We talk a lot about digital transformation and we know that companies are digitally transforming themselves. What’s missing sometimes, however, is the “why”.
Digital transformation is a complex process, and a fundamental aspect of it is that it occurs in what we call the digital ecosystem — an ecosystem in which every player both affects and is affected by the other players in the ecosystem. In this ecosystem, new opportunities arise from unexpected connections and dependencies between companies within an industry, from different industries and between industries.
What do Butterflies Have in Common with Digital Transformation?
“It has been said that something as small as the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world”. The quote, from The Butterfly Effect movie, stems from the chaos theory and the idea that a small change in one state of a deterministic nonlinear system can result in significant differences in a later state.
Similarly, a digital butterfly flapping its wings, which means a small change in a player in a digital ecosystem, could lead to disruption across other players and other industries. A single wing beat could destroy a traditional company’s long-standing competitive advantage or, more generally, threaten a well-established business model.
New business models, new value chains and new economies are emerging all the time, with digital the key underlying factor. Digital transformation means going beyond digitisation. It’s not simply about applying new technologies to old processes. It’s about using digital to evolve the business, adding new business models and new revenue streams, and carving efficiencies out of their core operations, with data as the pillar of innovation.
All industries are exposed to digital disruption, even if they have different levels of innovation propensity. In retail, for example, innovation is an imperative, according to our innovation index. Trends under the spotlight here are customer experience and omni-channel platforms, with the key role of technology enabler played by IoT and AI. The utilities industry, however, scores lower on innovation, despite high ICT spending growth — technology investments are growing but they are focused on more traditional technologies.
We have identified three main butterfly effects driving digital transformation:
- Between companies in the same industry, where the driver of change is a new player, often a start-up, entering an industry and bringing new business models
- Between companies operating along the same value chain, when a transformed partner drives change and creates new value chains
- Between different industries, where disruption in one industry spreads rapidly to other industries to create new digital economies
First Butterfly Effect: Between Companies in the Same Industry
Digital disruption within an industry is generated by a new entrant flapping its wings and creating new business models that destroy existing ways of doing business — requiring existing players in the industry to transform themselves to stay competitive.
For example, Kickstarter, the crowdfunding company, disrupted the traditional venture capital business model by introducing a new way of funding that leverages the crowd, making financing easier for start-ups and entrepreneurs.
Another example is Airbnb, the hospitality platform, which introduced a new business model acting as an online brokerage platform that matches house renters and accommodation seekers for temporary periods.
In the staffing industry, Upwork, a gig-work platform, introduced a new digital business model, a marketplace for buying and selling flexible labour services on demand.
Second Butterfly Effect: Between Companies in the Same Value Chain
In this second scenario the butterfly is a partner in a value chain that changes in a way to reinvent the value chain itself.
An example is Ticketmaster, a ticket sales and distribution company founded in the 1970s and among the first in the industry to move to online ticket sales — changing how and where consumers purchase the service, and enabling consumers to buy tickets online rather than going to physical shops.
Another example is Lego, the Danish toy manufacturer, which has changed the traditional manufacturing value chain by externalising to the customer the ideation phase of the product development funnel through crowdsourcing. Yet another example is DHL and its “last mile” delivery. As with Ticketmaster, here we have disruption in the way products are delivered to customers, using flexible delivery solutions designed to respond to urban ecommerce trends and environmental challenges.
Third Butterfly Effect: Between Industries
The third butterfly effect — the most pervasive one — originates from an industry and rapidly destroys other industries to create new digital economies. An example is the connected car economy, a transformation that started in the automotive industry and then extended to insurance, media, transport infrastructure providers and government.
Another example is the smart city economy, originating from the government industry and then disrupting other industries such as utilities (for water quality monitoring), healthcare (for emergency response), transportation (for public transport) and telecoms.
A final example is the open banking economy that originated in the finance industry with the European Payment Services Directive (PSD2). The directive stipulated that banks should be required to share more customer information than ever before via technologies such as application programming interfaces (APIs). Open banking has unlocked an array of digital opportunities and changes in other industries such as retail, professional services and tech manufacturing.
What Does This Mean for European Industries?
This is a wake-up call for companies that believe digital disruption is not going to impact their specific industry. We believe disruption can come from anywhere and can impact every industry.
Digital transformation is a complex business process, and companies that want to transform need to manage, design, plan and anticipate it. This means that traditional organisations that want to remain relevant in the future need to transform themselves by being in tune with every single flap of the “digital butterfly”, following a clear road map, innovating faster, being more customer-centric, embracing risk and using technology to create competitive advantage.
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