Mathias Döpfner was restless. He was appointed as the CEO of the 70-year old publishing house – Axel Springer in 2002 and in the past decade, Döpfner knew they were way ahead of its peers by embracing the wave of digital change. At a time when its contenders were grappling with the steep fall in traditional methods of content distribution, the company saw a steady rise in online readers for their leading tabloids – Bild and Die Welt.
Yet, Mathias Döpfner wasn’t happy. With news portals like Buzzfeed and Vice round the corner, he understood that the digital era was highly volatile and coping with its changes was quite tough.
He decided to send three of his senior managers to the buzzing Silicon Valley, who came back with valuable lessons. This led to a series of daring strategic moves by the Axel Springer group including the acquisition of the famous business and technology news website – Business Insider, 80 plus investments in digital companies and the swift disposal of redundant regional newspapers, women’s magazines, and television magazines. They also vowed on increasing their international presence.
Axel Springer saw itself transform into a European digital publishing powerhouse with digital activities of the company yielding more than 70% profit not to mention its success of 40% in classifieds. Kudos to the agile and adaptable CEO – Mathias Döpfner who was at the helm of the digital business transformation at Axel Springer! His initiative to ride the wave of digital innovation, kept the flag at Springer flying high.
Digital Disruption – No longer a fancy Tech term
Like Döpfner, by now the digital bee would have stung most of the C-suite executives as they observe a strong customer inclination towards enriched experiences at reduced costs and the importance to stay virtually connected is more than ever.
Users of products and services are always on the lookout for their needs and wants to be met in the most hassle-free way. The audience that the market caters to is quite high on their digital quotient, seeking an app for every requirement. The likes of Uber and Airbnb have taken consumer behavior and expectations to a different strata toppling age old models of transportation and accommodation.
Being mobile-friendly with a strong social media presence is expected from most companies. If Gen Y and Gen Z are getting tech-savvy, it’s high time that corporates turn Digi savvy too before the wheels of their business get rusted.
Digital disruption has stunned incumbents already, leaving 47% of digital revenue with new entrants. Young digital attackers and competing fellow incumbents raise the pressure of traditional companies to up their digital standards.
Companies that fail to go through the digital whitewash find themselves put or rather thrown out of business like BlockBuster who refused to budge when Netflix crept into live streaming. Giants of the industry were, what economists would term “disrupted” from their well-established businesses. Clayton Christensen’s fancy term slowly sunk in as the brutal reality.
Decoding the Disruptive theory
The year 1995 saw the birth of “Disruptive Innovation” theory put forth by Clayton Christensen, a professor of Business Administration at Harvard Business School, defining disruption as a process by which a product or service enters in simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors. The often misunderstood and misinterpreted disruption theory has three key takeaways which when understood clearly will guide traditional competitors in the right way.
- Begins at the bottom of a market – Attackers usually look for overlooked and unaddressed segments, rendering services to a small crowd initially before attracting a competitor’s core customers. Consider the humble beginnings of Air Bed and Breakfast, now referred to as the much celebrated Airbnb. With hotel chains usually booked full during large conferences, Brian Chesky and Joe Gebbia made productive use of their vacant loft, which though didn’t bring folks at Hilton to their doorstep met the needs of a limited band of people.
- Disruption is a process – Unlike sustainable innovation that sees profit with minor changes, a disruptive innovation is an ongoing and prolonged process that takes time to boil the top. Airbnb kicked off in the year 2007 but it took almost 5 years before their flame of fame spread.
- Displaces age-old competitors – A disruptive product or service not only makes significant strides but also robs market share from existing business giving it its name. Fine tuning their amenities, by 2014 Airbnb stood at a $10B valuation surpassing established competitors like Hyatt and Wyndham.
A clear picture of how a disruptive innovation works its way upward gives legacy competitors the lucidity to address or dismiss budding digital trends.
Question the “when” not the “why” of Digital Reformation
Executives are not blind towards the enormous power that the digital world holds. They’ve realized the benefits of technology and are cushioning existing businesses with Digi-friendly features to gain customer acceptance.
But while photocopier inventor Xerox worked on adding more features to their high-class machine, Canon worked on making it accessible to all ends of the customer spectrum. Making incremental innovation a part of your digital strategy to stay in pace with the digital leaps is only a short-term fuse. A complete makeover in business models and organizational culture is required to be digitally mature and companies must know when and not why to make the shift.
Disruptors in your respective industry may be at the bottom of the S-Curve now which incumbents comfortably ignore. Combating temporary failures, attackers occupy about 15% of the industry and as researchers in McKinsey point out, this is where the industry achieves its 40% digitization mark changing the ecosystem with a bang.
As the grip of the entrants begins to strengthen, biggies caught off guard decide to act by painting their existing business with digital gloss (think mobile app, social media marketing). By then it’s too late and they don’t stand a chance to stay afloat in the global market. Numbers show that about 4 in 10 incumbents could be displaced by a digital disruption in the next five years.
Incumbents could survive and even thrive if they recognize the industry breakpoint and act instantaneously, ditching their old way of doing things by adopting a new business model.
So what’s stopping you Champ?
Kodak always falls in the bad pages of digital transformation though they had a digital strategy in place. The digital camera was invented by them in 1975 and sensing the world to go digital they started rolling out digital cameras right in the 1990s! So what went wrong?
The scare of self-disruption: Also commonly referred to as the “fear of cannibalization”. Kodak was doing extremely well and they thought it would be a foolish act to let go of film business. Carrying the old baggage around, they failed to capitalize on their own innovation of digital photography. Their reluctance to let go made them a juicy prey for fellow peers.
Apple remains at the top of the industry constantly reinventing itself through iPods, iPads, and iPhones with the company’s base philosophy dictated in the words of Tim Cook “to never fear cannibalization; if we do, somebody else will just cannibalize it, and so we never fear it”.
The weight of uncertainty – You aren’t going to sleep on the stat that 80 to 90% of risky innovation fails, but the 10 to 20% that succeed create the 40% of profit pool. To act ahead of the pack also increases the probability of facing failure.
The change is going to be risky but it comes with a reward. Most incumbents realize a transformation is needed but are hesitant to cause unrest in existing models due to the uncertainties and perils it bears with it. Yet taking that dangerous plunge is all that matters at last!
It’s not a Win-all transition – Understanding the digital race, you put on your shoes of technology and train to win the race. To your frustration, the margins hit an all time low!
Disruptive innovations don’t always bring the expected returns initially. It is a tectonic shift where buildings of profits might come tumbling down. Progressing from DVDs to streaming in 2011 was demanding indeed for Netflix. It saw an 80% drop in stock price at the time of transition but in due time their courageous step reaped a 134% spike in stock price since 2016 reaching a valuation of $60B in 2017.
Brewing success in digital innovation takes time and efforts which established companies fail to put in, as their mind is set on the businesses currently in hand.
Comfy in the success couch – You are already seeing success in the industry, correct? Then why toss it all for a shift that is uncertain, unproven and unstable? It’s just easy to keep doing what you do the best the only problem being in a few years there would be no takers for the core business that you are good at.
Sony’s Walkman was deemed as an innovation in music industry increasing it to double cassette capability, 180 minutes of music and even transforming it into an MP3 Player. What was not expected is an iPod- predicted to be a failure with lower battery life and not the best-sounding system(when they started) to keep the Walkman in it’s packaged box.
Sony enhanced their existing features with the belief that it would enrich the experience for music lovers while Apple was responding to another major portability issue. Giving your best at what you’re reputed for is not going to catapult you to digital success.
You get it but what about the rest? – Though it didn’t help, Kodak’s newly hired CEO from Motorola was quite digital savvy and started working on the digital camera. However, at BlackBerry(RIM) it was a different situation. Physical keyboards were their cherished assets only to be rattled by touchscreen smartphones. When the idea of BlackBerry 10 came up, Lazaridis the co-founder of RIM insisted on keeping the keyboards stating that they were the reason customers held on to the handheld. While Heins and team knew they had to change their business model, they were unable to convince the big wig. Sadly, the yesteryear king of smartphones has still not succeeded in making a comeback.
Despite the buzz, a combined survey by IMD and Cisco uncovers that 45% of companies do not see digital disruption as worthy of board-level attention as of June 2015. Getting the management on board the digital ship is crucial yet difficult. They’ve been seeing steady profit from the current business model and switching it to a new one might raise questions about the revenue generation.
Barriers such as these hinder most of the established companies from making digital advancements with only 25% of the companies adopting a proactive approach.
Buckle up and join the Digital Bandwagon!
A digital disruption is bound to completely redefine a market altering the price, needs, and behavior of consumers and if left unchecked it eats up 30% of traditional competitors’ revenue growth.
Bold reactions are expected of incumbents to stay in pace and even ahead of the digital reactions as this yields about 1.9 times greater payoff (in retail) and more in other sectors like telecom and manufacturing.
So how can you take this highly profitable digital leap?
Understand that it’s a holistic change – Emulating certain aspects of a company’s successful digital transformation strategy to your organization is only a short time fix. The wave of digital reform must hit everyone beginning from the leadership on top to every employee in the enterprise. A realignment in the business model, technology, and human capital is crucial in terms of cost, experience, and platform. As a Forbes insight report states, “Everybody needs to get involved with strategy, design, and implementation of digital transformation”.
Limelight is always on the consumer – Get to know the end users who consume your product/service better. Often in big establishments, the decision makers on the top have little or no visibility on the consumers, who are in this digital age the most valued jewels. This gives entrants a major advantage as they look for unmet needs and build their business on them, attracting the major chunk of customers over time. Overlooked customers disrupt markets the most and executives must ever be on the lookout for new and untapped segments in the market.
Clayton Christensen in his revised HBX Disruptive Strategy urges entrepreneurs to look those needs as “jobs to be done” for a customer, citing the example of how a car company can seek for ways to turn the car into office space rather than just working on the mileage enhancements. Work from car! Sounds cool, right?
Play to your Strengths – Digital Entrants may have the advantages of being nimbler, faster innovators and more ready to take risks with their nothing-to-lose attitude. On the other hand, incumbents have the upper hand in terms of capital, strong brand value and huge customer bases. Executives can take over the digital realm with these solid assets favoring them.
Partner and Invest – When tuning a large scale company becomes tedious it is wise to partner with smaller promising companies that are working with digital prowess. Interesting startups are always popping up and when an emerging opportunity presents itself, investing in those will show the incumbent’s broad digital outlook. Though acquisition is a possibility, it can be kept as a last resort to keep fresh technology alive as it was imagined.
Dig Market ground with the Data shovel
From being the Big Blue in the hardware industry to hitting cloud nine in software services is a remarkable journey for IBM. They are constantly disrupting themselves moving from mainframes to PCs to cloud capabilities by taking bold strategic moves based on the observed market trends.
Data backed decisions on when and how to digitally evolve have huge returns rather than going with instincts or with uncertainty always in the air. The wide world of web holds valuable information not only on customer sentiments but also on up and coming technologies like augmented reality, 3D- Printing, Internet of Things(IoT), etc…Real time market feedback, website analytics pose as determinants for executives to look at while taking their digital steps.
Gartner rightly marks that digital disruptions typically exist outside of the enterprise’s normal range of vision and since such business disruptions are not an overnight phenomenon, the need to set up a sensing apparatus is felt like never before. Since reaching the digitization tipping point in the industry is a slow-paced process, public market research will go a long way in aiding the top tier to take measured strides in their digital journey. Indicators to sense may include and are not limited to any of the following:
- Customer behavior as social and emotional dimensions are equally important as the technological aspect
- Social media information that reflects public sentiment on a growing trend
- Sniffing the Internet for any unaddressed market segment
- Competitor success in implementing a digital move
- Technology or service towards which unicorns are in beeline and research is mounting.
- Investments made by Venture Capitalists to get a grip on the recent digital fad
For Kevin Plank, CEO of athletic apparel brand Under Armour, big data is definitely the weapon to innovative growth. Expanding from shirts, shoes to fitness trackers, he believes that he can give good product choices that make lives easier for customers by knowing their health and fitness information. This propels him to innovate digitally to not only meet customer satisfaction but also foresee what they will need and deliver it.
At the core of every digital transformation, be it entrants or incumbents, must lie the thought of providing the community with better choices thereby delivering more value and not the fear of being disrupted or seeing stunted growth. Having seen well accounted and guaranteed profits so far, the digital path marked with its uncertainties and possible failures might seem daunting for established enterprises.
Data informed predictions in terms of rising digital opportunities and its associated threats will equip traditional companies in traversing the right direction with respect to new business models and digital investments. Leveraging the right information in the Internet space could clear the air and open more avenues for innovation and novel thinking enabling businesses to take the right risks.
If Springer had sat on their once golden-egg yielding printing business, they would have long been put out of the journalism scene. Before your business turns obsolete, give the Uber-powering, Amazon-driving Digital force the clear go-ahead!