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In a rapidly changing world, managers and decision-makers are increasingly concerned with a phenomenon that is fundamentally transforming their industries: digital disruption. This process describes how new digital technologies and innovative business models are changing established markets, traditional products and tried-and-tested services or even rendering them obsolete [1]. Companies such as Netflix, Uber and Airbnb have shown that digital disruption is not just a theoretical concept, but an immediate reality that decision-makers need to understand and actively shape. The ability to recognise and respond to these changes will determine the long-term success or demise of established organisations.
Digital disruption: What decision-makers need to know
Digital disruption is caused by the introduction of new technologies. These enable more efficient processes and better solutions. They not only change individual products, but entire value chains [1]. It is crucial for decision-makers to understand this dynamic.
A classic example can be seen in photography. Kodak invented the first digital camera in 1975. However, the company did not recognise the potential of this innovation in time [4]. Instead, Kodak continued to concentrate on film rolls. As a result, the company lost its market share massively. In 1991, Kodak still achieved record sales of 19.4 billion US dollars, but digitalisation ultimately led to its decline [4].
Another example comes from the banking sector. Fintech companies such as Revolut are challenging traditional banks [1]. They offer mobile applications and digital services. Customers can now carry out banking transactions from anywhere. Established banks therefore need to rethink and modernise their business models.
The music industry also experienced a radical upheaval. Streaming services such as Spotify eclipsed physical music sales [6]. With its subscription model, Spotify minimised the benefits of CDs and downloads. Artists had to reorient themselves. The industry had to completely restructure its revenue models.
Understanding the different facets of digital disruption
Digital disruption manifests itself in various forms. Each form brings its own challenges and opportunities [5]. Decision-makers should be aware of these differences in order to be able to react correctly.
Disruptive technologies as a driver of digital disruption
Artificial intelligence (AI) fundamentally optimises business processes [1]. It analyses customer data and personalises offers. This enables completely new services that were previously impossible.
The Internet of Things (IoT) networks devices with each other [1]. This creates completely new business models. One example is intelligent lifts from Thyssenkrupp. The TWIN lifts have two cabins one above the other in one shaft [6]. They can reach different levels at the same time. This increases efficiency considerably.
Cloud computing offers flexible and scalable IT resources [1]. Companies no longer need to invest in expensive hardware. They can rent computing power as and when they need it.
Disruptive business models and innovative platforms
Netflix's business model demonstrates this impressively. Netflix started with a subscription model and mail delivery of DVDs [4]. They later switched to streaming. Instead of individual video cassettes or DVDs, customers paid a monthly fee. This revolutionised the entire entertainment industry [1]. Video stores disappeared within a few years.
Amazon showed a similar pattern in retail. The company started out as an online bookshop [2]. Later, Amazon expanded its marketplace into a huge platform. Today, Amazon sells almost everything. Traditional bookstores like Borders and Barnes & Noble could not keep up with this model [2].
Booking.com revolutionised the hotel industry through digital mediation [8]. Hoteliers quickly recognised the competitive advantage of this platform. Those who joined in early secured a large market share. Today, it is almost impossible to be successful without Booking.com.
Utilising the opportunities of digital disruption
Although digital disruption threatens many established companies, it also offers immense opportunities [1]. Decision-makers who recognise and exploit these opportunities can lead their industry.
Innovation and competitive advantage through digital disruption
New technologies promote innovation [3]. Companies can develop completely new products. They can improve existing products and offer them more cheaply.
Uber, for example, created a new business model for the taxi industry [1]. The company did not need its own vehicles. Private individuals offer their service via the app. This drastically reduced operating costs. Prices became more attractive for customers [10].
Airbnb followed a similar pattern in the hotel industry [7]. Homeowners rented out their rooms to tourists. The company did not need to build hotels. This enabled rapid growth with minimal investment.
Increased efficiency and cost reduction
Digital technologies significantly improve efficiency [3]. Automation reduces manual labour. Costs fall, quality increases.
Fintech start-ups such as Square and Stripe simplified credit card processing [2]. They eliminated unnecessary intermediate steps. This reduced fees for everyone involved. Robinhood made share trading free of charge [2]. In doing so, they democratised access to financial markets.
Slack changed communication in companies [7]. Emails were replaced by a centralised channel. Communication became faster and more transparent. Teams work together more efficiently.
Access to new markets and customer groups
Digital platforms open doors to new markets [3]. Geographical borders are becoming less important. Companies reach customers worldwide.
PayPal and Bitcoin transformed the financial sector [3]. They enabled borderless payments and money transfers. These services were particularly transformative in developing countries. People without bank accounts were suddenly able to participate in the global economy.
WhatsApp massively disrupted the telecoms industry [7]. The company enabled free messages, calls and video chats over the internet. This opened up completely new markets in countries with high SMS tariffs.
Risks and challenges of digital disruption
However, digital disruption also harbours considerable risks for established companies. Decision-makers must take these risks seriously and act proactively.
The risk of displacement through digital disruption
Established companies risk being ousted. This often happens faster than expected. Netflix displaced video stores within a few years [1]. Blockbuster, a giant at the time, almost disappeared completely.
Amazon displaced traditional bookshops and retail chains [2]. The company utilised several levels of disruption. First books, then everything else. Amazon Web Services even revolutionised the IT infrastructure of companies [2].
Kodak shows the existential threat. The company created the technology, but was unable to utilise it properly. Other manufacturers took over the market. Digital photography became the standard. Kodak completely lost its competitive advantage.
Organisational resistance to digital disruption
Large organisations often resist change unconsciously. They have profitable businesses that they do not want to jeopardise. This can lead to stagnation.
Established banks are losing customers directly to fintech disruptors [2]. They are confronted with disintermediation. Customers are switching to digital solutions because they are better. To remain relevant, banks must acquire fintech start-ups or enter into partnerships.
Cultural barriers arise when old and new mindsets collide. Employees who have trusted a business model for decades may be sceptical about radical change. This can block innovation.
Technical and financial challenges
Implementing new technologies costs money and time. Not all companies can afford these investments. The technical complexity can be overwhelming.
Data security is becoming more critical with increasing digitalisation. Cyber attacks are on the rise. Companies need to invest massive resources in security. A data breach can threaten a company's existence.
Strategies for decision-makers on how to deal with digital disruption
Decision-makers need concrete strategies to benefit from digital disruption and minimise the risks.
Recognising and understanding trends early on
Successful decision-makers keep a close eye on trends [11]. They continuously analyse how digital technologies are changing their industry. They not only look at their direct competitors, but also at players from outside the industry.
One hotelier quickly recognised the value of Booking.com [8]. While other hotels grumbled about the platform, this intelligent entrepreneur used it as a competitive advantage. By the time Booking.com became the market dominant, he was already established and was able to maintain his booking rates.
Decision-makers should conduct market research and talk to experts [11]. They should launch pilot projects and experiment with new technologies.
Questioning existing processes and enabling innovation
Companies should critically scrutinise their processes [11]. What is really necessary? What can be automated or improved? Freedom for innovation is essential.
Netflix started with DVDs by post. However, they continuously scrutinised their business models [4]. They invested in streaming technology. They realised that this was the future. Today, Netflix is a streaming company, no longer a DVD mail order company [1].
Courageous decision-makers allow mistakes and learn from them. They create space for experimental projects. They understand that not every test has to be successful.
Establishing agile organisational structures
Rigid structures are the enemy of innovation. Agile organisations react more quickly to change. They can adapt quickly and test new approaches [11].
Start-ups often have an advantage because they are agile right from the start. They can make decisions quickly. Large organisations should also develop this agility. Cross-functional teams and fast decision-making processes help with this.
Decision-makers should also consider partnerships with agile start-ups. This allows large companies to benefit from external expertise. They can integrate innovative technologies more quickly.
BEST PRACTICE at the customer (name hidden due to NDA contract): An established financial institution recognised the threat posed by fintech companies. Instead of just reacting, green
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