Aussie firms must swiftly respond to digital disruption

Traditional Australian businesses must be faster to respond to disruptive start-ups and other digital challenges, according to a new report from the University of Sydney Business School and Capgemini Australia.

“Digital disruptive intermediaries” (DDIs) including iTunes, Uber and Airbnb can have a major impact on incumbent businesses, the report states.

DDIs create new services and networks between two parties and add value to the transaction. Companies such as iTunes and Netflix, for example, act as intermediaries between content owners and digital consumers. This can have the effect of upsetting incumbent businesses in industries such as music, books, film, media and TV.

“In Australia, we are seeing the emergence of content hubs such as Presto, Stan and, most recently, international penetrant Netflix, who are evolving their business models in line with digital disruption to ensure relevance of their service,” Capgemini Australia & New Zealand Head of Digital Customer Experience Dorus van den Biezenbos said.

The report identifies eight DDI archetypes - digital stores, content hubs, sharing hubs, promoters, aggregators, discriminators, crowd sourcers and matchers.

Matchers include companies such as Airbnb and Uber, which are creating digital offerings that reorganise the allocation of services to customers, disrupting traditional market allocation mechanisms used by businesses in the hospitality or transport sectors.

Each archetype can have a disruptive effect on traditional businesses and industries. While this disruption often feels sudden, the source has often been present and sometimes even observed for some time before it creates a significant impact, the report noted.

It can be difficult to identify a source of digital disruption at the early stage. When compared to the dominant technology of the time, DDIs are often initially seen as inferior or only targeting a small market niche. But over time, DDIs are often able to outperform competitors and overturn the status quo.

The report gives the example of MP3 players, which were initially dismissed by many as providing inferior quality to CDs. But over time MP3 quality improved and the players ushered in fundamental changes to the way music is consumed, becoming a mainstream technology.

DDIs succeed by creating entirely new business models that were not possible in a pre-digital era, or by exploiting inefficiencies and inadequacies in existing industries. Markets characterised by high fragmentation or markets with inefficient existing monopolies are thus particularly prone to DDI disruption.

Industries with high variation in service qualities, those dependent on physical distribution channels, and markets with a lack of transparency and access are also at high risk.

Ben Gilchriest, from Capgemini’s Digital Innovation practice said incumbent businesses operating in such markets must be ready to respond rapidly to digital disruption.

“For established businesses, this means they need to react with a greater sense of urgency and view digital disruption as an opportunity as opposed to a threat - whilst defending is a strategy, it’s not one that will protect them from the market disruption,” he said.

“Businesses need to gain a thorough understanding of how DDIs change the flow of value in markets and, through this, uncover vulnerabilities and opportunities. It’s through this that businesses will gain an understanding of where they are prone to disruption and where the opportunities are.”

For incumbent businesses caught in the digital disruption crosshairs, it is ironically often their inherent adversity to risk that presents the biggest risk, the report states. Businesses must be willing to innovate and take chances to remain competitive, but this often requires disrupting a core business that at the time is proven and successful.

The University of Sydney Business School and Capgemini urge companies looking to prepare for disruption to identify potential DDIs that could affect their business and carefully evaluate the threat posed.

Engaging with customers that choose the DDI over a company’s own products or services can provide insight into the state of the market. Companies should also consider creating a spin-off or innovation team focused on disrupting from within, and allowing the team the freedom to experiment without being impeded by conservative executives and risk management concerns.

Large organisations should also seek to draw on information and ideas from employees. This could require revamping traditional management structures to facilitate openness and transparency or adopting new social networking technologies designed to improve communication between employees and management.

Image courtesy of Steve Johnson under CC