What not to do in times of digital disruption

Digital technologies create disruptive forces and present leaders of existing companies with new challenges.

There’s the technology itself to get to grips with, and – even trickier – the mindset shifts required to use it. This is where large corporates often face an especially tough time, and for three key reasons.

First, ‘going digital’ may imply big changes to the business model, and therefore big risks, but large corporates have mostly got to where they are by excelling at optimizing their existing models and nailing down the processes that deliver them. This means that, in effect, the corporate now has to use a new, weak muscle to tear up what the strong one normally does.

Second, big investments are typically required, in business ventures that may not be profitable for years. Being loss-making is widely accepted in digital startup-land, but large corporates are expected to produce returns quarterly. Indeed, a common complaint of corporate leaders is that investors judge them on completely different metrics from the startups they want them to compete with.

And third, in these new digital markets, there are very few established predictors of success. This can be alarming for leaders with a ‘mature industry’ background, who are used to having highly polished sets of KPIs for every aspect of operations.

No industry is immune

When faced with so much uncertainty, the greatest temptation is always denial. Ten years ago, people in the fashion industry were telling themselves that online retail was only good for books. Those companies have since been massively disrupted by the likes of ASOS. Five years ago, people in food were saying it wouldn’t come to them; now that market is likewise getting upended.

Today, very few people entertain an illusion of immunity from digital disruption. Most companies have multiple digital projects in play, and the question becomes one of how much to do and how to manage it all.

Let’s look at the example of a large consumer goods company. Several years ago, in response to the challenge, they started acquiring online brands, thus creating a digital portfolio. The portfolio was run largely alongside the core business by a specialist team, but with some senior involvement via a committee of C-level executives. The pandemic elevated digital in everyone’s minds, and the portfolio was defined as one of five key corporate initiatives for the future. It got more budget and greater prominence.

But what happens when other disruptive events occur? For example, the recent cluster of crises around energy and commodity prices, the war in Ukraine and a looming recession. How is digital disruption navigated amongst all of this?

One option is to recognize that cuts need to be made, and when looking to save, say €100 million, these digital side projects are easy targets. They are loss-making and outside the current core business, and it takes great courage from leaders to stare through a downturn to the long-term vision. However, sacrificing the company’s developing digital capabilities now clearly makes it more likely that it won’t exist at all in 10 years.

A second option is to protect the digital budget, but to economize instead on time. Senior leaders in particular can only deal with so many things, and given that the digital portfolio commands revenues of tens of millions of euros, and they have a multi-billion euro company to save, they redirect their attention fully at the core. This is eminently sensible, with the only downside being that without senior involvement, digital projects tend to fare poorly.

Getting that digital buy-in

Digital working is, by nature, dynamic and involves frequent pivots, budget changes and bump-ups against corporate rules, and without someone senior on board to keep signing off on all of this, the project slows down and inevitably gets bypassed by competitors. Also, there is the problem that in large companies, talent follows senior attention; without any, the digital portfolio struggles to attract the best people, loses momentum and again gets outcompeted.

The third option is what actually happened. A new digital startup entered the market of one of the company’s acquisitions and, loaded with cash from venture capitalists, started buying up all the online traffic. This new competition galvanized the company’s senior leaders into action. They knew they couldn’t win an all-out buying war with the VCs (because of the investor constraints discussed above), so seeking other ways to fight back, they leveraged their advantages as a large corporate.

After all, they had over 50 years’ experience in the industry and knew it better than the startup, plus they had a large existing customer base from their main brands. Drawing on these two factors, they helped the acquisition turbocharge its scaling efforts.

It worked: the acquisition saw off the startup and regained dominance of that particular digital market. But more significant was the effect on the company. Through the increased collaboration, the company gained exposure to how the acquisition was using customer data, yielding valuable insights that they could apply to their other brands. This also opened avenues into how they could collect and analyse data better themselves, and apply these techniques to their own, much larger customer base.

More customers means more data and therefore more power to generate insights in a virtuous cycle.

The company sponsored the acquisition to take on an expanded team of data specialists who would advise the corporate parent, and with high levels of ongoing senior involvement, results could feed meaningfully into operations.

In short, the company was no longer just defending a side-project acquisition, but learning how to improve its core business. And that is the route to surviving disruption of any kind.

This is a story in outline, but the core lesson is that disruptive times call for greater engagement with digital, not less. Indeed disruption itself – in this case, by a new competitor – can sharpen the edge, and get companies out of their comfort zone and doing it.