I often hear people say that Internet of Things is just another buzzword like Artificial Intelligence, Cryptocurrency and so forth.
I wanted to take the time to highlight what are the false beliefs about IoT:
FALSE BELIEF #1: YOU NEED TO BE THE FIRST ONE TO SUCCEED IN ANY IoT-RELATED BUSINESS
There is a common belief that the first in are always the winners, that to leverage digital transformation and innovation the first is the one that takes it all. This can be a belief in IoT as well. Bill Gross, IdeaLab’s CEO, did a research study (available on http://www.idealab.com) on what made startups successful among 5 essential elements: ideas, team, business model, funding and finally timing.
The results show that timing is, by 42%, the number one success factor across more than 200 companies. This should be no different for the IoT Market.
In their book, Pioneer Advantage: Marketing Logic or Marketing Legend? Gerard J. Tellis and Peter N. Golder analyzed approximately five hundred brands in fifty product categories. The results show that almost half of the market pioneers fail and their mean market share is much lower than that found in other studies. They state: “Our results suggest that being first in a new market may not confer automatic long-term rewards. An alternative strategy worth considering may be to let other firms pioneer and explore markets, and enter after learning more about the structure and dynamics of the market. Indeed, early leaders who entered an average of 13 years after the pioneer are more likely than pioneers to lead markets today. The reason is that the early leaders entered decisively and committed large resources to building and leading the market. The logic of success is not to be first to enter the market, but to strive for leadership by scanning opportunities, building on strengths and committing resources to serve consumers effectively.”
Looking at what happened to Kodak from the perspective of Gerard J. Tellis and Peter N. Golder’s study, it is important to understand that the main root cause of Kodak’s failure was a mistaken strategic framing of what the digital transformation meant for new business models, adapting resource allocation and overall timing.
Kodak had a good strategy and the means to execute it, but paid the price of wanting to be the pioneers and not setting the right model in place. The underlying subject around people, leadership, and middle management should not be underestimated when addressing digital transformation (this also applies to Kodak).
Kodak’s bad strategic and investment timing
Chunka Mui , in his “How Kodak Failed” article published on January 18th, 2012 on Forbes highlights the following: Barabba (head of market intelligence in 1981) had done a deep dive on the future adoption curves from the analog silver halide films versus the digital photography. He highlighted the fact that digital photography could possibly replace Kodak’s analog base business but also and importantly, that this would not happen overnight and consequently the company had around 10 years to strategize and execute a digital transformation. Barabba sheds light on the fact that executive management was so worried about the digital photography threat, that they executed a strategy based on digital kiosks (10,000). Unfortunately, the team did not realize that the digital photography market would evolve towards home storage and home printing capabilities, and not remain dependent on photography services in these areas.
This example shows that the first ones to enter carry an important portion of the risks implied by testing unproven business models and carrying the R&D costs resulting from multiple available technologies that have not yet proven their relevancy.
Kodak remained complacent in their analog success and acted like a stereotypical change-resistant organization
Kodak applied their well-established analog business references (product, margin split, product performance and specification, price points, channels: Kodak digital kiosks) and this later proved difficult to change. Kodak tried to simplify and adapt to technologies, but as illustrated in the example of digital kiosks, doing something and doing the right thing are different things.
Important contrast to Kodak’s failure is Fujifilm’s successful shift.
In his blog entry “How Fujifilm survived” , KNC, the economist explains that Fujifilm realized in the 80s that digital photography was going to be the next big transformation they would face. The executive management, mainly from the very profitable film division, took the decision to milk the analog cow. The slow analog film business fall took 15 to 20 years and went from 60% of Fujifilm’s profits to basically nothing. Kodak and Fujifilm both had quickly identified the trends and possible impact to their profitability. So why was the result so different between the two leaders? Kodak nearly disappeared and Fujifilm leveraged this transformation to leap in front of its competitors?
KNC highlights the main difference between these two competing companies when dealing with digital transformation:
- Strategy and Execution: Fujifilm management decided to diversify and adopt a long-term vision that enabled them to sacrifice some short-term profitability to harvest long term gains. Fujifilm also understood the importance of expertise and key digital skills as part of its workforce.
- Self-cannibalization: Fujifilm understood that the analog film and digital film market were serving a similar application and usage. The market transforms according to the evolutions of technologies. Fujifilm that had a strong market position did not hesitate to cannibalize its own space to enable long term success.
Kodak’s leadership failed to manage simultaneously competitive frames and business models.
The main mistakes and root causes have been very well explained by Clark Gilbert and Joseph L. Bower in their article “Disruptive Change: When Trying Harder Is Part of the Problem“ published in the Harvard Business Review from the original Kodak case study done in May 2002, concluded that Kodak had fallen into the trap of trying to make the new digital business model fit their old, but very successful, analog model instead of figuring out the best model in order to serve new needs and applications.
Their results suggest that “being first in a new market may not confer automatic long-term rewards. An alternative strategy worth considering may be to let other firms pioneer and explore markets, and enter after learning more about the structure and dynamics of the market. Indeed, early leaders who entered an average of 13 years after the pioneer are more likely than pioneers to lead market today”.
Thus, this advice should be applied in all markets, including (but not limited to) the IoT marketplace.
Another common belief is that startups have all the cards in their hands to beat the well-established analog companies. In fact, analog companies have great weapons to fight back and even lead the digital transformation; especially if they leverage their considerable resources to fight off the attacks including:
- Investment capitals
- Production capabilities
- Strong brands & demand generation
- Strong channels
- In depth relationships with global accounts
- Sales force on the ground
- Influence power: Standardization, market price, specifiers, etc.
When you add those two elements – time and assets – it’s not too late for incumbents/analog companies to adapt; they in fact have what is needed to lead and beat competition leveraging and adapting to the new rules of the digital analog marketing game.
IoT changes the rules of the game. In some areas, the IoT Market changes the game entirely.
The completely new business models adopted by Airbnb and Uber illustrate how severe the disruption can be.
Manufacturers need to be not only willing and able but nimble in pivoting quickly, in this fast-moving technological revolution. Changes will occur at lightning speed, both in technology and the marketplace and the consumers’ tastes will probably change alongside at every blink of an eye.
When studying companies that have been faced with the need for change and disruption in the last decade, data shows that there are multiple scenarios which describe their approaches.
IoT and the potential disruptions it may cause also comply with those four scenarios:
Choosing to ignore these technologies and the digital transformation they implicate, is a convenient option. Ignoring is a deliberate choice; it will, at best, prevent your business from profiting from the changes. At worst, your analog business will find itself floundering and eventually may even fail.
Indefinitely procrastinating may be a related choice, due to trepidation, budgetary or resource limitations or plain naiveté in thinking you are too big to fail or that the new paradigm doesn’t apply. The challenges will only become bigger and more complicated.
Another strategy is to milk the cow; in other words, to continue doing what you’ve been doing without embracing the digitalization of the environment in which your company operates. The difference with option #1, is that in this option, a conscious decision is made to take advantage of your current market position without, deliberately preparing for the future.
This strategy is all about leveraging your current market position and associated organization, channels, operations and so forth, to deliver financial performance without the burden, and associated financial impacts, of going through digital transformation of your portfolio, organization and so forth.
The advantage that the newcomers have when a market begins to evolve due to digitalization, is in fact also a disadvantage for them concerning the historical analog businesses and channels. Very often the cost of entering those analog marketplaces is so high, not only from a technological aspect but also when taking into account the channels, manufacturing and logistics capabilities, patents, etc… that it places important barriers keeping your analog a safe heaven, for a while. Unfortunately, this analog safe heaven is, sooner or later, being attacked by the digital newcomers. This is the option that Kodak chose, and it served them well for several years until the quality of the technology improved and the cost decreased. By that time, it was too late for Kodak to change direction, but they did thrive for several years leveraging their analog market place predominant position.
You can try to move the mothership; in other words, you can attempt to implement the new paradigm throughout your organization and marketplace. This process is extremely difficult and complicated, and the risk is very high. Changing existing procedures, markets, and processes can prove to be impossible, and the likelihood of failure is high. This scenario also assumes there is time to research products and services, hire or retrain staff and restructure or reorient the business as appropriate.
A better option is to maintain your existing markets and channels—keep the mothership afloat—while investing money into creating a new opportunity at the edge of your core offerings. You could liken this to an organ transplant: you’re keeping the body alive while you change out the other parts for newer and more modern parts.
As stated by Alan Lewis and Dan McKone’s in their book Edge Strategy: A new mindset for profitable growth; Edge strategies are less risky and can bring a higher return than many other options when a company needs to grow their revenue and associated profits. The risk and the resulting costs, are often subsidized by another area of the organization, very often the historical analog part of the business, which has the capacity to carry such financial burden thanks to its healthier balance sheet.
Edge strategies are ideal in those transition periods as they are about harvesting more value from existing assets while simultaneously stepping out into the IoT marketplace that is yet not well or fully understood.
Edging strategies also contribute to financial performance. Later in Edge Strategy: A new mindset for profitable growth, Lewis and McKone explain: “Edge achievers have increased risk-adjusted shareholder returns by more than 15 percent versus their peers. Furthermore, these companies have outgrown their peers by 39 percent”.
Transforming from the edge requires retraining and/or the reallocation of resources (people, products, manufacturing capabilities, supply chain capabilities, etc.) in addition to adapting the organization to the new rules of the game. If you want to tap into the IoT opportunity and your company is an established analog player, then this strategy should be studied. It enables organizations to mix, both, their existing analog business and operations with the needed transformation resulting from the digital evolution of the market place. Analog specificities such as intellectual property, customer base, unique value proposition are your safe heaven guardians’. They must be leveraged in order to help your organization leap ahead all of the newcomers that will have to bear high costs to assemble even a portion of those assets.
The time is now.
Incumbents will need to transform themselves into digital enterprises if they want to survive. Getting digital is not all about investing in the latest technologies; more importantly, it’s about setting a strategy with proper timing and dedicating the proper digital capabilities (people, business plans, operations, etc.). Not trying to understand and adapt to the new rules of the game has an impact. We have seen such impacts in market places facing digitalization; companies that once were prominent in their analog market facing low margins or commoditization.