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Digital disruption is here

AT Cisco's 2015 customer conference, its then-CEO John Chambers told the 25,000 attendees that "40 per cent of the businesses in this room, unfortunately, will not exist in a meaningful way in 10 years".

This diminishing corporate life span, according to Mr Chambers, was due to the rise of digital technology. He added that the "digital world will change our life, our health, our education, our business models at the pace of a technology company change".

According to the Accenture Technology Vision 2016 Report, we are in the midst of a major technology revolution and the research points to a digital domination of every sector of the economy. It is therefore not a matter of if, but a matter of when businesses will go digital.

BUT BOARDS DON'T GET IT

However, in spite of numerous studies backing this phenomenon, it appears that a majority of boards are still lagging behind.

They are only just becoming aware of this thing called "digitalisation" - the use of disruptive technologies to change business models and create new revenue and value-producing opportunities. Many have yet to see how this can matter to their very business survival.

Perhaps it is a lack of understanding on how to deal with this new wave of change that is causing the board's inaction.

Deloitte's survey of 614 global board professionals from 50 countries in early 2016 revealed that 40 per cent of the survey respondents have no director with sufficient digital knowledge.

The Harsh Nash Board Report 2015, which represented the views of 300 non-executive directors and chairs in the UK, also showed 53 per cent of non-executive directors believe their boards lack the skills to tackle digital disruption, rating it as by far "the most needed skill to improve board performance".

THE BRIGHT SIDE OF DIGITAL DISRUPTION

There is no denying the opportunity that digital technology provides in reframing business and industry models in powerful ways, creating tremendous positive value for consumers, companies and communities.

Consider the conventional industry value chain, which broadly comprises three parts: suppliers, distributors, and consumers. In the pre-digital, pre-Internet era, controlling the supplier and distribution relationships often enabled companies to achieve strong competitive positions.

Digitalisation has however turned this relationship dynamic on its head as transacting and distributing digital goods can be accomplished at zero or near-zero costs.

This changed competition. Now, distributors no longer compete based on having exclusive relationships with key suppliers. Instead, suppliers can be aggregated at scale, and distributors can focus on building and maintaining strong relationships with consumers. Many new success stories are about companies that provide a platform, a marketplace, a sharing economy that delivers out-sized performance on a global scale.

THE FLIP SIDE OF DIGITAL DISRUPTION

In changing playing fields and transforming industries, digital technology has decimated companies that could not keep up. Consider the well-discussed example of Kodak. In its heyday in the 1990s, Kodak was the market leader in cameras and films. In 1996, it had a market valuation of US$28 billion and 140,000 employees. Yet in 2012, Kodak filed for bankruptcy protection and while it was emerging from bankruptcy in 2013, it sold most of its units and is now a much smaller company.

This rapid decline is especially surprising for it was Kodak that invented the digital camera but it was too married to its money-making film development and photo printing business. Kodak's leaders had simply missed the boat when digital cameras were incorporated into mobile phones.

And with any good thing, one can expect a dark side. These days, cyber threats to national and economic security are increasing in frequency, scale, sophistication and severity in impact. The types of cyber threat actors, methods of attack, the systems that are targeted, and their victims are also expanding and evolving.

Recent major cyber attacks were startling and serve as a portent for companies to tread cautiously when adopting new technologies.

In 2014, a data breach at Home Depot exposed information from 56 million credit and debit cards, and 53 million customer e-mail addresses. In 2015, the United States Office of Personnel Management discovered that a number of its systems were compromised and resulted in 21.5 million personal records being stolen.

Despite ever improving network defences, nearly all information and communications technology networks and systems are at risk indefinitely.

THE BOARD'S RESPONSE

The era of digital disruption has undeniably arrived. As Mr Chambers said: "Either we disrupt, or we get disrupted."

Digital technology enables productivity and profitability, but can undermine a business' ability to stay in business. The impact of digital technology comes in many forms and disrupts businesses and industries. Its potential to create and destroy value is immense.

Such complex, high-impact issues should surely draw the attention of business leaders, boards and management. Boards need to challenge and direct management to seek out digital opportunities, while providing oversight of the risks associated with cyber security.

  • The writer is a member of the governing council of the Singapore Institute of Directors.