…Or why in business we need a more sophisticated approach to appreciating the impact of digital technologies
When we think about the impact of digital technologies on the modern business environment there’s a prevailing narrative now around disruptive new market entrants, and accelerating and exponential change. This is often expressed in talk of the ‘Uberisation’ of entire industries, or catchy soundbiteslike: ‘the pace of change has never been this fast, yet it will never be this slow again’. Or demonstrated with graphs like Nicholas Felton’s for the New York Times that shows how technology consumption is spreading faster than ever (the telephone took decades to reach a penetration of 50% of U.S households yet the mobile phone took less than five years). Or supported by studies such as that conducted by Professor Richard Foster at Yale University that showed that the average lifespan of a company in the S&P 500 index has decreased from 61 years in 1958 to just 18 years now (although the detail is arguably more nuanced). Yet the reality is perhaps not as clear cut as this picture suggests.
The Myths Around Disruption
Given all the column inches and social media mentions dedicated to disruption you’d be forgiven for thinking that it was all around us. Yet the latest IBM Global C-suite Study (based on research with more than 12,500 CxOs worldwide, including 2,000+ CEOs) demonstrated a more refined picture of the reality of disruption but also more specifically where the C-Suite now see as its source.
To begin with, disruption is far from ubiquitous. Over a third of executives (36%) reported minimal or no disruption in their sector, and only just over a quarter (27%) reported that they were experiencing significant disruption. In a previous iteration of the survey in 2015, a majority of executives reported that they were expecting significant disruption from new market entrants outside their sector but in the latest survey only 23 percent of respondents reported that this was the case and 72 percent said that it was industry incumbents that were leading the disruption. Whilst the impact of new market entrants should never be under-estimated (I certainly wouldn’t want to be a CEO when Amazon entered my market), it’s unhelpful to consider either that disruption is everywhere or that it is solely the domain of innovative startups.
The Nuance of Change
It’s true, I think, that many things around us are changing quite profoundly, and faster than ever before. But not everything changes. Narratives about accelerating change are far from new but it’s lazy thinking to think that this applies to all contexts. More than this, it can also be dangerous if this then causes us to be distracted or overly tactical, or to pursue shiny technologies with questionable value. As Jeff Bezos once said:
“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time…”
Bezos (of-course) talks about how fundamental customer needs like access to a great product range, good value, cheap prices, and fast delivery remain constant. Fundamental needs change slowly, if at all. So that affords the opportunity to invest energy and focus in areas that you know will pay dividends over the long-term. Essential elements like these should be the guiding North Star for any business. Yet the way in which we may deliver to these fundamental needs may indeed be susceptible to swift change.
So in order to make smarter decisions in businesses about how we respond to this environment we need to articulate a more nuanced understanding. Here’s a few thought starters from me on the specific dynamics that actually havechanged and are changing quickly and profoundly:
Capability Access:- the democratisation and widespread availability of new and potentially transformational enterprise services and means that even the smallest startup now has access to scaled capability that was once only the domain of large, well-funded businesses. Barriers to entry have been vastly reduced. For example, with the right approach any business regardless of scale can access some of the best digital infrastructure technology, analytics tools and open-source machine learning capability currently available.
Access to knowledge and expertise:- the democratisation of information has fundamentally changed the value dynamic. The value of specialist expertise has not diminished but when we can find the answer to pretty much any question on Google, and harness internal and external expertise more easily than ever (andeven access some of the best teaching online for free), advantage shifts from being focused on the stocks of knowledge that we have built up in the business over time to being more about the flow of ideas and knowledge, how we apply it, and what we choose to do with it.
Data:- an elemental part of this shift in the information dynamic is of-course the ability to access, filter and utilise the wealth of data that is now being continually generated. This is clearly not new news but businesses need to get better at extracting value from data by structuring good quality data, interpreting patterns and meaning, and originating processes that can execute against actionable insights quickly. We’ve yet to scratch the surface of how machine learning will take this to completely different level.
Networked value and connectivity:- with the explosion in the connection of things and people, network dynamics have change some fundamentals of how we should think about value creation. This is writ large in a diverse set of impacts from the development of platform business models and ecosystems which have changed competitive dynamics considerably in some sectors, a radical shift in the flow of data through APIs, the operational efficiency gains that can be derived from connected machines, the rapidity in which ideas and content can spread through networks, the eroding of traditional barriers like geographical borders and market boundaries, the ease with which collaboration can happen.
Lowering transactional costs:- digital has completely changed the cost dynamic in many areas of value chains, reducing key elements of some chains to zero marginal cost and enabling dramatic changes in efficiency and new entrants to compete at relative scale from a small base. Growing automation will continue to generate opportunity and impact here.
Scaling dynamics:- digital networks have brought with them a dramatic shift in scalability that gives individual people access to a global market, small teams the ability to originate and scale transformational ideas, and businesses with finite resources to have disproportionate impact. Pre-digital for example, it would potentially take decades for a business to expand to a global scale yet in a little over six years Netflix was able to complete an international expansion that has taken them into no less than 190 countries worldwide.
Customer expectation:- whilst some areas of consumer behaviour are changing rapidly, more fundamental needs are arguably not. But customer expectation is changing fast and changing all the time. Services like Lemonade Insurance, Monzo, Revolut, Netflix, Uber, Amazon set a new bar for customer experience that raises customer expectation (not only in category but more broadly across sectors) for how easy to use and convenient services should really be. This is a significant challenge for businesses of all types but also an opportunity. Jeff Bezos (in his 2018 annual letter to shareholders) said:
“One thing I love about customers is that they are divinely discontent. Their expectations are never static — they go up. It’s human nature.”
Bezos describes how the cycle of improvement required to serve customer’s appetite for better solutions is happening faster than ever, but the phrase ‘divinely discontent’ demonstrates how the real opportunity is to use continually rising customer expectation to challenge your teams to do it better or do it differently.
Accelerating complexity:- in-spite of the promise of technology to simplify, the reality is that it also creates growing inter-dependencies and problems with competing ecosystems that results in poor inter-operability and unnecessary friction. Whilst I’d love to believe that this is a temporary situation, my feeling is that this increasing complexity will remain a reality for years to come.
So if that’s what is changing rapidly, how should businesses respond?
Responding to this More Nuanced Picture of Change
It’s clear that organisations need to think smarter about potential sources of disruption but also how they can shape their organisations to be more adept at responding to it when it happens or even before it happens. Increasingly, I’m finding that it’s useful to think about the impact of change more in terms of heightened unpredictability. And the ability of businesses to re-orient themselves to becoming far better at rapid adaptation.
If you can’t easily predict how market, competitive and consumer dynamics will change in a world where some of them may change quickly and at scale, then the organisation needs to always be exploring, learning and inventing. This means evolving structures, strategies, processes and culture towards enabling continual reinvention of value. The reality however, is that most businesses are still structured and organised for a very different world.
It was notable that that IBM C-Suite study that I mentioned earlier found that the most successful businesses that were part of the study were those that weren’t waiting for disruption to hit before making change happen:
‘The organizations that are prospering aren’t lying in wait to time the next inflection point — the moment when a new technology, business model or means of production really takes off. Remaking the enterprise, they recognize, isn’t a matter of timing but of continuity. What’s required, now more than ever, is the fortitude for perpetual reinvention. It’s a matter of seeking and championing change even when the status quo happens to be working quite well.’
Cluster analysis of the research outputs led IBM to categorise three main types of organisation according to where they were on their journey towards reinvention:
The Reinventors: 27% of the total, these are the standout businesses that are successfully re-engineering their businesses to lead the way in innovation and disruption and outperforming their peers in revenue growth and profitability
The Practitioners: 37% of the total, this represented those businesses with big ambitions (notably to take on more risk or to launch new business models) but yet to develop the real capability to bring those ambitions to life
The Aspirationals: comprising 36% of the total, these organisations still have some way to go in their digital journey and in changing their companies to be able to move rapidly to adapt or capitalise on new opportunities
Looking at those organisations that are more advanced on the journey to reinvention and the incumbents that are successfully leading disruption there were some consistent attributes. IBM classify a range of factors that separate the ‘reinventors’ from the ‘practitioners’ and the ‘aspirationals’, most notably:
- Continuous adaptation and the ability to evolve rapidly alongside a well-defined strategy to manage disruption
- Strong alignment between IT and business strategy in order to deliver the technology infrastructure and foundation to optimise business processes and support new strategies
- Redirection of resources towards deriving new scaled value from ecosystems and networks of partners, a willingness to explore opportunities for co-creation with partners and customers
- An ability to derive exceptional value from data and analytics to inform business strategy, to support prototyping and fast feedback loops, to successfully iterate innovative products and services, and to build compelling customer experiences
- Investment in and attention to developing people and leadership skills, structures and culture to support and empower greater experimentation and adaptiveness
These ‘reinventors’ are demonstrating the way in which incumbent organisations can not only learn but apply that learning to adapt capabilities, structures and ways of working to the new environment.
The really big change here is what John Hagel and John Seely Brown at Deloitte describe as the shift from ‘scalable efficiency’ to ‘scalable learning’. As institutions have become more adept at leveraging the benefits of scale they have structured around consistency, stability and predictability which has forced a trade-off between efficiency and the organisation’s ability to learn. When key dynamics such as those listed above change rapidly, the business struggles to adapt.
I’m curious to know what I’ve missed in my list so feedback and contributions are more than welcome.
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