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.
Speaking at NACD was a highlight of my year, as the audience was forward-thinking, eager to learn, and willing to grapple with tough questions in order to reach good answers. The discussions after my talk were almost as much fun as the talk itself, and there was significant appetite for a reference sheet to some of the bigger ideas I’d outlined. I hope that the summary pulled together here will prove helpful, and I welcome remarks, insights, or questions about any of it!
Disruptive trends in technology, culture, and business are converging. That convergence is an opportunity for businesses that recognize how to proceed.
Code: Technology is cheaper, faster, and better than ever before.
From software toolkits to education outlets, cloud computing to open-source big-data structures, there have never been so many ways for a motivated player to exert so much leverage so rapidly. Competitive advantages and resources that once belonged exclusively to large companies are increasingly not just accessible but freely available. In many cases, these platforms even invert such advantages—meaning that individuals who are part of porous, open groups are able to deploy better solutions faster than corporate counterparts by leveraging their communities. And all at low to no cost.
President Obama’s first campaign for the White House is a prime example of this phenomenon: he hired data specialists who used a simple method to computationally test different versions of his website in order to see which ones were generating more donations. Using this approach, he exceeded his projections by an additional 4 million e-mail addresses, a click-through rate of 140 percent, and $75 million more than was expected.
Culture: Transparency, meritocracy, and a willingness to disrupt anything characterize the new technology (and business) marketplace.
The age of playing by the rules—any rules—has largely gone by the wayside. When it’s possible to conduct corporate inversion online in under 20 minutes using a digital toolkit provided by a foreign nation state, it’s clear the playing field has changed. This is exactly what Estonia’s new “E-Estonia” initiative—which grants corporations a type of citizenship supported by cryptographically backed authentication—has been accused of enabling.
The people developing new solutions and creating new technologies take for granted an entirely different set of social (and moral) norms, which have no respect for the way your business is currently structured.
Competition: An exploding black market and a global tipping point that will occur when the remaining two-thirds of the planet come online over the next five years herald an incipient tidal wave of strange new competitors.
If you think the Internet has been disruptive during the past 20 years, you haven’t seen anything yet. The motivations and expectations of people completely new to technology differ from those of people who have already internalized it. Much like the toddler who doesn’t know what to do with a computer mouse and thinks a computer screen is broken when he can’t swipe it, new users of innovative technologies will have different expectations for what your company should provide. When you mix in a booming black market and a surging cascade of disruptive technologies—everything from drones to 3-D printing to dial-your-own genomics—you have a strange new world indeed…and one coming at you very, very quickly.
ACTION ITEMS: There’s good news in all this. You can compete just as well—if not better—by recognizing that the game has changed and adapting to the new rules.
1) Experiment, experiment, experiment.
It’s faster, cheaper, and easier than ever before to invent, test, and iterate. It’s what your competitors (and they are legion) are doing—especially the outlier startups that you so fear will flip your market as Uber did the medallion cab industry’s. The good news? You can do exactly the same thing. Even better, once you do, you already have a supply chain, established market, and deep resources to drive these new industries ahead of smaller first-time players.
What to ask your senior management: How are you implementing more agile and iterative development methodologies, and why?
2) Systematize culture change.
Empower your employees to act on your behalf. Legitimize risk. Reward insight. While this strategy looks good on paper, it is nearly impossible to execute, especially in highly efficient, competitive, and well-established organizations. Do it anyway, and you will find yourself at the helm of one of the most powerful entities in today’s market: A company that effectively innovates as a matter of course and knows how to build businesses and deploy products accordingly.
What to ask your senior management: How are we empowering our employees, at every level, to change the way our company operates? What evidence are we measuring that indicates this strategy is working?
3) Risk everything.
All business is about risk. But many companies have lost sight of the fact that this means not just mitigating risk but also embracing it. The emergence of new technology is confronting every industry with massive shifts that entail plenty of risk in the most negative sense. But the opposite is equally true, and it’s only by seizing the opportunities this time of change represents that you’ll emerge victorious. And who knows…you might even make the world a better place while you’re doing it.
What to ask your senior management: If you had to increase revenue by 25 percent this quarter, what would you try? Why aren’t we trying that?
I live every day in the future, metabolizing the new technologies that are slipping over our event horizon and into daily life. It’s a scary place to be, but it’s also one that offers boundless hope. Times of change are enormous opportunities for advancement. Those of us who experiment voraciously, learn quickly, and adapt effectively will chart the course for how human commerce unfolds over the next two decades. Our way will become the “new normal” and possibly set standards that will shape lives for generations to come. It’s not a time without risk, but it’s also a chance to change the world. What more could you want?
Josh Klein advises, writes, and hacks systems. He wants to know what you think.
Jeffrey Immelt, CEO and chairman of GE, spoke at our recent NACD chapter event here in New England. Joining him on the panel were Cathy Minehan, the dean of the School of Management at Simmons College, and Suffolk Construction CEO John Fish. Immelt’s insights were informative, interesting, and actionable. Afterward, I found myself thinking how well his remarks align with NACD’s efforts to future-proof boardrooms around the world.
We’ve pursued this effort in a variety of ways, but none so directly as the NACD Directorship 2020 initiative. “2020,” as we at NACD have come to call it, focuses on arming directors with the knowledge and foresight that feeds success in a changing world. The initiative encourages boards to diversify backgrounds, perspectives, and experiences in ways that prepare their organizations with the leadership necessary to remain competitive in the midst of volatile geopolitical, technological, and environmental situations.
Immelt’s discussion with our chapter touched on many of these disruptive market forces, especially economics. The facts are clear: we live in a new normal, and things aren’t going to simply settle down. “The uncertainty is the state of affairs, and it’s just going to be there for a long time,” said Immelt.
So how can directors help guide their organizations through this perpetual uncertainty? Immelt recommends a focus on U.S. manufacturing, an area where he believes our country is currently more competitive than it has been in 30 years. He was also quite prescriptive about the need for boards and their organizations to address underemployment, calling that goal the “major social responsibility initiative of business.”
But perhaps one of the most pertinent points Immelt made was also the most provocative: “The thing that drives growth is small- and medium-size business. Everyone says they love them, and everyone does their best to kill them every day.”
I take that to heart as an NACD chapter president. NACD has many members from the Fortune 100, but we also count plenty of small- and mid-size organizations among our membership. Only by working together–not separately–can we effectively address all the disruptors we face as we lead our organizations into the next decade. NACD will continue to bring all our members together for collaborative and educational opportunities. Capitalism is ever changing, so we must adapt, evolve, and lead.