What So Many Strategists Get Wrong About Digital Disruption

What So Many Strategists Get Wrong About Digital Disruption

“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 15 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.

 

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