As many business leaders know, digitization has unleashed a wide range of opportunities and challenges for companies. The digitization of interfaces and processes has helped to drive new markets, redefine business systems, and uncover latent supply. With markets continually fluctuating due to digitization, business leaders are seeking to understand the sources of digital disruption so they can get ahead of these trends, or even become the disruptors.
In a recent report, the global management consulting firm McKinsey & Company explained how the basic economic principles of supply and demand empower digital transformation and disruption. The following explores the impact of digitization on supply and demand, as discussed in the McKinsey report.
According to McKinsey, digitization has the power to expose previously unexploited sources of supply, while also satisfying unmet demand through the repackaging of products and services. The combination of freshly undistorted demand and recently exposed supply allows market creators to attract consumers by decreasing information asymmetry and transaction costs.
Over the course of the last decade, digitization has triggered massive changes in various industries, ranging from transportation to hospitality, by capitalizing on uncovered supply and unmet demand.
Unmet Demand and Consumer Expectations
McKinsey further explains unmet demand by noting that technology is transforming products and services, as well the way that consumers want to use them. Companies are discovering that underserved consumers are using new technologies to meet previously unfulfilled needs.
For example, consumers can now instantly process and share their photos instead of having them developed or listening to a particular song online rather than buying an album at the store. Digitization fosters refined demand, as consumers increasingly have access to customized products and services in more places and at a lower cost. With so many resources available online, consumer expectations have also increased, and many now expect a premium online experience regardless of the business or industry.
As demand becomes less distorted, the McKinsey report states that companies are at risk of disruption if their customers cannot obtain a best-in-class user experience, or if they can’t access a product or service when and where they desire. Digital transformation and disruption can also occur if a company requires customers to purchase an entire package to access one component or to cross-subsidize other consumers.
Through digitization, underutilized assets can become a new supply and completely transform a market. For instance, digitization can empower crowdsourcing and provide companies with access to previously untapped information and sources of innovation.
Once sources of new supply are unlocked, the McKinsey report explains that companies might be susceptible to disruption if customers only want part of a product, if their supply is used variably, or if fixed costs are high. Disruptors can capitalize on these factors by utilizing the sharing economy and reducing redundant production.
In addition to driving new supply and reducing unmet demand, digitization is blurring the boundaries between industries, making it more likely that disruption in one market will impact other markets.
Companies can no longer rely on current barriers to entry, as digitization diminishes the need for physical assets, technology redefines products and services, and demand leads to changes in regulations. According to the McKinsey report, the combination of these forces increases the likelihood of more intense digital disruption outcomes.
Greater Value Propositions
While digital disruption begins with refined supply and demand, the process continues as consumer expectations increase and companies work to fulfill those higher expectations through new value propositions. What this means is that companies are giving consumers something they didn’t know they needed or wanted, such as access to the Internet through a smartphone. In many cases, new propositions are maximizing the wealth of available data and harnessing the power of global connectivity.
McKinsey emphasizes that companies are continually expanding consumer expectations and delivering greater value propositions, so enterprises have to advance in a wide range of areas to avoid disruption. Most importantly, they need to improve distribution and delivery models, digital features, connectivity to physical devices, and social media integration.
Innovative Business Systems
When creating new value propositions, companies also have to reimagine underlying business systems or risk being left behind when innovators disrupt industry value chains. The McKinsey report highlights this point by citing how hard-drive producers were outpaced by digital storage innovators, completely disrupting the industry and the value structure by transforming products and services and reducing costs.
Recognizing this trend, some longstanding companies have been able to successfully transform their business systems. For example, major newspapers have digitized their publications, and large retail corporations have implemented digitally integrated supply chains.
Companies can become vulnerable to digital disruption in this area when they form deep-rooted physical distribution networks and redundant value-chain activities.
Hyperscale platforms are businesses that operate across a range of customer segments and product categories. While breaking down traditional industry boundaries, these platforms also realize significant operating leverage through algorithms, automation, and networks. Hyperscale platforms have the power to affect multiple industries and produce new barriers to entry.
The McKinsey report states that companies could be disrupted by hyperscale platforms if they ask consumers to pay for information, or if they haven’t established concrete suppliers and users.