Focus on the value of disruption

IN 2017, the buzz word "disruption" continued to dominate the headlines. People debated the merits of transportation-sharing services and driverless cars, the viability of new payment methods and the feasibility of wearables marrying with healthcare, insurance and retail products.

But in 2018, focus needs to shift from being wowed by disruption to learning how to take advantage of disruption - which is by identifying and seizing the value opportunities that are being created by known disruptive forces.

Let us start by understanding disruption. It typically takes one of two forms: big bang or compression. Big bang disruption occurs when innovation and technology advancement yields new offerings that are substantially better and cheaper than those currently available. Customers jump in quickly, and entire new industries are born. Think of how electricity transformed the world in the 1800s; or more recently, how the Internet has made a difference.

Compressive disruption is more insidious. It occurs when incumbent companies' operating margins are squeezed over a prolonged period of time, usually driven by the arrival of new entrants with new business models or new offerings that consumers are adopting gradually, for example, renewable energy. Or consider the car industry. Between 2009 and 2013, global car manufacturers grew by 35 per cent, as revenues for the 49 largest original equipment manufacturers rose from US$1.34 trillion to US$1.81 trillion during the four-year period. Since then, growth in both revenues and earnings before interest, taxes, and amortisation (Ebita) has flatlined. Stagnant, near-zero growth (in this case, a compound annual growth rate around one per cent) is the first indicator of an industry potentially headed towards rapid decline. As both profits and revenues continue to decline in parallel, the core business is weakened, making it difficult to create sufficient investment capacity to capitalise on new opportunities for the industry incumbents. Without new investments, organisations cannot bring innovations to their customers. Over time, obsolescence ensues.

When faced with disruption of either type, many companies instinctively try to protect or preserve their legacy business. Instead, businesses need to recognise that disruption represents an opportunity to reinvent the core and make it more financially viable - and then to leverage its power to help unlock value in new businesses, those that potentially would help the company command a leadership position tomorrow.

We live in a world of abundant economic opportunities - many stemming from the promise created by new technologies, including artificial intelligence, the Internet of Things and biotechnology. But there is another edge to the sword. Even as the opportunities for successful new products, services and solutions powered by technology emerge, it is not easy for companies to consistently convert these into economic reality. This is what we call trapped value - an economic opportunity that can be, but has not been, realised. It can be found within the individual enterprise, in industry, in the world of consumers and in society at large.

Value can be trapped within the legacy enterprise - in the form of process inefficiencies, long-term contracts and under-utilised assets, to name a few. For example, using robotics to make the back office more efficient may be one way of unlocking trapped value in today's businesses.

TRAPPED VALUE

Value can be trapped in the industry itself, because it is unseen or unreachable by all but a few players. For instance, with the expected shift to electric vehicles by the major car manufacturers, what will be critical to success is ensuring consumer access to a large network of charging stations for these vehicles - to stimulate and sustain the demand in the long term.

Value can be trapped in the consumer market. Consider the existence of demand for more convenient ways to travel locally. Online car companies such as Grab in South-east Asia have been able to unlock new sources for value - for themselves, the drivers and the consumers.

In society at large, trapped value exists where current commercial activities could be, but are not, creating benefits for the general population. For example, finding solutions that reduce carbon footprint, improve access to drinkable water and create new jobs could help unlock trapped value in society, while creating new economic opportunities for businesses that offer such solutions.

Blockchain solutions could unlock some societal trapped value. For example, a universal database of biometrically-verified identity information stored on a blockchain could offer individuals proof of identity that transcends borders. With a scan of a fingerprint or retina, or through facial recognition technology, an individual could access her own unique identity wallet containing her digital ID card, passport, university qualifications, bank accounts, select personal medical data and more, immediately helping authorities in her new country to validate her identity and background.

This could be the springboard for new business lines for incumbent players and new businesses for startups. In financial services, blockchain could provide greater transparency into the origins and underlying risks of any investment, regardless of its complexity, to regulators, banks, investors, and other key stakeholders. This could have proved useful during the recent financial crisis where in the case of mortgage-backed securities, the loans bundled into each security could have been traced all the way back to the original loan documentation, making the true credit profile of the product apparent to anyone who looked.

In short, companies should look at digital disruption to improve efficiency. But they should also see it as an opportunity to identify new revenue streams.

One can look to Singapore for guidance. As digital disruption started to threaten the telecommunications industry, Singtel accelerated its move away from being just a traditional telco to become a global communications technology company replete with new digital services such as cyber security, digital marketing and data analytics. These new services leverage Singtel's telco assets and are fast emerging as new growth drivers for the group. Singtel's digital transformation has also seen it connect with innovation hubs globally, investing in startups with technologies and solutions that can enhance its capabilities.

Some pushback may arise from concern that getting ready to compete in the digital economy will cost too much. However, new digital architectures (eg new cloud services, data lakes, microservices, open APIs or application programming interfaces, robotics, etc) can help reduce dependency on and the cost of maintaining the legacy systems, and executives can support faster execution of the business strategy, which would allow them to unlock trapped value.

Disruption should not be what competitors are doing to your industry. Become friends with disruption - consider how you can use new technology to improve your core business and to expand into growth segments of the future.