The crusade of digital disruption

Journal of Business Strategy The crusade of digital disruption Kurt Matzler, Stephan Friedrich von den Eichen, Markus Anschober, Thomas Kohler,

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To cite this document: Kurt Matzler, Stephan Friedrich von den Eichen, Markus Anschober, Thomas Kohler, (2018) "The crusade of digital disruption", Journal of Business Strategy, https://doi.org/10.1108/JBS-12-2017-0187 Permanent link to this document: https://doi.org/10.1108/JBS-12-2017-0187 Downloaded on: 01 November 2018, At: 08:36 (PT) References: this document contains references to 19 other documents. To copy this document: [email protected] Access to this document was granted through an Emerald subscription provided by Token:Eprints:MAT4ISHCBEWWXS7RUZQT:

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The crusade of digital disruption Kurt Matzler, Stephan Friedrich von den Eichen, Markus Anschober and Thomas Kohler

he quest to disrupt has become Silicon Valley’s crusade and startups across the world are shaking up existing industries. Former Cisco CEO John Chambers predicts that “40 per cent of businesses in this room, unfortunately, will not exist in a meaningful way in 10 years”, Cisco CEO John Chambers at the giant Cisco customer’s conference in 2015. Downloaded by 141.239.247.105 At 08:36 01 November 2018 (PT)

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Europe is lagging behind. A McKinsey study claims that only 12 per cent of the digitalization potential has been used to date, compared to 18 per cent in the USA (Bughin et al., 2016). The first round of digital transformation was won by Silicon Valley. New technologies are changing the entire economic structure, society and the way we live, work and consume with breathtaking speed. The digital transformation is unprecedented in terms of speed, range and impact. The combination of individual technologies offers unparalleled new possibilities. Bringing together emerging technologies such as cloud computing, artificial intelligence, robotics, 3D printing, smart devices, big data or social media has led to entirely new products, services and business models across industries. The challenges are enormous. Many of the digital changes are disruptive. They are changing industries fundamentally. New business models replace traditional ones in ever shorter time intervals. Many established companies are struggling. They underestimate the dynamics, react too slowly and are sticking to their existing business models.

Kurt Matzler is Professor at the Department of Strategic Management, Marketing and Tourism, University of Innsbruck, Innsbruck, Austria. Stephan Friedrich von den Eichen is based at IMP, Munich, Germany and University of Bremen, Bremen, Germany. Markus Anschober is based at IMP, Innsbruck, Austria. Thomas Kohler is based at Hawaii Pacific University, Honolulu, Hawaii, USA.

This pattern of disruption is remarkably stable. It characterizes most disruptive changes in business history (Christensen, 1997) and still holds true in the age of digital transformation: Netflix killed Blockbuster, Amazon disrupted the retail industry, and it was not the “Big Four” music labels that introduced MP3 or streaming business models. The digital transformation is revolutionizing every industry, and the disruptors very often are new entrants while incumbents face the innovator’s dilemma. Their business models and their core competencies make them good at sustaining innovation but hinder them in disruptive changes. A worldwide IMD-CISCO survey of more than 800 executives across twelve industries found that, depending on the industry, the established companies within industries are the least likeliest to disrupt (Bradley et al., 2015). Up to 25 per cent of the disruptions will come from companies outside an industry, and between 25 and 50 per cent of the disruptors will be start-ups, either inside or outside the industry. Typically, startups and new market entrants change or even eliminate the need for industries because of their disruptive business models. Christensen’s (1997) theory of disruptive innovation provides some compelling arguments for why established companies fail when their industry is disrupted. Very often, disruptive innovations are unattractive to incumbents as, beginning in small market niches, they do not offer enough growth and profit opportunities, as their most profitable customers in the main market are not interested, as the innovation would cannibalize existing business, and as their business models are not compatible with the new, disruptive one. Start-ups have a clear advantage in all these respects. Being small, they do not need a big market to satisfy growth needs; being new, they do not depend on

DOI 10.1108/JBS-12-2017-0187

© Emerald Publishing Limited, ISSN 0275-6668

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existing customers and do not cannibalize existing sales; and, starting from scratch, they have all degrees of freedom to radically experiment with and redesign their business model. Digital transformation requires rethinking the entire business model. Never before have so many innovation opportunities for new products, services and above all for new business models emerged. And it has never been so easy to collaborate with other companies and partners from around the world to create new things together, and challenge large established corporations.

1. The three levels of digitalization Digitalization impacts three different levels (Figure 1): digital products and services, digital processes and decisions (algorithms and Big Data) and entirely new digital business models.

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Let us first turn to the digitalization of products and services. This digitalization entered many industries years ago. Vacuum cleaner robots, lawnmower robots or digital thermostats are examples. Even trivial products such as soccer balls are becoming digital. For example, Adidas recently introduced a smart ball. An integrated sensor captures data and provides feedback on shot strength, trajectory, and spin or speed via an accompanying app. This can lead to tips for improving technique and skills. Customers can log their statistics, track their improvements and share their success with friends (Matzler et al., 2016). Nike is doing something similar with Nikeþ. Running shoes equipped with sensors collect data and synch with the web. The online platform provides analysis of tracks and times, customized training programs and social networking. Athletes receive feedback on their progress and can connect with friends, other athletes and coaches (Arons et al., 2014). At the same time, Nike collects useful marketing data: when users run, how often they run, how long they are running and what music they listen to (Westerman et al., 2014). The product and brand experience can be completely reimagined. The digitalization of products offers the potential for differentiation. However, the benefits are likely to last only in the short term. Equipping existing products with sensors is relatively simple and inexpensive and usually requires no dramatic changes within the company. The installation of actuators in products requires more adjustment, but still will not lead to significant competitive advantages in the long run. Rapidly falling prices for sensors and actuators will Figure 1

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Three levels of digitalization

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accelerate the influx of digital products. The cost of an acceleration sensor was seven dollars at the start of the first iPhone generation in 2007. Today, they are less than 50 cents. In the future, digital products will become commodities. The value creation will be in digital business models. Consider how this puts pressure on established automobile manufacturers. They realize that if they are unable to build new business models around the digital car, they will be degraded to hardware producers. The companies that will benefit the most are the ones that are able to leverage data to create and capture value, maybe Apple and Google. The value will thus not be created solely by the physical product, but rather in connecting the analog and the digital world. The digitalization of the products is hence a necessary but not a sufficient step to ensure a company’s competitiveness in the future. The next level of digitalization represents the automation of processes and decisions. Industry 4.0, Big Data, algorithms and artificial intelligence are the buzzwords here. Industry 4.0 means “a networking of autonomous, self-controlling, self-configuring, knowledgebased, sensor-assisted and spatially distributed production resources (production machines, robots, conveying and storage systems, operating equipment) including their planning and control systems” (Kagermann et al., 2013). A Boston Consulting Group (BCG) study estimates that Industry 4.0 will lead to 30 per cent faster and 25 per cent more efficient production systems (BCG, 2015). Every process that can be digitalized will be digitalized, even in the most traditional industries. Consider Domino’s Pizza (Buvat et al., 2017). Ten years ago, Domino’s faced historical lows in consumer surveys and share prices. Today, Domino’s is a leading digital organization with about 50 per cent of employees in the headquarters working in software and analytics, and about 60 per cent of its sales coming from digital channels. Domino’s created a digital platform for consumers to order, including Google Home, Smart Watches, Amazon Echo, SMS and Ford cars. Voice commands and single-touch technology made pizza ordering very easy and convenient. All operations were digitalized. Customers can track their pizza, when baking starts, when it comes out of the oven, when it is delivered. Domino’s also works on autonomous delivery vehicles and drones. Payment, of course, is also automated. Data generated allow Domino’s to follow user trends and to predict demand. Third, the company shares the technology and innovations it develops also with franchisees, including digital royalty programs. Domino’s today considers itself a technology or e-commerce company. Digitalization will help developed economies to maintain their competitiveness. Digitalization will also help in bringing manufacturing back to Europe and the USA. Efficiency increases and cost reduction are, however, purely defensive measures. They will be necessary but not sufficient for the competitiveness of the future. Again, it will be crucial to build new business models and new ways of creating customer benefit and monetizing the value created. Therefore, the digitalization of products and the digitalization of processes fall short. Companies need to grapple more intensely with the question of which new business models are enabled by digitalization. In the end, it is about linking digital products with digital processes and adding new revenue mechanisms.

1.1 Six steps to achieve digital transformation Figure 2 shows the six different value creation steps that can result from digitalization. Using the example of Nest, the American manufacturer of digital thermostats and smoke detectors purchased by Google, we show the logic of the value-adding steps and the business model. Just five years ago, it was unlikely that an energy supplier would think that Google would participate in this market. When Google offered $2.3bn for the acquisition of Nest, most observers did not understand Google’s intentions and struggled to envision how the future business model should work.

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Figure 2

Value creation steps during digitalization

Here is how value is created and captured with a new business model (for an extensive description see Iansiti and Lakhani, 2014):

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Step 1: Physical product or process. The first stage of the value-added logic is the physical product or the process. In the case of Nest, these are the thermostats. Analogue thermostats are simple, the desired temperature is set via a setting wheel. The benefit to the customer is the temperature control.

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Step 2: Sensors and actuators. Physical objects are equipped with sensors and actuators in a second step. The case of the Nest thermostat represents “Smart Appliances”. The thermostats are capable of learning. Sensor-controlled, programmable and Wi-Fi supported, they adjust the room temperature to the outside temperatures and the consumer habits (for example, whether you are at home).

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Step 3: Connectivity. If the physical objects are equipped with IP-capable sensors, they can communicate with other objects or exchange data. Nest continuously collects data via the thermostat, which can be evaluated and used.

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Step 4: Analytics. The collection, storage and evaluation of sensor data can now be used to gain valuable information that can be transformed into value-added services. Nest, for example, can leverage data about consumption habits for consumption forecasts or optimize energy consumption.

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Step 5: Digital services. Digital services can now be created on the basis of analytics. For example, Google knows whether a user of Google Now is at home or not. This can significantly save unnecessary heating costs. If the cloud data are now also linked to other industries, many new business opportunities arise. Washing machines, for instance, can be controlled via the internet in such a way that they become active at just low electricity rates and off-peak grid loads. Providers of wearables know when the customer is awake and how the temperature should be adjusted accordingly, or whether the TV should be switched off because the customer has fallen asleep.

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Step 6: New value creation and value capture. Finally, a new business model emerges with a new customer benefit and novel revenue logic. The entire process of temperature control is digitalized. Nest earns money by offering beautifully designed thermostats, which are much more expensive than comparable devices. Money can also be earned from energy suppliers sharing the savings with Google because Nest customers consume less energy. Google expects to save 10 to 15 per cent of energy. Even if Nest has not yet achieved its targets (currently only six per cent of US households have smart home devices and probably only 15 per cent in five years according to a Forrester study), this example still shows the logic and the potential of digital business models.

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Digitalization thus has a threefold effect: on the product level, on the process level and on the level of the business model. Above all, the availability of data and the services that can result from it will lead to many new business models. The value of the future is in data. Companies need to consider the new possibilities of the individual value-added stages (Figure 2) and answer the following questions: 䊏

How does your digitalized product or process provide value to customers?

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What type of useful data can you generate with sensors?

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How can these data be collected in real time and linked to other data?

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Which patterns and insights can you generate from the combined data?

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How can the data create new customer value?

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How can this value created be monetized?

1.2 How to tackle digital disruption It is evident that digital technology transforms industries. It is also clear that companies need to take these developments seriously. We need to be conscious of the time pressure. While complete digitalization in the sense of Industry 4.0 may take 20 years, the next 5 to 10 years will determine who will emerge as winners or losers (BCG, 2015). Here are a few recommendations for actions that will help companies to successfully adapt to digital transformation: 1.2.1 Understand the customer problem. A successful digitalization project starts with the customer. What are the customers’ pain points? What problems do we currently solve for our customers and how can we leverage digital technology to better meet our customers’ needs? Consider how asking these questions helped Putzmeister, a German manufacturer of concrete pumps and other machines get to the bottom of customer problems. Rather than a large market study, they engaged in in-depth talks with their customers, the construction companies. They discovered three pain points: First, customers struggled to move the concrete pumps across the country to the construction site. Second, they confront a workforce with ever lower qualifications to service the machines. Third, small construction companies shy away from significant investments to purchase the machines. Putzmeister is now developing a simple digital business model. PUMPNOW is a digital platform for flexible rental of machines. The customer no longer buys the machine but pays for its use. Transport, service and maintenance are no longer required. 1.2.2 Develop the right mindset. Many companies are still unaware of the dangers of disruption. How would Silicon Valley destroy my business? Who would be a disrupter? These are important questions. Many CEOs are currently traveling to Silicon Valley to address these questions, as Gisbert Ru¨hl, CEO of Klo¨ckner, Europe’s largest steel trader, did. After some company visits and discussions with internet founders, the answer was

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clear: An electronic platform (“the Amazon of the steel industry”) could mean the extinction of their current business (Keese, 2014). Thinking about risks can initially be very helpful. It raises awareness about threats, shows disruptive potential and mobilizes. Anyone who identified the risks must get out of their comfort zone. In Mark Zuckerberg’s words, the greatest risk is not to take any risks: “Disrupt or be disrupted!” The company’s little red book reminds employees that “If we don’t create the thing that kills Facebook someone else will.” To renew themselves in time, companies must show a willingness to destroy themselves, at least mentally, before others physically do. This includes the willingness to cannibalize one’s own products, services and even the business model. A trip to Silicon Valley might not be necessary. You can instead run the thought experiment of the “Nightmare Competitor”. Imagine a fictitious competitor who is well positioned for the future, pulls all the levers of digitalization and operates its business according to completely new rules. The competitor is a real threat to your business. This controversy helps to concentrate the energy of creative despair, shows potential hazards, and can help to find a new business model in time. A view from the outside to the inside is necessary. We recommend to integrate external innovators in the innovation process.

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1.2.3 Think in business models. If you do not think holistically about your business model, you run the risk of created incomplete solutions. It is not enough to change only individual dimensions. Digitalization makes businesses more efficient. The cost savings are significant and they are also important. They will help companies remain competitive and they will also help bring back manufacturing from low-wage countries to industrialized countries, a trend already in full swing. However, this mindset focuses too much on efficiency gains. It is a mistake to consider digitalization only to increase efficiency. We need to think more about novel digital products, services and new business models. In the end, it is about identifying new growth areas and creating digital business models. This is the only sustained way to achieve growth. The questions to ask are: Which new target groups and which new customer benefits are enabled by digital technologies and development? Which new products and services will enable digitalization? How do digital technologies change our value creation logic and processes? What are new marketing strategies emerging through digitalization? However, those who are still at the beginning of the process of digitalization should not overwhelm their organizations. The 80/20 rule applies: Identify the processes or areas where you have the greatest impact with the lowest resource use. The customer interface is a good starting point. Initiate small projects that allow you to gain quick wins while not losing sight of the big picture. 1.2.4 Open your strategy process. Today, no one can predict where the next big idea will come from. Therefore, companies need to open up their strategy process to some extent. Leverage the wisdom of crowds within and outside your company. Nobody has to reinvent the wheel. After all, 90 per cent of business model innovations are nothing more than transferring or re-combining patterns from other industries (Gassmann et al., 2013). Great ideas arise through cross-fertilization when you leave the constraints of your own industry, your own expertise or your own discipline behind. Keep your core competency in mind. Combining a company’s unique strengths and assets with other technologies and different knowledge will fuel the innovation engine (Kohler, 2016). 1.2.5 Develop speedboats, not tankers. Most companies have the greatest difficulty when they try to develop new digital business models inside their company – especially when they are disruptive. The company’s immune system is immediately activated. The fear of one’s own cannibalization prevents progress on future growth opportunities. The established structures and processes do not allow flexibility, speed and risk. Therefore, it is often worthwhile to start outside the company’s borders. Klo¨ckner, a steel trader, has set up its own start-up with Klo¨ckner.i in Berlin. Within the existing organization, implementation is highly unlikely to succeed, as the CEO Gisbert Ru¨hl explained. He points out that he would always run the venture again as a separate unit, working with people from the outside, who

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initially work independently. In a second step, the company needs to ensure that such a unit radiates to the rest of the organization and does not move as an independent satellite on the edge of the corporate orbit. They are trying to transfer the start-up mentality to the corporate. 1.2.6 Cooperate with startups. Engaging startups can be a way to get a grip on digitalization. Startups work differently than established companies. They follow an idea unconditionally, are agile, show a certain degree of risk, often have great prospects for growth – all the characteristics which are inconsistent with establis hed large companies. In turn, large companies have resources, special skills, stability, power, an established market and appropriate routines to operate business models efficiently. More than 35 per cent of Germany’s large companies have chosen this strategy and collaborate with startups (Depiereux, 2017). If cooperation is successful, established companies and startups can complement each other well because of their different characteristics. With cooperation projects, many companies are hoping to gain access to new ideas and access to new products, insights into the ecosystems’ surrounding founders, innovation and entrepreneurship, startups and their way of doing business and finally investment opportunities. Large corporations especially are positioning themselves with corporate venturing, corporate accelerator programs or corporate incubation to gain access to the digital scene (Weiblen and Chesbrough, 2015). 1.2.7 Develop a failure culture. Ultimately, companies need a new culture to unleash their innovative capacity with great incentives for successful innovation and small penalties for mistakes. In most companies, we find the exact opposite. AG Lafley, the former CEO of Procter & Gamble and Open Innovation Pioneer, describes his view of failure culture as follows: “You learn far more from your failures than you do from your successes [. . .] what we’re trying to do now is fail a lot faster, fail a lot cheaper, so we can fail more and get onto the next idea or the next innovation that may become a commercial success. But failure is incredibly important, and learning from failure is very important.” (Anthony, 2014). The Dutch chess master Jan Hein Donner was once asked what his strategy would be if he had to compete against IBM Deep Blue (NB: Gary Kasparov was defeated by IBM Deep Blue in 1996). He thought for a moment and said, “I would bring a hammer.” That is certainly one way to deal with the digital transformation. In the short term, it may help. In the long run, certainly not. It turns out that the best chess player is neither the man nor the computer. It is the cooperation between man and machine. Those companies that find ways to deploy digital technologies for their business models to the advantage of their customers will be those that succeed in the area of digital disruption.

Keywords: Disruptive innovation, Open innovation, Business model innovation, Digitalization, Digital transformation, Corporate-Startup engagement

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Depiereux, P. (2017), Digitale Transformation Und Zusammenarbeit Mit Startups in Großunternehmen in Deutschland Und Den USA, Etventure, New York, NY. Fleisch, E., Weinberger, M. and Wortmann, F. (2014), “Gescha¨ftsmodelle im internet der dinge”, HMD Praxis Der Wirtschaftsinformatik, Vol. 51 No. 6, pp. 812-826. Gassmann, O., Frankenberger, K. and Csik, M. (2013), Gescha¨ftsmodelle Entwickeln: 55 Innovative Konzepte Mit Dem St. Galler Business Model Navigator, Carl Hanser Verlag GmbH Co KG, Munich. Iansiti, M. and Lakhani, K.R. (2014), Digital Ubiquity: how Connections, Sensors, and Data Are Revolutionizing Business. Harvard Business Review, Vol. 92, pp. 91-99. Kagermann, H., Wahlster, W. and Helbig, J. (2013), “Umsetzungsempfehlungen fu¨r das zukunftsprojekt industrie 4.0”, Abschlussbericht des Arbeitskreises Industrie, 4, p. 5. Keese, C. (2014), Silicon Valley: Was Aus Dem Ma¨chtigsten Tal Der Welt Auf Uns Zukommt, Albrecht Knaus Verlag, Munich. Kohler, T. (2016), “Corporate accelerators: building bridges between corporations and startups”, Business Horizons, Vol. 59 No. 3, pp. 347-357. Matzler, K., Bailom, F., Friedrich Von Den Eichen, S. and Anschober, M. (2016), Digital Disruption. Wie Sie Ihr Unternehmen Auf Das Digitale Zeitalter Vorbereiten, Vahlen Verlag, Mu¨nchen.

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Weiblen, T. and Chesbrough, H.W. (2015), “Engaging with startups to enhance corporate innovation”, California Management Review, Vol. 57 No. 2, pp. 66-90. Westerman, G., Bonnet, D. and Mcafee, A. (2014), Leading Digital: Turning Technology into Business Transformation, Harvard Business Press, New York, NY.

Further reading Christensen, C.M., Anthony, S.D., Berstell, G. and Nitterhouse, D. (2007), Finding the right job for your product. MIT Sloan Management Review, Vol. 48, p. 38. Meck, G. and Weiguny, B. (2015), “Disruption, baby, disruption”, Frankfurter Allgemeine Zeitung.

Corresponding author Kurt Matzler can be contacted at: [email protected]

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