Navigating Digital Disruption, Part 1: A Q&A with Darden Professor Michael Lenox

The Fourth Industrial Revolution has come of age. Digital technologies are pervading virtually every aspect of our lives. They are transforming businesses and industries in profound, new ways. As innovative startups drive disruption, incumbent firms are forced to face up to the challenges wrought by digitization. To help them stay relevant, we’ve asked Darden Professor Michael Lenox, an authority on technology strategy and policy, to share his insights. Read on to find out how to start capturing the opportunities offered by digital technologies.

Q. What technology trends are having impact on today’s business environment?

A. We are in a unique period of time in terms of the advances in various digital technologies. We see a whole constellation of things like data and analytics, shifts to the cloud, artificial intelligence, blockchain, Internet of Things (IoT), you name it. And those technologies are shaping markets and competition and have the potential to disrupt numerous markets and industries.

The auto industry is a really interesting example. We’ve had a century of stability. Internal combustion engines have been the dominant technology, and there’s been a fairly stable set of dominant players. Now the industry is being disrupted by electric vehicles and autonomous vehicles. We’re seeing new entrants like Tesla, Google and Uber, and we’re seeing companies like BMW and Volvo heavily investing in electric and autonomous vehicles.

What’s fascinating is the possibility of a complete rethinking of the business model of an automobile company. Uber is betting big on autonomous vehicles, because they recognize that in the near future, maybe we won’t need to own automobiles individually anymore. They’ll be always on demand, when we need them. Again, this is what we call business model innovation or business model disruption. Digital technologies have the potential to be disruptive in many different ways.

Q. You mentioned Tesla, Google and Uber, the newcomers disrupting the auto industry. How should traditional businesses in different industries respond to the threat of digital disruption?

A: First, disruption is nothing new. In fact, it’s a natural product of market economies. This goes back to the 1930s, to Joseph Schumpeter’s famous “perennial gale of creative destruction,” which underlies modern thinking on how economies evolve.[i] Schumpeter saw disruption as a hallmark of market economies, believing that it would lead to new technologies and innovations that could improve our lives. So in this sense, disruption shouldn’t be feared, but embraced as an opportunity to bring in new ideas and new technologies.

Q. What can help incumbent firms understand digital transformation and its potential disruptive effect on their industries? 

A. You really want to think about the underlying economics of innovation and technological change. There are four underlying factors that drive disruptive potential.

One critical factor is what we call network externalities. It’s the idea that the value of a good or service increases as others consume it. Take Facebook. The more people are part of the network, the more valuable it becomes. This is also the case with operating systems. The more people had Microsoft Windows, the more valuable it became.

Network externalities often lead to a second factor, what we call winner-take-all markets, where a few dominant players lock in valuable positions within an industry. Microsoft clearly won the operating system battle for your personal computer. Facebook, Google, Amazon and Apple managed to leverage network externalities in various ways to create, in essence, quasi monopolies.

The third factor of digital economies to consider is platform technologies. The internet is the prime example here — an underlying technology that has great value across a number of sectors and allows different companies to plug in in different ways. Mobile and cloud computing are all examples of platform technologies.

Q. What’s the fourth driver of digital economies?

A. It’s complementary capabilities, which is other ways of delivering value. In a world in which we have network externalities, winner-take-all markets and platform technologies, companies might need to compete by offering some specific capability that allows them to leverage those platforms to their advantage. So, if you have a manufacturing capability or you provide a great customer service, you’ll need to find that specific way in which you can uniquely deliver value, given the ubiquity of these different platforms and technologies.

Understanding these underlying drivers and how they might impact various industries can help traditional businesses navigate disruptive innovation that’s happening across industries. Digital transformation can be scary, but it doesn’t have to be fatal for the incumbents. It presents opportunities to innovate, to unlock new business models, new products and customer experiences. And this understanding can help a company be the disruptor rather than the disruptee.

In Part 2, Professor Lenox will explore what digital means for strategy and how traditional businesses can redefine their strategies to compete in the digital age.

[i] Joseph Schumpeter, Capitalism, Socialism and Democracy. Originally published in 1942 by Harper & Brothers, New York, NY.