Digital Transformation is the new buzz word, most companies in the Tech world and beyond are jumping on this bandwagon. It is perhaps the most over used word in today’s business vocabulary, next only to Internet of Things (IoT) and Big Data Analytics.

It is a well acknowledged fact that, the world today, is more connected and mobile, than at any other time in history. Work loads are moving to the cloud and software is automating business processes. Marketing is another area where digital has had a major impact, today marketing is synonymous with digital marketing. From social media to lead generation, marketing has gone digital. Firms are diverting marcom budgets from Broadcast and Billboards to Digital Marketing.

Digital is certainly making businesses more efficient and competitive. Enabling firms to use digital for customer engagement and computerising processes such as Farm to Fork or Pay to Procure has great benefits. But are these changes merely transforming businesses or are they  disrupting them ?

Are we missing something?

A study of established companies and their deployment of digital may lead us to believe that it is yet another tool for achieving better efficiencies and cost savings. Almost all of them talk of Digital in the transformative sense, but is that really the case ? Are we under estimating the power of Digital ?

The dictionary describes transformation as ‘Change into another condition/nature/character’ while disruption is defined as ‘to throw into confusion or disorder, to break apart or alter so as to prevent normal or expected functioning.

According to Prof Clay Christensen the Innovation Guru, “Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

To understand the real power of digital, we need only to look beyond the established companies. The industry is replete with examples of upstarts using digital to trounce the more established competitors; iTunes nearły drove the record companies out of businesses, Uber disrupted the Cabs & Taxi Services industry, AirBnB owns no real estate but its impact on the hospitality industry is well documented, Amazon used digital to trump Walmart.  These are, but a few examples of digital disruption affecting every sector, including ones that might be considered too asset heavy and far removed from the digital revolution to be affected. And there in lies the power of digital, the ability to empower small nimble players to take on the might of the established companies.

So what is it about digital that makes it so disruptive? Before we answer that question, we must understand the mechanism of competitive advantage that firms use to dominate markets.

Digital is changing the rules of competitive advantage

Firms gain competitive advantage in many ways; Superior products, Better pricing derived from cost advantages, control over supply chains, access to large sums of capital for future investment, incorporating high switching costs, to name a few.

Walmart is a prime example of a company that used its mastery over supply chains to dominate the retail industry, Toyota with its Just In Time production and TQM is an example of a company that derived its competitive advantage from superior manufacturing processes. In many ways companies that excel at better manufacturing and efficient supply chains are large firms, with years of experience behind them.

The management consulting group BGC even had a frame work called the experience curve to explain it.  The theory, which had its genesis in a cost analysis that BCG performed for a major semiconductor manufacturer in 1966, held that a company’s unit production costs would fall by a predictable amount—typically 20 to 30 percent in real terms—for each doubling of “experience,” or accumulated production volume.

The implications of this relationship for business was significant, argued BCG’s founder, Bruce Henderson. In particular, it suggested that market share leadership could confer a decisive competitive edge, because a company with dominant share could more rapidly accumulate valuable experience and thus achieve a self-perpetuating cost advantage over its rivals.

Experience curve, supply chain innovation and manufacturing excellence are good concepts that are still relevant in the physical world. However, with most companies adopting these strategies, its importance as a source of competitive advantage has declined over the years.

Customer Engagement, The new source of competitive advantage

Arguably, the new source of competitive advantage is Customer Engagement. The adage ‘Customer is King’ has never been more true. Today, thanks to social media, mobile and the Internet, the customer is truly empowered. They no longer trust advertisements from brands, choosing instead to listen to their friends and acquaintances. They have the ability to get what ever information they want, whenever they desire. This combined with the transparency of pricing in a connected world has truly given them the power. A dissatisfied customer today, can do more damage to a brand than ever before and a happy customer can generate multiple reference customers for the brand.

In such a customer driven world  competitive advantage comes not from traditional means like supply chain or manufacturing efficiencies but from customer engagement. Companies that engage customers, listen to them, observe them, use big data analytics to make sense of the data and adopt agile methods of development will succeed.

By changing the rules of competitive advantage, Digital has created a new playing field where nimble new entrants and start ups have a fair shot at beating the established players. Further, the proliferation of the internet, mobile and availability of free tools has made it easier for new entrants to connect with their customers online. Understanding customers no longer requires expensive offline customer surveys, focus groups and ethnographic studies.

Digital is reducing the entry barriers, thus encouraging a huge number of start-ups to develop innovative products

Gone are those days when software products were developed out of expensive labs filled with high end servers placed in temperature and humidity controlled rooms with raised flooring. This is the era, in which  a group of millennials,working out of a garage and developing a disruptive product, with nothing more than a laptop, mobile and an internet connection. This is made possible in largely due to the proliferation of open source software, free tools, SDK and platform / ecosystems.

A product once developed can be made available to the world almost instantly, thanks to platforms and ecosystems like Apple’s App store, Google Play store and Amazon’s cloud hosting services. Even B2B companies like Saleforce.com are adopting a platform approach and opening up their offering to a larger community of developers. These platforms offer the new entrant a go to market path that would have taken them many years and millions of dollars to create in the physical world.

Once hosted the product is instantly available for the world to download. Creating awareness is now almost free, thanks to social media and digital marketing. In fact most disruptive offerings, don’t spend a single dime on marketing relying instead on clever buzz marketing and word of mouth propagation.

Digital is enabling new entrants to offer ‘Free & Freemium’ business models

A product, hosted on a freemium cloud service, marketed through buzz and  created by a small team of geeks, using open source software and working from their garage, can be priced at a princely sum of Zero.

Today, Free or Freemium is a valid business model and free does not mean inferior quality either. Take the case of google search, Evernote, OneNote, Youtube, Vimeo or any number of free products. They are free but certainly not low quality.

Digital had enabled this whole ecosystem of free and essentially free models that can only be exploited by companies that understand digital in its truest sense. Large companies with their huge fixed cost base will be hard pressed to offer Free & Freemium services.

Still think digital is transformative and not disruptive ?

To visualise the full impact of Digital one ought to look beyond the large companies who typically use digital for operational efficiencies, marketing and basic forms of customer engagement. Digital is fundamentally changing the face of business, from the way products are developed, to the way they are distributed and marketed.

To compete with the new breed of digital disruptors established companies must start thinking like nimble startups, develop products using open source tools and software, adopt agile development methodologies, engage their customers through the product life cycle and embrace free and freemium as legitimate business models. Using digital at the fringe, for customer engagement and operational efficiencies alone, will leave them vulnerable to disruption by new entrants.

What do you think ? Is Digital yet another hyped term or is it something with the potential to disrupt industries ? Please do leave your comments.