The rise of budget airlines forced long-established carriers to change their strategy. Photo / Bloomberg
The rise of budget airlines forced long-established carriers to change their strategy. Photo / Bloomberg
Established industries can fight off the disrupters, writes Jon Hooper
In the face of relentless disruption by agile, new players in their markets, legacy businesses are not standing still.
But though many understand that responding to disruption is the most critical strategic move they can make, few established companies or industries have successfully disrupted their own business models.
In part, it's because they've lost focus on what their customers want, allowing entrepreneurs with innovative new business models to seize the market.
It's a combination of many things, says Harvard professor Clayton Christensen, who coined the term "disruptive innovation" back in 1995.
Initially, incumbents dismiss the disrupters, as they seem irrelevant compared with the company's established products or services.
And what the disrupters are offering frequently doesn't meet the needs of existing customers. But a small core group of customers do embrace it, giving the disrupters a toehold in the market.
The disrupters improve the quality of their product or service, more quickly than the established business expected. It starts selling better than the "old" product, and at this point customers start piling in.
The incumbents scramble to move into the new market but often it's too late.
History is littered with examples. It's how the PC (personal computer) replaced the mainframe, how smartphones are replacing the standalone GPS and how driverless cars are likely to disrupt the auto industry (and have far-reaching consequences for jobs and society as a whole).
But as disruption becomes mainstream, businesses are becoming more proactive in addressing the challenge.
Three key themes are emerging: empowered consumers; a willingness to trade personal data for a more personalised service; and a shift in the way consumers access information and whom they trust to provide it.
According to EY's latest global Megatrends report, a critical factor is how companies deal with customers.
Brands are now being built by consumers themselves, not advertisers.
Empowered by the unprecedented access to information that digital technology has given them, consumers have a more powerful voice than ever before, and easier access to a wider range of products and providers.
Customers now understand their commercial value and expect to be understood and appealed to in a customised way.
"Organisations need to see them as nuanced individuals," Megatrends says. When it comes to consumers, there is no one-size-fits-all.
Banking and the airline industry are two examples of established industries fighting back against low-cost and innovative competitors.
Faced with competition from budget airlines, the legacy players changed their business models, introducing low-cost, grab-a-seat options and a user-pays approach to inflight services. At the same time, airlines upgraded their premium products to avoid alienating that sector of their business.
Banks, too, face unrelenting competition from low-cost alternatives such as peer-to-peer lending and crowdfunding.
Between 2014 and 2015, crowdfunding increased from US$16 billion to US$34b. These figures are not large in the context of global lending. But the increase in uptake is more than 100 per cent in only 12 months.
Russell Jones, ASB's executive general manager, technology and innovation, says customer focus -- as always -- is the key.
The bank introduced a formal digital strategy nearly three years ago and is at the forefront of industry change. Its latest offering is a digital wallet, ASB Virtual -- a digital version of the customer's credit card, loaded into a mobile app.
Another new product is ASB Card Control, enabling customers to manage their cards anywhere, any time from the bank's mobile app.
Jones says the speed of these changes is driven by customer demand. Strategically, it's a balance of following (meeting customer needs) and leading (anticipating and fulfilling future customer demands).
But banking is still a regulated industry and players must remain mindful of their statutory obligations in areas such as confidentiality, risk management and compliance.
What does all this mean for consumers?
Access to social media and the internet gives today's customers unprecedented information and choices.
For example, they can block advertising. Ad blocking software cost businesses US$21.8b in advertising revenue in 2015.
Consumers no longer want to be commoditised or slotted conveniently into categories. They're willing to pay for what they value -- eg, green or ethical manufacture, organic products -- but want to be appealed to as individuals.
And, according to the Megatrends survey, 69 per cent of those aged 25 to 34 say they're willing to trade their personal information for more personalised products and services.
"In this culture of niche, all interactions, products and services need to be personalised," the survey says. "Spotify personalises your music, Netflix customises your entertainment and Coca-Cola displays your name on a billboard as you drive."
Fiona Colgan, ASB's general manager, digital, says: "Customers might not want something today but we know they will want it tomorrow." Much more use is being made of the bank's data and analytics to anticipate customers' future needs -- for example, pre-authorised personal and home loans, and credit card limits.
It's an aggressive approach, fuelled by the expectations of customers who have adopted the new behaviours and products more quickly than the bank expected.
Customers might not want something today but we know they will want it tomorrow.
The challenge, says the ASB's Jones, is in ensuring new software can be delivered in a timeframe that matches the demands of the bank's product team.
As the demand for personalised services has grown, the direction of trust has also changed.
As Megatrends puts it: "Customers are bombarded daily with information, promotions and brand messages. Curated retail options such as Stitch Fix or Birchbox, and social reading apps such as Kite are helping consumers overcome the paralysis of too many choices." And, it seems, customers trust each other more than they trust brands or businesses.
Online shoppers, for example, have more faith in peer recommendations and earned media such as customer tweets than they do in traditional advertising. Brands are now being built by consumers themselves, not advertisers.
The survey shows that 70 per cent of customers distrust traditional ways of selling and supply chains. They want multiple routes to transaction -- whether it be website, mobile app or a physical store. And they expect seamless engagement across all these channels.
It's a big ask for traditional businesses scrambling to adapt to these new consumer demands and, at the same time, disrupt (and often scrap) their own business models in a bid to stay in the game in the face of disruptive entrepreneurs.
But disrupting traditional business models and reinventing the way products and services are delivered goes to the core of an entrepreneur's DNA. A sharp focus on the customer is part of who they are.
Jon Hooper is an EY partner and the director of the Entrepreneur Of The Year awards in New Zealand.
