Strategy in the age of digital disruption

Disruption is one of the most popular terms in management theory today, and is a major feature of INSEAD’s business courses on innovation and strategy. Powerful digital technologies are creating dramatic opportunities and potential threats in a wide range of companies and enterprises. Understanding those challenges is vital in developing strategies in the age of digital disruption which promises to impact substantially on almost every sector of the modern economy.
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As Dean of Innovation and Professor of Strategy at INSEAD, I have been responsible for digital strategy for Europe’s leading business school. There are three broad aspects of the subject that I cover in my teaching:

  1. The nature of digital disruption and the technologies that are behind it, such as The Cloud, Big Data, Blockchain and Machine Learning.

  2. What we should teach in an era when digital has become a ubiquitous part of life, ensuring that the latest applications and case studies are covered in the curriculum.

  3. How we should teach this so that graduates can develop strategic responses to the new possibilities faster, with online teaching as one method.

In today’s tech ecosystem, there are three types of business: the first is the traditional incumbent which has often been too slow to adapt to digital; the second is the tech start-up which feeds off digital; and the third is the giant tech company which combines the scale, brands and resources of traditional incumbents with being digital, entrepreneurial and innovative. Start-ups often collaborate with traditional incumbents, partly to counter the advantages of the big tech companies which they may be competing against.

At INSEAD, our graduates are involved in all three types. We have lots of alumni in big tech companies such as Google and Amazon which often hire our graduates, and many alumni doing start-ups. We also have some alumni at traditional companies or involved with them in executive education.

There may be partnerships between those three types, though they have their limitations – you can’t just convert a traditional company into a tech company. If you are going to get the best out of working with the tech ecosystem in a way that is sustainable over the long term, making that core transformation requires experimentation and learning fast. It is also important to attract top talent which can work flexibly with teams to deliver speed of change partnering is a key skill that must be taught.

If you come from a smaller country like Israel or Finland, you know that you have to go global from the beginning – which is why many of them succeed

Other partnerships have been formed between small start-ups and large tech companies which have the scale, relationships and data to enable the start-ups to move fast and compete with more established tech companies. However, lots of big companies talk a good game and set up what look like corporate venture pro- grammes to work with smaller companies, but some are more window-dressing than reality. Other big companies can collaborate really well and will make decent partners, but it needs due diligence to figure out which they are.

For companies with global ambitions, it is important to be aware of the mid-sized country trap. If you are based in a large country like the US or China, you can scale up in those countries and conquer the world. But there is a danger in mid-sized countries such as France or Spain that you can be quite busy but lack the scale to become a category winner.

If you come from a smaller country like Israel or Finland, you know that you have to go global from the beginning – which is why many of them succeed. European mid-sized countries can get some momentum but if they have aspirations to go global, they need to think about cultural changes that will help them do that – such as greater diversity in their teams and a broader range of working languages. And since big returns in tech usually come with talent and scale, building scale needs talent with experience of growing tech companies. It may be worth thinking about recruiting from leading overseas centres such as London and New York where there is greater talent.

Students often ask about strategies that have succeeded in creating hyper-growth companies. I always say that they have probably been in the right place at the right time when they pioneered innovations such as social media or Software as a Service (SaaS). That doesn’t require a lot of strategy apart from recruiting the best talent and giving them the freedom to experiment, which can help the company to ride a wave and scale up. When social media were taking off and Facebook was the leading platform, there was little strategy needed apart from trying not to screw it up.

Broadly, technology growth comes in two forms for established companies: disruptively, by undercutting their rivals who then fall behind; or through sustaining innovations that give them competitive advantage and make their businesses better.

Disruptive undercutting was what the consumer internet did, while AI or Blockchain are more sustaining innovations. In fact, Blockchain has turned out not to be as radical as anticipated, but it is often a self-sustaining element used innovatively by big companies to change processes such as agricultural supply chains or financial services. It will normally be done by consortiums of big players like Cargill and JP Morgan, however, rather than by bright entrepreneurial start-ups.

Today, founders take a broader value proposition into the business, attracting from the beginning people who care about it

And far from being disruptive, Machine Learning and AI have been hugely sustaining for traditional big internet companies. It makes data assets much more valuable which has entrenched the control of big tech, and led more people – especially in the venture community – to talk about anti-trust moves on those big companies. Whether people will support moves that could increase costs remains to be seen, but more agility and tolerance for start-ups could be better possible reactions.

The regionalisation of tech is getting stronger for a variety of reasons. The Great Firewall of China was probably political in origin, but it has proved to be one of the best industrial policies of the last 50 years. The Trump dynamic, on the other hand, means that US tech is no longer benign while the new European Commission is clearly aiming for a dynamic leadership role on issues such as The Green Deal.

Regulation is a hot issue in the tech ecosystem, with the technology community increasingly interested in more regulation. Large companies such as Microsoft and Google are serious about it, partly because new technologies often raise tough political and social issues, and partly for self-serving reasons. They see that the Wild West atmosphere created by weaknesses in tech regulation causes distrust among consumers and users, which creates risks for their businesses. But they also hope that if they shape the regulations as the banks have done in their sector, they can create barriers to entry for start-up rivals.

Those start-ups are in any case beginning to learn from incumbents. The strategy of moving fast and breaking things is probably coming to an end: the classic Uber and Airbnb approaches that ignore regulations and figure things out later are shifting. Many tech companies large and small have realised that failing to recognise the changing relationships between business and society and the increasing expectations on the tech sector will mean trouble. Eventually Facebook will realise that it is a media company and they always end up with lots of constraints on them – and the longer they drag their feet by claiming to be a platform, the worse it will get for them.

New regulation will probably come from a big bloc, but China is unlikely to do it and the US is hopeless at it. At Davos in January, however, senior European

Commissioners were talking about becoming a regulation superpower, and while there are lots of risks in doing so there are also lots of opportunities. It is quite speculative at this stage, but Margrete Vestager, the EU’s Danish Competition Commissioner, the people around her and other commissioners are keen to take the task on. And if expectations rise that Europe is a good place to regulate on green issues, for example, it could strengthen its position as the leading market for tech regulation.

Clearly political and social expectations on technological change are shifting in many countries and in business globally. You still need to make a lot of money, but you must pay attention to your geographical impact on the planet and people more broadly. One option is to create a lot more social enterprises, which could make an impact. But there are difficulties in scaling up social enterprises and turning them into for-profit businesses.

What seems to work better is that when launching new start-ups, founders take a broader value proposition into the business, attracting from the beginning people who care about it – such as investors and employees who are committed to following best social practices.

Large companies will find it harder to repurpose themselves in this way, but there are big opportunities in creating for-profit start-ups to lead the transition of the business. And there are certainly exciting opportunities for Europeans to lead if investors and employees insist that start-ups should be underpinned by economic, social and governance (ESG) values. 

Peter Zemsky has been a faculty member of INSEAD since 1994, and a member of the School’s leadership team since 2010. As Deputy Dean, he is responsible for external relations including fundraising, alumni relations and communications. As Dean of Innovation he is responsible for INSEAD’s digital strategy including the development of its award-winning online courses. And he is the Eli Lilly Chaired Professor of Strategy and Innovation. He graduated from the University of Pennsylvania with an economics degree in 1988 and received his PhD from the Stanford Graduate School of Business in 1995.