Why digital will destroy your business

Now that might sound like an attention-grabbing headline, but there is nothing truer in the current economy. According to research by McKinsey (1), digital leaders typically run 4 times faster than traditional businesses, and we are edging towards a winner takes all advantage for first movers and superfast followers.

A staggering 92% of businesses felt that their business model would not be economically viable as digitisation progressed (2) and this further backed up by a PwC study where only 10% of manufacturing companies were categorised as Digital Champions. (3)

BUT there are steps that you can take to stave off destruction by building a business strategy that is fit for the digital age.

So, what is it about digital that will destroy the traditional business?

Firstly, more power is moving into the hands of the consumer. Transparency of pricing, the cost of switching providers, reduced barriers to market entry all mean that typical margins made by companies start to diminish and competitive moats disappear. Think moneysupermarket.com or Expedia.

Secondly, there is a consolidation effect. Smartphones are the classic example where they have all but replaced cameras, music players, some gaming consoles and even encroaching into areas like wallets.

Finally, digital is in many instances completely replacing the need for physical products or distribution channels. Music, gaming, even newspapers are now almost completely digital. Those that will survive will be companies that carve out niches for themselves (vinyl records for enthusiasts). With this digitisation of products and services, the ability to scale massively disappears as the cost of producing one more unit costs next to zero with a digital product.

When you combine all of these factors, you end up realising that these threats can come from anywhere, and at any time. Traditional players in your market are not necessarily the threats just around the corner and this is why 92% of business leads don’t believe that their current business model is economically viable in the digital future.

What can you do about digital?

Many companies come up with a digital strategy. Sounds great on paper but often all they are doing is putting lipstick on a pig. Judy Goldberg of Sony Pictures hit the nail on the head when she said, “you don’t need a digital strategy, you need a business strategy for the digital age.”

“You don’t need a digital strategy, You need a business strategy for the digital age” – Judy Goldberg (Sony Pictures)

What your strategy should look like really depends on the threat levels posed to your current business model.

Scenario 1: Clear and Present Danger

There will be some organisations who are clearly in the throes of major disruption as a result of digitisation. These organisations frequently go into denial mode, trying to protect their current business, playing at the edges of digital. They are often doomed to failure because they are already struggling for oxygen, the business is shrinking and they don’t have the cash to invest in innovation. This is where the world of media finds itself… TV, newspapers, advertising, all rapidly changing their business models to survive, or going out of business.

The only option here is to pivot and pivot hard. This is the type of reaction that we’ve seen from a vast array businesses during the COVID-19 pandemic. Companies cannot shy away from the impacts and therefore they MUST change their business model to survive. This is also the mindset (and investment approach) required to get through the Clear and Present Danger level of threat posed by digital.

Scenario 2: Intruder Alarm

For most industries, the warning signs are actually there well in advance of getting to survival mode. New, smaller players start to make signs that they are trying to take a piece of the pie, digital giants start to make acquisitions that allow them to enter markets they hadn’t previously touched.

This is where companies have the chance to shape their own futures within that new digital framework. They have the chance to be a fast follower on new technologies, protect their piece of the pie, and potentially even take some market share from those incumbents who are slower to move. Great approaches here are to acquire those technology companies who have the tools to disrupt the market, creating a competitive moat, or to partner with those digital leaders in more of an ecosystem.

Again, critical to this is recognising the threat and ensuring that your investment profile allows you to not just run the business, but to help reshape it in parallel for long-term health.

Financial services fall into this category – there have been massive investments by banks and insurance companies in reshaping their businesses, becoming more agile, and even becoming more consumer focussed as FinTechs and TechFins have started to enter the markets. They’ve probably changed more in the last 5 years than they have in the last 50 years.

Scenario 3: Be prepared

The are still some industries where digital advances haven’t quite started to disrupt the traditional equilibrium. I can’t think of any industry that hasn’t been completely untouched by digital, but there are some where the traditional business models remain relatively intact (e.g. bars and pubs).

This is where incumbents have the opportunity to become the disruptors, or to prepare for when it does come. To fundamentally look at what they do, and either make bold moves to lead the change in the industry, or to prepare themselves for when the change comes so that they can respond quickly and positively.

Again, the risk here is the mindset that the business is immune to the effects of digitisation, or that it can be dealt with later. Scenario 3 is really the time to get your house in order. Critical here is again, ensuring that your business and investment strategy reflects that the industry will change and that you need both the means to sense when that is coming through great insight, and the ability to react to it when it comes.

What should be part of my business strategy in a digital age?

Strategies are going to be different for different industries and different businesses, but to give yourself the best chance of success in the digital age, there are 3 common threads that need to be woven through the fabric of your business strategy – innovation investment strategy, agile organisations and data-driven decision making.

1. Innovation Investment Strategy

Long gone are the days when business models didn’t change for decades or even centuries. You need to have an investment strategy that facilitates innovation. Your threat level scenario will determine the relative weighting between Run the Business and Change the Business and the traditional measures of success and ROI also need to change so that innovation happens without the expectation that every move is a successful one. Tied in with this, is that the process for approval and reassignment of budgets within the innovations streams needs to be rapid, with autonomy divested to the teams at the front line.

McKinsey’s report on Why Digital Strategies Fail (4) provides a simple view on how you should assess your response for your industry, allowing you to plan your investment and change strategy.

2. Agile Organisations

Big business have historically ‘won’ because they were able to leverage economies of scale and functional efficiencies to gain competitive advantage. Whilst these are great approaches when business models are relatively static, they create real barriers to change where siloed mentality and functional KPIs reinforce narrow perspectives and slow decision making. By building agile organisations, aligned to customer products and services, the speed of decision making and collaborative focus means that improvement are typically delivered up to 4 times faster. (1)

PwC’s report on the Six Dimensions of the Agile Enterprises highlights how Organisation, Talent, Technology, Planning and Performance Management, Ways of Working and Risk and Compliance can be tailored to support agility (5) delivering massive benefits over traditional ways of working.

3. Data-driven decision making

Agility only works when you have great data to base your decisions on. Historically, companies had a good amount of data and a whole load of gut feel and instinct. Decisions were typically determined by the HiPPO (Highest Paid Person’s Opinion) and they either came off or they didn’t, and you typically didn’t know until a lot later when you couldn’t do much about it.

Organisations now have huge amounts of data, in fact more than any person can typically make sense of, let alone analyse different scenarios AND then make the best decision.

By joining data together, utilising AI (encompassing predictive analytics, machine learning and AI), and rapidly test new hypotheses, the ability to get drive key business decisions with a high level of precision has come down from months to weeks or even days. If you’re unsure of the value of this approach, you only need to look at the top companies in terms of Market Capitalisation in an article by BCG from a few years ago to see the change that is taking place (6)

Summary

So, digital has the ability to destroy your business.

If you do nothing, digital WILL destroy your business.

But it also presents opportunity.

To figure out your next steps, you need to assess the danger level – Is disruption killing you now? Are new players and changing business models starting to encroach on your territory? Is the threat currently invisible? Use these questions to determine your investment strategy.

Whatever the level of threat, becoming more agile and using data to make better and quicker decisions will help you to survive in the here and now, or at least prepare yourself effectively for the future.

Sources:

  1. https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/the-drumbeat-of-digital-how-winning-teams-play
  2. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-at-the-speed-of-digital
  3. https://www.strategyand.pwc.com/gx/en/insights/industry4-0.html
  4. https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/why-digital-strategies-fail
  5. https://www.strategyand.pwc.com/us/en/reports/2020/six-dimensions-of-the-agile-enterprise.html
  6. https://www.bcg.com/en-gb/publications/2017/digital-transformation-transformation-data-driven-transformation.aspx

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