The Digital Tsunami: Size matters in the digital world

The digital revolution has seen a bunch of new organisations experience staggering growth

The ambitions of such upstarts might bring a smile to the sceptics, but they still recognise that Google has transformed access to information, Facebook has connected more than a billion people, and human DNA analysis services are now available for a few hundred dollars. The success stories are rife.

Should traditional businesses worry? Appearing across numerous sectors, these start-ups share outsized ambition and care little about traditional business models or management theories. Since 2000, 50% of enterprises listed in the Forbes 500 have disappeared. Not only are new companies disrupting traditional value chains and threatening dominant market players, they are causing a rethink in business-to-consumer relationships.

So how are these organisations achieving market-dominant positions in such a short period of time? The ability to grow a client base rapidly without undermining service quality requires considerable execution speed (for example, Uber covered six towns in two months). Unlike existing post-industrial organisations, the operational models and processes of digital organisations enable considerable responsiveness and ‘scalability’.

Meanwhile, the costs of entry continue to fall for a number of reasons:

• In hardware, electronics costs are following Moore’s Law; meanwhile, open source and new programming paradigms reduce hardware and software development overheads
• Software platforms are freely available, so creating an e-commerce site only takes a few days (for example, using Shopify) and stock control software (for example, Vend) is available for only a few tens of Euros per month
• Access to human resources is easier with subcontracting, offshoring and other models, reducing costs and increasing flexibility. Amazon’s Mechanical Turk is an example of this kind of marketplace for recommended subcontractors
• Investment levels are lowered and therefore access to investment is greater. For example, Nickel is enabling payments to be made from a local shop without requiring a bank account.
• Crowdfunding models enable start-ups to sell products to early adopters even before they exist, at very low cost – thus minimising the need for a cash pile for product development. Scio raised USD 2.7 million in record time on Kickstarter.

However, traditional weapons to respond to competitive pressure (barriers to entry, competitive advantage) are proving useless. In the old days, organisations would use their size to control distribution. Today, e-commerce enables direct access to the market, with the Web as a low-cost marketing tool. Digitalisation reduces variable costs so digital-first organisations can operate at the same (or indeed greater) scale as traditional, capital-intensive organisations.

Furthermore, big businesses are not very good at being disrupted. Even if they have recognised R&D competences, innovation is generally focused on optimisation of existing products and processes rather than higher-risk, more disruptive goals. In addition, an organisation’s internal operations can be difficult to change for a host of reasons, including corporate inertia and workforce obligations. It is often easier therefore, for a start-up to deliver a proposition of greater value, more quickly, to a broader audience.

New market entrants have been accused of not respecting competition rules, legal or regulatory frameworks (as illustrated by taxi operators’ reactions to the arrival of Uber). Yet traditional organisations have been equally guilty of using regulation as a barrier to hide behind. This strategy is proving ineffective, not least because it encourages a protectionist attitude rather than one of innovation. In addition, legal frameworks are not keeping pace with technological development, as the music industry is well aware. Regulatory and ethical lines are moving, and the laws of yesterday are not necessarily those of tomorrow.

So, what to do? The digital groundswell is a reality that established businesses need to confront, changing the behaviours of employees and clients, transforming value chains, and driving a rethink in business models. Neither is it enough to recognise this fact and undertake mere initiatives: transformation isn’t the sum of several projects around client relationships, but should impact all aspects of the organisation.

It is time for concrete action. In a future blog, we examine the six ways that organisations can surf the digital wave, but for now we recommend:

• Forward planning and strategic research become key business activities to better anticipate future drivers
• Partner strategies with start-ups that allow an organisation to reposition itself at the heart of innovation, creating virtuous circles
• Freeing up the necessary resources for transformation and not being afraid to invest in projects where profitability is uncertain
• Collation, analysis and monetisation of data be placed front and centre of digital transformation
• The organisation promote risk-taking, and should value youth as a source of momentum and creativity

Clearly, size matters for both traditional enterprises and digital upstarts, but while the former look to achieve a critical mass and economies of scale, the latter look to reach the largest possible number of people. This hyper-centricity, with the consumer in the middle, should be taken into account by even the largest enterprises.

Digital-first businesses are driven by a shared a spirit of conquest, the ability to question themselves and a positive attitude to seek out new horizons. Such a spirit is open to organisations of all sizes, if they choose to adopt it from the board-level and throughout.