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Digital Disruption:have you been disrupted yet?

Digital disruption: Have you been disrupted yet?

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Table of contents

Introduction .................................................................................... 3

What is digital disruption? ............................................................... 5

Death by digital disruption .............................................................. 6

Why is digital disruption happening? ............................................... 8

Digital disruption success .............................................................. 10

The five drivers of digital disruption ............................................... 12

Why digital disruptors have the edge on customer experience ...... 13

Uber delivers on customer experience ........................................... 14

How collaborative business models are disrupting the economy ... 15

Conclusion .................................................................................... 17

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Digital disruptors are encroaching on the

territory of traditional organisations with new

business models that pose a very real threat to

their very existence. No organisation, industry

or region will avoid digital disruption.

Philippe Lemoine, Chairman of Next Gener-

ation Internet Foundation sums up this era of

digital disruption nicely when he says: “What’s

new about this phase, characterised by the

word ‘digital’, is that the technology race is no

longer driven by large organisations, but by

people”. Digital disruptors are serving custom-

ers with better experiences and in order to com-

pete established organisations must focus on

the customer and optimise each experience, at

every touchpoint across the customer journey.

As Peter Drucker, the legendary management

consultant once said: “The purpose of a business

is to create and keep a customer”. This serves

as a guiding principle for both established busi-

nesses trying to maintain market share and for

new start-ups that are trying to break through.

In this paper, we look at the reality that is digital disruption and why it is happening. We’ll explore

who the digital disruptors are and why they’re achieving success. We’ll also look at why digital

disruptors have the edge on customer experience and what traditional organisations must do to

minimise the threat.

“Since 2000, 52% of companies in the Fortune 500 have either gone bankrupt, been acquired, ceased to exist, or dropped out of the Fortune 500” .

- Ray Wang, Principal Analyst, Constellation Research

Introduction




“Every single step that you put between the customer and the actual function is friction. And today people don’t live with friction. People see friction for what it is”

– Konstantin Peric, Bill & Melinda Gates Foundations

Digital disruption refers to changes enabled by digital technologies that occur at a pace and magnitude that interrupt established ways of value creation, social interactions, doing business and, more generally, our thinking. 1

It can be seen as both a threat and an

opportunity. Indeed digital disruption is

a threat to traditional organisations that

currently hold market share in an industry ripe

for transformation.

On the other hand it presents many

opportunities for ambitious entrepreneurs and

start-ups that are leveraging technology and

building business models that challenge the

status quo and present opportunities to acquire

customers, market share and revenue at rates

never seen before.

Ultimately, however, it is the customer that

will benefit most from digital disruption as

both traditional organisations and new market

entrants vie to engage, attract and retain

more customers over the long term by offering

products, services and customer experiences

that meet and exceed their expectations.

1 What is digital disruption? The Big Opportunity, June, 2013

What is digital disruption?



A poster child for ‘death by digital disruption’

is Blockbuster, the video rental giant that

fell from grace when it failed to evolve

its business model and was essentially

overthrown by Netflix - a brand that did just

that and evolved with the times.

Blockbuster opened its first store in the US

in 1985 and was a huge success. Media giant

Viacom bought Blockbuster for $8.4 billion

in 1994 and store numbers in the US grew to

10,000 at its peak, but by 2010 Blockbuster’s

value had shrunk to just $24million. 1

While Blockbuster grew, its ‘late fees’ policy,

which had generated $800m by 2000 sparked

the creation of Netflix which was started by

Reed Hastings in 1997 after he was appalled

by a $40 Blockbuster late fee charge. Netflix

was different, offering DVD rentals sent to

customers via post.

While the service wasn’t quite as convenient

as a local store, it was cheaper and didn’t

charge the late fees that were a common bug-

bear among Blockbuster customers. In 2000

Blockbuster had the opportunity to buy Netflix

for $50m but turned it down. Netflix was seen

as a small competitor to start with, reaching

4.2m members by 2005, but with the launch of

its video streaming service in 2007, it disrupted

the market again and became a veritable

threat to Blockbuster. Its new distribution

model offered unlimited streaming of movies

to subscribers on a range of devices for a

monthly fee – with no need to visit a store.

1 Blockbuster bankruptcy: a decade of decline, FASTCOMPANY, 2010

Netflix posted its first profit earning of $6.5

million on revenues of $272 million in 2003 but

Blockbuster was slow to identify Netflix as a

threat and failed to see the changes taking

place in the market in terms of consumer

behaviour and media consumption via new

channels. When questioned about Netflix in

2008, Blockbuster’s CEO was quoted as saying:

“I’ve been frankly confused by this fascination

that everybody has with Netflix… Netflix

doesn’t really have or do anything that we

can’t or don’t already do ourselves.”

Blockbuster eventually launched its own digital

download service but by that stage it was too

late. Its retail stores had become expensive

liabilities and a massive drain on the company.

Profits continued to decline and in September

2010 Blockbuster finally filed for bankruptcy in

the US. By January 2013 Blockbuster had also

gone into administration in the UK.

“I’ve been frankly confused by thisfascination that everybody has withNetflix…Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.”

John AntiocoBlockbuster CEO, 2008

Death by digital disruptionBlockbuster fails to move with the times




The InternetDigital disruption is happening due to the

growth of the Internet. Globally, there are

three billion people connected to the Internet

via smartphones and other devices, which

is forecast to increase to nearly six billion

within the next five years.1 The Internet

has changed everything - the way we

communicate, consume, shop, date, share,

source information, and do business. The first

wave of Internet disruption affected traditional

offline content producers. As consumers

became adept at using the Internet and

consuming online, new digital players grabbed

the opportunity to distribute news, music and

movies via digital channels.

Google began to aggregate and deliver

news. Newspaper ad revenues tumbled when

sites like Gumtree and Craigslist presented

traditional print and classified ads online

and often for free. Amazon created a new

distribution model for books, with ebooks and

Kindle. For music, Apple launched iTunes with

songs synced directly to the iPod, while Netflix

offered online video and TV streaming services.

While publishers and traditional content

providers such as McGraw Hill, Blockbuster,

HMV and EMI Records could see what was

happening, they failed to act fast enough

and experienced significant revenue losses

as a result. Of these four digital disruption

casualties, only two continue to do business

today. 2

1 Digital Transformation Review, Strategies for the Age of Disruption, Capgemini, 2015

2 The Decoupling Effect of Digital Disruptors, Harvard Business School, 2014

Customer BehaviourWhile the Internet and technology are indeed

the enablers, digital disruption is ultimately

driven by people. Customer behaviour

has evolved as a result of the Internet and

technology, and it is the continued desire

for businesses to attract, acquire and retain

customers by meeting and exceeding their

expectations that has spurred digital disruption

and transformation, as brands battle it out for

market share.

The digital age that millennials are growing

up in has reshaped traditional consumption

behaviour. 79% of people aged 18-44 have

their smartphones with them 22 hours a

day and of those, 80% say checking their

smartphone is the first thing they do in the

morning.3 Millennials are more willing to

share and interact with strangers as a result

of technology and the world of social media

in which they are now immersed. While

previous generations were more concerned

with ownership of ‘things’, millennials are

more inclined towards shared ownership as

an economic way of accessing services they

desire. The car sharing service Zipcar is an

example of this.

3 79% Of People 18-44 Have Their Smartphones With Them 22 Hours A Day, SocialTimes, 2013

“The rhythm of digital transformation is determined by a customer. As a result, everything must be designed and developed based on the customer’s needs and priorities.”

Philippe Lemoine Chairman of the Fing

Why is digital disruption happening?


New business models and technology

Digital disruption generally occurs when an

entrepreneur or start-up identifies a new or

better way of delivering a product or service

that people desire with the help of new

business models and technology.

A digital disruptor may look at where customer

pain points currently exist within a particular

industry and provide a more efficient,

preferable offering.

Digital disruptors may also look at clunky

systems, structures and business processes of

traditional organisations and develop ways to

streamline, reduce resources and offer services

at a fraction of the cost using new business

models and technology.



While Netflix skyrocketed to success and

Blockbuster plunged to bankruptcy, it was not

all plain sailing for Netflix as it made its own

mistakes along the way.

When Netflix looked to expand its online movie

streaming service in 2011, its execution of this

actually infuriated customers. The company

raised its prices by 60% and announced plans

to divide into two services — one sending DVDs

through the mail, and the other streaming

movies online – an increasingly popular choice

among its 24 million subscribers.1

Customers became frustrated when they were

required to maintain two separate accounts

across separate websites for Netflix services.

In trying to force the transition on customers

Netflix made a major strategic error and paid

the price with nearly 1 million customers

cancelling their service and shrivelling its

market capitalisation from $16bn to $4bn in

just three months.2

While Netflix made some poor decisions along

the way, by listening to its customers it was

quick to recognise and address its mistakes,

something that Blockbuster failed to do.

1 Disrupters bring destruction and opportunity, ft.com, 20142 IBID

Netflix’ digital transformation did not stop with

the introduction of online movie streaming. It

continues to innovate and evolve its business

model in line with the latest industry trends,

market predictions and consumer behaviour.

A recent innovation was the brand’s decision

to produce its own online only web TV shows

including “House of Cards” and “Orange is the

New Black”, and in September 2014, Netflix

became the first video distribution company to

win a major Emmy award.3

In 2014 Netflix had more than 50 million

subscribers in 50 countries with revenues

in excess of $4billion and net income of

$183million.

3 Blockbuster becomes a casualty of big bang disruption, HBR.org, 2013

Digital disruption successNetflix continues to innovate and learn from its mistakes


Four things we can learn from Blockbuster and Netflix

FOCUS ON WHAT’S AHEAD AND HOW CUSTOMER BEHAVIOUR IS CHANGING WITH THE TIMES. No matter what happens with technology, brands must always focus on delivering a superior customer experience – and this means really understanding customer behaviour.

BE PREPARED TO INNOVATE AND SHAKE UP YOUR BUSINESS MODEL. Blockbuster was wedded to its old ‘bricks and mortar’ model for too long as customers abandoned it. Even as late as 2011, Blockbuster continued to buy more stores. Netflix has innovated its business model several times since it started out and continues to do so with much success.

DON’T FORCE TRANSITION ON CUSTOMERS. Netflix attempted to force the digital side of its business on current customers prematurely and infuriated them as a result.

DIGITAL DISRUPTION DOESN’T HAPPEN OVERNIGHT. The warning signs were there for Blockbuster, it even had the opportunity to react, but failed to do anything until it was too late. It’s important to pay attention to the market and be ready to act.



Wastage of resourcesEntrepreneurs identify an

unused asset and find new

ways to generate value

from it. Airbnb recognised

a way to enable people

to monetise unused

properties or rooms and

meet the needs of cost

conscious travellers.

RedundancyEntrepreneurs identify ways

to bypass ‘redundant’ people

and inefficient processes using

technology. Transferwise and

CurrencyFair allow customers

to save as much as 95% on

transfer fees by bypassing the

middle man and enabling peer-

to-peer currency transfers.

ComplexityEntrepreneurs identify

ways to simplify complex

and frustrating customer

experiences. Uber and

Lyft have successfully

simplified a complex,

costly and unreliable

service for customers.

Limited accessStart-ups are identifying ways to enable people to access expensive

or luxury services that they wouldn’t otherwise be able to. BMW-on-

demand is a new offering from the luxury car brand that gives customers

shared access to a car. They are charged per minute of usage rather than

having to pay for the full cost of ownership.

Broken trustWhere customer trust in

large institutions is broken,

start-ups that offer peer-

to-peer platforms and

bypass the middle man

are emerging. Examples

include Funding Circle and

Zopa that both offer peer-

to-peer lending platforms.

5

4

2

1

3

The five drivers of digital disruptionGlobal thought leader, Rachel Botsman has identified five key drivers of disruption.1



Today, most companies claim to be focusing on

customer-centricity. However, few traditional

organisations have been built around the customer’s

needs or with an ‘outside-in’ approach. Digital start-

ups, on the other hand, have customer-centricity at

their very core.

Through digital, customers have found new ways to

communicate, consume and share.

Customers now measure the performance of

organisations and the brand experience based on

the standards set by ‘digital natives’ such as Amazon

or Uber. They expect the same response times, the

same omni-channel experience, and the same level

of real-time information.1

1 Digital to the core - Are Britain’s mid-tier companies playing to win? KPMG, 2015

Ericsson Communications Technology outlines why digital disruptors have the edge on customer experience.

• Digital disruptors are mainly founded on the premise of improving or simplifying the lives of end users

• Their business is built from the user’s perspective rather than on an established business model

• The digital technologies on which they build their products and services enable a much higher degree of customer-centricity

• They lack the legacy infrastructures, bureaucracy and operating models that force many traditional companies to continue thinking from the ‘inside-out‘ rather than from the ‘outside-in’

Why digital disruptors have the edge on customer experience



Uber is the obvious example, but also a very

worthy mention. Recently valued at $41 billion

and predicted to go public very soon, Uber is

a brand with a new business model that has

challenged the status quo and leveraged the

latest technology to deliver a standardised

service but in a faster, easier and more

affordable way – in cities across the globe.

Customers are impressed with the ease of use,

speed and affordability of Uber’s service, and

it has left taxi companies – even in regulated

markets such as London, wondering what to

do next, as this is a business model that will

be very hard to emulate. Uber provides better

customer experience while generating new

sources of revenue, and all at lower costs,

without the need for Uber to actually own any

vehicles or employ any drivers.

“If you look at a company like Uber, the product is not that innovative. They’re a transportation company, but at the same time, they’re using social technology to generate driver reviews, mobile technology to deliver the app, cloud technology to power the whole thing, and big data analytics to track surges that alter their pricing. It’s a very innovative business, but it’s not about replacing taxis. It’s about removing an intermediary that gets in the way of efficient transportation, making the process simpler.” 1

Ray Wang, Analyst, Constellation Research

1 CRM Evolution 2014: Modern Marketers Must Focus on Context, Content, and Revenue, destinationCRM.com, 2014

Uber delivers on customer experience


Collaborative business models are reflective of the changing customer behaviour guiding businesses

today. Consider Airbnb, Uber, Lyft, or YPlan. What do all of these digital disruptors have in common?

None of these businesses actually have physical assets. Airbnb doesn’t own any accommodation but

facilitates access to spare rooms and unused properties. Neither Uber nor Lyft own any cars or em-

ploy any drivers, and YPlan doesn’t own any venues or operate events. Both groups simply facilitate

the provision of the service between the provider and the customer.

Customers aren’t as concerned with physical ownershipCustomers today aren’t as concerned with

physical ownership as they were in the

past. Businesses that have tapped into this

collaborative economy and evolving consumer

behaviour are some of the most well-known

disruptors today. Netflix and Spotify customers

pay to access the benefits of the service

without actually owning any of the media.

Likewise, Zipcar and bike-share schemes allow

customers to access all the benefits without

the cost of ownership.

Technology makes it easier for people to build trust with strangersTechnology makes it easier for people to build

trust with strangers and to interact and share

in ways that were never possible before.1

Customer and provider reviews and ratings are

a big part of the collaborative economy. Today,

people do not just share assets; they’re sharing

knowledge and experiences with their peers

using ratings and reviews. These socially-based

recommendations are often regarded as more


trustworthy than traditional marketing, the

press, or the advice of a broker. People connect

with strangers, who build value and trust using

the currency of their personal reputation, and

the trust cuts both ways. For example, the

Uber passenger is rated with the same process

as the drivers, and that rating may influence

whether drivers want to do business with a

specific passenger.

Customers demand transparency of service costsSavvy customers are eager to have full

transparency when it comes to the services

they use and pay for. They want to understand

how systems, fees and service providers

operate and will no longer tolerate unfounded

hidden fees. Many digital disruptors are

tapping into and facilitating this by cutting

out the broker or the middle man in service

transactions to offer customers the same

service but at a much lower cost. Customers

are quite happy to bypass the middle man and,

instead, do business peer-to-peer.

How collaborative business models are disrupting the economy



WeSwap cuts out the middle-man to become the world’s first P2P currency exchange for the traveller WeSwap is the world’s first person-to-person currency exchange for the traveller. It allows customers to swap their travel money for a fraction of the costs normally incurred using conventional financial institutions - or even for nothing, if among their friends. Users swap currency with each other at the interbank exchange rate and pay a transparent fee. As well as an online account which can hold multiple currencies, users receive the WeSwap Prepaid MasterCard® which enables them to access the funds in their account anywhere that accepts MasterCard. 1

1 Startup pitch: WeSwap aims to disrupt the currency exchange market with P2P platform, Tnooz.com, 2014

“Our USP – we offer travellers the best possible rate on their foreign currency by cutting out the middle man – it’s as simple as that!”

Jared Jesner, co-founder, WeSwap


ConclusionThere is no doubt about it, the organisations that sit by idly hoping that digital disruption will not come knocking will be in for a rude awakening. It is important to understand that most digital disruptions don’t happen suddenly: they take place over time.

Many organisations get so caught up in everyday operations they forget to look at what’s happening outside the organisation and fail to think about what the future may hold. As previously highlighted, Blockbuster is a prime example of this.

Digital disruptors recognise problems in the current way services and products are offered and do it better with digital. Where traditional organisations are failing to meet the expectations of customers, digital disruptors may very well enter the market and bridge that gap providing customers with what they’re looking for.

While technology has certainly enabled digital disruption, disruption really comes down to meeting customer needs in the most effective way possible.

Whether you’re a digital disruptor or a traditional organisation the better you can meet and exceed customer expectations the more successful you will be.

As the world becomes increasingly digitalised, customer expectations will evolve accordingly so think about how your business can transform to align with this.

Understanding your customers and paying attention to what is happening in the market is fundamental to success and indeed survival.



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