When Strength becomes a Weakness


Disruption is a popular topics. The use of the concept became popular due to Clayton Christiansen’s book, The Innovator’s Dilemma. His theory, The Disruptive Innovation Theory describes a process where new entrants to an established market, typically a small company with few resources, can use innovation to challenge the incumbent. Examples of disruptions are Ford Model T, Personal Computers, NetFlix, Skype to name few. However, there is another theory by Christiansen that is even more important. This theory is called The Resource, Processes and Values (RPV) Theory and it explains why good companies can’t respond to technology changes. It explains why companies fail.

The RPV Theory states that the resources of a company (the people, technology, information, cash etc.), the processes (how the company works), and the values (the believes of the employees) defines the companies strength and also weakness. In stable markets, the dominating incumbents can beat any new entrant competitor because they know their business so well and have optimised all the processes. On the other hand, when technology changes, new entrants use new technology to offer a new value proposition and the state of the incumbent company becomes a weakness. They can’t respond and fail.

History has number of examples. Netflix started with a simple subscription based DVD movie rentals service using the post office. Blockbuster, the dominating video store rental company, which owned the market, could not respond and failed. They were in the video rental store business and they did not have resources, processes and values to go into a new completely different model.

Now think about any traditional business. Companies in industries such as retail, healthcare, insurance, finance, transport and so on, will need to adapt to the chances due to technologies such as digitalisations of processes, real-time logistics algorithms, the Internet of things and sensors, robotics, drones, data analytics, and Artificial Intelligence to name some important ones. The RPV theory is important because it will define which companies survive the digital transformation that is taking place.

Any traditional company that uses manual work processes instead of digital and automated processes will be at risk. Call centres can be 80-90% automated by software. Applications, forms to manually fill out, and request for services can be turned into web page or an app. Such request, such as loan application in bank, can be evaluated by AI algorithm with feedback in few seconds. Going though documents, for example legal cases, can be done by algorithms. Coordination of people, for example a construction worker and a task to be done, can be done by software. These are just few examples. The digital transformation in inevitable and companies with resources, processes and values from the 20th century, need to move into the real-time intelligent software era.


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Switching Roles

There is a silent switch of roles happening. One of these things that change people’s behaviour, businesses, and societies. For decades now we have used computers as tools. In the 90s people would learn how to use them, primarily for work. Over the years they got easier to use, and today, with laptops, smartphones and tablets, they are becoming ubiquitous. And then the switch happens. Instead of us, people, using computers, we are switching roles. Now the computer, or to be more precise, the software is using us. We are entering times when software tells us what to do. We are switching roles.

Computers emerged during the Second World War. They emerged in the US, UK and Germany. Of these, the US war machines like ENIAC and Univac became well known. IBM defined the computer industry for decades providing data processing machines like IBM 704 and the IBM 360 series. IBM also dominated the PC industry to begin with. In the 80s and 90s, computers were so difficult to use that they required expert knowledge. Workers were sent to seminars to learn how to operate them. And that was the term, people used computers. Furthermore, they used them for work. Now with the universal smartphone, the software is telling us what to do and when.

This change in roles is the core of the Digital Transformation that is silently taking place. It is the move from the analog way of doing things to digital way of doing things. To understand this, consider a fast food restaurant home delivery service. Few years ago this was a pretty complex coordination problem. A customer would call the restaurant and order. The person taking the order would enter the information into the ordering system. When the food was ready, a driver would be dispatched from the restaurant to deliver the food. If no driver was available the order would wait until a driver was back from delivery. Few places managed this well expect pizza restaurants.

Now, with digital real-time algorithms the cost of coordination has dropped to almost zero.  Ordering a meal from a restaurant is just few touches on a smartphone. The message is routed to the restaurant that will acknowledge the order and indicated cooking time. This will signal a driver that will sign up to pick the food up. Signals flow and everybody knows what is going on. Now it is the computer that is using the cook and the driver – it will tell them what to do and when. And all of this is real-time.

A restaurant order is easy to comprehend. But consider any business where coordination of effort and resources must take place. The same type of real-time algorithms can apply with lower cost of coordination. Consider a hospital that needs to have staff in particular place at some time. They can be allocated using real-time algorithms. Consider transportation where truck drivers are dispatched in real-time to pick up containers. Consider a software agent that sees a booking in your calendar taking place in another country and informs you of possible flights for you. Upon approval of a suggested trip, the agent will book the flight, a taxi and hotel according to your preferences. It will then inform you of your schedule. The night before, it will tell you to pack your bags and reminds you when the taxi will pick you up. On the other end, the hotel, airline and taxi service will all get the orders automatically in their software system.

With increasing application of AI, software systems will become our personal assistants as they will let us know what to do. Over time, they will get better, do more and we start to will trust them and then become totally depended on them. And when our software agents will start to talk to each other, life will become very interesting.


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Retail Transformation

Hands holding plastic credit card and using laptop. woman using laptop in home. using laptop internet.

Since the early days of the Internet, pre-dot.com crash, web sites for online shopping have been available. Early Internet users were reluctant to type in their credit card information, but over the last few years online shopping is really taking off. Not only is this format of shopping becoming common but it is kind of expected. Retailers that don’t have at least an online presence are at risk. Retail is transforming and store owners need to adapt.

Over the Thanksgiving holiday season in the US in November 2016, more people shopped online than in retail stores. According to CNBC, the National Retail Federation in the US reports that more than 108 million purchased electronically, while only 99.1 million bought in stores. In 2015, approximately 103 million shopped online while 102 million bought in-stores. Link.

Statista reports increase in online shopping, with most of the increase in using a smartphone to shop.

Infographic: Thanksgiving Weekend E-Commerce Roundup | Statista

There are some factors that are attributing to these trends. Of course, people are more digital today and expect services to be online. And there are more shoppers with access either with computers or smartphones. There are also other factors, One is trust. More people are trusting e-commerce sites because they simply work well, they are convenient, safe and secure. In the early Internet, the last thing many people would do was to put their payment information on some Internet web site they had never heard of. Web sites are getting better with good product description and fast and easy way to check out the products.

Not surprisingly, it turns out that people who make an order and get their products within the same day at a specified time, will order again much sooner than those who get their stuff at an unknown time in the next couple of days. With better logistics management of delivery services, getting products to consumers is becoming faster and easier – this is the Uber effect. Delivery is controlled by real-time software.

Having an online presence – a web site, not just a simple Facebook page, is becoming vital to small store owners if they want to compete with online giants like Amazon or now Walmart. According to MineWise 81% of shoppers do research online before making a purchase decision. Link. The digital natives will first grab their phone if they want something. And if it is not there – it doesn’t exist anyways.

Retailers that serve a local market need not be at risk. They should adopt an offline/online strategy (sometimes called O2O or offline to online or the other way around) and view their store as an online store with a physical showroom. Customers will find them online and this has been shown to drive customers to their local store. However, retailers that emphasise aesthetic approach to store design are able to give customers better experience. Customers will come because they like the experience. And that is something that the global Amazons of the this world cannot easily compete with.

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