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Dec 07, 2016 @ 09:12 by Uly Wolters

Digital disruption – the challenge to reinvent business models

There’s no escaping from digital transformation. Traditional retailers are facing the challenge to reinvent their business models due to changed consumer behaviour and disruptive business models led by digitization

Due to mobile technology, our daily lives are changing. These days, the digital shift is highly affected by the technological progress made in matters of mobile technologies. The progress does not only affect the way we behave, how we communicate or how we work – it also affects our consumer behaviour.

To stay competitive, companies have to react to these changes. If they dismiss the ongoing change, they run the risk of losing profits or – in the worst case – going bankrupt. In this connection, digital disruption is often discussed as a way to transform the trade. Upon closer inspection, however, it becomes clear that often only small – albeit somewhat ‘digitally enabled’ – improvements are meant. This is not digital disruption. In contrast to these evolutionary advancements made possible through new technology, digital disruption stands for a radical change of business models, of how added value is created by companies, driven by the digitization of our world, by changed consumer behaviour and a changed competitive market environment. If companies want to stay relevant – or just alive even – they will need to substantially rework or even completely abandon their current business models.

The difference between digital disruption and evolutionary innovation

Since the term ‘digital disruption’ is often misused for smaller changes, it is well worth to clarify the difference. Evolutionary innovation focuses on using the digital change to increase the productivity. This can be achieved by shortening or automatizing the value added chain, which leads to reduced costs. It is important to point out that no new business model is invented through evolutionary innovation; all improvements still happen within the existing business model. Digital disruption, in contrast, means nothing less than the literal ‘disruption’ of the current structures of an industry. Through the digitalization whole new business models and ways of trade are developed, often marginalising existing products or service offers in part or completely. One successful example of implementing digital disruption is Amazon. Amazon completely changed commerce and championed the shift from offline to online shopping. Further, Amazon uses machines and algorithms instead of employees for key processes such as purchasing, pricing, and product recommendation for customers. In short – Amazon used a completely new business model in a previously traditional industry and forces competitors to adapt if they wish to stay relevant.

The changed consumer behaviour

The digital disruption is driven by the changes of the customer behaviour and the way we interact with our digital devices. Over the past years, access to the internet shifted from open browsers (Google, bing, etc.) to social networks and messaging apps. At the same time, desktop PCs lose importance as access device to the internet – the smartphone is today’s ubiquitous companion. Even the TV is outdone by smartphones concerning media consummation. For mass market manufacturers, this loss of significance means that they are no longer obliged to use TV as the main channel for range marketing campaigns. It is impressive to see that this observed change in media consumption is the strongest over the last 20 years, and the shifts observed tend to occur in one generation rather than in 2 years.

As a synthesis of the use of smartphones and the shifted online access via social networks and messaging apps, we see that today around 90% of the time spent on the internet through our smartphones are spent in mobile apps instead of browsers. Despite this ongoing trend, about 90% of the budget for online-advertisements is still invested in advertisements posted in open browsers instead of social/messaging apps.

Speaking of social/messaging apps, an enormous trend can be witnessed. Companies such as Google, Apple, Facebook, Amazon, Tencent and Alibaba (abbrev.: GAFATA) dominate the market with a combined turnover of almost 2 trillion US dollars. What unites these companies is the “battle for the customer interface”: each of them is striving to develop an online-ecosystem which allows the users to combine entertainment with an online-shopping experience. To do so, the GAFATA companies try to improve the user experience to keep them in their online-ecosystem instead of visiting the merchants’ websites. Hence, outside companies are well-advised to develop business models which work within these ecosystems or in cooperation with the companies.

Because of the presented changes in terms of digital and mobile transformation, new ways of producing, selling and delivering products and services are required. Revolutionary business models and the ability to react fast to the latest online trends are necessary not to get lost in an ever-changing competition. Thus, closely watching market trends, new competitors and the efforts of established ones are just as important as prepping one’s own organisation to enable it to keep pace.

Traditional retailers must reinvent their business models to survive the digital transformation tsunami

Every industry is transforming over the medium and long term scale, there’s no escaping digital transformation. But what are successful business models of the future for traditional retailers who want to compete against an increasing digital competition?

In the book Digitale Transformation oder digitale Disruption im Handel, recently published by Springer Gabler, Digital Insiders present new ways how traditional retailers can reinvent their business model and obtain digital knowledge in order to gain strategic advantage. Renowned authors, scientists, experts and digital thought leaders present successful digital business strategies and best practices from market leaders such as Alibaba, Axel Springer, Beiersdorf, Bonial/kaufDA, eBay, Conrad Electronic, Thalia or UNITO.

It is the must-have guide to provide traditional retailers with tools to reinvent their business and illuminate the principles and practices that lead to successful digital transformation. If you want to learn more about this topic or get in touch with one of our authors, please contact us.

Uly Wolters is Co-Founder and Managing Partner at dgroup. He is co-editor of the book ‘Digitale Transformation oder digitale Disruption im Handel’ and led multiple projects to success with the special focus on business modelling, company building and digitization of business processes.

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