The way digital disruption usually unfolds is that a new entrant with a revolutionary, technology-reliant business model upends the operations of existing firms. This pattern, in part or whole, has recurred so often in industries as diverse as publishing, entertainment, wealth management, hotels, and private transport, that it seems to describe a new, lasting reality: the large are now inevitably eaten by the smaller and nimbler. This compelling tale, however, is a simplified and (owing to recent advances in digital technology) outdated version of past events. Large legacy firms across the economy now have the assets to maintain and grow market share faster than new entrants – provided they are willing to adapt their business strategies to the new environment.
Transforming value chains into digital ecosystems
To understand the latent strength in legacy firms requires us to take a step back. For the past four decades, competitive strategy has revolved around three fundamental premises: all revenue comes from goods or services; these products are positioned in their markets via the company’s value chain; and the nature of the industry can amplify or diminish the value of the product. At a basic level, strategy has involved marshalling these insights around value chains for competitive advantage.
The use of data – whether gathered within the company or obtained from partners – to improve the efficiency of value chains is old hat. New technological advances offer companies far more: the ability to move beyond value chains toward far more responsive and profitable digital ecosystems.
This potential shift arises from the evolution of available data. For years, legacy and other companies have gathered and then aggregated episodic data that relates to discrete, finite events. But a commodity far more valuable in the modern business environment is continuous, interactive data. For example, a traditional bookstore will record the purchase of individual books, and nothing further in relation to the transaction (apart from, possibly, the method of payment). An online bookstore, in contrast, can record the entire consumer search and selection process, compare it to previous searches and purchases made by the same consumer, and use the resultant insights to offer further purchase options.
The development, and pervasive deployment, of automated data-gathering sensors and the connection of the data via the wider Internet of Things, have given every company the capacity, once limited to tech giants, to collect and respond, in real time, to interactive data. To extract full strategic benefit from such information, however, companies need to think differently. Value chains, once the focus of strategy, need to become the foundations upon which organization can build their new digital ecosystems.
New strategic opportunities from digital ecosystems
Fundamentally, both value chains and digital ecosystems are networks. In a digital ecosystem, participants generate, exchange, receive, and respond to interactive data continuously. The great opportunity for legacy companies, especially the larger ones, is that they already have substantial existing value-chain networks, most elements of which have (or will soon adopt) the digital technology required to participate in digital ecosystems.
While each industry is different, legacy companies should seek to reshape their current value chains into – broadly speaking – two digital ecosystems: one based around production and the other around consumption.
Production ecosystems have, in many industries, started to become established. Real-time sharing of interactive data between suppliers, R&D, logistics, and other partners in production and sales has greatly enhanced efficiency. The next step is to move beyond simply fulfilling existing tasks more efficiently to using the data itself in the creation of new revenue streams. Predictive services, such as telling plotting the optimum flight path for a plane according to forecast atmospheric conditions, or manufacturers when their machinery is likely to require servicing, have already appeared. Transient data itself can even become a product: as soon as a company finishes opening a street to lay new pipelines, it could sell that knowledge to another firm that fills the same space with high-speed networking, or similar. What was once a project stage immediately becomes a product that is also a source for new data-driven revenues.
The consumption ecosystem is more exciting and, in some ways, newer. The sale of a widget, or widget servicing, to individual customers may not seem like the potential basis of a complex ecosystem. The vast majority of goods and services, however, need an initial context in which to work: an extensive network of what economists call “complements,” without which consumption of the final product might be impossible. Cars, for example, need roads and fuel; light bulbs require fixtures and an electricity supply. A network of complements surrounding and supporting a company’s own products can provide extensive interactive data that allows companies to mold and hone their offerings. A car is no longer just a vehicle that takes you from point A to B; it provides you with a large set of experiences along the way. It points you the nearest gas station if you are running low on gas or tire pressure, helps you order and pick up coffee without waiting in lines for payment, or find and take you to an empty parking spot.
Using data to connect with consumer needs
One way to look at market demand is that purchasers are seeking to satisfy a need. A consumer buys a comfortable mattress to get a better night’s sleep, for example. Data from sensors in the mattress and around the sleeping area can help discern the ideal environmental conditions – temperature, humidity, ambient light, etc. – and which kind of mattress design will lead to a better night’s sleep for each specific individual. Rather than simply selling a physical requirement – the mattress – a company can harness its consumption ecosystem to position itself as selling a means to fulfil the consumer need: that is, a better night’s sleep. Rather than the consumer wondering whether their product choice will give them the outcome they want, they feel they are choosing the outcome they want directly.
Through the creative interaction generated by deeper, more granular data insights, this ecosystem can also provide new product concepts. One startup in Boston, for example, is developing light bulbs with audio sensors that can recognize certain sounds – including gunshots – and warn home dwellers of potentially dangerous scenarios that could be unfolding nearby.
Legacy companies are far better placed than start-ups to derive benefit from these consumption ecosystems. Their existing customer bases mean that the foundations of the necessary networks are in place. Put another way, customers used to buying standard widgets from ABC Corporation will be more open to buying sensor-enabled widgets from the same company than having to begin a commercial relationship from scratch with the untested start-up XYZ Limited. Having value chains capable of this kind of conversion already in place gives legacy businesses a huge advantage over companies that need to build everything from the ground up. As such, the tables have turned, and industry disruption is now easier for incumbents than entrants.
The main challenges are intellectual
In order for legacy companies to benefit fully from the huge opportunities that digital ecosystems represent for them, the leaders of these companies will need to adopt a different mindset in two important areas.
The first is the very essence of business: strategy formulation. The current environment represents a double-edged sword for legacy firms. Particularly if they are currently doing well financially, it is tempting for executives at these businesses to take an “if it ain’t broke, why fix it?” attitude to forward planning, and consider only minor adjustments to successful product lines and services. But thinking along these lines would be a huge mistake; the offerings of companies which use this approach to strategy are almost certain to be commoditized. Rather, legacy businesses need to set their data trajectories and develop their business strategies around them.
Such a different approach also requires a degree of humility on the part of executives, in that it will involve learning to formulate strategy in new ways, including the use of widespread experimentation and rapid diversification of offerings. In other words, each legacy company must think like a start-up, but one that has the data advantage arising from a large product and customer base. It will require patience, as does any change of mindset and culture, and also, therefore, requires buy-in from the top down. The most far-sighted C-suites, who can see that the future is going to be about data and digital ecosystems, will not hesitate to give this.
Respecting the consumer – and their data
The second conceptual change is the relationship with the consumer. For some years now, companies have talked about viewing the purchasers of their products and services as partners and stakeholders; now, they have to show that they mean it. Having a faceless company know how well you slept last night is more fitting as an element of dystopian fiction than a consumer paradise. Customers who do not feel that a company has made the effort to build a relationship of trust with them will be unwilling to provide the data that will make consumption ecosystems both effective and a source of rich opportunity.
The sharing of data from sensors will need to be conducted strictly on the basis that the company will handle any such information securely and use it to benefit the consumer directly. Those businesses that provide the value that consumers seek will retain them; those that do not will lose the most valuable asset in the consumption ecosystem.
Here, once again, legacy firms with a strong brand identity will be streets ahead, having established the trust needed to thrive in the competitive environment of the future. In the new world, the key to success will be maintaining that trust.
The landscape of business competition is ever-changing. Today’s patterns of technology-driven disruption will not be the same as tomorrow’s. Accordingly, access to interactive data across existing value chains has moved legacy firms from far back in the pack to pole position in the race for future markets reshaped by information. Legacy leaders should be fully conscious of this opportunity as they forge their strategies for the road ahead.
To read more on this, see The Future of Competitive Strategy