Which-50: What digital winners know and incumbents refuse to accept – information trumps physical assets

BY Andrew Birmingham, Wednesday April 22, 2015, Which-50

There’s rock, paper and scissors — and then there’s information. The emerging generation of digital winners recasting business models the world over has worked out where the real power resides.

At least, that’s our reading of a new study into digital disruptive intermediaries.

Called Digital Disruptive Intermediaries: finding new digital opportunities by disrupting established business models”, the study by the University of Sydney Business School and Capgemini identifies eight different digital disruption archetypes including digital stores, content hubs and crowd sourcers. The archetypes are not meant to be mutually exclusive, with many dotcoms exhibiting characteristics of several categories.

According to the report, which looks at the way Digital Disruptive Intermediaries (DDIs) change how value is created and organised in different markets, the current levels of disruption in business match anything the industrial age could offer up. “Whereas incumbents derive competitiveness from the ownership of physical or other assets, DDIs get their edge from the superior utilisation of information,”.

The study argues that it is the ability of digital disruption intermediaries to both analyse and exploit information to create new services and network effects that puts them ahead. “By following an ‘information-first’ approach (Battelle 2014), DDIs approach markets as a matter of information management rather than traditional resource deployment and exploitation. Consequently, their digital strategies rest on the gathering and exploitation of information in order to create novel digital services that capitalise on market inefficiencies.

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Often they do not own physical assets, but rather “… they are disruptive and successful because they reorganise the allocation of supply and demand through the gathering and exploitation of information, often aided by sophisticated analytics. In this way they can achieve scale, and cause disruption, extremely quickly.

Among the key findings of the report:

  • Digital Disruption often feels sudden, yet the source of disruption has often been present, and even observed, for a while before it creates a significant impact;
  • It is key to understand the mechanics by which Digital Disruptive Intermediaries (DDIs) change the value flow in markets to uncover vulnerabilities and new opportunities in your business;
  • The current wave of emerging technologies are so disruptive because they both transform the way value is generated and change our thinking and understanding of how a market operates;
  • DDIs change the allocation of supply and demand by exploiting the flow of information, not the control of physical assets — not only does this make them disruptive, it means they can grow extremely rapidly;
  • To prepare, incumbent businesses need to think systemically and experiment and innovate using digital technologies that are outside of their current, established business structures;
  • The biggest threat to incumbent businesses is their adversity to risk, which prevents them from reacting even when disruptive change is upon them.

The authors note, “Whilst disruption often feels sudden it is likely that the source of disruption has been around for a while. However, evolving disruption is notoriously hard to spot. We tend to try to predict the future by extrapolating what we know today, and this approach doesn’t work for disruptive change. It is often unrecognised until it is too late as it is easy to miss or dismiss something that initially appears insignificant against the current understanding of how the market operates.

The study also delves Into the reasons incumbents often miss the emergence of new threats.

Sydney Business School Associate Professor and report co-author Kai Riemer told Which-50, “Disruption is notoriously hard to spot — in fact these changes are disruptive precisely because they seem to hit suddenly when the actual services were around for quite a while.

The reason, according to Riemer, is that the disruption is based on a change in understanding of what is important about the product or service. “MP3 was disruptive to CDs only when sound quality was no longer important, but mobility. Remember that initially the iPod was largely dismissed with ‘no one needs 1000 songs in the pants pocket’ — today we want everything, anytime and everywhere, and quality is pretty much unimportant.

In the study, the authors argue that new technologies are often dismissed initially, as they are understood against the established technological standards of the time. Yet, they say, “As the shift occurs it is profound, and going back is impossible — what was once established and normal is now old, out-dated and inferior.

Likewise, traditional approaches to modeling markets fail to grasp the shattering effect of new models on old certainties. “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 Riemer (pictured below).

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Ironically, for incumbent businesses it is often their in-built adversity to risk that presents the biggest risk in the face of disruption,” said Riemer as a warning to traditional businesses. “In a time of rapid and unpredictable change, it is better to be a part of the disruption than a part of history.

Disruptive change cannot be grasped by extrapolating into the future what we know today. Such an attempt at forecasting leaves out the innovation that market actors within traditional business practices engage in using digital technologies — they do not stand still and wait to be disrupted by some mysterious force.

Moreover, the authors argue, as business practices change so does the understanding of what counts as meaningful, valuable, and the right way of performing these business practices. That in turn brings about further changes. “What is required is an analysis of the mechanism by which successful digital disruption operates.

All hail the Middle Man

The study suggests that, contrary to the conventional wisdom of dotcom 1.0 that intermediaries would be cut out and gradually eliminated from the value chain, more recent research suggests we are in an ongoing “period of reintermediation or even cyber mediation and that these new models are both plausible and economically rational.

Indeed, the commercialisation of the Internet and the emergence of mobile technologies have given rise to waves of new intermediaries. The first wave (the dot.com boom) gave rise to e-commerce companies, online stores and new media companies. The second wave is currently under way; it is created by a swell of trends that overlap and converge, such as the digitisation of content, the emergence of mobile devices and app ecosystems and the rise of data analytics and recommender systems,” according to the report.

See Sydney Business School Associate Professor, and report co-author Kai Riemer speak at Which-50’s Daze of Disruption conference. Secure your ticket to Australia’s best digital transformation forum. Use the AND1 promo code for your Which-50 reader discount.

– See more at: http://which-50.com/blog/2015/april/22/what-digital-winners-know-and-incumbents-refuse-to-accept-information-trumps-physical-assets/#.VT2IiGccTIX