Incumbents’ curse in digital age

By Oh Won-seok

What do Kodak, the New York Stock Exchange (NYSE), and Borders have in common? Although the magnitude of impact varies, these enterprises all have been penalized by the emergence of digital technology.

Kodak, an iconic worldwide photography company for over 130 years, is on the verge of collapse due to digital cameras rapidly penetrating the market. Interestingly, Kodak was brought down not by its camera business competitors such as Canon, but by smart phone manufacturers who happened to integrate digital cameras into their products.

A similar downfall occurred to the NYSE, which had been recognized as the symbol of capitalism and the global leader of trading for over 200 years. At the peak of its success in the 1980s, the NYSE held a 90 percent market share, but the figure dropped substantially to 25 percent in 2012. Automated electronic trading was one of the main causes for the precipitous drop of the NYSE’s share in the market.

Finally, Borders, the second-largest bookselling chain in the United States, filed for bankruptcy protection last year after experiencing years of sales decline of double-digit percentage rates. This troubled company failed to capture online business opportunities and literally had no presence in the growing digital e-book markets. As a consequence, it was unable to compete against its larger rivals, Barnes & Noble and Amazon.com, both of which have devoted substantial resources to pursuing online ventures and creating e-book substitutes.

In virtually every industry, new products and services based on digital technology have entered the market, and this technology is transforming the way people live and work.

The vast opportunities that digital technology presents for building transformational business models raises serious questions for the strategy of incumbents. Should the incumbent continue to defend its business model, or should it capitulate and adopt new technology and a new way of doing business?

This is a difficult question, for how can the incumbent know whether or not such new models are sustainable? Nevertheless, hesitation has its own dangers: many incumbents and market leaders have been so committed to their existing way of doing business that they failed to adopt a new business model until it was too late.

One lens for understanding the nature and effects of transformational change is called punctuated equilibrium. This approach describes how industries experience long periods of stability punctuated by major changes in technology. An example of a major transformation is that in the airline industry, which came as a result of moving from propeller aircrafts to jets.

Technology transformations have tended to occur over a long period of time without a well-defined beginning and end point. Nevertheless, researchers have offered some clarification in distinguishing between competence-enhancing and competence-destroying disruptions.

The former occur when a technological change leverages existing skills and capabilities. A competence-destroying change, on the other hand, renders existing skills and capabilities obsolete and results in the loss of employment and in business failures.

Information technology (IT) plays a dual role in transformational changes. In its first role, the technology destroys an incumbent’s core competence by enabling transformations and new business models for a new entrant.

Its second role is to enhance incumbents’ core competencies by providing the capabilities for them to defend their business models if they choose to do so. An incumbent might opt for the latter path because it believes that the new entrant’s model will fail, or because the incumbent feels its own model is superior.

Eventually one technology and one model emerge to become dominant until there is another punctuated change in the industry equilibrium. As a result, the challenge for managers is to use IT and other resources to defend their business model and to recognize when it is time to change that model in response to a major technological transformation in their industry. For the manager, IT is both the problem and the solution.

To avoid the curse of technology and maintain leadership as long as they can, incumbents must do the following:

ㆍ Destroy own competences if enhancing them is insufficient

ㆍ Fundamentally change the traditional ways of doing business by redefining business capabilities and processes

ㆍ Acquire and develop new silent capabilities and resources to enter a new marketplace

ㆍ Leverage digital technology to dramatically change the nature of work and do things differently.

Incumbents, in order to avail themselves of the many advantages of a digital economy, must transform existing business activities and processes, both internal and external to the organization and develop the business of the future. Otherwise, they will be transformed by following the paths of Kodak and Borders.

Oh Won-seok is a professor of Information Systems in the School of Business at Yonsei University where he teaches and studies information systems management.