The Digital Vortex is the inevitable movement of industries toward a “digital center” in which business models, offerings, and value chains are digitized to the maximum extent possible. The difference between digital disruption and traditional competitive dynamics comes down to two main factors: the velocity of change and the high stakes involved.
This is a summary of some of the work published by the Global Center for Digital Business Transformation (DBT Center), an IMD and Cisco initiative, which is dedicated to original research and to creating opportunities for executives to innovate new business models for the digital age.
Digital disruptors innovate rapidly, and then use their innovations to gain market share and scale far faster than incumbents and challengers still clinging to predominantly physical business models. Digital disruptors are particularly dangerous because they grow enormous user bases seemingly overnight, and then are agile enough to convert those users into business models that threaten incumbents in multiple markets.
Digital disruption is not just an issue for firms in high-technology sectors. The impact of digital disruption is being felt across industries. The relatively traditional high-end fashion sector, for example, has been disrupted by digitally savvy incumbents such as Burberry, as well as new entrants such as Net-A-Porter and Gilt.
An industry’s ranking and its position in the Digital Vortex (as per the picture above) represents the extent of potential competitive disruption within five years as a result of digital technologies and business models. Industries poised for greatest disruption are those in which the most digitization is taking place. The center of the Digital Vortex symbolizes a “new normal” characterized by rapid and constant change as industries become increasingly digital. The center of the vortex does not represent an end state in which markets stabilize around new competitive leadership for an extended period of time.
Disruptive business models fall into 3 categories, providing cost value, experience value or platform value, as described in the DBT Centre’s paper New Paths to Customer Value: Disruptive Business Models in the Digital Vortex.
This is perhaps the area where the competitive effects of digital disruption are most acutely felt. Disruptors employ a multiplicity of strategies to lower the cost of a product or service for the end customer. The following are common Cost Value business models:
Free Lunch: Providing something for free, rather than requiring customers to pay for it. Customers benefit from rebates or rewards, freemium, outright elimination of cost or incremental value for loyalty or participation such as with Skype, Dropbox, Coursera and Spotify.
Share the Wealth: Spreading costs over people or time, or through buyer aggregation. Customers benefit from the amortization of costs over time, group discounts or buying economies of scale such as with Fon and Groupon.
Turn the Tables: Reverse- auction-style sales, competitive bidding or “name your own price”. Customers benefit from downward pricing pressure and strategic sourcing, such as with Ariba and Lending Tree.
Hard Bargain: Facilitating price transparency. Customers benefit from greater supplier choice or comparison shopping, such as with PriceGrabber, Trivago and Shopzilla.
Pay as you Go: Paying only for what is used/consumed; subscription services; “X as a service”. Customers benefit from variable cost, lower risk or decreased vendor overhead such as with Progressive, Rolls Royce, Salesforce and Amazon Web Services.
Experience Value offers customers more convenience, context, and control— it has been central to the rapid ascent of many of today’s most disruptive companies. As with Cost Value, Experience Value increases as offerings are digitized because what was formerly physical and indivisible can now be partitioned into only the units that customers want, then delivered instantly to any device or location. The following are common Experience Value business models:
Power to the People: Enabling self-service, disintermediation of middlemen or do-it-yourself. Provides greater independence, control or convenience to customers, such as with Bitcoin, Netflix and PayPal.
Just-4-You: Personalisation of products, services and experiences. Provides increased customisation, contextualisation or aesthetic/design improvements to customers, such as with eSalon and Fitbit.
Robo-tasking: Automation of processes using analytics or low-cost labour. Provides time saving, greater execution speed, quality or wage arbitrage to customers, such as with Amazon Mechanical Turk, TaskRabbit and Wealthfront.
Non-friction: Removing latency or bottlenecks in business processes. Provides more simplification, greater efficiency or information aggregation to customers, such as with Zipfit Denim, Liquidnet and Intuit Mint.
Right here, right now: Delivering goods, services or value-added experiences in real time, on new form factors, typically through dematerialisation. Provides relevance and immediacy to customers, such as with Instacart, Shyp and Amazon Prime.
Platform Value is disruptive to competitive dynamics because it introduces an element of exponentiality. Platforms create network effects—situations where the number or type of users impacts the value derived by users. The following are common Platform Value business models:
Digital Karma: Creating intangible value from status or gamification. Provides standing or reputational capital to customers, such as with eBay and Reddit.
Crowded House: Crowdsourcing inputs from ecosystem of contributors. Provides a larger volume of ideas, greater diversity of ideas, new labor sources, capture of scarce or unique information to customers, such as with The Huffington Post, Quora and Kaggle.
Chain Gang: Dissemination of information through a network or community of recipients; viral content. Provides an optimization of communications/distribution/execution to customers, such as with Ted and Nextdoor.
Data Orchestrator: Combination of sensor/machine data and analytics to create new insights. Provides real-time data, new sources of data, recognition of patterns in extreme complexity or the optimisation of decisions for customers, such as with Bosch, Cisco, GE, Intel and SAP.
Connect the dots: Connecting individuals and groups; creation of marketplace capability; “sharing economy” and peer-to- peer (P2P) dynamics. Customers earn revenue from buying, selling, transacting, socialization and the mobilization of resources, or education of users, such as with Airbnb, Etsy and Khan Academy.
The most successful disruptors of recent years—Amazon, Apple, Facebook, Google, Netflix, and others—employ what we refer to as “combinatorial disruption,” in which multiple sources of value—cost, experience, and platform—are fused to create disruptive new business models and exponential gains.