Why everyone wants to be the next disrupter?
For business, disruption is the ‘new black’. How does it work?
As smart technology-driven upstarts turn business conventions on their head and attempt to grab market share from incumbents, the Holy Grail is to develop a digital platform that redefines traditional market structures and displaces conventional value streams.
Examples abound, from Airbnb shaking up the hospitality industry to app-based transport service Uber taking on the once untouchable taxi industry.
Eric Lim, a lecturer at the school of information systems, technology and management at UNSW Business School, says despite some companies wishing it away, digital disruption is here to stay because it brings with it a wealth of benefits for consumers.
Consider a simple transaction such as paying for a meal at a restaurant: once at the mercy of the powerful credit card companies, today a customer can choose from options such as digital currency bitcoin.
"You no longer have to be held down by a few major players and be dictated by their terms," he says. "In that sense I see disruption as a liberation of consumers."
For companies, however, such disruption can be scary, and many incumbents or market leaders are scrambling to adopt or improve digital platforms that allow them to compete with, or keep at bay, new entrants.
Lim and his colleagues, Erol Kazan and Chee-Wee Tan of Denmark's Copenhagen Business School, recently released a research paper, Towards a Framework of Digital Platform Disruption: A Comparative Study of Centralised and Decentralised Digital Payment Providers.
In it, they present a framework to examine the disruptive potential of digital platforms by comparing case studies of leading online payment company PayPal – a centralised digital payment platform – with bitcoin start-up Coinkite – a decentralised platform that offers small merchants lower costs using a payment terminal that has been modified to accept bitcoins as a means of payment.
According to the authors, centralised platforms "seek to obtain monopolistic power by tightly coupling platform layers to derive unique configurals, which are difficult to replicate".
Decentralised platforms, on the other hand, "purposely decouple platform layers to mobilise third parties to innovate on each layer and accelerate market disruption".
'Being in a start-up now is the equivalent of being in a band in the ’90s'Frank Farrell
Layers of competitive battle
Lim says the ubiquity of digital platforms has created an urgency to understand them more thoroughly so they can be used to greatest advantage.
"Right now in articles or commentaries people talk about them in a generic fashion, but what they don't realise is that platforms consist of different layers that are mashed up," he says. "At every single layer of these platforms there are ways to do things differently."
The key layers that Lim and his co-researchers outline in their paper are:
- Device (physical IT artefacts such as an iPhone);
- System (operating systems such as iOS);
- Network (data transmission protocols such as the internet);
- Service (software applications such as Apple Pay); and
- Content (data such as electronic payment receipts).
In their paper, they argue that each of these "digital platform layers signifies a competitive battlefield for incumbents and disruptors to wrestle market leadership by exerting control over the growth and pace of innovation". Within these layers, companies can adopt different strategies.
With Coinkite, for example, Lim says it does not seek to produce a faster payment device or one with more functionality – instead, it offers freedom of choice, allowing external partners to use whatever device they want.
For a dominant incumbent in the digital payments space such as PayPal, such flexibility from the new players means there is the potential to be disrupted at all layers.
Lim says companies have a lot of options at each layer of their digital platforms which must be broken down and carefully considered.
"A lot of the time you fail to see the actions that you can perform at each of these layers; you just think of a generic strategy."
Frank Farrall, lead partner of Deloitte Digital in Australia, says there is no doubt that disruption will continue to redefine business "because of all the 19-year-olds out there in universities and garages with access to really inexpensive technology and cloud-based infrastructure".
"Being in a start-up now is the equivalent of being in a band in the '90s," Farrall says.
His message is clear: know that disruption is happening, and that it could happen to you.
"I still have plenty of clients saying: 'I've been in this business sector for 20 or 30 years, so digital disruption is not going to happen to us'. [But] the smart executives are constantly testing their teams around the question: Who could Uber or Airbnb us tomorrow?"
In Deloitte's own recent report, Harnessing the 'Bang' – Stories From the Digital Frontline, case studies of industry leaders such as Telstra, AustralianSuper and Westfield demonstrate that large established companies can wake up to digital disruption, make some strong technology investments and respond to new challengers.
"If you understand disruption is happening and you rise to the challenge, ultimately the customer gets the better experience – you can offer new services and capabilities and make money in a new way," Farrall says.
Big players such as banks are also doing just that – mobile apps, social media investments and using a phone at ATMs to withdraw cash are among the counter-strategies they are deploying.
However, Farrall warns that in the world of disruption there is no room for complacency: "Because we're in a digital marketplace, we're constantly under pressure."
'Essentially, the different platforms give birth to innovation, and innovation is the thing that actually disrupts the market'Eric Lim
What to do
Farrall recommends four key elements for companies seeking to respond. The first is acknowledgement at executive-suite level of the threat of digital disruption and a commitment to react; the second is a focus on the customer or citizen and understanding how they want to interact with your business; the third is investing in digital specialists who can work within organisations but also change their culture.
"And finally, continuous improvement – you can't just build an app or do a social media project and declare victory," Farrall says. "You have to constantly be driving innovation and looking at the landscape in order to keep up with digital disruption."
Farrall also advocates a two-speed technology approach for business; one that ensures an agile digital front-end platform for app creation, social media activity and the like while maintaining a secure core system where data resides.
"That is the best construct we've seen that allows businesses to really secure their data and their core systems while innovating and keeping up with customer expectations," Farrall says.
One major question that has arisen out of Lim, Kazan and Tan's paper is whether there is an optimal digital platform configuration that could fend off potential disruptors. Lim says there is no clear answer at the moment, but that drawing attention to the different layers is a good first step towards success.
He says having a strong understanding of the different dimensions of platforms can help a business anticipate innovation – and respond to it.
"Essentially, the different platforms give birth to innovation … and innovation is the thing that actually disrupts the market."