Digital Disruptive IntermediariesLooking to start-ups to find innovative digital business models

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AuthorsBen Gilchriest, Martim Teixeira (Capgemini North America Digital Innovation) Kai Riemer, Uri Gal, Jakob Hamann (The University of Sydney Business School)

ContactBen Gilchriest, ben.gilchriest@capgemini.com

A/Prof Kai Riemer, kai.riemer@sydney.edu.au

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Table of Contents

Disrupting old business models to unlock new digital opportunities

Understanding Vulnerabilities

Characteristics of Digital Disruptive Intermediaries (DDI)

Digital Disruption: Finding the Advantage

Key Findings of the Report

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Digital Disruption not only alters the way we do business, but also how we understand the world, technologies, products and markets.

It is key to understand the mechanics by which Digital Disruptive Intermediaries (DDIs) change the value flow in markets to uncover vulnerabilities and new opportunities in your business.

The current wave of emerging technologies are so disruptive because they both transform the way value is generated and change our thinking and understanding of how a market operates.

DDIs change the allocation of supply and demand by exploiting the flow of information, not the control of physical assets. Not only does this make them disruptive, it means they can grow extremely rapidly.

To prepare, incumbent businesses need to think systemically and experiment and innovate using digital technologies that are outside of their current, established business structures.

The biggest threat to incumbent businesses is their adversity to risk which prevents them from reacting even when disruptive change is upon them.

4 Digital Disruptive Intermediaries: Looking to start-ups to find innovative digital business models

Digital Disruption is reshaping the business world, challenging established business models and making many time-tested formulas for success obsolete.

What is Digital Disruption?

Unpredictably and unstoppably, Digital Disruption is reshaping the business world, challenging established business models and making many time-tested formulas for success obsolete. In broad terms, Digital Disruption refers to advancements in digital technologies that occur at a pace and magnitude that disrupt established ways of creating value within or across markets, social interactions, and more generally, our understanding and thinking. In other words, Digital Disruption not only alters the way we do business, but also how we understand the world, technologies, products and markets.

For example, consider Uber. With its mobile app now available in more than 250 cities around the world, Uber is disrupting the taxi market through its superior management of information. By using digital technology to match the supply of available drivers with the demand of passengers, Uber is able to outperform established taxi companies in ways that are faster, easier and more cost-effective for both passengers and drivers. In creating this new business model, Uber has also built a digital platform that it can re-direct and apply in other industries. In fact, Uber has already

jumped into the logistics and food-delivery markets. Along the way, Uber has collected – and continues to build -- a wealth of valuable data, such as traffic patterns and passenger demand cycles. With all of this information at hand, Uber is not only positioned to disrupt even more industries, but also to evolve the very business model it created. For example, in the future, it’s conceivable that Uber could use this data to setup a fleet of driverless vehicles that will provide many of the same pickup and delivery services that it performs now.

Another example is iTunes, which disrupted the entire supply chain of the music industry by replacing physical products (albums, cassettes and CDs) with digital music downloads – and as result, transformed the ways that people buy, listen to and share music. With the emergence of Spotify, Pandora, Apple Music and other on-demand music services, disruption continues to reshape the entertainment industry – transforming the relationship between artists, recording companies and customers and redefining how music is owned, delivered and consumed.

The Perpetual Disruption of DDIs

As the Uber and iTunes examples illustrate, Digital Disruption is more than a one-off phenomenon. These type of digitally-driven companies don’t just disrupt a market and then pause, allowing established competitors to catch up. Instead, they begin by transforming the industries they disrupt, and then they evolve the very nature of the disruption they created.

For established companies, the lesson should be clear: They cannot afford to sit back and watch disruption take place in other industries before taking action in theirs. It’s quite possible for digitally-driven companies to quickly shift their business models from one industry to become formidable competitors in another market. Consider this: Though it started out as a transport-booking

company, Uber needed just a few short months to evolve its business model to offer an effective logistics service – and now it’s competing within a new industry against such stalwarts as FedEx, UPS and DHL.

Before offerings like Uber and iTunes existed, few could have predicted the sweeping changes they would bring to their respective markets. Yet, gradually and often inconspicuously, these changes occurred -- challenging established business models and working practices along the way. These examples illustrate the dichotomy of Digital Disruption, which can be seen as both a threat and an opportunity. On one hand, the changes associated with new digital technologies are unfolding at a pace and scale that are destabilizing – and often, invalidating – many existing ways of doing business. On the other hand, digital technologies are creating opportunities for entrepreneurial-minded companies to scorn the status quo and out compete traditional businesses in a wide range of industries.

What does this mean for you and your company?

Much has been written about this and what is clear is that Digital Disruption cannot be ignored. However, what does this mean for you and your company? If you recognize the disruption and the potential impact on your business, what’s next? Moreover, whilst Uber, iTunes, AirBnB and others are interesting case studies to demonstrate a model it is highly probable that your company is not a start-up and that these cases don’t relate to your industry or company, so how is this relevant to you?

This report is designed to help answer these questions by describing the mechanisms by which some “born digital” companies, the Digital Disruptive Intermediaries (DDIs) disrupt markets and what this means for the 90-plus percent of the economy that does not do technology for a living.

Disrupting old business models tounlock new digital opportunities

5Digital Disruptive Intermediaries: Looking to start-ups to find innovative digital business models

Understanding VulnerabilitiesSome DDIs innovate to create entirely new business models that simply weren’t possible in the pre-digital age. Others exploit inefficiencies in existing industries, typically by using information in novel ways. Whatever the case may be, these market conditions favor DDIs.

Market Fragmentation

Fragmented markets are those with many small players. This makes it difficult for customers to research, compare and access the products and services the many companies provide. DDIs capitalize on this by becoming a single point of access for customers, cataloging services and streamlining accessibility to the offerings of multiple providers.

Inefficiency of Existing Monopolies and Structures

Most often due to regulation, some industries have few, if any, competitors in their respective markets. As a result, they tend to be conservative in providing access to customers who want to receive product and service information or to provide feedback. However, these industries are increasingly ripe for disruption as DDIs find ways to use digital technologies to change the flow of information – invariably with the customer in mind.

Information Richness and Lack of Transparency

In some industries, products are complex and rich in information – especially in terms of features, options and prices – making it all but impossible for consumers to make “apples-to-apples” product comparisons. DDIs cut through this lack of transparency by offering structured comparison and filtering tools designed to help customers make informed buying decisions.

Convenience Limitations of Physical Channels

Many physical distribution channels, especially those in the retail industry, are being disrupted by DDIs that aggregate and present information in ways that significantly increase customer convenience. Digital stores, which allow shopping from home, are a prime example.

Lack of Market Access

Small businesses and individuals have typically struggled to enter markets dominated by large enterprises. DDIs are taking advantage of this by setting up digital platforms on which small businesses collectively market their products and services to a much wider audience.

High Variations in Service Quality

In many service industries, particularly the travel, restaurant, financial planning and home repair sectors, service quality varies greatly, creating uncertainty and risk among potential customers. DDIs help by gathering and presenting information from existing customers to help inform new customers’ buying decisions.

Consider if any of these conditions apply to your market. If so, what does this mean for your company?

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Characteristics of DigitalDisruptive Intermediaries (DDIs)A vast majority of DDIs today are “born digital” companies, however, what truly sets them apart is not their starting point but how they use digital technology and information in their business model.

Typically, DDIs do not own any assets and change the dynamics and distribution of value in established markets by being superior at managing information. Without assets – Uber owns no cars, AirBnB owns no real estate, iTunes does not produce music – they are able to scale rapidly, create novel services and quickly adjust their business models to ultimately gain a significant competitive advantage.

Based on extensive market research, we have identified eleven ways in which DDI’s manage information to create an advantage (see Figure 1).

Based on the research we found that DDIs combine these functions to create new business models and disrupt markets. For example, AirBnB and Uber have primarily combined Intent Casting and Channeling Actors functions to disrupt their respective industries to efficiently and easily match supply with demand. Since then, multiple start-ups from dog walking to baby sitting have looked to replicate their success by combining these DDI functions and applying them to new markets.

Figure 1: Typical DDI functions

Function Explanation

CataloguingProviding a comprehensive and structured way for customers to view products, services, or content from multiple sources in one place.

Bundling Combining products, services, or content from multiple suppliers into new packages for customers.

Reordering or Filtering Enabling customers to interact with, reorder or filter structured lists of products, content and services, so they can find a suitable offering.

Ranking & Recommending Using algorithms to rank-order products, content or services, based on certain criteria (e.g. quality) or to provide personalized recommendations for customers.

Delivering Delivering digital content by way of downloads, online streaming or via a mobile app.

Hosting Providing a cloud-based platform for the uploading, storage and accessing of user- generated digital content.

Sharing Enabling sharing of digital, often user-generated, content between users.

Intent Casting Allowing users to spell out their needs (intents) for sourcing a product, service or project funding from other users or suppliers of the platform.

Channeling Actors Providing the ability to select supplier-provided products, content or services and routing customers to the supplier’s digital platform (for purchase).

Pricing functions Comparing and/or setting prices of products, content or services sourced from suppliers.

Matching Actors Pairing customers with the right suppliers of products, content or services, often using specialized algorithms.

Digital Disruptive Intermediaries: Looking to start-ups to find innovative digital business models

Based on extensive market research, we have identified eleven ways in which Digital Disruptive Intermediaries manage information to create an advantage.

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Digital Disruption;Finding the Advantage

8 Digital Disruptive Intermediaries: Looking to start-ups to find innovative digital business models

Digital Disruption;Finding the Advantage

Whether it’s to protect against the market vulnerabilities or to create new opportunities, for established companies, embracing digital can be intimidating and for a long time may even have been seen as an enemy: Something to be understood but ultimately to be avoided when stability within your business is seen as key to maintaining profit.

This is not to say that businesses are not reacting to digital disruption; US businesses invested billions of dollars in 2014, investment in ecommerce alone was U$ 1.2bn in 2014, so changes are being made even though there are fewer examples of established companies applying digital thinking to fundamentally transform their business models. And it is easy to see why - for decades, as organizations have scaled, systems have been put in place designed to manage risk, minimize failure and ensure consistency and compliance. Whilst these have stood the test of time, and ensure profitability in stable markets, ironically, it is these concepts that now present the greatest risk to businesses. Why? Because they slow companies down

and prevent them from making the bold decisions needed to continue to grow, or maybe even survive.

This ultimately begs the question, “What do I do next?” The answers are many, but above all is this: understanding how Digital Disruption will specifically impact your market or business cannot be understood by extrapolating into the future what you know today. This misses the role that innovation plays. More importantly, it misses that as business practices change so do our views about what counts as meaningful and valuable, and what best represents the right ways of performing these business practices. What this means is that a successful approach is not prescriptive, or about implementing a defined set of digital capabilities, it is an adaptive approach, as much about people and mindset as it is about technology.

To achieve this we recommend three things:

1. Embrace the unfolding paradigm shift in your own business model, using the DDI functions as a working model;

2. Empowering employees and embracing experimentation; and,

3. Considering innovation not as a stand-alone function but as the DDIs do, as a way of operating the core.

Embrace the unfolding Paradigm Shift in your Business Model

Traditionally, when companies seek ways to be more innovative they give a cursory glance to improvements taking place outside their industries, tending to focus mostly on what’s happening within their own markets. This incremental “market-matching” approach to innovation no longer

holds water. To effectively take advantage of the ways in which digital technologies allow conventional business models to be redesigned and also respond to DDIs demonstrated ability to swiftly dominant new markets, established companies will need to embrace the unfolding “paradigm shift” engulfing many markets. Not just in how they deliver the current business model, but the fundamentals of how they make money and how they connect with their customers.

A good starting point is the DDI functions and using these to inform innovation; as we’ve seen these are already successful and highly repeatable. How might you use these to create a market advantage? What would it mean to your business if you applied Channeling Actors or added Ranking and Recommending to your digital business model? Consider some car insurance companies for example which have chosen to introduce Pricing Functions and Cataloguing so customers are able to compare the price of competitors’ products from their website. A counter-intuitive move that takes advantage of an opportunity that the DDI model enables to take ownership of the unfolding disruption.

Also acknowledge that DDI-driven disruption is already underway in your market. DDIs may only be in its infancy right now but should not be dismissed. Take a fresh look to find the significant in the insignificant. Compare what you see within your company and your market with what’s happening in already disrupted markets. How have those markets changed? How did the understanding of the industry, what counts as the relevant product and what is relevant to customers change? What impact would a similar change have on your business? Are there any small players applying DDI functions which could disrupt your market in the future? How might this inform your thinking of changes you can make to get ahead of this disruption?

Even if you don’t implement the specifics, this exploration will help to uncover new possibilities and reflect upon your existing business model in new ways.

For established companies, digital can be intimidating and for a long time may even have been seen as an enemy.

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Empowering Employees and Enabling Experimentation

Among the greatest advantages that large enterprises have in this age of disruption are their sizable workforces. Big companies can see with a thousand eyes and draw on the ideas of a thousand people. Yet management structures aren’t always geared toward collecting and sharing information among employees. Now more than ever, it is critical to encourage openness, transparency and the free flow of information and ideas. New social media technologies, combined with management support, can help bolster the dialogue. This does not necessarily mean doing what the masses want or what common sense dictates, but surfacing differences in viewpoints that will allow management to see their industry with different eyes – a key ingredient in seeing the unfolding disruption.

In tandem with this is enabling space for managed experimentation. There is no one-size-fits-all solution for creating a truly digital business, which means that established companies will need to continually test new ideas. What you’re trying to achieve is hard, complex and perhaps no other company has attempted anything like it before, so you’re bound to make some mistakes. But rather than giving up on new ideas and blaming individuals when their ideas cause setbacks, work together as a team to overcome the challenges and find new paths to success. Any

failure is an opportunity to learn. As Ed Catmull, President and founder of Pixar, said “failure isn’t a necessary evil, it’s a necessary consequence of doing something great”. Always remember that in the face of Digital Disruption, the traditional focus on risk management, failure prevention and compliance represents the greatest risk to your company. Not only do DDIs see opportunities in the market sooner, they are better equipped to take advantage of those opportunities because they are encouraged to experiment and are not constrained by traditional business attitudes about failure.

Innovation as an Operating Model

Embracing failure however does not mean experimenting with multiple ideas in an unstructured way with a hope that the right one will reveal itself. It’s about identifying and managing a set of focused ideas through a structured process to progress ideas on a continuous basis. Innovation Labs have a role within this as a focal point for innovation activities and they act well as a mechanism to enable ring-fenced discovery and development, free of the broader constraints that may exist elsewhere in the business. However, they should not be the only place where innovation happens. As mentioned previously, employees need to be engaged across the company otherwise innovation will, at best, become another functional silo, at worst will begin developing ideas that don’t have relevance. Engaging with a broad range

of people, especially those people who are able to see challenges and identify opportunities, is key.

Move Before you “feel the heat”

In summary a lot of companies – perhaps even some of your competitors – are waiting to “feel the heat” before they react holistically to Digital Disruption. They’re playing a dangerous game. Why? Because in this time of inevitable and unpredictable change – where established companies and their ways of doing business are being challenged, if not disappearing altogether -- complacency can be lethal.

Now is the time to test, to prepare, to always keep looking for opportunities – and to be part of Digital Disruption and not part of history.

Embracing failure does not mean experimenting with multiple ideas in an unstructured way with a hope that the right one will reveal itself.

Digital Disruptive Intermediaries: Looking to start-ups to find innovative digital business models

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Dr. Ben Gilchriest is a Principal and go-to-market lead for Capgemini’s North America Digital Innovationpractice. Ben is focused on the innovative application of emerging technologies to drive new customerand business value. He has founded and led multiple ventures and start-ups in Europe, Australia, SEAsia and North America. He is currently based in Los Angeles, USA.ben.gilchriest@capgemini.comtwitter: bengilchriest

About the Authors

Martim Teixeira is a Manager within Capgemini Australia, specialised in Customer Experience and Digital Transformation, including Strategy and Operations. Martim has an extensive consulting experience including the Big4 and has worked on a series of engagements in Australia, Europe and Africa. martim.teixeira@capgemini.comabout.me:about.me/martimvt

Kai Riemer is Associate Professor and Chair of Business Information Systems at the University of Sydney Business School. Kai’s research is focused on Enterprise Social Networking, e-Collaboration, inter-firm networking, virtual work, and E-Commerce. He has developed methods for team communication, enterprise social network adoption and collaborative business practiceskai.riemer@sydney.edu.autwitter: karisyd

Uri Gal is a Senior Lecturer in the Discipline of Business Information Systems. Uri’s research takes a social view of organisational processes in the context of the implementation and use of information systems. He is focused on the relationships between people and technology in organisations, and changes in work practices, organisational identities, and the introduction of new information systemsuri.gal@sydney.edu.au

Jakob Hamann is a postgraduate student of Information Systems at the University of Göttingen (Germany) and a research visitor with the Discipline of Business Information Systems at the Universi-ty of Sydney Business School. Jakob’s research is in the field of digital disruption. Prior to coming to Sydney Jakob spent a year at the Universitat Autònoma de Barcelona in Spain, and as a working student at the Cooperation Systems Centre Munich.jakob.b.hamann@googlemail.com

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