Digital Transformation: fast is as important as right.
In a recent post, I highlighted the importance of approaching digital transformation in the right way and honest way: too many companies treat the process as a bit of an experiment, and many more do not even try, pretending they are transforming. Nevertheless, speed is a third, critical dimension for digital transformation to be successful: A compelling study from McKinsey highlights why digital strategies fail, and among the many variables, at the very top, speed stands out. But what are the consequences of underestimating the velocity of digital transformation? There are many, and they are all intertwined, so they represent a complex system per se, which many fail to understand, and therefore they misjudge.
In marketplaces being disrupted, there is a tipping point in which the emerging digital business model cannibalizes at exponential rates the incumbents. Beyond that tipping point, most of the incumbents do not survive. They cannot switch from one model to the digital one fast enough (e.g., Blockbuster and Netflix).
Digital Business Models redistributed value.
Consumers and customers experience transparency, convenience, and better pricing. Nowadays, most consumers expect to return their online shopping at the retailer’s expense. There is an emerging payment model in which online shoppers do not pay for their purchases until they have decided to keep them. At that point, many wanted to pay in installments, hence the success of Klarna, which developed beyond an online payment processor by redistributing risk between the shopper and the online store. But the value redistribution goes well beyond experience, as many digital propositions are cheaper for the customers (e.g., shared economy), cut the proverbial middle-man (e.g., travel agencies), and make specific categories obsolete (e.g., smartphone vs. cameras, mobile maps applications vs. portable navigation devices, Skype on mobile vs. calls serviced through the mobile operator). Value redistribution and convenience make the technology rate of adoption faster and faster. The market share shift that the incumbent Kodak experienced when digital photography emerged was a decade; the market share shift that brought Blockbuster to file for bankruptcy lasted roughly three years.
First Movers Survival
While the first mover advantage was dismissed already a decade ago as an effective entry strategy (e.g., Yahoo vs. Google Search), it is commonly believed that first movers in the digital era have better chances of survival. This is due to two reasons: first, they experience faster growth rates. Furthermore, these growth rates produce better margins because of the lack of digital competitors. First movers and most rapid followers have a higher probability of survival because they, among other things, have access to a better pool of market growth and profitability than other late-to-the-party players.
The above vector is even more compelling and accurate in industries where scale and network effects create “Winner-takes-all-economies.” First, this is the case of Amazon, that in a more digitalized economy, is experiencing better operational results than before. They are growing in revenue, but they are also increasing more profitably in their bottom-line. And, as in the case of Amazon, because they are growing faster and more successfully, they are widening the gap with the incumbents more quickly. And many of their slow-moving competitors are filing for chapter 11.
Emergence of Ecosystems
Still on Amazon, for example, because they have built a platform and an ecosystem, they can move very quickly to other industries, even not adjacent. Amazon is making a growth play in the healthcare sector and the movie business, whereas Apple and Google are in Payments, Healthcare and Automotive. It is also rumored that Apple might make a move on Hollywood’s studio business. For incumbent players, it is more difficult to compete against a platform coming from another industry. Being one of the early digital transformation leaders or a fast follower is the only tactic limiting the influence of external media moving in.
While there is evidence that digital transformation is more successful when companies approach the challenge full-heartedly — rather than just dangling their feet in the water — being late in adopting a digital business model is as bad as not starting the process. Firms that transform into a digital model early and fast followers enjoy better growth rates and margins in a context where the value is getting redistributed. They often experience network externalities that improve their operational profitability, and they are better positioned for the competition coming from platform companies.