Digital transformation as a motivation for disruptive strategy
Together with the concept of digital transformation, the concept of disruption is often stated. What is meant here is usually the market entry of new competitors, which use new digital technologies with a new business model and threaten established companies.
In the following, I will refer to the ideas and concepts of Clayton Christensen, professor of the Harvard Business School.
For many companies, digital transformation is a motivation for the introduction of a disruptive strategy. This transformation does not relate to IT, but to the business model and the corresponding corporate culture. Understandably, companies should have a clear strategy on innovation and disruption as long as their business is still going well. In principle, the pursuit of a disruptive strategy in a changing dynamic environment is relevant to sustainably securing the company, so as not to miss any opportunities and be distracted from the current success.
A disruptive strategy is a guided strategy process of the company that optimizes the current business model while pursuing future opportunities. These may include a new business model. With such an approach, established companies are able to pursue even disruptive ideas. Examples of such companies are, for example, Amazon, which questioned its own established offers through new offers (e.g. the sale of books by Kindle) or Hilti with the renting of its tools.
In principle, small and medium-sized enterprises are in a good position to align the strategy process within the framework of a disruptive strategy: a lower hierarchy, little bureaucracy and clear leadership by the owner (s). (See also “Business Transformation in the SME sector”, please click here.)
Disruption & Innovation
Disruption as a concept is currently almost used inflationary. Clayton Christensen, who has coined the term, combines the following with disruption:
- A company with an established business model cannot itself disrupt itself; instead a new business model must be built up separately from the old model.
- A new technology is not per se disruptive, but it depends on its application in business models: established companies are succeeding in the competition with so-called sustaining innovations, new providers with so-called disruptive innovations, i.e. new innovations that lead to new offerings for customers in a niche in the market. This can either be in the lower market segment of an existing market or create a new market. However, both are unattractive for incumbents due to the still small size of this market segment or they cannot make a profit due to their cost structure in these market areas.
- Christensen distinguishes three types of innovations:
1. sustaining innovation
2. Disruptive innovation in the lower market segment
3. New market-creating disruptive innovation
Disruptive innovations often arise in start-ups or small businesses because large companies react more slowly for various reasons. Disruptive innovations are the result of experimenting and testing. A high fault tolerance and openness to new things are key elements in corporate culture. Google is a company that actively promotes such a culture. It has found that, for example, an emotional security in the case of errors is an important basis for the company’s ability to innovate. (See also “Standard of an innovation culture”, please click here.)
An example of a sustained innovation is the new Thermomix with its digitally extended product and service environment. Based on the previous model, the successor model was optimized, but at the same time a digital offer and cooperation with other companies was also expanded. Result is a sustained high demand, despite the premium price and various cheaper alternative devices on the market.
Flixbus is an example of a disruptive innovation that has created both the lower end of the market and a new market segment. Flixbus is not a travel company, but a mobility provider, combining elements of a tech start-up, an e-commerce platform and a transport company.
Change the character of the strategy task within the company
The dynamization of the company’s operational environment also requires a change in the strategy task within the company. Strategy is a process which, in close collaboration with the company’s executives, comprises the tasks of innovation management, organizational development and communication of the transformation process. If the Chairman or CEO delegates this strategy task to someone other as Head of Corporate Strategy, the direct reporting line and close cooperation is important. Such a design of the strategy task within the company facilitates the adaptation of the strategy depending on the development phase of the company’s business model.
“Jobs to be done” as an orientation
A product or service fulfills a task for the customer, called “Jobs to be done” (JTBD). The more a company understands the fulfillment of customer needs, the more it is differentiated in the competition. Starting from the functional aspect, there is the question of the experience of buying and using the product or service that a company should design. The design of the customer experience determines what needs to be integrated within the company organization in order to create the optimal customer experience. Ideal is when the customer clearly links the brand with the problem solution for the JTBD. Flixbus has managed to establish its brand accordingly.
Market research that refers to customer segmentation with attributes and not the causal mechanism of the problem solution, can lead to conclusions that have no impact when implemented. To investigate these “jobs to be done”, there are practical guidelines and concepts which can be used here.
Due to a continuous development of the own company and the dynamic environment, a certain strategy is only the right strategy for a certain period of time. Logically, strategic analysis is therefore an ongoing process that monitors the organization and the market environment and aims to develop its own company accordingly. It is important to determine exactly the central element for the JTBD in the company’s own value chain, as it is the core competency of the company.
In the strategy process, two different processes are executed, which run simultaneously, but basically have different orientations:
- a deliberate strategy process that aims at optimizing existing ones. It is clear structured;
- an emergent strategy process that aims to identify unexpected opportunities. It develops over time.
The central starting point in the layout of the strategy process is the resource allocation in the company. The company’s profit formula determines how much resources are available for the strategy process. The distribution of resources is usually determined by two factors:
- The cost structure determines the profit margin that must be earned for cost coverage.
- The size threshold, from which an opportunity for the company is seen as interesting. Large companies in particular are overlooking current small opportunities that may have strong growth potential.
Depending on the development phase of the business, a specific strategy process is relevant:
- In the initial phase, an emerging strategy must ensure that good ideas are promoted.
- When the business model is established and profits are generated, a deliberate strategy process ensures efficient market development.
- In the efficiency phase, the existing business is optimized by the conscious strategy process, while the emerging strategy process also promotes new growth opportunities.
Each company has its specific resources, processes of the value chain and a specific profit formula, which in combination determine what the company can do and what it cannot. There are numerous examples of failed innovation projects, which were mostly very costly. The same applies to acquisitions and the question of their integration.
In the search for disruptive innovations, many established companies use separately newly built units, such as incubators, aside from their established businesses. Why? In this way, the new business unit can independently develop its own success model with appropriate processes, resources and its own profit formula. The existing successful business model with its corporate culture and the learned processes would try to transfer this to new approaches and thereby dominate and hinder new approaches.
For corporate leaders, the challenge is to anticipate the organizational model required for their company, to design the strategy process with both sub-processes and thus actively to promote disruptive innovations. Openness to new approaches and e.g. the exchange with start-ups and networks are important for this.
Bosch Software Innovations is an example of a business unit within the Bosch Group that deals with emerging business and pursues different approaches.
Use of an Interim Manager
In the phase of redesigning and implementing a corresponding strategy process, the support of an interim manager can be useful. This means not only an additional capacity for this change process, but also the use of appropriate management experience, credibility and competence in the relevant topics. Last but not least, the interim manager can also take on the important role as the sparring partner for the corporate leader.