Since the beginning of this century, over half of Fortune 500 companies have disappeared. In their place has emerged a generation of new, digitally-driven businesses such as Facebook, Airbnb and Uber.
Famously, Warren Buffett has had great success picking the corporate winners over the years. His strategy involves investing in businesses with “economic moats”: companies that have generated success by erecting durable barriers to their competition.
But even the mighty sage of Omaha might be losing his touch. For a number of holdings in his stock portfolio, the moats have dried up and the walls are starting to crumble. It begs the question: do economic moats even exist in today’s digital age?
Industry disruption
Take Addison Lee, for instance. A little over a year ago, I was a huge brand advocate, booking a cab with the firm on average once a week. With over 4,800 cars in the London area, no other private hire company could compete. Fast-forward to today and I haven’t used Addison Lee in months. Instead, I am using their technology-driven rival Uber. Uber’s global bookings are predicted to rise to over £10bn, of which the company keeps 20%. This performance is down to a huge acceleration in consumer interest driven by brand advocacy of their service.
Carlyle, the private equity group, bought Addison Lee in 2013. Twelve months later the group shelved the attempted sale of the firm, reportedly after potential buyers became cautious about Uber’s growing threat. Other reports, however, suggest that the sale was shelved so Carlyle could focus on takeover opportunities. This story of industry disruption is just one of many, from Tesla in the automotive market to the proliferation of laundry apps threatening the detergent and washing machine markets.
The corporate answer to such disruptive threats? A digital transformation programme.
What is digital transformation?
Google it and you’ll get lots of definitions, but here’s mine. Transformation refers to holistic changes to corporations – business models, strategy, marketing and operations, all enabled by new technology. This presents both opportunities and threats. Companies need sustainable growth and a digital transformation programme looks to neutralise the threats and seize the opportunities for future growth.
Most programmes will fail
Corporates go into digital transformation programmes with good intentions – to unlock incremental growth, drive efficiencies and deliver sustainable innovation – but somewhere on the way they become cost-saving initiatives. Yes, they’ll deliver some new tech to the business, but more often than not it’ll feel like piecemeal modernisation, not transformation. In my experience, most businesses will fail to deliver the full transformational opportunity presented by digital. They may defend or achieve parity, but they’ll rarely disrupt.
Here are three observations why:
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It’s an age thing
OK, it’s not just age, but that’s part of it – age of the company and age of the leadership. When you’re starting transformation, the age of the business is an early warning sign. Typically, big businesses are older, which often means the culture is more ingrained with a “that’s the way we’ve always done it” mentality, and a leadership team that doesn’t reflect the customer’s average age. To compound things, many CEOs are from a finance background and don’t fully understand the possibilities of technology. As a point of comparison, Uber’s founder and CEO, Travis Kalanick is a 39-year-old computer engineering graduate. A very different profile to the standard FTSE CEO.
When you consider that many CEOs drive the digital transformation agenda, this can be a problem. It leads to digital as a side project or an experiment, as opposed to something core to the future. Digital is not a strategy, it is the strategy.
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It takes a certain type of leader
Business change is never easy. So many corporations will resist transformation, particularly if it involves disrupting themselves.
Leaders who successfully bring about transformation have a dogged determination to deliver their vision in the face of all opposition. When you look at Steve Jobs, Jeff Bezos, Daniel Ek, Elon Musk and Mark Zuckerberg, they all have this defining characteristic. Their style runs counter to collaborative, textbook leadership styles advocated and espoused by most large corporates. Furthermore, it raises interesting questions about whether such transformation is possible within their culture.
As an example of ambition, Musk audaciously predicted Tesla motors would do something no other automotive brand has ever achieved, a $700bn (£450bn) market valuation by 2025 – high than the market capitalisation of the five biggest automotive companies today.
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Appetite for risk
The business landscape is evolving rapidly and most corporates simply can’t keep up. By the time they’ve planned, approved and executed their digital transformation programme, it’s already obsolete. Conservative corporations avoid taking risks and often look back when they should be looking forward. Fail fast, test, learn and optimise are anathema when they should be the norm.
Transformation in the digital age requires speed and a willingness to embrace risk. Jobs had this at Apple. However, Musk has taken this to a whole new level, betting everything on more than one occasion – on the disruption of the finance, space (rockets) and automotive sectors.
Don’t get Ubered
If you want to be a winner, you need to keep moving. Digital is continually redefining the rules of competition. Everyone is affected. No one is immune. The only constant is change.
A digital transformation programme is a good start, but not an end in itself. Transformation requires visionary leadership, company-wide commitment to change and an adaptive, agile culture.
Magnus Fitchett is vice president and executive planning director at SapientNitro
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