Why industry leaders should preempt their own digital disruption

Even though the U.S. economic downturn beginning in 2008 was a dark time for many of us, there was a silver lining – the rise of innovative startups. The likes of Airbnb and Uber rewrote the rules of business by forming the sharing economy and disrupting stodgy industries along the way. Plus, they brought about a new favorite buzzword in just about every industry: digital disruption.

As a reaction to entire industries being flipped upside down, established industry leaders – the “old guard” – are attempting to preempt their own “uberization.” Now, you may say that they are too big, bureaucratic, complex, and slow to change. And yes, in the past, this assumption was mostly correct. Just look at Kodak. This iconic global brand was so addicted to fat profits from the photo-finishing market that it missed out on digital photography despite having an early technological lead. However, research from theEconomist Intelligence Unit seems to indicate that things have changed – with 57% of executives citing greater pressure from digital disruption presented by existing businesses, not startups.

Perhaps in this era of digital disruption, forward-thinking members of the old guard will disrupt themselves first by entertaining preemptive digital disruption. Why not? According to Accenture, $14.2 trillion in new revenue will be at stake within the next five years, thanks to the rising digital economy.

Why existing industry leaders should preempt their own digital disruption

The same technology breakthroughs (such as cloud solutions, smartphones, and the Internet of Things) that have set the foundation for innovative startups are increasingly adopted by the old guard. To do this successfully, these businesses must shift their mentality toward forming a startup culture from within. In this case, embracing digital disruption clears the path to profitability and stability – two factors that are critical not only for survival, but also for thriving in the future.

Across all industries, such business transformation is happening. Sometimes, it is caused by an industry disruption. However, in most cases, these companies are looking to lead innovation proactively. Even more exciting are the ones that have such opportunities served on a silver platter.

Nevertheless, established companies must choose whether and how they will seize the opportunities delivered by digital disruption. In my opinion, they have three choices:

1. Stay complacent with your revenue streams

For companies that choose this path, digital disruption has directly or indirectly impacted their core business. Unfortunately, they realized this reality too late and are now racing to get back to the top spot. My assessment is that they require the utmost discipline in their organization to succeed, which may be unlikely given they’ve missed the boat already!

Take, for example, the car-rental industry. On a recent business trip, I wanted to return a car early since I would be stuck in all-day meetings at a hotel. Luckily (or so I thought), there was a rental location close by. After a 30-minute chat on the phone, I learned that the rental company wanted to charge me 300% more to return the car three days early at a hotel location only a few miles from the airport. This reminded me how antiquated and asset-centric (versus customer-centric) most car-rental business models are. Just imagine the possibilities if they could innovate!

When you consider that utilization rates of car fleets average between 75% and 80% for most established rental companies, there’s a clear opportunity to monetize that remaining 20% to 25% of excess capacity by offering vehicles to aspiring Uber and Lyft drivers. Although Hertz (a centenarian corporation) has been considering this for the past year, no one from the old guard in this industry has taken advantage of this opportunity – yet. As a result, a whole new flock of rental-car companies specializing in renting vehicles to Uber drivers has emerged, such as HyreCar and Breeze.

2. Embrace disruption and get innovating

Companies that embrace disruption have also experienced significant disruption to their core business. However, there is one difference: they are also using it as an opportunity to enter entirely new markets. The gloves are off, and innovation is percolating.

Let’s consider Sears. At nearly 130 years old, the company could be thought of as the “Amazon” of its day, originally selling watches to outpost communities in the late 1800s and eventually innovating to become a leader in retail catalog sales. For the time following World War II, the company could be considered a Big Data pioneer. By analyzing U.S. Census data and demographic shifts to the suburbs, Sears decided to invest in numerous mall locations to form a brick-and-mortar retail business.

Fast-forward to today, Sears has clearly been disrupted for a portion of its core retail business by Amazon. As a consequence, the company is now pivoting into an entirely new business: unlocking the value of its vast real estate acquired at dirt-cheap prices in the 1950s to essentially operate as a real-estate investment trust (REIT) across approximately 30% of “super-ZIP” (also known as high net-worth) malls in the United States. Some estimates claim that Sears owns more than 200 million square feet of space – double that of Simon Property Group Inc., the largest mall operator in the United States.

Sears recently spun off a portion of its real-estate holdings, comprising nearly 18% of its square footage, for $2.6 billion under a new publicly traded company, Seritage Growth Properties. By reconfiguring its spaces to house a variety of retailers such as Primark, Whole Foods, Nordstrom’s Rack, and Dick’s Sporting Goods, the company will gain annual revenue from rent that is higher than what a larger Sears store could generate in a few years.

However, it is not just retailers that are renting or buying those “big-box” stores. Some locations are being transformed into large data centers that facilitate the buying and selling of just about everything online. CyrusOne is one such innovator that specializes in this activity with data-center sites in suburbs, former office parks, and retail centers. It’s amazing to see online retailers displacing their large, brick-and-mortar competitors by using the real estate of those big-box stores to create data centers and sell goods online. Things really do come full circle!

3. Preempt disruption before it controls the business

Preemptive disruption is the ultimate goal for the old guard, but very few are members of this club. These companies do not fear new models that may sacrifice a portion of their stable business in exchange for new revenue streams of tomorrow.

A great example of a company that is investing money and talent to lead the innovation pack is The Home Depot. The company decided to take a provocative step three years ago by acquiring the technology startup BlackLocus. By infusing a creative “lab” culture within the enterprise, The Home Depot is laser-focused on optimizing its pricing through a data-driven model. Since the acquisition, BlackLocus has helped The Home Depot bridge the pricing gap between traditional business and a broad spectrum of online competitors.

Beyond this apparent benefit, The Home Depot understands that customer interaction is one of its fundamental values. To dedicate 60% of its associates’ time toward customer engagement, the company applied various mobile solutions to check inventory and pricing and support mobile payment on the store floor.

The last word

What separates the laggards from the leaders in the digital age? It’s the wherewithal to take calculated risks and a strong culture of innovation. Without these attributes, a corporation is likely to encounter a disruptive reckoning in the near future.

To support this transformation, companies must have a supporting technology platform. In my opinion, this is the essence of the Run Simple approach.

More important, businesses need to understand that digital disruption is not a choice – it is now an integral part of doing business. Companies must be data driven to out-innovate their respective industries. Doing so gives decision makers greater understanding of when, where, and how to transform; any relevant workforce implications; and impacts on the capital structure and infrastructure. Plus, it offers an opportunity to seamlessly unite all point of contacts between the customer and business with processes that adapt to demand.

This article is published in collaboration with SCN. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Peter Russo is a contributing writer for SCN.

Image: An illustration picture shows a projection of binary code on a man holding a laptop computer, in an office in Warsaw June 24, 2013. REUTERS/Kacper Pempel.