Four articles in the January/February 2022 issue of Harvard Business Review (HBR) argued that “many people” are wrong in thinking that “old-economy companies” are “doomed to suffer a slow demise.” The articles had a point in that most “old-economy companies” have found ways to survive, “in some shape or form”, and have not yet died from digital disruption. But if we look at the bigger picture of what it takes to thrive, not just survive, the challenge for most firms still lies ahead. In part 1 of this article, I summarized the four HBR articles. Here (Part 2) I present a framework to thrive amid digital disruption.
Defining ‘Digital Disruption’
To begin, let’s define “digital disruption”. Digital disruption is not a disease afflicting “old-economy companies.”
“Digital disruption” is nothing less than a symptom of the birth of a new economic age, with a transition akin to that the agricultural age to the industrial era. The new age flows from the combination of exponential new technologies and new management principles, which in turn lead to massive new value creation. “Digital disruption” can be defined as a failure to take advantage of this opportunity: see Figure 1 below.
“Digital technologies” include at least 18 major technologies that together have the potential to reinvent almost everything we do for the better: see Figure 2 below. Anything that is slow, inconvenient, difficult, expensive, unpleasant or impersonal can in principle be transformed by these technologies into something that is cheaper, easier, more convenient, speedier, more agreeable, and more relevant to the user’s need,
As a result, firms that have mastered the new technologies and the elated management principles have already transformed parts of our lives, including how we work, how we communicate, how we shop, how we play, how we read, how we entertain ourselves, in short, how we live. In our actions, as consumers we have spoken. Firms have shown that it makes more money. There is no going back. This is the future.
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The Management Principles Of The Digital Age
Most firms have only scratched the surface of the potential of the new technologies. That’s in part because the technologies are often unfamiliar to executives at all levels, particularly the top, and in part because organizations have not made the transition to the new management principles.
The management principles of the prior era—the industrial era—involved mass production, mass distribution, mass consumption, mass education, mass media, mass recreation, and mass entertainment. These things combined with standardization, centralization, concentration, and synchronization, to produce the management system known as bureaucracy. Bureaucracy created huge benefits for humanity over several centuries, But bureaucracy isn’t fast, or agile, enough exploit the new digital technologies. Moreover, by treating human beings as cogs in a machine, bureaucracy dehumanized the workforce.
The management principles for the digital age are shown in Figure 3 below and include the following. Instead of starting from what the firm can produce that might be sold to customers, firms work backwards from customers’ needs and then figure out how to meet them in a sustainable way. Instead of leadership located mainly at the top, leadership, and an obsession with profitably creating fresh value for customers, is nurtured throughout the firm. Instead of tight control of individuals reporting to bosses, staff throughout the organization create value by working in teams with short cycles, drawing on their own capacities and imagination. Instead of steep hierarchies of authority, firms need to operate in interactive networks of competence, where ideas can come from anywhere, even from outside the firm. For most firms, these are deep changes.
Firms that have mastered the new management principles and the new technologies can move more quickly, interact more understandingly, operate more efficiently, mobilize more resources, attract more talent and use it more effectively, win over customers more readily, enjoy more elevated market capitalizations, and compete more overwhelmingly than firms being run on industrial-era principles.
Thus it’s not just individual firms that are being toppled. This is something more fundamental: the central management tenets of the industrial era are being upended. A new spirit of individual creativity and innovation is being generated.
The transition from industrial-era, to digital-age, management is occurring at different speeds in different sectors. As with any exponential transition, change tends to happen gradually and then suddenly. Stasis can hide imminent shocks.
Conversely, when one or more of these principles is not fully embraced, or is set aside, even an advanced digital-age firm may revert to industrial-era levels of performance. Both technology and management are needed: digitization without different management typically makes little difference.
A Better Name for the Digital Age?
The most-used label for the new era is “the Digital Age”, although the label can mistakenly be taken to imply that the digital era is only about new technology. Figure 4 lists 13 alternative labels.
Each of these alternative labels deals with one facet of the new age. “Digital age” has three key advantages. It correctly suggests that the new age affects everyone. Second, it is already the most commonly used label, and third: most firms want it: they are trying to implement digital transformations.
Regulating The Digital Economy
Yet not everything about the new age is positive. As with any basic change, the new age harms those not willing or able to embrace it or master its implications. Some large firms have abused their market power and committed other missteps.
Society is still groping for a balanced picture of the costs and benefits. A framework is needed to provide a coherent picture for a balanced assessment. While fresh digital-era regulations are obviously needed, along with clear rules for digital commerce, and redress of any missteps already taken, it would be economic and political suicide for regulators to kneecap the digital winners. If the digital winners are smart, they will take steps to regulate themselves.
The Need For A Digital-Age Framework
In an age of rapid innovation, if firms don’t embrace the principles and technologies of the digital age, some other firm will do it for them and in due course put them out of business. As a sign of this harsh reality, breakups of the old industrial behemoths are becoming increasingly frequent: GE, J&J, IBM, and Toshiba are just the most recent examples. They are surviving, but not thriving.
For large firms, the transition will require deep change and will take time. It means setting aside entrenched systems, approaches, practices, values and attitudes that served firms well in the industrial-era. It means senior executives understanding, internalizing, and communicating unfamiliar ways of operating. It means adapting the technology and the management to the context of each individual firm. Copy-and-paste directives don’t work. Consultants can help, but ultimately the top leadership itself has to live, breathe, and exemplify the new mode of operating.
All firms must acquire the new capabilities if they are to thrive, not just survive. If they understand what is involved, there is no reason why they can’t succeed. The pain that they feel in making the transition is not the pain of dying. It is the pain of being born.
And read also, in addition to Part 1 of this article: