One of the things I enjoy as an author is that I get to talk to a lot of senior executives about their business. As you can imagine, I naturally steer the conversation to their digital transformation strategy.
Sometimes, we get into great conversations about what the cutting edge is and where it is going. Other times, my jaw drops to the floor in exasperation. For example, I had a recent conversation with an executive that I have a great respect for, but who told me: “Well, we do not know where digital transformation is heading. So, our plan is to wait until it is clear and then be a fast follower.”
Then came a second statement that caused my jaw, again, to hit the floor: “Yep, we are great at execution and we will respond to digital disruption with full force.”
My response is best summarized below:
Most business executives who do not comprehend the true nature of digital disruption have these assumptions:
This executive, who relishes a challenge, and I debated the validity of these three assumptions. In closing, I recommended that he take a close read of one of my favorite articles in the digital thought leadership space: “Gradually, Then Suddenly” by the Anand Sanwal, CEO of CB Insights. Much of what follows borrows from this piece and I thank Mr. Sanwal and his Team for their great work!
There are three trends that form the basis of my discussion with this executive:
I began by pointing out that the top five publicly traded companies (by market cap) had dramatically changed from 5 and 10 years ago and there had also been a pronounced swing towards technology companies (Apple, Alphabet, Microsoft, Amazon and Facebook) and away from traditional manufacturing, oil and banks (Exxon GE, Citi, PetroChina and Total).
Not long ago, one generation created the invention and the subsequent generations adopted it. The telephone and the auto took well over 60 years to reach an 80% adoption (by households) in the U.S. Meanwhile, air conditioning took about 50 years and electricity took about 35 years.
In contrast, the cell phone took about 15 years and the Internet reached about 60% adoption in only 10 years. Furthermore, the adoption of disruptive technology has exploded. For example, the iPod sold about 600,000 units during its first full year in 2002, the iPhone sold about 1 million units per quarter shortly after its introduction in 2008 and the iPad, introduced in 2010, sold 50 million units in less than three months.
Meanwhile, disruptive user platforms have experienced incredible spikes in user growth following their launch:
The takeaway is that, once a digital business gets it right, there is no oxygen left in the room for anyone else.
Clayton Christenson at Harvard coined the term “Disruptive Innovation” in the early 1990’s to describe how a new startup may initially target less profitable, underserved market segments. The established players are often amused by the concept. But, over time, the startup improves and begins to move upscale with a better product, superior user experience and lower price than the established competitors. At some point, they begin to target the established competitors’ customers. By then, it is often too late for the established companies. They are trapped by legacy systems, hierarchical management structure, high fixed costs, long development cycles, limited flexibility and, most important, the absence of a culture of innovation. A great example is Borders laughing at tiny Cadabra, who started out with the crazy idea of selling books online, who is now known as Amazon.
One (hopeful) assumption that executives have in sticking with a “fast follower” approach to their digital transformation strategy is that they think they know their neighborhood. Many of these executives have decades of experience in their industry and know all the players incredibly well. What they are missing, however, is the fact that ‘born digital’ companies will come at them from all sorts of unexpected directions.
For example, Amazon has entered the lending space:
The very mention of Amazon entering a business can create a tidal wave of bad news for the existing participants. Look at the impact on Walgreens’ stock price after a rumor (just a rumor) emerged that Amazon was entering the pharmacy business: The stock price plummeted from $76.95 to $70.87 in two days! And, this was without an actual announcement by Amazon.
Large companies, many of whom believe that their size and scale provide moats of protection from competition, are also now subject to this incredible disruption. Mercedes Benz has long considered BMW and Lexus as its competitors, but is now concerned about ‘born digital’ companies like Tesla, Uber and Google.
Walmart thought it’s competitors were Target and Costco, but is now engaged in a global brawl with Amazon and Alibaba.
Hertz used to dominant the car rental business (vis-à-vis Avis and Enterprise), but now must compete with Uber and Lyft.
The Digital Age has not been kind to Hertz. In June 2014, Hertz’s market cap was $10 billion. By mid-2018, it was $1.3 billion. Uber is now estimated to have a valuation about 50 times higher than Hertz.
BOTTOM LINE: The Speed of Disruption is Gradually, then Suddenly, Then Gone
This company suffered when Apple launched its iPhone, as it stock price dropped dramatically from $120 to $30 and then stabilized into a band around $60 for about two years. Was it out of the woods?
No, it wasn’t. In 5 months beginning in late 2010, the stock price fell from $60 to about $5.
This company, Blackberry, went from global leader to a shadow of its former self, even as the press continued to award it accolades. Their mistake? They thought Nokia and Motorola were their main competitors, so a “fast follow” strategy made sense.
Here’s another company: Their stock price, due to pressure from unexpected digital competitors, saw a drop from $30 to the low teens, only to settle in a trading band in the high teens for several years.
Then, in a five-month period, the stock price plummeted from $15 to $10 and began a slow and steady drop to zero as the company went bankrupt.
Still, this company, Blockbuster, did not consider Netflix or Redbox to be competition. Their mistake? They thought Hollywood Video and Movie Gallery were their main competitors, so a “fast follow” strategy made sense.
We already discussed Hertz, but look at their stock price during its battle with digital competitors. Their stock price fell from $120 to below $90 and appeared to stabilize around $70 for a couple of years. Then, the stock price was slammed to $30 and continued its slide to $10.
Their mistake? They thought Avis and Enterprise were their main competitors, so a “fast follow” strategy made sense.
ONE MORE THING: This Is Just Beginning
Please understand: These companies are highlighted, but they are not exceptions. In the last 15 years, 52% of the S&P 500 companies have disappeared. That’s over half!
If this is happening to the large players with size and scale to protect them, how does a small and medium size business (SMB) have a chance once the ‘born digital’ disruptors arrive? Smaller companies, without size or scale to buy them time, face the same challenge of digital disruption, but with far smaller margins of error. If a small company has a “fast follow” strategy towards digital transformation, then they are skating on very thin ice.
HERE’S WHY: The Structure of Disruption Has Changed
One reason is digital disruption has rapidly accelerated is that the cost of launching a new company has decreased by orders of magnitude. The Cloud, often provided for free to startups, eliminates the need for a data center along with the cost, staff and long planning horizons. Now, scale is achieved by turning a dial on an AWS, Google Cloud or Microsoft Azure dashboard. The gig economy enables new entrants to add people under short-term work contracts with specific skills for specific tasks. Large staffs and their associated costs become unnecessary, even as the Internet allows people to work at home. Incubators and accelerators provide a wide range of low-cost services and mentoring to startups. Finally, the Lean Startup Method provides a reliable blueprint to building a product and company. This new flexibility enables digital companies to easily and quickly enter new fields of play at low cost, maximum flexibility and, most important, without having to follow the old rules. Many of these ‘born digital’ companies fail, but the ones that succeed can rapidly scale up in a manner that blows away traditional competitors.
The result is that traditional R&D-driven product refinement, with long development cycles, corporate hierarchies, large-scale ownership of assets, large staffs and high overhead no longer cuts it.
And, this is especially true in an age with unexpected competitors emerging daily. Look at how Amazon is attacking everything a bank does (short of becoming a bank itself – so far).
PLEASE LISTEN: So, To The Fast Followers
Please stop and think about what you are doing. We began with a picture of Mike Tyson standing over a boxer he had punched to the ground. The fact is, even when Tyson’s punch was a half-inch away from this poor man’s head, the impact was well on its path and with a ton of momentum, that punch still did not hurt. But, once it landed, the fight was over. Quickly and beyond all doubt. Today, digital disruption works in the same way. It will not hurt until it arrives. Thus, it is “gradually, then suddenly, then you’re gone”.
The “fast follower” strategy simply does not work once the ‘born digital’ competition arrives and it will be even less effective as time goes on. Please think of your digital transformation strategy as something you must actively engage in. Companies and executives need to develop their digital transformation strategy from a proactive perspective that looks out, to the side and ahead, as a reactive response is a likely guarantee of disaster.