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GIC Insights 2017: Asia's evolving role in an uncertain world

Digital disruption is not a zero-sum game

GIC’s annual thought leadership event, GIC Insights, was held here on 15 September 2017. It saw 110 prominent global business leaders deliberate long-term issues relevant to the international business and investment community. The theme was Asia’s Evolving Role in an Uncertain World, and topics included Asia’s Challenges and Prospects over the Next Decade, Artificial Intelligence for Traditional Industries and A Long-Term Future in an Uncertain World.

Below is GIC's excerpt from from the topic Succeeding in a Digital Disruptive World:

Digital disruption is not a zero-sum game

  • Disruption is not a new phenomenon, but its impact today is more significant than ever, particularly in the services industry.
  • New entrants are creating business models that combine cheap capital and cheap technology to compete head-on with incumbents.
  • Incumbents, who used to set the pace of innovation in the 1990s, are now facing time pressure to modernise and stay ahead of digital disruption.
  • The future, however, does not belong to one or the other; history suggests that disruption is not a zero-sum game – modernised businesses can co-exist with disruptors as long as the customer experience is at the centre of the strategy.

A new production function, set by cheap capital and cheap technology

  • Technology has brought down considerably the marginal cost of starting a business.
  • The prolonged and unprecedented cycle of cheap capital has allowed businesses to combine cheap capital and technology in fundamentally different ways to create better products.
  • As the impact of automation extends from the low-skilled jobs to middle-skilled jobs, the services industry will start seeing productivity gains that manufacturing and commerce industries have been enjoying for years.
  • New market players no longer need to target low-end or under-served markets; they can compete directly with incumbents for core customers using more efficient business models.
  • A recent survey found that the average lifespan of S&P500 companies decreased from 75 years in 1957 to 15 years in 2012, and predicts that 75% of the S&P will be replaced by 2027.
  • Incumbents must modernise, and time is of the essence.

Modernise with clear understanding of the technological, industry, and company context

  • Incumbents must be able to gauge the pace of innovation outside the company against the pace of innovation inside the company, and assess the gap accurately. Often, the pace of innovation outside the incumbent is much faster than internal innovation.
  • Incumbents must re-evaluate and modernise their business models with a clear understanding of the technological context, industry context, and company context.
    • Technological context refers to technological advances that are available to harness
    • Industry context refers to an understanding of the robustness of the business model within a disrupted ecosystem
    • Company context refers to the flexibility of the incumbent to effect necessary changes.
  • Value is created not only by disruption, but by weaving together advantages that create differential barriers.

Internal challenges faced by modernising incumbents

  • Creating a new model requires the right ecosystem, the right conditions for success, a different skillset and notably a different mind-set.
  • Disruptors build models that are entirely different from incumbents. They focus not only on the products, but the customer experience, and tend to follow a modular approach rather than a vertically integrated approach.
  • This is perhaps the greatest challenge incumbents face in modernisation – the attributes that make incumbents highly competitive are often the ones that keep them from transforming as the industry evolves.

External challenges faced by disruptors and modernised models

  • Companies must instil a culture of innovation that ensures they are producing results, while keeping their eyes on the horizon. Incumbents must look beyond existing mind-sets and adapt to a modular approach.
  • However, the markets’ heavy emphasis on current profits and aversion to volatility is not conducive to disruptors and businesses that want to modernise.
  • Companies and Wall Street, must be willing to accept volatility in order to facilitate change and innovation, which will ultimately increase productivity and GDP.

Focusing on consumers is key; Services industry still in early days of transformation

  • Incumbents will continue to play a key role if they choose to modernise. Modernised models can co-exist with disruptors, as long as the customer experience is at the centre of the strategy.
  • Battle for customers is intense, and success will depend on which customers a business goes after, and how it decides to do so. It is going to be a good time for customers globally.
  • Large, new companies are going to emerge from the digital disruptive world, and asset owners and investors should take advantage of this spirit of change.
  • Cycle is long (Retail industry took over 20 years to reap the benefits of technology); we have yet to see the full impact of technology in the financial services industry in bringing down cost and improving customer experience.
  • Services industry is still in early days of transformation, with disruption and change offering tremendous opportunities ahead.
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