Adapting to Technological Disruption

Five principles that can help business leaders keep up with rapid change. An excerpt from—'No Ordinary Disruption: The Four Global Forces Breaking All the Trends'

Founding Fuel

[Image by Gerd Altmann under Creative Commons]

Companies are increasingly finding that their era of dominance is more like the career of a professional athlete than the tenure of a distinguished college professor—it lasts a few years rather than a few decades.

While there is no technology silver bullet that is effective across different sectors, functions, and markets, we find that business leaders who adhere to five principles stand the best chance of staying on top and reinventing themselves to keep up with the "new normal."

Make the Most of Your Digital Capital

Many companies are starting to awaken to the important role their currently unstructured data can play in sharpening existing processes and future business strategies. Everywhere we look, companies are putting data to use—driving market share, reducing costs, raising productivity, and improving products and services. Retailers are using big data to optimize prices dynamically, forecast demand, generate recommendations, and improve stock management. Manufacturers are using big data to create bespoke products that better serve customer needs and to optimize their supply chains. At Alibaba, China’s largest online merchant, the live data room resembles NASA mission control. Data-as-service start-ups are booming, and giants such as IBM, Microsoft, Oracle, and SAP have spent billions of dollars in the past several years snapping up companies that develop software for advanced data analytics.

In fact, intangible digital assets—such as behavioral data on consumers and tracking data from logistics—can be the seeds of entirely new products and services. The disruption in taxi services is one example. Uber uses algorithms to determine "surge" prices in times of peak demand. Lyft, another on-demand ride-sharing start-up, employs a "happy hour" pricing model to lower rates in times of soft demand. Health care is another example of a sector where the marriage of data, analytical models, and decision-support tools—all key components of digital capital—can create immense economic value, improve customer experience, and create difficult-to-replicate capabilities. Some five million Americans suffer from congestive heart failure, which is treatable with drug therapy or implantable devices. Medtronic has built an industry first, CareLink Express Service, a remote heart-monitoring network that connects implanted cardiac monitoring devices to sites where physicians can remotely view and interpret data, improving the quality and efficiency of patient care in the process. During the pilot phase of the program, patient wait times fell sharply, to less than fifteen minutes. "This kind of data is the currency of the future," notes Ken Riff, vice president of strategy and patient data management at Medtronic.

Look to Exploit Lower Marginal Costs of Digital

Digitization significantly reduces the costs associated with the access, discovery, and distribution of goods and services. More efficient distribution and lower barriers to entry have spurred more individuals, entrepreneurs, and businesses to participate in the digital marketplace and experiment with new business models. Digitization has drastically lowered geographic barriers as well, fueling the growth of micro-multinationals, microwork, and micro supply-chain companies.

Kiva, the world's largest online platform for peer-to-peer microlending, has facilitated loans worth more than $630 million, mostly in the emerging world. Kickstarter, a crowd-funding platform that connects entrepreneurs to individuals interested in funding creative projects, has facilitated pledges of more than $1.4 billion to fund 70,000 creative projects since 2009. Small or individual registered investment advisors are the fastest-growing segment of the investment advisory business in the United States; they purchase turnkey back-end systems from companies like Fidelity and Charles Schwab to get all the capabilities they need in order to provide direct advice to consumers.

In markets such as search, e-commerce, social media, and the sharing economy, the low marginal costs of digital infrastructure allow upstarts to build business models with near-limitless scale. WhatsApp, the mobile messaging platform that Facebook recently snapped up for $19 billion, reached 500 million monthly active users within five years of its launch. Snapchat surpassed the photo-sharing activity on both Facebook and Instagram with 400 million users only two years after its foundation.55 Sharing economy start-ups are growing at breathtaking speed. In 2013, some 450,000 active users were launching the Uber app every week, and more than a million Lyft users had requested a ride with the tap of a button.

Traditional players have also benefited from changes in marginal cost economics to enter new markets, grow rapidly, or optimize processes and cost structures. French telecom operator Free Mobile reinvented the “mobile attacker model” by exploiting a large and active digital community of brand fans and advocates as its core asset. Free Mobile signed up more than 2.6 million new subscribers in less than three months in 2012 and captured 13 percent market share in one year with no above-the-line budget. Luxury retailer Burberry is synonymous with best-in-class multichannel customer experience; its flagship store at 121 Regent Street in London boasts the world’s tallest retail screen, real-life digital feeds, and RFID chips that are sewn into Burberry products. These tiny chips trigger bespoke content in front of RFID-enabled mirrors.  Nordstrom, the luxury department store, first exploited the marginal cost advantages of digital for internal purposes, to develop shipping and inventory-management facilities. The company then turned its digital investments outward, building a strong e-commerce site, mobile-shopping apps, kiosks, and capabilities for managing customer relationships across channels.

Find New Ways to Monetize Consumer Surplus

There’s an interesting and perhaps counterintuitive implication to the rise of big data and increasingly cheap digital business tools. In theory, both trends should be immense boons to the companies that can afford to gather, maintain, and use data to their advantage. Consumers, however, remain king and queen in our age of accelerating technological change. Consumers capture as much as two-thirds of the value created by new Internet offerings in what is known as consumer surplus—lower costs, better products, and improved quality of life. The challenge for companies is how to get consumers to pay for all of the great new stuff—video, content, games, storage, messaging, convenience—being made available to them.

So far, only a few monetization models have proven effective at shifting value back to companies. One is advertising revenue, which has fueled the highly profitable growth of tech giants such as Facebook and Google. The advertising revenue model will remain viable, but users' expectations surrounding the ability to target, measure, and analyze ads effectively will continue to rise.

Direct payments and subscriptions reflect an increasing ability to charge for online content. Under this model, the use of "freemium" pricing strategies—offering no-fee basic services and charging for enhanced features such as the ability to avoid advertising, virtual goods in games, or a higher level of service and access to valuable features—is increasingly common. Examples range from Zynga and Spotify to LinkedIn and Apple. Joining LinkedIn is free, for example. Upgrading to premium membership—monthly prices start at $59.99 per month for the Business Plus account—affords the user greater insight into who has been looking at his or her profile, the ability to send more messages to potential leads, and the use of more advanced search filters.

A third model is monetization of big data, either through innovative business-to-business offerings (for example, crowd-sourcing business intelligence or outsourced data science services) or through developing more relevant products, services, or content for which consumers are willing to pay. LinkedIn, for example, makes 20 percent of its revenue from subscriptions, 30 percent from marketing, and 50 percent from talent solutions, a core part of which is selling targeted talent intelligence and tools to recruiters.

You will have to keep experimenting in order to capture more consumer surplus for your business. Turning traditional transaction-based e-commerce into subscription models is one increasingly popular way. In an effort to lock in consumer loyalty and repeat business, a host of companies have created offerings that put the relationship on autopilot. In retail, for instance, Glossybox, based in Berlin, Germany, has already shipped over four million boxes of new beauty products to Internet subscribers, many of whom pay a $21 monthly fee for five surprise luxury items. Companies like Dollar Shaving Club and Harry's, which ship razor blades and cartridges to customers each month for a fixed price, are challenging long-standing incumbents like Gillette. Graze, a UK-based subscription service for weekly personalized healthy snack boxes, nearly doubled its revenues in 2013, to £40.2 million ($64.1 million). In media, experimentation with digital content monetization models is commonplace. Creating digital paid subscriptions as well as bundling digital and print subscriptions has helped the New York Times mitigate declines in advertising and print circulation. CEO Mark Thompson has dubbed the adoption of an aggressive paywall "the most important and successful business decision in years." The Times boasts more than 875,000 digital subscribers, and circulation revenues now surpass advertising revenues. Piano Media, a start-up in Slovakia, created a paywall system that encompassed most leading media in that country. In its original revenue model, the company split subscription revenue with the original site through which the user joined (30 percent) and other media sites based on the time users spent on each site. Piano drove subscriptions and proved the concept in a five-million-strong, linguistically closed market, before moving onto other Central European markets in 2012. In August 2014, Piano extended its reach by acquiring Press+, a US-based pioneer of micropayments and paywalls that is nearly nine times Piano’s size in revenues.

Don't Wait for the Dust to Settle

The instinct, in the face of rapid technological churn, can be to wait for the dust to settle before placing your bets on a new technology. But time is the enemy. Today's technology could be outdated tomorrow, and a seemingly irrelevant acquisition or strategic move may wind up shaking up the industry. Figuring out which of the dozen types of 3-D printing technologies will become standard is a time-consuming effort with a low likelihood of success. Most companies struggle to make such efforts an integral part of their business-as-usual processes.

For many established companies, placing big bets on early technologies is simply not an option due to strictly defined risk appetite, high hurdles for new investments, and legacy IT systems. In the auto insurance industry, for instance, many established players continue to limit investments in telematics and behavioral data to small-scale pilot programs, while they nervously watch new nimble attackers enter the space. Embracing innovation could potentially redefine the way companies monitor customers’ actions—and hence set prices and assess risk. Companies in the beauty business have also been caught off guard by technology. Mink, a 3-D printer that allows customers to "print" customized makeup from the comfort of home, threatens to challenge the healthy margin of incumbents once it launches at its target retail price of $200 in 2015.

Tech giants have stood out as an unsurprising exception to the rule, using their deep pockets and eagle eyes for the latest innovations to place large bets on the next transformative technologies. Google acquired Android in 2005 when the mobile Internet was in its infancy. The following year, when online video advertising was in its infancy, it paid $1.6 billion for YouTube. Both proved to be masterstrokes, defying the prevailing conventional wisdom. Google cofounder Larry Page gives a sense of the nervousness that thinking in advance of the crowd can engender. Talking about the decision to buy Android, he said, "I felt sort of bad and sort of guilty. Why am I spending time on this? Why aren’t I spending time on, you know, search or advertising or something that was more core to our business? But it turned out to be a pretty important thing to do."

Large companies in other sectors have realized that establishing symbiotic relationships with vibrant tech start-ups can be an increasingly effective way to place technology bets. Doing so minimizes risk and disruption to the core business, while potentially providing companies with the option to take ownership of or deploy promising new products and services. Companies do so by embedding accelerators and innovation labs, which provide supportive environments, mentoring, equipment, and funding to promising entrepreneurs, in their existing structures. In 2012, General Electric launched GE Garages, a lab incubator concept focused on reinspiring innovation in advanced manufacturing. GE Garages sets up workshops in the United States to provide start-ups with access to equipment, such as 3-D printers, computerized numerical control machines, and laser cutters, and to give them access to expert advice and potential partners. In 2014, GE took the concept global; the most recent GE Garage established is in Lagos, Nigeria. In 2013, Allianz launched its first Digital Accelerator, cosponsored by Google, which focuses on how big data can help drive the development of new insurance and finance business models, in Munich.

Think Technology for Your Talent, Organization, and Investments

Some companies have successfully institutionalized the technology mind-set by appointing a chief digital officer and elevating the role throughout the organization. In 2008, Sona Chawla joined Walgreens, the large US pharmacy and retail chain, from Dell as senior vice president of e-commerce. A couple years later, she was promoted to president of e-commerce, and in 2013 she became the president of digital and chief marketing officer, reporting directly to the CEO. Under Chawla, Walgreens acquired drugstore.com in 2011 and developed one of the most popular US mobile health apps, which allows customers to refill prescriptions by scanning bar codes and set personal medication reminders. Today, more than 40 percent of the chain's online refill requests come from the app, and multichannel customers spend 3.5 times more than brick-and-mortar customers.

Other companies have used the "acqui-hire" approach—buying a start-up in order to acquire the team that runs it—or established partnerships to catch up on promising trends and accelerate access to intellectual property, talent, and technology. Yahoo laid out $1 billion for Tumblr in part to bring wunderkind founder David Karp into the fold. In May 2014, Walmart acquired Silicon Valley–based ad software company Adchemy for $300 million and incorporated Adchemy's sixty-person team into @Walmart Labs, the company's in-house tech shop. In 2013, Sephora, the cosmetics retailer with 1,300 stores in twenty-seven countries, acquired Scentsa, a specialist in digital technologies, to improve the in-store shopping experience and keep Scentsa's technology out of the reach of competitors.

German media conglomerate Axel Springer has embraced technology and digitization in its investment approach. In 2014, it sold off its regional newspapers along with its women’s and TV magazines, then invested heavily in three digital pillars: paid content, digital advertising, and online classifieds. It also launched the Berlin-based Axel Springer Plug and Play Accelerator. In 2013, the company started a joint venture with private equity firm General Atlantic, dedicated to digital classifieds. An in-house VC outfit, Axel Springer Ventures, has investments in start-ups, such as price comparison sites and loyalty shopping apps, and in a leading early stage investment fund.

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Excerpted from No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika, and Jonathan Woetzel. Available from PublicAffairs, a member of The Perseus Books Group. Copyright © 2015.

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