Directors and executives could be forgiven for feeling like digital transformation has materialized out of thin air to attack their business models and markets. For most sectors, “digital” has historically been confined to tactical efforts across websites, mobility, social media, and e-commerce. Digital efforts were important to marketing execution but certainly did not inform overall business model strategy, much less determine which companies won, lost, or failed to survive. And while everyone is familiar with the global Internet giants that have emerged over the past two decades to dominate markets and stock indices, until recently digital disruption had not yet penetrated beyond the traditional realms of media, content, and e-commerce.
The massive competitive challenges witnessed in these early domains have now arrived in every other sector. Billboards lining airport corridors proclaim the urgency for companies to digitally transform. Corporations are funding incubators, venture funds, and innovation programs, and are facing the task of shaping the future of work. Many consulting firms and agencies make claims to broader digital transformation expertise, regardless of their historic core capabilities.
It is easy for leaders to get lost amidst the clamor. What follows is an account of the past, present, and the possible future of digital business risks and strategy that could help your board discuss digital business model risk and winning strategies.
Tracing the Origins
Along with my co-author, I presented the foundations of digital transformation and the strategic and financial performance considerations in a previous article. To begin to grasp how digital transformation impacts value creation, and to build on the concepts outlined below, I suggest starting there. The basic competitive dynamics across all past and emerging digitization phases reinforce the business model risk that directors and executives should understand as digital disruption changes their sectors.
The graphic below describes the primary phases of digitization over the past two decades and the emerging waves.
Click the graph to enlarge in a new window.
A pattern emerges across the phases. First, a primary enabling technology emerges, targeting specific product and service domains within a selection of target sectors. As these products and services are digitized, leading companies within these target sectors bring to market entirely new business models based on the primary enabling technology of the phase. These companies bring new value propositions to market and rewrite the rules of competition in the sector. For example, Google reinvented advertising, Amazon.com reinvented retail, Uber and other ride-sharing companies are reinventing transportation, and Social Finance (SoFi) is reinventing loans. Existing companies in these target sectors that fail to evolve their business models lose market share or cease to exist, while new, dominant-phase leaders emerge.
This dynamic has been consistent across the first three digitization phases, resulting in massive disruption across the target sectors as well as a recalibration of the world’s most valuable companies list—despite the relatively small number of target sectors initially involved. Currently, the dominant digitization phase is driven by Internet of Things (IoT) and smart products technologies, with implications for all machines, all physical products and the companies that design, manufacture, sell, and operate them.
Artificial intelligence (AI) and machine learning technologies are also in broad, albeit early, deployment with implications for every sector of the economy, including forming the foundational elements of continued robotics and digitized biology and chemistry.
This is an admittedly simplified picture. Primary enabling technologies do not evolve in isolation from earlier phases, and the phases themselves do not end. For example, more and more content continues to be digitized (from newspapers to videos to augmented or virtual reality), while the scope of digital services continues to expand (from basic e-commerce to mobile payments to blockchains) and AI is reinventing all previous primary enabling technologies. Furthermore, leadership in one stage of digitization does not guarantee continued leadership as the cycle continues. Yahoo! was among the major winners of the original content digitization phase but failed to evolve, while Google, which emerged during the same phase, has consistently grown in line with emerging technologies. Meanwhile, General Electric Co. and General Motors Co. are bucking the trend of established companies falling to digital upstarts to assume leadership in the industrial IoT and automotive markets.
While it is helpful to understand the enabling digital technologies, it is primarily beneficial for directors at companies of all types to seek to understand the implications of these technologies on the products, industries, and business models of their companies, and ensure that their CEOs have a sound strategy to address these considerations.
Every sector is now in the crosshairs of digitization. Many business leaders not operating in the initial target industries, however, have never been trained on how to think about digital transformation strategically. So long as a company was not in a target sector of digitization, it was sufficient to deploy point solutions related to the primary enabling technology of each phase, such as websites, mobile applications, e-commerce offerings, and a social media presence—and, indeed, it has always been important for companies to keep up with these tactics. Directors and the C-suite should understand, however, that this approach is not sufficient when it is their own sectors that are the primary focus of digitization.
Ryan McManus is senior vice president of partnerships and corporate development for EVRYTHNG, the IoT Smart Products platform company and serves on the board of Nortech Systems, the advisory board of Carlabs AI, and two advisory boards with the Aspen Institute. He is the founder of Accenture’s Digital Business Strategy and Transformation practice, has served an advisor to Fortune 100 companies, and is the author of numerous articles on digital transformation and corporate strategy. Ryan earned his MBA from the University of Chicago Booth School of Business.
Want to hear more from Ryan? Attend his session at the 2017 Global Board Leaders’ Summit. Learn more and register here.
The rapid pace of technological advancements is causing tectonic shifts in the business risk landscape. Social media and artificial intelligence (AI) in particular are causing directors to reconsider how they think and talk about risk. Consequently, these topics were the focus of the first part of a roundtable discussion on the next generation of risk hosted by EisnerAmper LLP and the National Association of Corporate Directors (NACD) in New York last week.
There is an abundance of examples of companies that sustained severe reputational damage after being caught in the center of a social media storm. Most recently, credit reporting company Equifax made headlines after the company disclosed that it was the subject of a major data breach that compromised the information of roughly half of the U.S. population. The company’s offering of free credit monitoring to affected customers only made matters worse: several print and digital news outlets, including The New York Times, analyzed the terms of the offer, which suggested that by signing up for the service, a person relinquished his or her right to take legal action against Equifax. While the company later changed the legal language in another effort to assuage public concern, reestablishing its trustworthiness may be more of an uphill battle.
“Some of these things would have always been in the news, but the amount of time and the quickness with which news reaches an audience is unbelievable,” EisnerAmper Audit Partner Steven Kreit observed. “Boards need to make sure there’s a social media strategy throughout the company. Boards need to ask management what it has planned for and make sure they can react to those issues as they come up. It’s also important to have policies around social media. What is the CEO allowed to say? Are they allowed to have personal accounts and use that to disseminate company information?”
When attendees were asked if they knew their company’s social media policy backwards and forwards, few indicated that they did—but there was some debate as to how necessary this is. “I don’t think it’s appropriate for a board member to know the details of what the policy is,” one director opined. “What the board needs to know is that there’s a policy and that employees know what they can and cannot say about the company.”
Kreit agreed. “You don’t want to get too far into the weeds,” he said, “but a CEO may react to something in the middle of the night and that response may harm the company. And board members need to make sure the company doesn’t get hurt.”
While most of the discussion focused on preparing for the worst, one attendee observed that a company response plan that is effectively used to respond to negative feedback on social media can not only curb a damaging situation, but help to restore trust in the company.
Discussion then turned to AI. Here, some companies are ahead of the curve in applying technology that has the power to parse through massive amounts of data to make a determination about something. Take for example, IBM’s Watson, the supercomputer that famously competed on the game show Jeopardy!, facial recognition software and self-driving cars. Here, the risk is that AI is advancing so rapidly as a disruptor across nearly every industry. If a company isn’t paying attention now, the competition will leave it in the dust later. But AI is a broad subject area and identifying the elements that are most relevant to a board agenda—namely the risks—can initially seem daunting.
“These are conversations I rarely hear discussed around the boardroom table,” Kreit remarked. “And these are risks that keep changing.”
“An interesting exercise is to look at risk factors in public disclosures,” one attendee said. “We look at competitors and it’s easy to see what risks they are identifying in the same industry.”
“In the conversations I’ve had, it isn’t so much about whether the machine will do its own thing and crush humans as much as asking what fundamental technology are we not using to help us be more competitive and customer-focused,” one attendee offered. “The other thing is, technologists sometimes rely too much on technology. At some point, a human being has to put subjectivity in the mix to make sure the automated methodology you employed doesn’t come back and bite you. This conversation comes through the CISO [chief information security officer] on my board as well as the CTO [chief technology officer] together.” Another director remarked that these discussions take place on the audit committee level.
“It’s important to not think about technology and risk without it being an integral part of the strategy discussion,” another director piped in. “If it isn’t, I think it becomes an academic conversation and you’re walking ahead with one eye open and one eye closed.”
To this end, and in closing this portion of the roundtable, another attendee remarked on how board composition it critical in positioning the board to oversee this issue in the years ahead. “If you don’t have enough forward-looking people with experience from other industries, you’re doomed. Look at who you’re working with and have some sense of what you are [as an organization], what you want to be, and how you’re going to get there.”
Next week, the NACD Board Leaders’ Blog will feature roundtable discussion highlights that explore geopolitical and regulatory risks.
Back in January I reported on some of the innovative trends that I saw on my trip to the Consumer Electronics Show (CES). Nine months on, the evidence of those technologies’ impact is everywhere. I expect these disruptive innovations to be front and center this January, when the National Association of Corporate Directors (NACD) will host a small group of our members for a directorship-centric tour of CES, along with an exploration of the implications for strategy development and risk oversight.
While January is still four months away, we have been talking about these changes across our education events all year, including at the forthcoming Global Board Leaders’ Summit.
Here are a few examples of the how these trends are manifesting.
Artificial intelligence (AI) technology continues its march into the mainstream. Autonomous vehicles give us one window into how AI is fueling disruption and industry change. Self-driving cars have the potential to save thousands of lives. That mission is part of what inspired Sebastian Thrun to found X, Google’s semi-secret moonshot laboratory, to focus on the technology. Self-driving cars’ potential to disintermediate is largely unanticipated by most business outside of the automotive manufacturing and services industry.
At our August Master Class, Travelocity.com founder Terry B. Jones laid out a landscape of compelling examples of disruptions that will be caused by self-driving vehicles. “People say, well, the technology’s going to disrupt insurance and surely it will,” Jones said. “But it’s also going to disrupt hospitals. The number one reason people go to the emergency room is car wrecks. We’re not going to have car wrecks anymore. It’s going to disrupt hotels. You’ll just stay in the car and sleep while it drives. It’s going to disrupt police—we won’t need traffic tickets.”
Extend Jones’ last point about a decrease in traffic tickets to red light cameras and then consider that in 2015, municipalities collected more than $6 billion in revenue from speeding tickets alone. Self-driving cars could bankrupt whole cities that do not have the foresight to create new revenue sources.
The increasing level of cooperation between companies across verticals is changing the very nature of industries themselves. The acquisition of Whole Foods Market by Amazon.com has fueled anxiety across industries and driven once unlikely bedfellows to team up, spawning, among other things, a new partnership between Wal-Mart and Google. Part of the urgency behind the Google–Wal-Mart partnership is the dual realization that voice-enabled shopping is the future of retail, and that Amazon now has a significant advantage over both companies in that space. Amazon is forecast to have 70 percent of the voice-enabled speaker market this year.
As noted at CES, the increasing amount of technology in vehicles has effectively transformed cars into giant computer on wheels, forcing companies from Ford to Honda Motor Co. into an identity crisis. When considering the question, “Are we a technology or a car company,” increasingly the answer is “yes.”
At our Master Class in August, Bonny Simi, a director of Red Lion Hotels and the head of ventures for Jet Blue, explained how the airline missed an early opportunity to partner with and invest in a small car ridesharing startup that eight years later has a valuation nearly ten times that of the airline’s market cap. “At the time when the startup approached us, we didn’t think it was relevant to our business because we saw ourselves as an airline,” Simi noted. “We’ve realized we need to think of ourselves as a travel company.”
The next generation of disruption is about more than technology. Don’t underestimate social and demographic shifts in the market, and the power of changing attitudes and norms to create new competition. Younger consumers have different ideas when it comes to everything from privacy to shopping. The rise of companies like Lyft and Airbnb was enabled by mobile technology, but it was also made possible by a generation of younger people who didn’t hold traditional, sometimes negative attitudes about sharing a home, a car, or even a dress, with a stranger.
At last year’s spring Master Class, Peter H. Coors, former chair of the Molson Coors Brewing Co. and chair of MillerCoors, talked about how millennials’ distaste for big brands and an embrace of the small and bespoke was driving sales away from MillerCoors towards smaller, local craft beers. Younger consumers’ preference of supporting local and small businesses presents a threat to larger food and beverage producers.
Younger people are also turning to alternative payment methods. This year at another Master Class session, Jones shared a story about his 20-something, newly married daughter. Since she and her husband had not yet merged their finances, they were sharing money via online payment platforms. When they went into their local branch of a Fortune 500 bank to get a loan, “the loan officer demanded to know who this guy Venmo was that they had been sending so much money to.” The message, especially to more established companies, is that “the way you’ve always done it” isn’t going to win the day moving forward. Don’t overestimate the long-term viability of legacy products and systems.
The complexity of risk will continue to grow exponentially. Acclaimed technology guru Shelly Palmer focused on this concept heavily both at CES and when he addressed our members at the NACD Technology Symposium in Silicon Valley this past July. “The velocity of data is increasing and will always increase, then the value of that data is going to decrease because there’s just too much of it,” Palmer said. “You’re going to have to sort this out in some way.”
To illustrate his point, Palmer then showed a pond half full of lily pads. He asked the audience the following: if the growth doubled every day until day 30, what day was shown on the slide with the pond half full? The answer was day 29. “Human beings do not think exponentially,” Palmer pointed out. “We think in a linear way. The question is, when is it day 29 for any of the things you’re working on? That’s the speed with which technology is coming at you… You don’t need to manage change. You need to be in a mode of continuous improvement and adaptation.”
When you consider the risk side of so much interconnected data, it raises the stakes for everything from privacy to cyber-risk oversight. Companies that don’t have their eye firmly on the ball face consequences with increasingly higher-stakes implications for their business.
Questions to Ask Management
Directors would be wise to begin pressing their management team for briefings on their strategic plans. Below are several questions you could pose at your next board meeting.
Have we considered how these forces can provide a strategic advantage to us, either by creating new revenue streams or new efficiencies?
Have we considered the risks to our business, including how we could be disintermediated or how a particular disruptive force might create competition including from unlikely or unforeseen sources?
How are we thinking about innovation? Are we good at fostering it in house or should we look to outside partnerships to supercharge our efficiencies, products, and capabilities?
What are we doing internally, including review of compensation and incentive plans, to ensure new ideas get an open and fair hearing and aren’t killed off internally by managers who may not want to upset the status quo?
Are you ready to attend NACD’s CES Experience in January? Register now to be considered for a place in this exclusive tour that will highlight exciting disruptive innovations.