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Disruptive Digital Technologies Drive the Need for Innovation

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Disruptive Digital Technologies Drive the Need for Innovation

In past years, there was more standardization of products offered to consumers and more centralization. Economics favored more standardization because fewer models and more volume both lowered unit cost. Economics also favored centralization of manufacturing, distribution facilities and head offices because transactions, moving information and management communication were all physically easier in a centralized facility. Centralized mainframe computing for business-process automation lowered costs relative to earlier periods.

Historically, economics favoring more decentralization, such as better local adaption, increased customer contact possibilities in traditional stores, lower shipping costs and lower labor costs were at a net financial disadvantage. This resulted in the business models, financial structures, information technology structures and level of outsourcing we had at the turn of the 21st century.

Recent disruptive digital innovations have changed the relative cost calculus and thus the best business structures and best business models in most industries. Digital transformation is underway, as evidenced by:

     • Total transactions costs and overhead that can now be substantially reduced by disintermediation. This is possible due to the maturity of the internet. The result is the elimination of many middlemen and many intermediary businesses.

     • Process-automation costs and overhead now reduced through a distributed environment, not increased as before. Instantaneous data-rich communication using cloud computing is the norm.

     • Many other manufacturing costs and distribution costs, especially those dealing with varied products, that can now be reduced by increased digitalization. The cost of moving relevant information anywhere is much reduced, more powerful computer control/change programs exist in manufacturing, the use of bots is widespread, and the speed of communication of large amounts of detailed data has dramatically increased. 3D remote printing is now a possible technology to adopt.

     • The rise of mobile applications and the ubiquity of consumer mobile devices that are drastically changing consumer communication with business. More transparency in prices is a fact. It has resulted in less pricing power for some companies.

     • The limits of competing through cost reductions from business-process outsourcing having been reached by many companies. Different means of cost reduction are now being sought.

The structural, pricing and business-model changes proceeding from this digital transformation are extensive. They include:

     • More customization in products and services becoming available to customers. Think, for example, of the wide variety in customized shoe purchases now available for teenagers.

     • A less centralized pattern of manufacturing facilities, operations and distribution. Think, for example, of how auto manufacturers operate through distributed plants, partnership production agreements and the web. Information and data can now be shared on an instantaneous basis with partners and customers, while technology allows rapid re-purposing of shared production facilities.

     • The closings of some retail stores or their modification into much asset-lighter and smaller stores designed as ordering points with demonstration models and shopping assistance available.

     • The widespread adoption of speed of transactions and mobility as competitive factors. This includes shipping times, which have decreased markedly over the past years as more precise information becomes available. There is also more transparency about expected delivery times. Expectations now often include next-day delivery in industry and immediate delivery of retail food orders.

     • A pricing structure for many consumer-facing companies in which pricing power has been reduced.

     • The existence of clear leaders in distribution having real cost advantages due to serving a very high share of possible volume. Amazon is an example in this regard. Further, in Amazon’s case, inventory patterns for many distributors have changed. Some inventory is kept with Amazon for expedited delivery. The remainder stays with the distributor.

     • The feeling on the part of some executives that corporate renewal must be continuous and that the speed of corporate change itself is now a competitive factor.

This is not all. Even newer capabilities have become more available recently. New data sources and new risks have become evident.

     • Blockchain brings “network of trust” possibilities, a reduction in misinformation and fraud, and faster timing of transactions.

     • Immense amounts of data from the “internet of things” are available cheaply for automated analysis through artificial intelligence. This includes machine learning, more robotic process automation and insightful deep learning.

     • Increased consumer engagement and the growth of social media have occurred simultaneously and now contribute much of the new data available.

     • Augmented reality, virtual reality and robotics are yet other emerging digital technologies. The first two feature more information and/or perspectives for consumers. Robotics clearly offers efficiencies to humans.

     • Cybercrime and security concerns have increased as new technologies become available.

     • Data privacy and protection represent new risks to be handled. Compliance with the General Data Protection Regulation of the European Union is proving to be a challenge for some companies.

     • There is real risk in attempting to turn around or restructure a company in response to new disruptive digital technologies. The competitive landscape is in flux, required talent is relatively scarce, and many organizations are resistant to the large-scale changes that are required.

     • The risk of attack from activist investors has increased in recent years. This includes the searches of private equity firms looking for new portfolio companies.

Finally, the environment for business has lately become more challenging with respect to changing trading pacts, varying tariffs and changing tax rates internationally.

Considering all the above, there is an urgent and increased need for consideration of what and how much change in every corporation’s business is best and how the business is best structured. The new economic values that can be created with digital transformation and disruptive technologies are not available to all companies. Analysis, decision-making and often new strategies are needed to produce value ,and there are new risks to consider:

     o In all industries, some companies will be able to take advantage of the new economics and new capabilities to capture increased value. The firms that do not lead must follow to compete or die.

     o In some firms, the improvement will come only in cost reductions and more efficient processes.

     o For many others, a new business model, or a modification of the present one, can be defined and value created.

     o Sometimes, perhaps rarely, nothing needs to change. Sometimes nothing can be changed. But there will be no extra value created, and value may be lost. These situations are not likely to be those of real interest.

     o Of course, a wider choice of technologies is now available for possible use in each corporate situation. Some technologies can be combined, some run in parallel, some should never be adopted.

     o An increase in work that crosses national boundaries is to be expected. Decisions in this respect need to be made. Sometimes national and regional differences are very consequential.

     o There is increased risk of not being able to accomplish what is needed to capture possible increased value to ensure corporate survival itself. Many executives worry about the agility of adaption in their organizations.

Students need to increase their capacity to distinguish what is possible to accomplish in any changing situation.

     • One thing is clear, strategic choices have to be made today and are being made in the search for increased corporate value. But more change and preparation are needed. MIT’s Center for Information Systems Research reports that 87 percent of executives surveyed felt that digital technologies will disrupt their industry. Only 44 percent indicated that their companies are prepared (Gearld C. Kane, “Why Companies Don’t Respond to Digital Disruption,” MIT Sloan Management Review, Jan. 9, 2018).

     • McKinsey found that globally, digital disruption is taking off 30 percent of incumbent revenue growth and 25 percent off EBIT growth (Jacques Bughin and Nicolas van Zeebroeck, “The Right Response to Digital Disruption,” MIT Sloan Management Review, May 17, 2017).

     • If good strategic choices are not made, activist investors will move in to force change, often through an adversarial process. Private equity firms are also searching for attractive acquisition possibilities.

     • If a company is unsuccessful in meeting the need to change, financial restructuring may be needed and/or forced on it. In more extreme cases, bankruptcy proceedings may result.

David Springate


Is Management Up to the Task?:

There is now a new complexity to business management. There are more factors to consider simultaneously as the business context continues to evolve. Unlocking value is not automatic. Risks of making poor choices or executing poorly abound.

The keys are management’s ability to choose among possible actions, to make the required changes in a timely fashion and to resist those that are not advisable.

In other words, the ability to manage increased complexity and manage corporate change in today’s environment is the key to increased corporate value.

The implications for increased investor value are similar. Managing today with a view to producing new value calls for effective, insightful analysis and successful, organizational implementation.

MIT’s Center for Information Systems Research reports that 75 percent of executives view digital technologies as an opportunity. The remaining 25 percent view them as a threat. Is the 75 percent too optimistic?

Increased value will come to those managers, organizations and investors who can effectively capitalize on the opportunities. There are significant challenges. Not all strategies and implementations will succeed. Also, the talent needed in this environment is becoming relatively scarce. Furthermore, younger managers often have some different perspectives and expectations from conventional views. The questions of talent recruitment, talent retention, talent growth and the creation of an innovation culture in large corporations are real and are points of leverage.

David Springate

David Springate is the director and co-founder of the Center for Finance Strategy & Innovation. He also is the academic director and founder of JSOM’s executive education programs. A finance faculty member, the courses that he teaches feature valuation, corporate strategy and finance. He developed the school’s graduate courses in private equity and corporate renewal. Read more articles

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