In 2000, a startup named Netflix approached video rental megastore Blockbuster with an offer to be acquired for $50 million. Blockbuster, with over 9,000 stores nationwide and rising profits, refused the offer. Ten years later Blockbuster filed for bankruptcy. Now, in 2018, there are only eight stores nationwide while Netflix is valued at over $140 billion. What caused Blockbuster’s collapse is similar to what legacy companies are facing today: potential disruptors changing the marketplace and forcing companies to adapt or perish.
This adaptation process has been termed “Digital Reinvention” – and is increasingly becoming a focus across industries. Unsurprisingly, this large-scale effort to overhaul a company for the digital age is a difficult task. In this three-part blog series, we’ll examine what is driving digital reinvention, the key changes required, and how to embrace emerging digital ecosystems.
What is driving Digital Reinvention?
Technological revolutions are not a new phenomenon – coal, steam power and machine tools powered the Industrial Revolution in the early 1800s, transforming textile work from hand-stitching to factory production. But increasingly nimble technology accelerates the pace of technological revolutions, and organizations must react quickly or face elimination. Many organizations have failed to react: 50 percent of the companies on the Fortune 500 in 2000 have closed their doors. Further, the average tenure of organizations on the S&P 500 has fallen from 33 years to 12 years since the 1980s. Organizations are not blind to this situation: in a survey conducted by McKinsey – only 8 percent of the 2000+ companies surveyed believe that their business model will be economically viable in the digital era.
So how can organizations respond?
Knowing that their business model needs to change is a good start, but how should organizations approach this adaptation? There are three primary considerations for companies to evaluate:
- Should the change be proactive or reactive?
- Should the change be enacted at the platform level?
- Should the change be pursued on the demand or supply side?
As it turns out – the choice is overwhelmingly clear: organizations that pursued a proactive, platform-based, demand-side solution achieved an average of 5.5 percent increase in revenue and 4.8 percent increase in profitability. Yet, only 1.5 percent of organizations are taking this approach. A vast majority (85 percent) of these organizations is taking a passive, reactive approach to making changes. This fails because competition is no longer just along vertical lines – digital disruptors are transcending industry barriers. The fastest growing database company, Amazon, was initially a digital bookstore. The largest taxi service, Uber, owns no vehicles. By the time companies can see their competition encroaching, it is too late to respond.
Implementing Digital Reinvention
Successfully implementing digital reinvention can be difficult and expensive – though necessary for survival – so it’s vital to understand how to shift effectively. There are two key changes that an organization needs to pursue in order to best position themselves in the new ecosystem. First, they must place customers at the center of their digital activity. Second, they must transform internal processes into intelligent operations. The next article in this blog series will explore these changes in greater depth.