Innovation

A race for digital business models

Marko Rebane Marko Rebane

"You can't solve a problem on the same level that was created. You have to rise above it to the next level." Albert Einstein

The COVID-19 pandemic has put many businesses in a forced situation – they must innovate and adopt technologies. The crisis has accelerated the changes that were taking place even before the era of so-called social distancing. Those with automation and digital sales channels in the DNA of their business models are getting out of the crisis stronger than they were. Among others, the race for the remaining of the market share is likely to begin.

Investments in technology show a strong growth

According to a survey conducted by Grant Thornton LLP and CFO Research in 2019, 38% of responding companies invested in business intelligence solutions at the time of the survey, 29% planned to do so in the next 12 months and 21% in the next two years. 30% of the respondents invested in machine learning, 27% in OCR (optical character recognition) technology and 24% in artificial intelligence. A significant increase can be observed in these areas compared to the results of the 2018 survey. Read a longer article on the study here.

According industry experts, it is misleading to assume that the crisis may hamper investments in automation, because technology is expensive, and decisionmakers are reluctant to spend resources in difficult circumstances. The economic literature of the last decade rather reflects that investments in fact are made during the crisis[1].

According to a 2017 McKinsey & Company study, the potential for technical automation is significant: approximately 50% of today's operations can be technically automated using state-of-the-art technology. Thereby, 60% of today's professions have more than 30% of activities that could be technically automated.[2]

The strong become stronger

The efficiency and convenience of technology is rapidly reshaping people's behavior, so there is no reason to hope that people will return to the old world after the crisis. Therefore, it is not surprising that the market value of technology companies such as Amazon, Apple, Facebook and Microsoft have reached a record level during the recession, reaching a total of five trillion dollars.[3]

These companies are also swimming against the current in the labor market, taking the opportunity to attract engineers, data analysts, developers and cyber security experts to their teams from troubled start-ups. For example, during the COVID-19 crisis, Amazon has hired 175,000 additional people to warehousing and logistics positions and advertises more than 20,000 vacancies in technology[4].

A successful digital strategy requires full commitment from leaders

Sunil Gupta, an expert in digital business strategy and a professor at Harvard Business School, has been researching Fortune 500 companies' efforts to introduce digital transformation for more than a decade. According to Gupta, only those leaders who are ready to go “all-in” will achieve fundamental changes – they do not consider the company’s digital strategy in any way separate from the overall business strategy, but drive their business with a "digital-first" mentality, making sure that digital strategy is embedded in the company's DNA and concerns all aspects of the business: business model, value chain, customer relations, corporate culture.[5]

Gupta has observed that companies often try to follow some combination of the following three strategies to keep up with digital change and find new growth opportunities, but in most cases these initiatives achieve limited success:

  1. the creation of a small separate start-up unit within a larger organization – the result is often, figuratively speaking, that the speedboat races away but does not take the mothership with it;
  2. conducting various digital experiments – experimentation without a definite direction and action plan may seem successful in the short term, but it does not always have a significant impact in the long run. Unscaled ideas can waste time and resources;
  3. using technology to save costs and achieve efficiency – according to Gupta, if you only base on this approach, you assume that technology will not be able to fundamentally change your business.

Burn old bridges in the name of success

Once an organization becomes aware of the necessity to transform and wants to carry out the changes, it is necessary to create an organizational culture with appropriate values to support it, to set up a strategy for innovation and build a system for innovation (processes, methods, tools).[6]

It is human nature to adhere to a safe, functional environment, and sometimes nothing else helps but burning old bridges. For example, software developer Adobe took the path by taking the digital transformation of the cloud-based business model as its only possible goal and communicated throughout the organization that Plan B does not exist. During the years of the digital transformation, Adobe's net profit fell from $ 0.8 billion in 2010 to $ 0.3 billion in 2014, but then picked up and reached nearly $ 3 billion in 2019.

Sunil Gupta has aptly stated that the transition to digital solutions is like changing the engine of a plane while it is in flight – it is likely that the plane will first start descending before it takes an upward direction again and reaches new heights.[7]

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