Proceed with caution

Technological disruption and its effect on business models is becoming a much bigger issue for boards. Matthew Sainsbury takes a look at the impact this is having on incumbent industries.

A recurring theme in the business environment at the moment is that regardless of the sector, traditional models are being disrupted by technology-based start-up businesses. Often helmed by a young executive with minimal experience in running corporations, these businesses make clever use of technology and digital media, grow quickly, and take the incumbents by surprise, soon becoming a dominant player before anyone can organise a response.

The examples are too numerous to count, but some recent examples include Freelancer.com being able to create a marketplace for skilled work that made project management much easier than it had been previously; CatchOfTheDay was able to innovate within online retail to claim a leadership position; and Health.com.au was able to create an online-only insurance business at a time when such businesses were considered impossible.

The only constant is that these businesses grow in sectors that had previously felt they were safe from digital disruption. In an August 2014 report entitled CEOs and CIOS Must Assume That Every Industry Will Be Digitally Remastered, technology research firm Gartner further came to the conclusion that industry disruption will come from the outside and underneath. In other words, it will not be the incumbents that lead digital disruption.

In the report, Gartner points out just how far digital disruption can go by highlighting the example of the cigarette as a “food” product that no one would have guessed could be disrupted through digital innovation. Yet the electronic cigarette (e-cigarette) has done just that.

The report says: “A strong current example (of digital disruption) is in the electronic cigarette, substituting the burning tobacco cigarette. It is a digitally controlled and increasingly data-connected new product that avoids most traditional regulation and is rapidly disrupting the industry, with a fast-revenue-growth, online direct-to-consumer, razor blade business model.”

The report goes on to say that “breakthrough product innovation disruption of this kind will come from two main sources: startup companies unencumbered by legacy beliefs and business models and tech companies entering adjacent markets.

“The e-cigarette world is full of many small start-ups, because the barriers to entry are low. Technology progress means access to the tools has been democratised and made far less expensive. In categories where technology barriers still remain high, major tech companies take the lead. For example, Google has been moving into self-driving cars and eyewear.”

In other words, if you are in a traditional business and are not seeing digital disruption, then it is more likely that you are not looking hard enough rather than that it does not exist. 

These businesses attract a certain kind of entrepreneurial director to the board, and they also offer some unique challenges for them. One of the most significant challenges that a director of a disruptor business faces is in dealing with resistance from traditional business models and the initial uncertainty over whether the disruptor business could be a success.

“If you are going to sit on the board of one of these businesses, you need to have a thick skin and be able to back yourself regardless of the commentary directed at you,” says Rupert Greenhough, chairman of Health.com.au (Twitter @healthcomau). “When we were starting up one of my businesses, SellMyCastle.com.au, we had real estate agents saying they did not need help generating business; they did not see a role for us.

“That was a few years ago, and now many agents recognise us as a key driver for their growth. As a director, you need to recognise that people will say the business will not be viable, but that does not mean it is actually impossible. We face higher highs and lower lows as these kinds of disruptive businesses grow, but it is an opportunity to have a real impact on an industry, and the rewards in doing so are significant.”

Disruptive boards

There are a few common characteristics that comprise the board of a disruptive technology-based company. Most critical is that they tend to feature a large proportion of directors who are drawn from outside the industry. The thinking behind this is simple — industry veterans might recognise the need to innovate, but as directors they will too often fall back on tradition rather than give the executive management the freedom it needs to attempt innovation.

“There are plenty of senior people at mature businesses that see the opportunity to disrupt and innovate, but in that environment, I think they are less likely to follow through with the innovation because people are more comfortable doing what they have always done,” Greenhough says. “With Health.com.au, we appointed Andy Sheets from realestate.com.au as the chief executive specifically to bring his expertise in online customer experience to the firm, and that has been a significant part of why we have been able to do things that are different from what everyone else has done.”

At the same time, the boards will have some directors with extensive industry experience to bring balance through expertise to the discussion and ensure that the business is not taking on excessive risk. Furthermore, disruptor businesses will have deep engagement with advisers.

“We have an actuary who has an open invitation to attend board meetings and access board papers, and we chose him specifically because he is not afraid to tell us when he thinks we are taking undue risk,” says Greenhough.

Directors of disruptors often find themselves needing to be much more hands-on with the business. Garry Visontay MAICD, partner at Sydney Seed Fund, which is currently financing online businesses Qwilr, RateUs and CeeQTM, says that the often young founders of these organisations rarely have executive management experience and need directors and a board structured to provide a deeper exchange of information. “Many of these tech founders are in their 20s and 30s, and they lack the experience that is required to grow a successful technology business,” says Visontay.

“They are constantly looking for help and looking for the wisdom that an experienced business person usually has. In turn, these fast-growing tech businesses are generally very good at data analysis and are able to develop complex metrics to perform against, which the executives can feed back to the directors. There is a lot of sharing of information between the founders and the board.”

One of the most challenging times for directors of a disruptor business is when it goes through the listing process, according to Melinda Conrad FAICD (Twitter @MelindaConrad1), non-executive director at OzForex Group. Conrad also has experience on the boards of traditional businesses, having served as director of David Jones and APN News & Media.

“By its very nature, a disruptor comes to the market with a new way of doing business. As a result, there are typically not many comparable companies listed on the Australian Securities Exchange (ASX) which investors can benchmark the company against. The net result is that management is required to spend a significant amount of time engaging and educating investors so that the business model, and in many cases the global competitive context, is fully understood,” Conrad says. “For the board, this means working with management to determine how to most effectively engage, while also retaining enough time and bandwidth to drive a business which is operating in a particularly competitive and fast moving space.”

Tackling Disruption

Flexibility is one of the key advantages that disruptors enjoy over traditional businesses, according to Conrad. Finding the right people to thrive in such an environment can be a challenge, but it can be even more difficult to bring a culture of flexibility into a traditional business.

“In a traditional business, with disruptive competitors, there is often a need to create an environment within your organisation, for example, a hothouse or incubator, which operates outside the normal business processes to allow greater freedom and flexibility, ” says Conrad. “This kind of environment requires directors to be more hands-on with the business. Our board has set meetings, but we also have regular informal meetings, and we maintain a small board deliberately because we like to be able to respond quickly when management need us,” she says.

“Beyond the people, traditional businesses also need to handle legacy systems, which might not have the flexibility they need to compete. Looking at technology with fresh eyes is important to allow traditional businesses to match, or even better, the technology the disruptors are using.”

Greg Duncan MAICD, chairman of CarsGuide.com.au, says the fundamental reason that disruptive companies are successful is because they fulfil a demand for a service or product that the incumbents are not offering. “These businesses have identified a customer need and sought to fulfil that need. The success of these businesses relies on how much the business resonates with customers or delivers on something missing in the market,” says Duncan. “At CarsGuide.com.au, the team have set out to deliver what consumers want and have put the consumer experience at the heart of the product development. They conduct extensive research with customers in live environments and also carefully monitor onsite conversion of traffic.”

According to Duncan, in order to be able to compete with these disruptors, an incumbent is going to need to be willing to take a short-term hit in order to allow it to better align its business model with consumer demand. “This is particularly difficult for listed businesses as shareholders expect continuing growth. Sometimes there is a need to pivot and move in a different direction. As a private company there is not as much scrutiny on month-on-month growth, so if money needs to be invested to head in a different direction, it is possible without impacting the share price and investor confidence,” he says.

Dr Stephen Hollings FAICD, CEO of online job search resource CareerOne (Twitter @CareerOne), suggests that organisations might also want to consider setting up a separate disruptive business of its own on the side. However, he adds that this may be challenging if the board culture remains unwilling to give the organisation’s managers the freedom they need to be disruptors themselves. Alternatively, they could look for a mutually beneficial way to partner with a disruptive business.

“If a separate business is either established or invested in, and allowed to compete in, an unfettered fashion, it can often be more successful than a traditional business trying to re-invent itself. So for company directors sitting on the boards of traditional businesses this can be a significant strategic question,” Hollings says. 

“There are no right or wrong answers to this and in many cases the success or otherwise of such directions can be affected more by corporate culture than the competitive market. At CareerOne.com.au, we have a business that works hand-in-hand with News Corp Australia’s newspapers to offer their customers effective multi-channel bundled solutions, while at the same time having a business that quite separately utilises the very latest digital toolsets to provide customers with digital head-hunter solutions, virtual career fairs and sophisticated workforce skill management tools.”

Ultimately, regardless of whether the board is at the helm of a digital disruptor, or is a traditional business looking to manage the challenges that the disruptors have brought into their space, all directors are going to need to become comfortable with rapid change, says Hollings. “The reality is that directors need to become comfortable working in an environment where business models will increasingly be challenged and potentially have shorter life cycles,” he says.

Silicon Valley — The Envy Of Aussie Startups

Australia has an impressive track record when it comes to technology innovation, and an entrepreneurial spirit that has meant an impressive number of startups
are created every year. In a report released in 2013, PWC estimated that more than 1,000 startups were created in 2012 alone.

Yet, Australian startups continue to look at California’s Silicon Valley with envy. It is a basic reality that Silicon Valley is to the brightest tech engineers and entrepreneurs what Hollywood is to actors, and over the years there has been a “brain drain” of some of our brightest talent as they head to the United States.

The problem in Australia is that funding remains scarce, with venture capitalists in Australia remaining risk-averse when compared to other hotbeds of technology innovation (Silicon Valley is one, but Israel and Singapore have developed a similar reputation over the years). This is in part because venture capitalists can take greater risks in Silicon Valley, thanks to its more robust manner of handling bankruptcy, and also because valuations of companies tend to be higher in Silicon Valley. If an Australian organisation were to simply pick up and move to Silicon Valley, it could be expected to be valued somewhere between $2 and $4 million higher.

Beyond that, the reason for Silicon Valley’s success is simple: the region has the brightest minds in technology from around the world living and working within it and when you concentrate a lot of smart, like-minded people in one area, the interactions they have will yield innovation. Just as businesses such as Apple and Microsoft are redesigning their office spaces to encourage workers to run into one another during their daily routines, so too does the design of Silicon Valley itself facilitate impromptu meetings between technologists, business leaders, academics and the media, and between people of every culture in the world.

This is difficult to replicate in Australia, where our innovative businesses tend to be spread across large cities, and at great distances from each other. We also do not have the same business culture to enable the widespread immigration of foreign talent.

However, there are new opportunities emerging to help local small businesses. Venture capital is on the rise, and for people with great ideas and minimal capital to realise them, the emergence of services such as Kickstarter, where people can pitch an idea direct to the public, has provided a new resource that has generated millions for some businesses.

Five Disruptive Digital Businesses To Watch

Netflix – Netflix is rumoured to be launching in Australia next year and this service will disrupt the business models of every incumbent in the country from Foxtel, to free-to-air TV networks, right through to any internet service provider (ISP) that does not offer customers enough monthly download data to make proper use of the service. Netflix allows users to stream TV content and films over their internet connection to their TV, tablet, or laptop device. Its sheer range of content has made it the market leader in this space, and now that it is also producing original content, such as the popular House of Cards series, it has become a genuine broadcasting force in the US and UK, where it is currently available.

CatchOfTheDay – CatchOfTheDay’s ability to offer extreme discounts for a very limited time has turned it into a permanent daily visit for the bargain shopper, and in doing so it has revolutionised online shopping, which was already proving disruptive to traditional retail. CatchOfTheDay offers new, extreme deals with very limited stock three times a day, ensuring that customers are incentivised to keep a close and continuous eye on the site, placing the site front of mind for impulse buy purchases.

Kickstarter – Kickstarter lets people with big ideas, but no funds to realise them, pre-sell the product direct to the customer. The individual or organisation post their idea to the site, setting a funding goal (for example, $50,000) and then people who like the idea are able to contribute an amount of money in order to be guaranteed a copy of the product after it has been created. If the person is able to reach or exceed the $50,000 target, they get the money from all the contributors and can start working on their idea. However, if the campaign does not reach its goal, no one is charged and the campaign creator does not get the idea funded. Kickstarter is rapidly establishing itself as an alternative to seed funding for disruptive ideas in the market, and in the process, it has become a disruptor to traditional product development and publishing business models.

Menulog – Menulog allows customers to sign on and find a local restaurant that will deliver food. The brilliance here is that Menulog has thousands of restaurants on its service, so customers can browse their local range to find something they are in the mood for at that moment. It also features customer reviews and special, Menulog-only deals. Restaurants that are not on the service may find takeaway revenues will take a hit as customers stop visiting individual restaurant websites to order takeout, and smaller restaurants will find their competitiveness improved as they enjoy equal online visibility to the major chains, which had previously dominated the Google rankings.

Flirtey – This is not formally in operation yet, but the potential impact it could have on logistics companies and couriers could be immense. With Flirtey, parcels are delivered to your door via small, automated, drone aircrafts. There is a mess of regulation for Flirtey to work through before we see drone delivery become mainstream, but it is the very definition of a disruptive company. Should it take off, it is going to be something difficult for the incumbents to manage.