Thanks to the first round of digital disruption, e-commerce and the platform economy have become a way of life all over the world. Call an Uber. Order on Amazon Prime with a single click and get free shipping. Compare insurance policies on The Zebra or places to stay on Booking.com.
Value at your fingertips. Whether it’s saving gas and time by skipping the mad dash around town for supplies or finding the best deal on a hotel, the first wave of digital disruption brought consumers personalized offers, savings, and convenience beaucoup.
For the companies who moved into the e-commerce and platform economy early on during this first wave, this revolution captured significant value as they monetized direct access to their customers and served as third-party aggregators in a wealth of ecosystems.
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The second wave
A convergence of mobile, cloud, and analytics technologies with advancements in blockchain, AI, and IoT technology has created a value potential breakthrough and further expansion of value networks while creating new sectors. Collectively, these technologies create cognitive engines that enable augmented human intelligence, autonomous decision-making, more efficient human-machine interactions, and real-time system optimization. In spite of the prevalence of these technologies and the growing investments across all industries, enterprises are struggling to realize the value potential. In fact, a productivity slowdown has appeared at the macro-economic level in direct opposition to the expected rise in productivity.
The second wave’s barrier reef: The productivity paradox
A paradox, to be sure. A productivity paradox, as many economists dub it. Though the Luddites among us would say that an overdependence on technology makes us lazy; researchers posit a wide range of theories. These include factors such as the lingering effects of the financial crisis, wrongly estimating the impact of the digital economy, and the lack of distribution of digital technology’s benefits among small- and medium-sized enterprises.
We, however, posit that siloed approaches focusing too heavily on operational efficiencies, as well as lack of business model innovation following digital tech adoption might also be a major contributor to the productivity paradox.
To take full advantage of the second wave, a company needs to open itself to the potential of business model innovation and adopt a holistic approach that combines initiatives focused on operational efficiency with those that can result in new customer experiences and new revenue streams.
Silos—and siloed approaches—enable only a kind of blind, marginal efficiency. Yet they stifle the very kind of innovation that can catapult a business into unparalleled success. In other words, a barrier reef that won’t allow the second wave of digital disruption to wash ashore.
Silos and a skewed view on operational efficiency
When digital transformation is solely the responsibility of IT, and the business units are not directly engaged, the focus from business outcomes shifts to the technological benefits. On the other hand, when business units attempt to adopt digital technologies on their own, they often end up in a never-ending experimentation mode and may have difficulty scaling their experiments.
Most digital initiatives have focused on incremental product improvements and operational efficiencies, likely because the well-established cost take-out KPIs can show the benefits of such initiatives faster. While the cost-savings and productivity gains can be significant, the real disruptive value, which is also harder to estimate, is in the emergence of new value propositions and associated business models.
Targeting and realizing the full value potential in this second wave will have three requirements.
- Adopting a holistic lens on the possibilities
- A concerted effort that involves the broader organization and strong governance sponsored by executive leadership; and
- A program that leads with business value, not technological benefits
Look to the innovators
Some companies have already burst through those boundaries, investing in true innovation and growth through platform-based business models and expanding into ecosystem offerings.
Amazon.com, Apple, Facebook, Google, and Microsoft have all done just that, generating nearly 3 trillion in value over the past decade. Massive growth in market capitalization over the decade from $600 billion in 2008 to $3,475 billion in 2018 demonstrates the strength of an approach that levels silos, re-imagines ecosystems, and innovates everywhere.
Image courtesy of IBM and the University of Cambridge
In fact, entire industries who have taken a more disruptive, innovative approach have transformed the value chain to their advantage, creating new sectors or disintermediating positions across the value chain. For example, the Food Trust—an ecosystem of food producers, distributors, and major retailers—uses blockchain technology to reduce the time needed to put out food safety alerts, gain access to a larger network, and cut costs.
In another industry, American Tire Distributors’ position in the value chain was eliminated when two of the largest tire producers, Bridgestone and Goodyear, went direct to customers using their own networks. Further, Sears Holdings, a major tire installer, partnered with Amazon.com to install tires that consumers buy on Amazon’s platform. Together, this resulting in ATD, the largest distributor of tires in the US, to file for Chapter 11 in 2018.
Embrace the value creation potential
The potential for the second wave of digital disruption reaches well beyond these early adopters. Those who leverage AI, blockchain, mobile, robotics, and IoT to their advantage throughout every step of doing business—from supply chain to operations to distribution–are positioned to gain significant value. They have the potential to save about $1.8 trillion per year during the coming ten years.
However, is imperative for organizations to assess value creation and capture opportunities through new and expanded value networks. They must also formulate innovative value propositions to quantify the value at stake for their business. These steps will significantly increase the likelihood that digital transformation efforts are successful in targeting the full value potential and positioning the company for sustained growth.
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