Surviving digital disruption

After an apparently slow start, Clifford Fram discovers Australian boards are starting to understand the threats and opportunities presented by rapid technological innovation.

Digital disruption is a problematic area "because you don’t know what you don’t know" and identifying potential disruptors is a particularly interesting challenge for management and boards, says John Meacock FAICD, Deloitte managing partner, NSW.

A recent Deloitte Australia report says digital disruption is so pervasive it deserves a place on the board agenda.

"Directors should be asking how new technologies and trends are changing their businesses and markets," it says.

Digital Disruption: Short Fuse, Big Bang?, the second title in Deloitte’s series, features a Digital Disruption Map (see p29) that compares the vulnerability of 18 industries based on the size of the expected effect and the imminence of change.

Only five industries appear set to escape a major effect over the longer term.

The authors argue the first step for a large organisation "is to take a portfolio view and consider how digital will disrupt – or is already disrupting – the various businesses".

One of the important things boards are having to do is question the business model and ensure it is sustainable, says Meacock.

Deloitte’s research among directors at Australia’s top listed companies also found many are questioning strategy and are spending a lot more time on this as a full board.

"To be honest, boards in Australia were a bit slow in looking at digital disruption, but over the past 12 months we have seen chairmen and boards get to it very quickly," says Meacock.

But directors shouldn’t see only the threats posed by digital innovation and new technologies such as cloud, mobile, social media and data analytics.

Meacock says these also provide opportunities to acquire new customers, reduce costs and be in better touch with your supply chain.

"I think businesses realise they have the opportunity to get closer to the customer. If you look at businesses that have been more disrupted than others, they tend to be the ones that have not really been close to their customers.

"You can argue that areas like media and retail have not really known their customers. They have seen the customer as an audience."

He says the challenge is to use data in a much better way.

"There are fantastic analytic techniques that help you extract value. The capabilities are all available now to understand enormous amounts of data and customer behaviour. The smart organisations are doing a lot on customer analytics."

The University of Sydney Business School’s Dr Catherine Hardy agrees. "Customers are becoming an important source of information through smart devices and social media tools, enabling business intelligence to be constructed around customer sentiment, competitors, suppliers and pricing."

Hardy, a senior lecturer in business information systems, says operational technologies, such as tracking systems, also provide opportunities to collect data that can be transformed into new information "bringing virtual and physical environments together".

However, she says given the volume of information that can be created, the challenge is how to translate it into something meaningful for the directors.

Meacock says digital disruption has been particularly challenging for large successful businesses.

"It’s not easy. They can seem to be uncertain. They run the real risk of disrupting what is a highly profitable business. In hindsight, they can look back and say they should have moved a lot earlier, but there are some big decisions to make when you have a profitable ‘bricks and mortar’ business."

He says the main role of the board in terms of digital disruption is to challenge, test and scenario plan. "The days are gone when management presents strategy and the board rubber stamps it."

Lynn Wood FAICD says digital disruption has not changed the board’s three key roles. These are "choosing the right CEO, setting the parameters for and approving the strategic direction, and effectively monitoring performance to achieve agreed objectives".

Wood, who chairs the boards of the Financial Reporting Council, Noni B and Good Beginnings Australia, says it is important to challenge management to ensure a long-term focus and thinking beyond short-term operational issues.

She notes that the strategic role of all boards includes considering the organisation’s internal strengths and weaknesses as well as external opportunities and threats.

"I believe digital developments represent an opportunity for the organisation and a proactive stance should be taken in relation to considering them."

Asked how her own boards had responded to digital disruption, Wood has several examples at her fingertips.

"The Noni B strategic plan identified the fast pace of digital developments in 2010. At Noni B, we say innovation is ‘anything that improves anything’. This means small new ideas that lead to improvements can add the same value as one big idea from head office.

"The Good Beginnings board noted in 2011 that entire fundraising campaigns are now hosted in the online or digital environment. It also agreed to a fundraising event called The Great Tribal Chase, to be held in May. The entire event will be facilitated through technology."

Wood says: "Directors on all my boards are expected to be tech literate by using digital technology. All directors should be conscious of the need to keep up to date with digital developments. Some directors who don’t keep in touch with change can be taken by surprise.

"The real challenge is not to become complacent when apparently successful, and to keep challenging your business model," says Wood. "A business needs to reinvent itself regularly to live a full and healthy life."

Hardy says the transformational reality of digital disruption is challenging and needs to be squarely on the board agenda to ensure shareholder value is protected and enhanced. She believes the traditions, structures, processes and practices of boards may need to be reconsidered, although there is limited research specifically on the role boards can play.

"Transformational leadership is key – the role and influence of the chairman will determine the extent to which directors engage in digital strategies and how receptive the CEO is to the board as well as the necessary interactions with outside parties," says Hardy.

She adds that the board must decide what talent or skills it requires to enhance its effectiveness in overseeing strategy. It must also decide if a "completely separate" committee focused on digital innovation is needed.

Hardy says boards need to decide if they want the company to be a leader in digital innovation.

"Do you wait and see what happens or do you invest in an entrepreneurial type of organisation?

"When you are a lot bigger you cannot move as fast as small start-ups. This requires an understanding about the mechanisms of disruption, how quickly you will be affected and your risk posture.

"There are all these different layers of complexities that boards are dealing with."

Hardy is concerned about the potential for reputational risk that companies may expose themselves to when embracing new technology. "There is a real duality of creativity and risk. To be creative can be quite risky."

She says the board must decide if a separate incubation research and development-type business unit is required.

"This requires an integrated approach between strategy, innovation and risk management. However, the impact on governance structures such as audit, risk and IT committees remains largely unanswered."

Part of Hardy’s work is focused on a parallel debate about the role of the chief information officer (CIO) in changing information landscapes.

While CIOs and IT departments have gained a lot of ground over the past decade in driving efficiencies with technologies, a recent global survey by the Economist Intelligence Unit has revealed they are not meeting expectations regarding business growth.

Further collaboration and information sharing through networks was identified as the top technology trend affecting business competitiveness.

One aspect is how IT organisations are working with major stakeholders, such as the board of directors, to identify the information they need to direct, evaluate and monitor digital innovations, says Hardy.

Dr Simon Marais, managing director and portfolio manager of Allan Gray asset managers, believes boards do best when they incrementally expand the business they know into the digital area and do not spend too much on acquiring new businesses they know nothing about.

For example, he points to Fairfax’s success with Domain, which has benefited from its established presence in property advertising.

Marais, a value-style investor whose equity fund has a significant stake in Fairfax, says: "Most big advances in the digital space have come from new companies, not the incumbents. The future is unlikely to be different.

"As a shareholder, I would rather boards focus on running their corporations efficiently, play to their corporate strengths and return more cash to shareholders. We’ll be much more efficient at investing money in digital start-ups than they are likely to be."

Bob Hayward, chief technology and innovation officer of CSC Australia and Asia, believes advances such as 3D printing mean few, if any, industries are immune from digital disruption.

Hayward looks beyond the obvious, and points out that even manufacturing and logistics companies could be disrupted in the future.

3D printing is at present the domain of early adopters such as the international space program, aircraft companies, academics and hobbyists, but advances have been rapid.

Already, aircraft components, bits and pieces for the international space station, prosthetics and a fully functional gun can be designed in one place and "printed" close to where they are needed.

"Everything can be digitised. It really brings digital disruption to industries that might have thought they were immune," says Hayward. And that includes manufacturing, which features in the second-safest area of the Deloitte disruption map.

"Every board meeting should have a section on technology and innovation. And, at least once a year, there needs to be a full-day board session on the competitive landscape," says Haywood.

"Boards should be looking at technology governance and technology literacy. They need to understand how technology decisions are made within their business and who makes them.

"What happens when someone brings a great new idea? Does it get buried? Does it get listened to? Does it get funded? Or does it just get lost?"

Five attributes needed to win

Virtually every sector of the economy can expect to face changes rivalling those of the industrial revolution as they come to terms with rapid digital transformation.

This is the view of a new report, titled Taking Leadership in a Digital Economy, which notes: "Allocating resources effectively requires good timing, which is difficult in fast-changing markets. Due to the digital transformation of the economy, the changes facing large corporations play out over many years, so they are beyond typical planning cycles and most CEO tenures. One thing is for certain, though, being too late is more costly than being too early."

The report, co-authored by Telstra Corporation and Deloitte, says organisations set to win in the digital economy share five characteristics:

• They invest in new capabilities over old business models.
• They treasure their customer relationships.
• They have become fast and agile.
• They know their true competitors.
• They invest in talent.

The report adds that all too often industry incumbents forget to look beyond their traditional boundaries and thus stand to miss the most important competition of all, that of substitutes.

"Many substitutes are free or come at much lower cost to customers than traditional products, and they tend to be written off by incumbents as ‘unsustainable’," notes the report.

"In the digital economy, past competitors may also become future partners, and current customers may become future competitors, as traditional value chains that were held together by physical limitations dissolve and new, networked-based competition forms."