For established businesses facing digital disruption, it’s natural to focus first and foremost on the particular startups or new companies that might be posing an immediate threat. After all, keeping a close eye on your competitors is perhaps one of the longest-established business principles around. But, as a recent article from McKinsey & Company argues, it’s actually far more important to consider why disruption is likely to occur; that is, what incumbents really need to understand is the nature of the disruption they face, not just which specific parties might prove to be catalysts for it.
To help incumbents clarify the sources of potential digital disruption, as well as the conditions under which it flourishes, McKinsey analysts have returned to the fundamental economic mechanisms of supply, demand, and market dynamics. In other words, the vital thing to understand about digitization is that it is disruptive to industries and incumbents when it results in a critical change to supply or demand (or both together).
For example, digital disruption can have the effect of exposing new supply and uncovering latent demand, and making a new market between them; one of the best illustrations of this is Airbnb, which exposed (rather than created) a previously unused supply of accommodation while at the same time revealing underlying consumer demand for more variety in accommodation choices. On the more extreme end of the scale, digital disruption can lead to the creation of new value propositions, hyperscale platforms, and reimagined business systems, all of which can change the nature of supply and demand to a significant degree.
For incumbents navigating the mechanisms of digital disruption and attempting to better understand the urgency of opportunities and threats they may be facing, McKinsey has produced a helpful “supply and demand” guide to digital disruption. Companies can use this guide as a basic organizational assessment tool to identify how vulnerable they may be to digital disruption in the following six supply and demand categories
Companies may be especially vulnerable to changes resulting from undistorted demand if the customer experience is below the current standard of “user friendliness,” both within and beyond the company’s particular industry. In other words, there is a strong risk of disruption if customers can’t get what they want at their preferred time and place, if they have no alternative but to buy the whole product or service to get the smaller part they want, if they are currently cross-subsidizing one another, or if the company’s customer identification and targeting techniques (like special pricing or advertising) are ineffective.
Indicators of vulnerability in this category include a supply that is used unpredictably and high fixed or step costs. If customers don’t fully use a company’s product or service, or could easily become suppliers of the product or service themselves (as in the Airbnb example), then the risk of disruption is likewise high.
The risk of disruption leading to new market-making is all about finding cheaper and more convenient ways of connecting supply with demand. Companies are vulnerable to disruption in this category if there is a lack of transparent information exchange between customers and suppliers, if research is costly and time-consuming with many intermediate steps and fees, and if transactions generally take a long time to complete.
New value proposition
Disruptions in this category aim to enrich a product or service and do more work for the customers on their behalf. If the experience of using a company’s product or service could be significantly enhanced through additional information or social media applications, or if a company offers a physical product that is not connected to the Internet (like appliances or thermostats), disruption that targets an enriched experience could be the result. If there is a substantial delay between when a customer purchases a product or service and when they receive it, or if they must be present in person in order to obtain the product, then disruption targeting a more convenient experience (doing more of the customer’s work for them) is likely.
Reimagined business systems
From an economic standpoint, disrupting business systems involves changing supply-side cost structure. Companies are vulnerable to such disruptions if there are multiple redundancies in the value chain, if physical distribution or retail networks are strongly entrenched, or if the industry in question has high margins compared to other industries or high variability in both cost and perceived value.
Platforms are one of the major drivers of the digital economy and have been a strong disruptive force across industries. Essentially, companies are most at risk for disruption from the effect of hyperscaling platforms if their business model is based on charging customers to access information. Another clear risk indicator is the lack of any kind of dominant platform that governs interactions between industry suppliers and users. Finally, if there is strong potential for network effects related to a company’s product or service—that is, the phenomenon of a product or service gaining in value the more people use it—the risk of disruption is high.