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September 22, 2015
Why digital disruption resembles a shark fin more than a bell curve
By: Clemens Oertel

People often ask me to compare the "old days" to the new world where digital disruption takes place at mind-numbing speed. In this new world, sudden success, even a sort of "violent" success, frequently shakes the status quo.

My answer to that question is quite visual.

In the past, a product or service lifecycle in a market segment gained traction in the shape of a bell curve e.g. a normal, or Gaussian, distribution. Customers adopted the offering gradually, the segment gained momentum and then it was sustained over time, allowing new players to step in and grab a slice of the market.

Now, markets are conquered with a shark fin burst of domination (as described in the book, Big Bang Disruption: Strategy in the Age of Devastating Innovation by Larry Downes and Paul Nunes). A peak comes early, led by innovators and early adopters, and then it's time again to extend or enhance the product. Think of how Google, Airbnb and Facebook built billion-dollar companies over very short times. In the illustration below, you see that these companies were and are operating in the shark fin red zone.

The shark fin model

But how did these companies and others do it?

To design and implement new digital business models—to create a shark fin effect—companies must generate innovation, and that is typically done in four areas: through convergence, simplification, immersion and/or diversification.

The problem is that it's a lot to manage, especially at one time. That's why it's critical to sequence multiple bets on several horizons on the path to becoming a digital leader.

Four ways to reinvent the value proposition

First I will discuss the four areas where innovation can be generated in the search for shark-fin style success. Then I will give a brief overview of ways to rollout digital innovation across multiple horizons, namely with a portfolio approach, new and aligned governance mechanisms, and separation of bets into distinct segments of the company where more risk is embraced.

If innovation is done right and sequenced bets pan out, the result is more than an improved customer value proposition. It can be a reinvention of that value proposition.

Let's look at some examples.

Apple successfully converged different industries in one conglomerate, such as apps, music and TV. Digital innovation made it possible for Apple customers to benefit from a converged platform. Now the market is watching closely to see if Apple will do it again with Apple Pay.

Another example is Monsanto, the US chemicals company. It has simplified farming by automating and digitizing farming processes and introducing predictive analytics. Again, digital makes it possible and customers reap the rewards with a better customer experience.

Indeed, customer experience matters. Some 89 percent of business leaders surveyed by Gartner believe that customer experience will be their primary basis for competition by 2016.

This strong belief in the importance of the customer experience is why my third example of an area where innovation can be generated is really important. It's immersion, in the sense of immersion into an emotional world.

Here, Nespresso offers a deep emotional experience as a value proposition. It achieves that experience by gathering information about its customers externally, for instance from social media sites, and using it to engage one on one. According to a news report, Nespresso uses a cloud-based customer engagement solution and has effectively learned to speak to the customer in his or her own emotional language. The customer benefits and appreciates the experience that is enabled, and intensified, by digital capabilities.

Finally, businesses can diversify to expand the value proposition enabled by digital strategy. Amazon has done this by entering B2B through its arm AmazonSupply.com, now called Amazon Business. In this case, I'd call it a diversification of the customer base, more than a diversification of the business model. Amazon is now taking on companies like office supply retailer Staples in an enormous market. In the US alone, the B2B market is expected to be worth more than $8 trillion by the end of 2015. The e-commerce segment will be 9.3 percent, said a recent report, citing Forrester Research.

Indeed, Amazon has already proved itself a master of diversification, having started what is now one of the world's largest retail sites with a product offering of books and expanding that into toys, tools and electronics and on to today's dozens of product categories.

Several horizons, sequencing multiple bets

Now, let's turn to how to manage all these avenues of innovation in a way that respects the reality of the market—namely the cold, hard fact that success ebbs and flows with changing customer expectations and technology capabilities.

In general, I see three ways to use a strategy of sequencing multiple bets.

The first is a portfolio approach, for instance with portfolios under the mandate to seek out new market opportunities for new types of digital products and services. One telecommunications company did this after facing diminishing returns. The digital portfolio was part of millions of dollars in business growth potential the company identified across multiple digital bets.

Another is governance of digital bets based on closer alignment. A large bank did this by making the CEO the "banking entrepreneur," the newly appointed CDO the "digital entrepreneur," and the CTO or CIO the "technology entrepreneur," and requiring them to shepherd digital projects together.

A final way to sequence bets is to separate out the areas where digital bets are made into a different organization. BMW created iVentures to identify and grow startups for mobility services, such as electric vehicle charging solutions and car parking sharing apps.

All in all, being a digital leader means becoming much more agile, adaptive and aligned to shape digitizing markets. And it means sequencing multiple bets in such ways that requires companies to reshape operating models and drive industry convergence, even as market cycles shrink from years to months to weeks.

I must think back to the shark-fin model. I'm beginning to wonder if it's actually a shark-fin metaphor?

Perhaps time will show that only the digital predators—the sharks of this world—will succeed in volatile, complex and fast-moving digital business.

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