Digital disruption represents the most significant opportunities and threats for companies worldwide. But perhaps one of the most surprising developments in this new era is the disappearance of over 50% of the Fortune 500 since 2000. Although these businesses have the resources and capital to innovate and push the boundaries of the industry, they still fail to remain relevant while losing momentum as a market leader.
Max Wessel, general manager of SAP.io, recently examined this phenomenon in his Harvard Business Review (HBR) article “The Problem with Legacy Ecosystems,” along with his co-authors Aaron Levie, co-founder and CEO of Box, and Robert Siegel, a partner at XSeed Capital. Recently, I had the great fortune to sit down with Wessel to discuss how long-established companies, founded in an industrial era, can differentiate themselves in an increasingly digital economy.
Why are incumbents creating a self-defeating prophecy by using old organizational models while engaging in new digital-driven business models to serve their customers?
Wessel: Many global CEOs are embracing digital models, but are unwilling to make the necessary tradeoffs to fully realize their potential. In most situations, CEOs are relying on legacy distributors and suppliers and believe that their network can make that transition with guidance.
Personally, I am skeptical that the right decision is to stick with a traditional network of suppliers rather than making difficult choices to find new vendors that better align with a digital business model. Companies that indulge in this mindset are forced to wear the proverbial bronze handcuffs. To keep the core business alive, they are locked in traditional means of operation – even if there isn’t rapid growth.
At the end of the day, CEOs must make a tough decision: Abandon old ways to make room for innovation or maintain the status quo.
How can these businesses free themselves from those bronze handcuffs so they can invigorate innovation and evolve?
Wessel: Many business models are built around a capability set that is no longer necessary. Through a design thinking approach, companies should consider why customers hire them. From there, they can quickly pinpoint how data is changing that relationship and which parts of the value chain are restricting the success of the customer experience.
Most important, companies can reinvent the business model to make interactions more engaging and valuable. This is not a complicated issue. You just have to start with the very basic foundation, understand what the ideal solution looks like, and build a strategy for building that new vision from the ground up.
In the HBR article, we talk about how HBO is using an algorithm to deliver high-quality entertainment content at a lower cost. Consumers tend to believe that its service and product are changing. In some respects, HBO isn’t just offering content through an online channel, but it is also providing a concierge service. However, after carefully examining the company’s digital evolution, we can argue that the result is the same: keeping consumers entertained for a chunk of time through the channels they prefer to use. The product isn’t changing nor is the problem – it’s the solution itself.
What should established business consider now to get their digital strategy on track?
Wessel: CEOs who can best position their business for this new digital paradigm are open about the challenges ahead and can authentically understand what they can do, where they are, and what they need to do to succeed. I don’t know if this is correlative or causal, but this is a uniform trait from my experience.
What do these CEOs do differently? They assess their digital strategy in three phases:
- Establish what you must do: Make the connection between what clients love about your products or services and the megatrends that are emerging. With this information, businesses can be relatively accurate in predicting how the world is going to work in the future and which solutions can help build a competitive advantage.
- Develop new metrics: Realize that metrics that indicate long-term success in a data-enabled world are very different from those used in an industrial economy. Instrument an application or connect a device to grab data; don’t just state that each incremental product that’s shipped out will increase margin by a random percentage. With this approach, businesses are better equipped to innovate over time and evolve along with ever-changing demand, opportunities, and risks.
- Build new partner networks: Look at all of your different stakeholders and figure out how to create new opportunities for them in the new ecosystem. When intelligence is built into applications, a businesses are removing a workflow that was previously governed by a person. Not everyone will be better off in the new ecosystem, but you have to give stakeholders the opportunity to become better off should they make the transition.
Read Max Wessel’s article “The Problem with Legacy Ecosystems,” in the Harvard Business Review to discover how established companies can differentiate themselves in this new digital landscape.