Strategy and Entrepreneurship
What exactly is the digital economy? How does it differ from the analogue economy? And what does it really mean for you as a business leader?
One thing’s for sure: it no longer refers merely to business conducted online. We can no longer delineate in any meaningful way between some supposedly analogue portion of the economy and a separate digital economy. All of the economy has become digital.
This digital economy is a new, very different business environment. It empowers insurgents and threatens incumbents with a perfect storm of creative destruction. While the speed and direction of the transition will vary, no sector or region of the economy will be unaffected, and the shift will be economically wrenching for many.
It will also, in many cases, have broader social, political and environmental implications that leaders will need to consider. For example, even if additional entrepreneurial activity creates enough new work to overcome the impact of automation, mitigating the downsides and smoothing the path will require radical re-employment for millions.
No sector or region of the global economy will remain unaffected by the impact of digital technologies; it’s where and when and how, rather than if. And the impact in the real world is already much more significant than the virtual world alone.
Hugh Han on Unsplash
“The most important leadership capability to succeed in the digital economy is audacity”
In just the last four or five years, there’s been a dramatic acceleration in the adoption of cloud services, which now span all key business activities. This has dramatically reduced barriers to entry, enabling new ventures to start quickly and cheaply, evolve rapidly and scale up easily. Increasingly, it’s incumbents that are encumbered; disempowered rather than empowered by their enormous investments in information technology and other legacy infrastructure.
Perhaps most significantly, AI, in the form of very rapid innovation in machine learning (ML), is enabling the automation of almost all routine and narrow tasks – not just basic, boring back-office admin work, but much supposedly higher-level knowledge work that until recently was the preserve of highly paid professionals – and, increasingly, interactions with customers.
Already businesses such as Cogito, Affectiva and Soul Machines can detect people’s emotions, and through ‘digital humans’ or augmentation of people’s capabilities deliver dramatically superior customer experiences.
And the extraordinarily rapid uptake of Alexa and Google Home now means that about half of all US households take it for granted that they have an AI robot in their home who responds to voice commands. Advanced robotics, enabling collaboration with humans and increasingly autonomous operations, extend the impact of AI and ML into manipulating the real world in sectors as prosaic as agriculture and as far upstream as primary industries such as mining. Swiss start-up Ecorobotix enables autonomous robot-weeding and in Pilbara, Australia, mining giant Rio Tinto’s AutoHaul is the world’s largest robot, a 28,000 tonne autonomous train transporting iron ore hundreds of kilometres from mines to pots.
To make sense of what is happening as the economy becomes digital, let’s take a step back and look at the big picture. We need to take a broader perspective on the repercussions of this new digital platform for how consumers behave, for how businesses operate, for how people and businesses interact, and for innovation and entrepreneurship.
Five powerful economic forces characterise this new digital economy:
First, this digital platform empowers consumers. It puts an enormously powerful ‘magic wand’ in the palm of people’s hands. It enables almost every economically active adult worldwide to connect with the people who matter to them, make better informed choices, and save time and money.
Online reviews inform consumer choice. Price transparency and real-time comparisons have moved from big-ticket durable goods to everyday purchases. Apps such as Citymapper make it easy to navigate the worlds’ most complex cities and the app is now transforming itself into a complete travel-as-a-service solution.
This is reshaping people’s behaviour and expectations. Consumers now expect richer information and greater transparency about products and services and easier and faster availability and access.
In 2009, just as the modern smartphone was taking off, Chris Anderson published Free: The Future of a Radical Price, promoting pricing models that provide products or services for free, monetising them in other ways, such as premium services (the ‘freemium’ model) or through advertising. But easy is even more powerful. Easy beats everything, because it gives us back our scarcest and most precious commodity, even more valuable than money: time. In the digital economy, either you’re easy or you’re extinct.
Second, this digital platform also unleashes creativity. It frees up people’s time by unshackling them from routine and narrow tasks. It can augment people’s capabilities, providing them with relevant information and insights, delivering better results from collaboration between humans and machines.
It enables people to focus on what humans do best: develop and demonstrate empathy, use their wisdom and knowledge for well-informed and well-reasoned judgement, and harness their creativity to develop novel solutions to the world’s most pressing problems.
T-Mobile in the US, for example, has used its people’s time that automation made available to dramatically improve the quality of its customer service.
It also creates new freedom for when and where people work. Smartphones, cloud services and ML unshackle us from the industrial-era requirement that we coordinate our activities by all coming together in the same place at the same time. The reality is that much work is either or both better delivered to customers, or better for workers that they that they do their work, outside conventional workplace hours or locations.
“In times of rapid change, it becomes more important to look beyond the boundaries of the business”
These new ways of working are not just more efficient than traditional ways of working; they’re also more effective, producing smarter decisions and more creative outcomes – and perhaps most importantly, they’re also much better places to work. The advantages that companies who adopt these new ways of working have will be compounded as they don’t just outperform their peers, they also win the war for talent, as good people go to places that enable them to get stuff done easily and effectively, and provide them with the flexibility they value highly.
Third, this digital platform is catalysing connections. It makes it much easier to connect people to each other and to products and services. It makes coordination possible that was just not possible using analogue approaches. This is energising new business models. It enables on-demand services, such as Postmates, Instacart and Deliveroo. Critically, from a sustainability perspective, it facilitates sharing and peer-to-peer exchange through companies ranging from Airbnb for homes to Etsy for products, Turo and Getaround for vehicles and even specialist niches, such as ShareGrid for camera gear.
Perhaps most importantly, these digital technologies are accelerating innovation. They increase the rate of iteration through faster development and feedback, boosting the pace of incremental innovation. They reduce the cost of experimentation, enabling superior ultimate performance. Critically, they enable new combinations, creating new possibilities for radical innovation and breakthrough products.
Last but not least, digital technologies are energising entrepreneurship. New ventures can now reach consumers directly, tightly targeting potential customers. They have dramatically reduced the costs of starting a new business through cloud services and other digital platforms. They enable new ventures to evolve new products and services much more quickly and then, when they’ve found product-market fit, to scale very rapidly.
Insurgent businesses can start easily, innovate rapidly, pivot effectively and scale up successfully. Incumbents can no longer rely on their established economies of scale and scope, confronted by competition from much more nimble and agile competitors.
Speed beats scale and scope. Take Uber, a business that launched less than 10 years ago. It launched as a “luxury service on-demand” with ‘luxury automobiles – [specifically] Mercedes sedans”. Just a couple of years later, it launched Uber X, then another couple of years later UberPOOL, and shortly thereafter UberEATS, transforming not just the scale of its activities but their scope.
While digital natives – who had cellphones and the internet at university or even at school – are typically au fait with these digital technologies, it’s a doubly difficult challenge for digital immigrants, the only generation in human history who began their working lives in the analogue era and have had to learn how to work in the digital world.
The challenge is compounded by how extraordinarily quickly these technologies have co-evolved and come together to change the how business works.
Rather than being able to rely on our decades of experience as we reach senior leadership roles, we find ourselves having to relearn the rules and develop a new set of leadership behaviours and capabilities.
There is, however, hope. My work worldwide over the last few years with established enterprises has identified four distinctive leadership capabilities critical to success in the digital economy:
While digital insurgents have the advantage of launching without the shackles of legacy operations and organisation, leaders in incumbent businesses have to navigate a difficult transition.
For them, the first key digital leadership capability is ambidexterity: being able to pull off the delicate balancing act of continuing to deliver results from the current core business while simultaneously making the investments required to explore emerging opportunities to create and capture new value.
The good news is that this management and leadership challenge is not unfamiliar. Leaders in high-tech sectors characterised by rapid technological innovation have long had to work in a world that requires relentless reinvention. The bad news is that it remains difficult and the odds of success are not great. Confronted with radical change, few business leaders manage to walk this high wire well and most incumbent businesses fail.
Doing it right requires working well in two very different ways at the same time. In the current core, continue to drive out cost and increase revenue by taking share from competitors; digital technologies have a key role to play in this through, for example, automation of existing processes and transforming customer experience to become customer-centric, continuous, conversational and customised.
At the same time, learn to move much more quickly, embrace and manage risk and leverage digital technologies to target new customers, build breakthrough products, and enable new business models.
The second key digital leadership capability is acuity. In times of rapid change, it becomes more important to look beyond the boundaries of the business, building insight into how the environment is evolving and developing the foresight needed to anticipate potential changes.
What does this actually involve doing differently on a daily basis? It requires a conscious shift in time and attention away from optimising performance in the current core business, shifting the focus away from it, its customers and its competition to build a perspective on innovation, on changes in customers’ preferences and behaviours, and on emerging and evolving business models, such as digital ecosystems.
Strikingly, top management at two of the large and long-lived companies that are furthest along in navigating their way to leadership in the digital economy – Schneider Electric and Accor Hotels – attribute much of their success in doing so to this shift in attention.
The third key capability, and the one perhaps already most widely recognised and embraced, is agility. The power of agile approaches is increasingly being embraced by incumbents, going beyond its origins in software development.
At Vodafone, for example, the early results paid off so powerfully that the leadership supported a dramatically accelerated rollout, across both key functions and activities at corporate level, and worldwide throughout the organisation’s operating companies.
As I’ve worked with business leaders on their digital journey and seen them successfully develop these new capabilities, it’s become clear, however, that one particular leadership capability is both the most difficult to develop and the most important to succeed in the digital economy: audacity.
Without the courage to commit money, time and talent to making significant organisational changes, to reallocating resources and to taking on real business risk, established enterprises will be eclipsed by those with the entrepreneurial energy to become digital explorers.
All too often, business leaders don’t walk the talk. It’s easy to pay lip service to the need for change and lip-synch to bold statements, but hard to take decisive actions, accepting the reality that there will often be embarrassing and expensive failures. Overcoming short-term inertia is difficult, but the price of inaction in the long term is much higher. Continuing to do the same thing when radical innovations reshape the environment is the only certain way to fail.
In the digital economy, the businesses and leaders who will not merely survive but thrive are those with the courage to confront these challenges and the conviction to become digital explorers, building new enterprises: “To boldly go where no man (or woman) has gone before”.