Digital transformation has the potential to be disruptive in many different ways. Dave Rogers of Columbia University talks about five domains that we should particularly pay attention to. The first is data. Data is now ubiquitous in a world of social media and mobile technology. We have huge amounts of data that are available to consumers, but also to companies to leverage to advance the products that they offer. Take Waze, for example. Waze is an app that leverages people's cell phone data to determine when there are traffic jams. And also uses social media to allow users to express maybe the traffic jam is due to an accident, or maybe it's due to some debris on the road. By leveraging that data, they're able to create unique value, and that we see across any number of different sectors. The second domain we want to think about is innovation. In a world of a digital economy, we're seeing the ability to do quick testing with innovation in ways we've never been able to see before. This is speeding the innovation cycle, and allowing companies to run real time experiments with their products, and run prototypes in a very inexpensive way. Take Facebook, for example. They're able to offer new features and new offerings on their platform in a way that allows them to experiment and learn in real time. The third domain we want to think about is competition. One of the truisms of digital transformation is it often eases entry by other players within an industry. Because of that, we would expect increasing competition in any number of domains where digital transformation is having an impact. One of the things this does is it starts to blur the boundaries between different industries. Companies that were once partners are now increasingly rivals. One only need to look at Google and Apple and Amazon as they increasingly compete in various domains within the larger digital technology space. The fourth domain that gets impacted is ultimately the value, the value that's created for customers. And what we're seeing are new ways to deliver value in creative ways, leveraging digital technology. Take Uber, for example. Once again, leveraging social media and leveraging mobile technology to offer a new value proposition to customers looking for traditional livery services. Last domain, customers. The customers themselves are evolving. The ubiquity of information allows customers to be highly informed. It also seems to tend to allow them to be less loyal than they were in the past. Take Best Buy. Best Buy suffers from the fact that many customers will come to their stores, sample their various products, and then, even while in the store, pull out their cell phone, look on Amazon and purchase the product then and there. So, customers are becoming more sophisticated, and they're becoming less loyal to their home brands and products. What this means at the end of the day is that the old sources of competitive advantage are largely disappearing. Things like natural monopolies formed through resource scarcity, while they're still important today, and the old adage in real estate that location, location matters here is still true, but in many industries, place and space are becoming less important. The obvious example is retail. As retail goes online, those positional advantages, the geographic advantages become less and less important. Another area of traditional competitive advantage under threat, is scale or economies of scale. The idea that the more production you have, the lower your production costs, and that can provide you a competitive advantage. What we're seeing is that scaling in a digital environment, it can often be quite easy and quite costless to scale. Think about Facebook. Facebook went from two guys in their Harvard dorm room to a billion dollar business in a matter of a couple of years. The ability to leverage digital platforms to scale your business, and scale your technology, are greater than they've ever have been before. A third area which was a traditional source of competitive advantage were learning curves. This idea that over time as you learn to deal with a new technology, you improve your understanding of it, and that in and of itself can be an advantage over others. And while clearly learning curves still do exist, the ubiquity of information provided by the internet and other data sources is making those learning curves less and less pronounced, and allowing others to catch up relatively quickly, by having access to valuable information on how to deliver, let's say a new product or service. The fourth thing we want to think about is vertical integration. So historically, large industrial companies might vertically integrate as a way to create value, but also serve as a deterrent to others trying to compete with them in their marketplace. While digital technology is making it easier and easier for people to disintegrate the vertical supply chain, and specialize in different components of it. So now, you see things like contract manufacturers. Those are really interesting. To give an example from my experience at the Darden School, we see for example, student entrepreneurs who historically let's say, developing a new product, a new physical attribute would have to figure out how to manufacture it, how to get access to distribution channels. There was a lot of capability development that was necessary for them to bring a product to market. Now, they can go online, contract with the manufacturer in China, use online as a distribution channel, never actually touch the product that they're designing, yet still have massive distribution potential throughout global markets. And this really highlights a broader impact that digital is having. Which is that as digital becomes more ubiquitous, transaction costs start to drop. So transaction costs are those costs incurred when you have parties selling goods and services. This is everything from contracting that needs to take place to even things like transportation of goods and services. 20 years ago, the biggest companies were largely in the same industry, doing the same thing. Today, smaller players have the opportunity to disintermediate that value chain. Take the financial services industry. What you see is it's not being disrupted as a whole. It's not like someone is entering in and trying to compete head to head with Bank of America across all their different businesses. No, rather what you're seeing are companies like PayPal, Venmo and Bitcoin all entering in, and taking various pieces of the overall financial services pie. This is what we call FinTech and FinTech right now is really having a disruptive potential in the broader financial services industry. So, we want to think about four underlying drivers that try to drive digital economies and have this disruptive potential. The first one are network externalities. Network externalities are very simply, the idea that a good or service might improve in value as others consume that good or service. The classic example is the telephone. Having to be the first person to own a telephone is not very valuable. Who are you going to call? As others begin to buy telephones, the value to you of owning a telephone, starts to go up. Let me give you a more recent example. Facebook. As more and more people use Facebook, the value to you goes up as a consumer who uses Facebook. We see similar dynamics for example in operating systems, as more and more people use the same operating system, it makes exchange easier. Also it makes it more likely to develop other apps and software for that operating system. And it's for this reason you see companies, like Microsoft dominating in the personal computer industry, and a battle going between Apple and Google in terms of mobile operating systems. And this leads to the second point, winner take all markets. These various network externalities that we tend to observe in digital economies, tend to create winner take all markets, where there might be one dominant player within an industry. Facebook, Google, Amazon, Apple have all in various ways leveraged network externalities to create, in essence, quasi monopolies where they have advantages of a winner take all markets. Now, what's interesting, is these four players that I just named are also increasingly competing with one another. And this relates to my third driver of digital economies, which are platform technologies. The internet is the prime example here. An underlying technology that has great value across a wide number of sectors, and allows different companies to plug in in different ways. Mobile is very similar. Cloud computing as well. All are examples of platform technologies. Now, of course, this isn't limited to just the digital. If we think about the automobile and the advent of the automobile a hundred plus years ago, it had a similar impact in the sense that a whole set of suppliers and services grew up around the automobile industry to support that. And it's interesting to think as the automobile industry goes through a disruption again through autonomous vehicles and electric vehicles, that we might see a similar kind of shift in the underlying platform technology, that will give rise to a whole number of different players and business models in that space. The fourth thing we want to think about are complementary capabilities. Complementary capabilities are other ways of delivering value. In a world in which we have network externalities and winner take all markets, and the emergence of these platform technologies, the way in which you might need to compete is by offering some specific capability that allows you to leverage these platforms to your advantage. Perhaps it's manufacturing capability or a great customer service that you provide. But you're going to need to find that specific way in which you can uniquely deliver value, given these, ubiquity of these different platforms and technologies. So in summary, when you think about digital transformation and potentially the disruption it might have on your industry, you want to think about these underlying drivers and how they might impact ultimately, the way the industry evolves, and how you might compete.
