Over the last decade, China’s so-called BAXT companies (Baidu, Alibaba, Xiaomi and Tencent) have joined their US GAFA (Google, Amazon, Facebook and Apple) counterparts in disrupting numerous industries, especially the technology, media, financial and consumer sectors.
For some of the incumbents in these industries, that disruption seemed to happen in the blink of an eye. It’s easy to assume that the explosive disruption that has rocked traditional retailers, banks or media companies is the greatest threat to established brands. In fact, a far quieter and gradual form of disruption is more common. And more insidious.
Consider the energy and utilities sectors, where carbon policy is gradually changing consumption. Or the automotive sector, where societal trends are weakening the demand for car ownership. Or the telecoms sector, where voice revenues have been in a long, slow decline.
In each case, this “compressive disruption” has been stealthily eating away at core business models. And the impact can be devastating. It is most often manifested through “empty growth”, where revenue expansion remains solid, if not stellar, but where margins begin to fall, denying enterprises the resources to invest in new opportunities. Some industries have met the challenge well. The global automotive industry has seen growing revenues and flatlining profits in recent years. Yet, for the most part, it is aggressively experimenting with electric vehicles, ride-sharing and other innovations.
But many companies in asset-heavy industries have exposed themselves to danger by considering themselves immune to highly visible, sudden disruption. This has lulled them into a false sense of security and made them less conscious of the slow squeeze of compressive disruption. At first glance, their fortress of stability seems protected. Barriers of entry are high. But the threat evolves over decades, far outlasting the tenure of the average CEO. And even when business leaders do become aware of the incremental attack on their core business, they typically remain glued to it. After all, it is where they serve their customers, where their leadership has established itself, where long-term investments have been made.
Should companies respond by abandoning their core business in a race to the new? Far from it. Those who successfully rotate to new opportunities revitalize their legacy business by identifying trapped value within it. They grow it to generate the investment capacity needed to unlock the value of new markets. They pursue their rotation deliberately and cautiously, culminating in a wisely timed pivot towards the new.
Our latest Digital Index research of 450 companies in China was conducted with CASIII (the China Service Alliance for the Integration of Informationization and Industrialization). It reveals a similar pattern to that we have found in other markets across the world. Only 7% of Chinese companies we examined have accelerated their journey to the new, generating a high proportion of their revenues from recently started business activities. These “Rotation Champions” master two key attributes that help explain their success in unlocking trapped value.
Firstly, they apply digital technologies to build intelligent operations. This may be through digitizing marketing channels, their HR function and financial systems. Or by applying intelligent, connected technology to make their manufacturing operations smart and agile.
China’s Rotation Champions also drive digital innovation by creating entirely new business models, and by pursuing new markets. They form new ventures to accelerate their ambitions. And they create entirely fresh products and services, using digital to integrate both into unique customer experiences.
It’s clear that technology is not the only driver of change. New consumer expectations and societal attitudes are redefining value creation.
At the Annual Meeting of the New Champions 2018, the World Economic Forum is calling on businesses to ensure the Fourth Industrial Revolution is more inclusive and sensitive to society’s needs. Whether it’s the use of blockchain to grant people secure forms of identity that bring them into the formal economy, or image recognition to help the visually impaired interact with their community, or AI to improve food supply chains in remote areas, digital technology is already playing a critical role in improving the way the world lives and works.
The sooner companies embrace the very innovations that are threatening their traditional businesses, the sooner they can be disrupters in their own markets. The greater their focus on innovation, the greater their ability to create value that meets the needs of both shareholders and wider society.