In a recent post, I highlighted the importance of approaching digital transformation in the right way and honest way: too many companies treat the process as a limited experiment, and many more do not even try, just pretend they are transforming. Nevertheless, there is a third, critical dimension for digital transformation to be successful: speed. A compelling study from McKinsey highlights why digital strategies fail, and among the many variables, at the very top, speed stands out. But what are the consequences of underestimating the velocity of digital transformation? There are many, and they are all intertwined, so they represent a complex system per se, which many fail to understand, and therefore they misjudge.
In marketplaces being disrupted there is a tipping point in which the emerging digital business model cannibalize at exponential rates the incumbents. Beyond that tipping point, most of the incumbents do not survive. They cannot make the switch from one model to the digital one, fast enough (e.g., Blockbuster and Netflix).
Digital Business Models redistributed value
Consumers and customers experience transparency, convenience, and better pricing. Nowadays most consumers expect to return their online shopping at the expenses of the retailer. There is an emerging payment model in which online shoppers do not pay for their purchase until they have decided to keep them. At that point many want to pay in installments, hence the success of Klarna, who developed beyond an online payment processor, by redistributing risk between the shopper and the online store. But the value redistribution goes well beyond experience, as many digital propositions are cheaper for the customers (e.g., shared economy), cut the proverbial middle-man (e.g., travel agencies) and make specific categories obsolete (e.g., smartphone vs. cameras, mobile maps applications vs. portable navigation devices, Skype on mobile vs. calls serviced through the mobile operator). Value redistribution and convenience make technology rate of adoption faster and faster. The market share shift that the incumbent Kodak experienced when digital photography emerged was in the order of a decade; the market share shift that brought Blockbuster to file for bankruptcy lasted roughly three years.
First Movers Survival
While the first mover advantage was dismissed already a decade ago, as effective entry strategy (e.g., Yahoo vs. Google Search), it is commonly believed that first movers in the digital era have better chances of survival. This is due to two reasons: first of all, they experience faster growth rates. And, furthermore, these growth rates produce better margins, because of the lack of digital competitors. First movers and most rapid followers have a higher probability of survival, because they, among other things, have access to a better pool of market growth and profitability, then other late-to-the-party players.
The above vector is even more compelling and accurate, in industries in which scale and network effects create “Winner-takes-all-economies”. First, this is the case of Amazon, that in a more digitalized economy, is experiencing better operational results than before. Not only they are growing in revenue, but they are also growing more profitably in their bottom-line. And, as in the case for Amazon, because they are growing faster and more successfully, they are widening the gap with the incumbents more quickly. And many of their slow-moving competitors are filing for chapter 11.
Emergence of Ecosystems
Still on the Amazon, example, because they have built a platform and an ecosystem, they can move very quickly to other industries, even not adjacent. As a matter of facts, Amazon is making a growth play in the healthcare sector and the movie business, whereas Apple and Google in Payments, Healthcare and Automotive. It is also rumored that Apple might make a move on Hollywood's studio business. For incumbent players, it is more difficult to compete against a platform coming from another industry. Being one of the early digital transformation leaders or a fast follower is the only tactic limiting the influence of external platforms moving in.
While there is evidence that digital transformation is more successful when companies approach the challenge full heartedly – rather than just dangling their feet in the water - being late in adopting a digital business model, is as bad as not starting the process at all. Firms that transform into a digital model early and fast followers enjoy better growth rates and margins in a context where the value is getting redistributed. They often experience network externalities that improve their operational profitability, and they are better positioned for the competition coming from platform companies.