Race against the machine: who will thrive in the era of digital transformation?

By Brad Howarth

In 2010, sales of recorded music in physical formats earned $431 million in retail sales in Australia. But fast-forward to 2015 and those sales have plummeted to just $205 million. These figures, from the report Australian Entertainment & Media Outlook 2015-2019 by PricewaterhouseCoopers (PwC), illustrate a story very familiar to anyone in the media, entertainment and publishing industries.

It is the story of digital disruption and few businesses – if any – will escape its impact. The internet, smartphones, apps and other digital technologies have delivered access to a massive range of new services and entertainment options, and seen the creation of entirely new business models.

True, it’s been a wonderful time for consumers, but it’s not been so great for the traditional service providers. One recent example is the fight between Australia’s taxi industry and the rapidly rising ridesharing service, Uber. Taxis have existed for centuries – Uber is only six years old, and has now raised more than US$8.2 billion from investors.

For business leaders, the key question is not ‘if ’ they will experience digital disruption, but ‘when’ and how to respond.

Why are digital disruptors different?

United States-based digital media consultant Robert Tercek believes the reason why digital companies can grow so quickly is their ability to write software that automates the processes of running a business and providing a service.

“That digital domain – that automated part of the economy – is growing twice as fast as the regular economy,” says Tercek. “A company that figures it out is going to grow at twice the pace, and fi ve to 10 years out that company is going to be dominant.”

Digital disruption has been fuelled by the alignment of several planets. First, the internet and smartphones have put brands and services into the palms of our hands – literally. It used to be that business success meant getting in front of a customer. Now, it means being on the screen they’re looking at, preferably through an interactive app.

Second, cloud computing means anyone who wants to launch a digital start-up can do so cheaply and quickly test their idea. The internet has also trained users to expect instant access to any service at any time, raising customer service expectations.

This means any business whose customer service is poor, or where there is little barrier to customers leaving, is ripe for disruption. Allan Burdekin, director of industry development at Optus, says a big part of why disruptors disrupt is their ability to extract value from the massive amounts of data generated online every day, and use it for a business advantage.

“The true differentiator of digital disruptors is that they understand that data is like a natural resource and they are mining it all the time to get those insights,” he observes.

And the number of data sources available to businesses is set to explode as more and more sensors and devices are connected into what is now known as the Internet of Things.

Innovate or perish

It’s tempting to think digital disruption will be confined to only those sectors that have already experienced it. But new players Uber (with taxis) and Airbnb (with travel and accommodation) show that any industry can be disrupted. Looking at the lessons learnt in those disrupted industries is useful.

The problems that beset the music, film and newspaper industries were in part due to their core products being easily copied and shared online. While manufacturers of other goods might feel more secure, the emergence of 3D printing already poses a challenge for makers of goods such as toys, and that threat will expand as 3D print quality improves and costs decrease.

For manufacturing, the value of an item will shift from its physical rendering to the actual design itself, which can be easily copied and shared. The problem is, as businesses are reduced to a set of plans and processes in the digital age, any business can be copied in its entirety.

“Given the rate at which you can copy and the short time you have to exploit whatever competitive advantage you have, the implication is you have to build up your skills in innovation as a discipline within a business,” explains Megan Brownlow, the editor of PwC’s Australian Entertainment & Media Outlook. “That is now a must have. It is a heavy line item that needs to be resourced and considered at the senior management level.”

When Tercek was asked how digital disruption might impact an American company that makes products for dentistry, he identified 3D imaging replacing the making of dental moulds, and for 3D printing to be used to create fillings or replacement teeth. Both outcomes might be preferred by patients and dentists, but could be disastrous disruptions for the makers of moulding compounds and dentures.

Tercek’s advice was for the company to invest in developing software to support different processes in digital dentistry, or to invest in miniature electronic technology that can be fitted inside teeth to monitor mouth health or other variables – especially as this technology is already in development through a set of projects in Taiwan.

“All the value is going to be in the imaging and in the software,” Tercek explains. “There is a tonne of information in the mouth, we just don’t see it that way. It’s got to be a data-rich environment. But I would argue that just about every industry is data rich.”

Computers that think

A big factor in digital disruption is how software automates many jobs that were previously done by people. IBM’s Watson Analytics technology, for example, simulates human thinking using a technology known as cognitive computing. It can analyse endless amounts of unstructured data, such as legal documents or medical reports, to make accurate recommendations.

It’s now being used as a decision support tool for cancer treatments, as it can access information on more programs and clinical trials than a human could ever remember. This same technology is also being used in the wealth management division of the ANZ bank, and at Victoria’s Deakin University as a tool to answer student queries. While this frees up humans from performing these low-level tasks, it also effectively extinguishes jobs.

And the consequences could be dire. In its Australia’s Future Workforce? report, the Committee for Economic Development of Australia (CEDA) predicts that more than five million jobs, or 40 per cent of the Australian jobs that exist today, have a moderate to high likelihood of disappearing in the next 10 to 15 years due to technological advancements such as automation. As well as the manufacturing sector, these changes will impact traditional white collar sector jobs such as accounting and healthcare.

Tercek, however, is confident that humans will remain adept at making themselves useful, regardless of how smart we let the machines become. “This is not the first time in history that technological unemployment has come up,” Tercek says. “It comes up every time there is a new technological breakthrough. Robots and automation come in and destroy jobs, which sounds bad for those workers, but it is great for everything else because automation makes products cheaper and more widely available.”

Surviving the disruption

So what do we do with all of the human beings who are displaced by digital disruption? Tercek says we should do what we have always done. “Human beings have unlimited wants and desires,” he says. “What we have to do is create new opportunities for some entrepreneur to come along and create a new ‘want’. Our capacity to invent new desires is unlimited, and robots can’t do that – that will never be automated.”

We should not try to recover lost jobs, but should be retraining our workforce and freeing labour to migrate quickly to the new jobs, he concludes. “Every company will become a software company, and every industry will be instrumented and measured,” predicts Tercek. “The first companies to adopt this will get an advantage, and start to get good at this and develop the internal skills.

“Other companies will defer the investment, or say this is not their expertise. Those companies won’t go out of business overnight, but they will become less relevant. They may be mainstream today, but they are going to get moved to the periphery. And I know this is true because the number of hours that people spend in digital environments continues to go up every single year. We now spend more than 10 hours a day in front of digital screens.”

Get close to your customers

PwC’s Brownlow thinks part of the solution to digital disruption is to ensure that your business is as close to your customers as it can be. This lets you both deliver the experience that will keep your customers loyal, and also to learn from your clients.

“We are moving away from a products based economy to a services-based economy,” she explains. “And if you think about all these amazing new sharing platforms, they are often about better customer service. And that’s not just being polite to customers, it is absolutely giving customers what they really want.”

Getting to know customers better can lead to new opportunities. While digital disruption has seen the death of some of the big discount-oriented bookstores, says Brownlow, some new, small bookshops are doing quite well.

“They are diversifying along a literary theme and into other products as well,” she explains, citing the example of Urchin Books in Marrickville, in Sydney’s inner west. “It has new books and old books, but also a bunch of literary-themed toys and jewellery and handbags,” Brownlow says. “My favourite is the Jane Austen action figure.”

It’s not so much that the book industry is dying – it is changing. “Writers’ festivals are growing every year and hard-copy book sales are growing at writers’ festivals. So I think that the longevity issue for some businesses might seem like a real constraint, but it shouldn’t,” says Brownlow.

Marketing, too, must be properly resourced for a business to succeed. Consumers now have an abundant choice of products, so marketers need access to data that helps them make the right decisions about reaching the right customers.

“Your marketing has to be data-driven,” Brownlow says. “What that means in a practical sense is a combination of data sets that also includes a business’s own data, which might sit in their CRM [customer relationship management] systems, in combination with data from external parties like media companies. It is a more granular, sophisticated view of consumers that is going to drive marketing eff orts of the future, because consumers have so much more choice.”

Burdekin at Optus believes any business’s success in the digitally disrupted age will in part depend on its ability to think like a disruptor. And that means building a culture of innovation. “It’s about providing an environment where there is a right to fail,” Burdekin says. “And this is hard when our leaders are so aligned to KPIs around revenue and gross margins and the like.”

This article orginally appeared in Leadership Matters, AIM's bimonthly magazine exclusively for AIM Members.