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Traditional firms need to respond faster to digital disruptors… not with lawsuits though

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Disruption from digital disruptive intermediaries such as iTunes, Uber and Airbnb often emerges slowly, yet incumbent firms do not respond swiftly enough, according to a report recently prepared by the University of Sydney Business School and Capgemini Australia.

The report, titled Digital Disruptive Intermediaries; finding new digital opportunities by disrupting established business models, looks at how new operators are exploiting digital information to disrupt the Australian business landscape by challenging established models and changing how value is created or distributed.

“More often than not, people in established companies are aware of emerging technologies and how these may impact on their organisations, however due to conventional business structures and the evolving market conditions that foster disruption, response to these changes can be slow and difficult to manage,” said the University of Sydney Business School’s Associate Professor, Kai Riemer.

“Ironically, for incumbent businesses it is often their in-built adversity to risk that presents the biggest risk in the face of disruption,” he went on to state.

“I think awareness for digital disruption is increasing, but more often than not, incumbents react when disruptors start presenting a real threat, which is often too late, because by then the disruptor has gained momentum and the disruption is in full swing,” Kai further remarked to Anthill.

“Remember that disruption is not playing the game better than the incumbent, but changing the rules of the game.”

How exactly do digital disruptors shake things up?

The report identifies eight different disruptive archetypes, their different business functions, how they innovate and disrupt various markets and what this disruption means for established companies. Of Davids and Goliaths…

It reveals how digital disruptive intermediaries are transforming the way value is generated by reorganising the allocation of supply and demand through the use of information and not the control of physical assets.

Intermediaries, by definition, are service providers that function in between two parties and add value to the transaction for all involved.

Driven by the convergence of technology trends such as the Web 2.0, mobile devices and the app economy, digital disruptive intermediaries create new services and networks that capitalise on existing market inefficiencies.

For example, businesses that fall under the Content Hub archetype, like iTunes or Netflix, are acting as intermediaries between content owners and digital consumers, upsetting incumbent businesses in industries such as music, books, film, media and TV, where there is no longer the need for a physical ‘middle man’.

Similarly, disrupters under the Matchers archetype, such as Airbnb and Uber, are creating digital offerings that re-organise the allocation of services to customers in innovative ways, thus disrupting existing market allocation mechanisms that traditional businesses in the hospitality or transport sectors are used to working with.

What does digital disruption mean for incumbents?

“For established businesses, this means they need to react with a greater sense of urgency and view digital disruption as an opportunity as opposed to a threat – whilst defending is a strategy, it’s not one that will protect them from the market disruption,” said Ben Gilchriest, from Capgemini’s Digital Innovation practice.

“Businesses need to gain a thorough understanding of how digital disruptive intermediaries change the flow of value in markets and, through this, uncover vulnerabilities and opportunities,” he recommended, “It’s through this that businesses will gain an understanding of where they are prone to disruption and where the opportunities are.”

Ben went on to highlight that with the report identifying the eight archetypes and offering recommendations on how to respond to them, established businesses can now gain a more in-depth understanding of how their current business models need to be adapted.

What can incumbents do about digital disruption?

Kai told Anthill that examples from the past (e.g. music and digital photography) have shown that digital disruption is impossible to stop, saying that while many incumbents follow a judicial approach, trying to protect their business model in court, this strategy if anything buys time, but will not stop the disruption.

Yes, hold on before you file that lawsuit…

He said that in a time of rapid and unpredictable change, it is better to be a part of the disruption than a part of history but went on to remark that self-disruption is hard because it often goes against what the business believes in and what it is validated by.

He pointed out that while different mechanisms exist, such as creating an incubator or spin-off, dedicated innovation teams, or buying competitors or start-ups to gain talent and skills, the most important aspect is independence.

Kai says that for self-disruption to work, the new team has to be independent from the existing structures, decision-making culture and budgeting mechanisms.

“If the new ideas have to stand up to the existing ways of making decisions it is unlikely to work, because if it did, the incumbent would not be disrupted in the first place but develop naturally in this new direction,” he explained, “In other words, the self-disrupting team needs to be allowed to play to the same (new) rules as the disruptor.”

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