to question whether they are actually doing the right things anymore.

Disruptors of the market usually have less time, less money, less people to get things done but also less organizational processes and rules to hold them back. As new entrants and start-ups don’t have to worry about productivity, they will focus and only focus on what customers are really asking for. On the other hand, traditional companies quite often have the advantage of scale and are far better resourced so ultimately, it becomes a question of agility and ability to respond to disruptive competition.

The rules of competition of the analogue world, where you would simply wait to see how the challenger is changing the standard value proposition and then copying that, is not an option anymore. The digital world is disrupting itself so fast that any company wishing to stay in the competition must pursue digital more aggressively. For traditional companies, this means that attack might very well be the best defense, even if it means attacking your own revenue streams and cannibalizing your own business.

If disruption is decoded as “simply can’t compete with”, it means that digital is quickly changing from an option to imperative since the longer you plan on waiting, the more you risk your business becoming marginalized. In case you are still today more worried about how to become more efficient or more productive, maybe you ought to take a step back and re-invent your business to better accommodate the new digital world order.

This blog post was originally published in LinkedIn August 31, 2016.