How companies can avoid the pains of digital disruption
From 1768 to the early 1990s, one company dominated the world’s market for encyclopedic information. For over 200 years, it had mastered the esoteric practice of selling libraries of information through a unique blend of traveling sales people and consumer distribution channels.
Suddenly, everything changed for Encyclopedia Britannica, as Philip Evans diagrammed in a seminal Harvard Business Review article in 1997. With the advent of the information age, what took Encyclopedia Britannica nearly two centuries to build up was undone by computer-oriented businesses in just a few years.
Blockbuster, Kodak and Borders have similar stories; these companies have taught us that in the digital era, with competition democratized across a widening landscape, managers and businesses are threatened by the very activities they’re most invested to accomplish. In Britannica’s case, this meant continuing to sell high-priced physical books with CD-ROMs as an add-on, rather than the other way around. For Borders, one of its perilous moves in entering the digital economy was contracting digital commerce to its eventual disruptor, Amazon (AMZN). And as responsive as Tower Records may have been to change, retail stores and physical supply chains became a burden when its core product turns into bits. In many cases, there’s simply no fighting the inevitable disruption at play in one’s industry, but how quickly you respond and the characteristics of that response are critical.
For many enterprises, it felt like the digital disruption of the 1990s had fully played out. Ecommerce sites were launched, supply chains were optimized, and information technology investments experienced a boom. But the first digital wave of the 1990s and 2000s merely brought digital interfaces and experiences to universes where similar, albeit analog, metaphors already existed. This is why the first technology company to explode was a web-version of a book catalog, and why news surged onto the Internet, scattering newspapers in its wake.
Fast-forward to 2014, and it’s becoming clearer that the transition to digital in news, media, and commerce was just the tip of the iceberg. It wasn’t until Internet ubiquity, location-aware smartphones, and a commoditization of underlying computing resources came together that our world was fully ripe for transformation.
This next decade will be about building digital “interfaces” and experiences in the rest of the economy. Enterprises once protected by significant investment in assets or slow-moving regulatory environments now run the risk of going the way of the record store if they don’t respond. Startups tackling markets as diverse as life sciences and eyewear are cropping up in a world where computing is infinitely scalable; talent can be acquired on-demand; contract manufacturing is just a few clicks away, and distribution to billions is nearly an entrepreneurial birthright.
Every company board, IT organization, and leadership team should assume that there are – or will be – new ways to more efficiently serve customers. In 2010, the Taxi industry neglected to ask, ‘what is the job we’ve been hired to do?’ and deliver a high-quality, on-demand experience for the consumer as a result. So Uber and later Lyft did it for them.
While few industries are as broken as the taxi industry, the same factors that have changed fortunes in urban transportation are at play in nearly every other market. The structures that once supported market dominance are becoming unsound: rigid “monopolies” that led to a false sense of competitive security due to a lack of new entrants (traditional healthcare systems); regulations that ensured high barriers to entry (traditional taxi companies); or businesses that won via constrained access to alternatives (big box retailers). These once-competitive advantages become inert in the face of newly valued characteristics, delivered by companies that focus on personalization, on-demand experiences, and don’t have the baggage of traditional infrastructure, vertical integration, or huge assets to amortize.
In a recent piece for Harvard Business Review, Harvard Business School professor Michael Porter wrote that “These new types of products alter industry structure and the nature of competition, exposing companies to new competitive opportunities and threats. … In many companies, smart, connected products will force the fundamental question, “What business am I in?””
No matter what the business, there’s a path to move from the industrial age to the information economy. The first step is to recognize the natural extensions of proprietary or unique value in this new digital world. If you’ve amassed massive infrastructure, consider creating application program interfaces (APIs) to let any outsider take advantage of your scale. For product companies, consider how a digital feedback loop can create a more dynamic relationship with your customer. If you’re a high-end provider, figure out how new technology lets you lower your costs and bring your solution to a wider set of customers. Digital transformation doesn’t mean throwing out your core competency, but it does mean heavily augmenting it with new experiences and technologies.
And beyond developing new products and technologies, part of the solution may be to partner with startups in Silicon Valley and beyond, as Whole Foods recently did by linking up with Instacart, where they’re already seeing transaction sizes increase by 150%, or as GE just did by investing in Airware, a leading drone startup. In other cases, the right answer might be through acquisition, as Nordstrom demonstrated by acquiring Trunk Club, or Monsanto did by scooping up the Climate Corp last year. This shift is even leading to a change in the DNA across the leadership team, as seen by the recent move of Gap naming Art Peck, its head of digital and innovation, as its next CEO.
As Marc Andreessen, founder of Netscape and VC firm Andreessen Horowitz said, software is eating the world. But technology-driven innovation won’t just come from the technology sector. Businesses across all industries have the opportunity to learn from companies who failed to catch the first wave of digital disruption and get ahead of this change, remaking themselves for the digital world.
Aaron Levie is CEO of Box. Levie is an investor of Airware. GE, Gap and Monsanto are customers of Box.