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Digital disruption. How to digest a new environment in traditional companies.31/08/2020

Vicenç Hernández / Economist. PhD in Economic Psychology. CEO of Tecnotramit and Treshabitat.


One of the great dilemmas facing management today is how disruptors create their businesses to generate change and what knowledge and new practices these more traditional companies and institutions should have in order to try to counteract and become disruptive to their own markets.


The dynamics of today’s competitive environment demand more agility from companies and institutions in order to change their traditional way of acting and know how to adapt to the new rules of their markets.


Digital transformation is top-down and requires a change of culture and approach by the entire organisation. But this can become mere theory with no relevant practical application if we do not understand the nature of this change and the threat this new generation of companies poses to their existing businesses.


By disruption we understand the repercussion and influence that new technologies and digital business models condition the changes in the value proposal and positioning of the companies that form a market. The concept of disruption differs from that of digital transformation in that the latter refers to the changes that organisations should carry out by using digital technologies and business models to improve their performance and build a digital base. This transformation has to be brought about by one or more digital technologies and requires an organisational change impacting on processes, people and strategy. In our opinion the real disruption does not come from the technology itself, but from the need for a radical cultural change within the company.


Let's talk about disruption. Break out of pre-set moulds


If we had to look for the main differences between the most traditional business environments and those of companies immersed in a real digital disruption, I would highlight two; the speed of change and the attitude towards risk-taking. Companies with disruptive DNA innovate very quickly to gain market share and stay ahead of competitors who are still stuck in more traditional and slower models. This innovation allows them to capture databases of potential customers in order to offer their services in a more reiterative and efficient way, thus increasing their chances of success.


One of the great mistakes of companies based on more traditional business models is to think that digital disruption is only a matter for technology companies. This type of company finds it difficult to understand that this disruption alters the nature of the competitive change it represents, and it is essential to know which business models and technologies are most needed in order to establish a new strategy for the coming years.


This new dynamic of digital disruption significantly increases the risk of being pushed out of the market as the force with which it is being implemented makes the changes increasingly rapid. This speed adds a bit of chaos to the different markets in which the company operates bringing in new competitors who until a couple of days ago were engaged in another type of business, and now they have reached a new one by removing possible entry barriers thanks to new technologies. These competitors appear from nowhere and usually come from sectors outside of ours to be a real threat wherever they touch down, so the competitive focus is not only on our conventional market and led by the companies we already know after years of collusion.


For traditional companies, their business models and processes are or have been good for their past businesses, but they are no longer valid from a point of view of the agile competitiveness that disruption triggers. One of the two big problems that this generates in the face of the challenge of innovation and digital disruption is that on the one hand, if it has gone well ... Why change? If they have been able to adapt in recent years, they will also be able to do so now. This problem of complacency leads us to the second problem. When the market inevitably forces them to change, but in a much faster and different way than before, they find themselves with extremely bureaucratic, slow and flimsy structures that hinder them from making the necessary changes in mentality prior to having a strategy focused on technology.


This does not mean that it is a problem without a solution, since more traditional companies can count on tools and solutions to change this trend as long as they are clear that the previous step is a change in organisational culture. This change will require more tools of psychology applied to organisational behaviour the larger the company is and the more bureaucratic processes it has.


New companies focused on disruption have the advantage of more agility, faster action and a corporate culture based on experimentation. In addition, they have the ability to take risks so that they are not heavy structures and can grow and displace traditional companies more quickly. In contrast, traditional companies have the advantage their positioning gives them, thanks to the strength and notoriety of their brand, a consolidated client portfolio and easier access to financing.


But the new rules of digital disruption are giving these advantages a fragility that makes them ephemeral when the factor of scalability comes into play. This scalability is what allows a strong optimisation of investments at a faster speed than we are used to. The defensive bastions they have had until now can now be flanked more easily by calling into question the supposed barriers to entry into the sector under which they have always been sheltered.


The mere redefinition of a product or service or a new platform where the customer can access it, can reconfigure entire sectors by new competitors coming out of the woodwork or other sectors where innovation has landed them in a new activity where some time ago they did not even think they would be. So to think that this will never happen to me because my sector is very concentrated and the barriers to entry are high, is wrong thinking.


A clear example of this is the technological start-ups in the financial sector (better known as fintech) and the real estate sector (known as proptech), which have been able to break down many of the more traditional products and services, breaking down the entry barriers that were involved in offering the full range of services. The right combination of technologies and business models allows them to digitise their offerings and focus their attack on more than one business, meeting the needs of a clearly underserved market.


These types of disruptive companies manage to offer similar or even greater value without the need to apply traditional business models and more conventional implementation. And all this by means of the digitisation of products, services and processes to deliver more value to the final consumer avoiding the bureaucratic methodologies that the most traditional companies have. Their focus is on the value they bring to their customers, not on the value chain needed to generate it as this minimises time and difficulty.


Many companies are convinced that capital costs, regulatory barriers and the difficulty of many business models are insurmountable barriers to digital disruption. It is true that today it is hard to deny the evidence of the importance and relevance of technology in all areas of business, but the “this will never happen to me” bias is more prevalent than we think in many managers and business owners.


But what they are not aware of is the speed of all these changes. In fact, we are no longer talking about independent technologies, but rather about combinations and convergence of different digital mutations (big data, AI, the cloud, etc.) which, when they come together, cause the companies that carry them out to dissociate their sources of value, resulting in new forms of competition. In fact, as we said before, the concept of sector or industry is blurring due to the increasing degree of digitisation, which causes many sectors to break up and be recreated in a totally new and different way than before.


Self-confidence ceases to be a virtue and turns into complacency when we believe that this will not happen in our sector, since we think that its limits and boundaries that distinguish it from others will always be immovable. These changes, which until now were linear, become exponential when we realise that it is too late to replicate them. Disruptors are not willing to play by these rules. Their strategy is to precisely change that, the rules they have to play by.


The different phases of the value chain can be digitalised in all industries, and this is precisely the focus of the most innovative companies, which find in these small details the way to optimise and make profitable their staging in sectors that have not always been their usual ones. More traditional companies can take advantage of these technologies and adapt them to generate new business models for their recurrent activities.


Many times companies make the mistake of thinking that diversifying is only about doing completely different things that are either so different from their core areas that they end up with an inhomogeneous portfolio of products and services or are derived from their traditional activities but end up distorting their main focus of value generation. This operation is based on the theory of diversification, which seeks to create a portfolio of products and/or activities whose diversity generates a decrease in non-systematic risk (that which can be eliminated by diversification) due to the low correlation between the assets that form part of the portfolio. Another way of diversification used is geographical expansion and internationalisation which, under the effects of the so-called river fisherman’s syndrome, which thinks that the best fish are always on the other bank, it was fairly widely assumed that the policy of geographical expansion could be an appropriate way of growth without paying attention to the high costs and risks involved in this decision.


The problem is that this way to go is the source of many business failures because they do not focus their experience and knowledge on extracting the value they still have in their traditional activities. If they spent more time digitising their operations and internal processes they could get much more value for money without having to experiment in areas they don’t know about.


The great threat for those who do not make this internal prospection is that we are going to live in an era where margins at a general level are going to fall (are falling) as emerging economies and companies with a greater predisposition to digital disruption are going to make an appearance in all industries, introducing new business models in sectors that are totally new to them. Large platforms are the perfect gateway for this type of company, which are more agile and can compensate for their lack of visibility and positioning, as well as the scarcity of capital resources.