Introduction

“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”

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 Generation 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 customers with better experiences and in order to compete 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 businesses 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.

What is digital disruption?

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.

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.

“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

Death by digital disruption: Blockbuster fails to move with the times

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.

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 bugbear 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.

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 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.” John Antioco Blockbuster CEO, 2008

Why is digital disruption happening?

The Internet

Digital 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.

Customer Behaviour

While 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 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

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.

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.

Digital disruption success: Netflix continues to innovate and learn from its mistakes

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.

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.

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.

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.

In 2014 Netflix had more than 50 million subscribers in 50 countries with revenues in excess of $4billion and net income of $183million.

Four things we can learn from Blockbuster and Netflix

1. 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.
2. 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.
3. 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.
4. 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.

The five drivers of digital disruption

Global thought leader, Rachel Botsman has identified five key drivers of disruption.

1. Wastage of resources: Entrepreneurs 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.
2. Redundancy: Entrepreneurs 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 peerto- peer currency transfers.
3. Complexity: Entrepreneurs identify ways to simplify complex and frustrating customer experiences. Uber and Lyft have successfully simplified a complex, costly and unreliable service for customers.
4. Limited access: Start-ups are identifying ways to enable people to access expensive or luxury services that they wouldn’t otherwise be able to. BMW-ondemand 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.
5. Broken trust: Where customer trust in large institutions is broken, start-ups that offer peerto- peer platforms and bypass the middle man are emerging. Examples include Funding Circle and Zopa that both offer peerto- peer lending platforms.

Why digital disruptors have the edge on customer experience

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 startups, 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.

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 customercentricity
• 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’

Uber delivers 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.” - Ray Wang, Analyst, Constellation Research

How collaborative business models are disrupting the economy

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 employ 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 ownership

Customers 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 strangers

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

Savvy 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.

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.

“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

Conclusion

There 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.