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Massive changes in digital technology are reshaping the business world—from more power to consumers, to business models that are more about ecosystems than competition. John Hagel of Deloitte Services LP spoke to Tanya Ott about digital disruption’s challenges and opportunities—for companies big and small.
TANYA OTT: This is the Press Room, a Deloitte University Press podcast on the issues and ideas that matter to your business today. I’m Tanya Ott, and today we’re talking about disruption.Digital disruption.
JOHN HAGEL: The technology and media industry are probably the first and hardest hit, but the perspective that we have is that forces that are driving change in those markets, and industries are spreading to a broader and broader ranges of markets and industries over time.
TANYA OTT: That’s John Hagel. But before I get to him, let’s go back to this . . .
TANYA OTT: It’s a tune called “Panic at the casino,” composed by someone named Ventsi. I found it on one of the many online music licensing websites. For less than $100, I bought the rights to use it in this podcast. I was going to hire my friend Adam to compose some original music, but this was quicker and cheaper—sorry Adam! It’s a calculus lots of consumers and companies are making these days. Ventsi has sold more than 11,000 downloads on the website where I found him. You do the math.
If you use a music streaming service, you’re part of digital disruption. If you use a video streaming service, you’re part of digital disruption. If you read newspapers and magazines online, you’re part of digital disruption.
But John Hagel says that’s okay. Hagel is cochairman of the Deloitte Center for the Edge in Silicon Valley.
JOHN HAGEL: I’ve actually been in Silicon Valley for about 35 years doing a broad range of activities—everything from a couple of technology start-ups to working with Atari in the video game business many years ago.
TANYA OTT: In his article The hero’s journey through the landscape of the future, Hagel tracks the massive changes in digital technology and what it means for business today.
JOHN HAGEL: One of the key impacts of this digital technology is it significantly increases the power of the customer. We have much more access to information about more options over time, and much easier ability to switch from one vendor to another if we’re not getting our needs met.
TANYA OTT: So, as customers, we’re all benefitting enormously from this digital technology. But for businesses, it’s a much more challenging environment.
JOHN HAGEL: [These] digital technology infrastructures, not just the technologies themselves, but the infrastructure that brings all these technologies together, are helping to significantly reduce barriers to entry and barriers to movement on a global scale. So no matter how large you are or how well positioned you are in a market or industry, it’s easier and easier for new entrants to come in and attack from the side, and it also allows the new entrants to come in with much less investment that previously required in order to enter and then scale. So I think on both fronts you’re seeing pressure on large established companies.
TANYA OTT: You talked about the smaller companies that have much fewer barriers to getting into the marketplace, but you can’t talk about that without recognizing that the recent challenges in the economy have resulted in particularly a creative class and a technical class of folks who say, “You know what, I don’t need to work for a traditional employer. I can do this on my own.”
JOHN HAGEL: Exactly. I think that’s one of the key forces that we see reshaping the business world, that for many decades, if not centuries, creative people felt the need to come together in large companies because they needed the scale in order to have impact with their creativity. And increasingly, again as a result of digital technology in particular as a force, there is an option for creative talent particularly to say, “I don’t need this large company. I can go off and build my own small business, I’ll make a good living for myself, and, most importantly, I’ll have the autonomy in order to pursue the creativity that’s really driving me.”
TANYA OTT: Do you have a sense generationally if employees who are, for instance, Millennials, are much more attracted to that kind of independent venture? Particularly since they’re entering a marketplace where there aren’t a lot of jobs.
JOHN HAGEL: Yeah, I think actually it’s an interesting phenomenon. At both ends of the generational spectrum, we’re seeing issues emerge. You mentioned the Millennials coming into the job market. The job market at least until now has not been as robust and attractive as they would like. And many of them are making the choice and saying, “Look, I’m not going to go interview with yet one more company that will turn me down. I’m going to go build my own business around my skills and make a contribution again, as a small business.” On the flip side, at the other end of the generational spectrum, you have the Boomers who are facing retirement and many of whom, either because of need or because of desire, are not wanting to retire. And now they’re viewing this as a catalyst to say, “What is it I really wanted to do rather than just going to work for a paycheck? What is it that gets me excited, and could I build a business around it?” And more and more Boomers are actually retiring, if you call it that, from large companies and then going off and building a small business of their own.
Think about all of the digital platforms that are ubiquitous today but didn’t exist 10 or 20 years ago:
• eBay (1995)
• Netflix (1997)
• iTunes (2001)
• Etsy (2005)
• Kickstarter (2009)
JOHN HAGEL: There are a whole series of crowdfunding platforms that have emerged that are helping connect people who have business ideas with funders who are willing to fund those ideas. So you no longer have to go to a large venture capitalist or a large bank to get your funding. You can get funding from, again, people anywhere in the world who have a real interest in the kind of product or business you’re trying to build.
TANYA OTT: You write about some individuals and small companies who are taking advantage of these type of opportunities. Tell us the story of Pomplamoose.
JOHN HAGEL: It’s a great example in the music arena. It’s two musicians, Jack Conte and Nataly Dawn, who came together and created a YouTube hit called “Single ladies” that they introduced in 2008 and that now has about 10 million views on YouTube, and what’s interesting is with all this success they’ve remained independent. They haven’t signed on to any major label. They’ve decided that, again, through the various kinds of mechanisms and sources that they can tap into, they can basically remain independent. They harness ad revenue on YouTube. They do commercial work. They do music tours. But basically they’ve been able to be quite successful and support themselves very well as two independent musicians.
TANYA OTT: And that, of course, is an industry that’s been massively disrupted by technology.
JOHN HAGEL: It’s just one of thousands of examples of musicians who’re making the decision to not sign with a major music label and to simply reach their audience directly and tap into a variety of revenue sources that will allow them to make a comfortable living.
TANYA OTT: You also write about a guy named Spencer Walle. Who’s he?
JOHN HAGEL: Basically he’s a guy who loves languages. He speaks many languages himself. And he’s become an independent, a freelance intellectual property translator. He used to work for a translation company, but he left the company and basically went on his own, tapped into online freelancer platforms, tapped into direct e-mail solicitation, participated in Google groups, and found a whole range of ways to connect with people who had need for this kind of translation service. And he’s created a very rich network of customers. The result is that now he’s making about five times the salary he made when he was working for the translation company, but he’s doing it as an independent. He’s thinking about potentially creating a small business around his translation services and bring in a few other people as well, but has no interest in going back to work for a larger company.
TANYA OTT: Five times—wow, that’s impressive!
JOHN HAGEL: Yeah.
TANYA OTT: Another impressive story you have is the company Nasty Gal and the woman behind Nasty Gal. First of all, you gotta explain what Nasty Gal is before anyone makes any assumptions!
JOHN HAGEL (laughing): It’s a clothing business founded by Sophia Amoruso, who actually started as a dropout from photography school; to try to make some money, she bought low-cost vintage clothing items and resold them on eBay for a profit. She was arbitraging the clothing. But she ended up so successful at that—she had a really good eye for what would appeal to people—she ended up purchasing the domain name Nasty Gal. She’s formed partnerships with a lot of independent clothing labels, and she’s using, again, a variety of digital platforms like Facebook and Instagram as ways to connect with customers, and she created a very profitable and successful growing business.
TANYA OTT: Her story’s kind of interesting because she started so small and almost accidentally, and yet, a couple of years in, she got some major external financing.
JOHN HAGEL: Yeah! She actually ended up getting $50 million in investment for her business, and she’s grown the business significantly. In 2012, she was generating $130 million in revenue, so this is no longer a small business by any imagination.
TANYA OTT: So investors are taking notice, but are the large traditional companies taking notice as well?
JOHN HAGEL: It varies. I’d say that, at one level, if you’re a very large company, it’s easy to kind of dismiss these smaller players because they’re just a tiny fraction of what the large company is producing and the revenue that they’re generating. But, on the other hand, as the number of examples mount, it’s hard to avoid noticing this. I think more and more companies have a sense that there’s a number of players on the edge, if you will, that are relevant to their market or industry but are doing quite well as small, independent companies.
TANYA OTT: You mention that some companies are starting to notice. One of those is West Elm.
JOHN HAGEL: Yes! West Elm, as people know, is a retailer. One of the things they’ve done is to begin to allocate floor space in their stores to provide visibility and host some of these smaller independent product makers and producers, and help connect them with their customers while at the same time building a sense of uniqueness for West Elm.
TANYA OTT: What about GE? They’re doing some things on this front as well.
JOHN HAGEL: Yeah, General Electric has a number of initiatives, some that go back quite a ways actually. About 10 years ago, they spun off a major part of their business. They had a lot of their back office services concentrated in a business unit, and they decided to basically divest themselves of that business unit. It became an independent entity called GenPact, and they now service not just GE in terms of back office service processing but a lot of other larger companies. So they saw an opportunity to take a particular skill they have and create a business and divest it so that it could serve others equally well. On the other side, General Electric has been doing a lot of interesting things, for example, in its appliance business, connecting with makers—these small groups and often individuals who are using 3D printing technology as ways to make appliances, in some cases actually the entire appliance, in some cases just modifying or enhancing an appliance for a particular need. But they’ve started to think about how can we create a platform for these makers to help them become more successful and connect with customers that would have an interest in their products.
TANYA OTT: What is the calculus that GE or West Elm is using to say, “It’s okay to be working and collaborating with other companies”? Because traditionally that’s not necessarily where folks went.
JOHN HAGEL: No. I think the traditional response would be to either view them as competitors and try to crush them (laughs) or, if you can’t compete with them, to acquire them so they become part of your company. And I think an increasing number of companies are beginning to see a third option, which is, rather than competition or acquisition, how about creating a network or ecosystem where we mobilize the specialized talent and creativity of these smaller players and add more value to our customers, our marketplace, by helping our customers to connect with these more specialized creative players. The large company becomes in effect the platform or the host, and generates and captures some of the value that’s represented by providing that connecting capability.
TANYA OTT: Is that value balance even between the smaller maker and the larger existing company, or is there a concern that, down the road, there could be a power struggle there?
JOHN HAGEL: Oh, there’s certainly always the potential for a power struggle. I think one of the interesting things, as you see these networks and ecosystems emerge and evolve, is that, on the one hand, the organizer or the orchestrator can become greedy and try to take more and more of the value that’s been created. But, on the other hand, in a world of more choice, where there are other options, the smaller players are constantly faced with the question “Do we participate on this platform or that one over there?” If the orchestrator starts to become too greedy, you see a mass defection and people moving over to platforms where there’s a more equitable distribution of the value creation.
TANYA OTT: And maybe, potentially, I won’t say bidding wars, but competition among the big established ones to collaborate with the smaller ones?
JOHN HAGEL: Exactly so—again, particularly as these large companies start to see the potential economic benefit. One of the things that we emphasize with larger companies in trying to understand what’s going on here is what we call “leveraged growth.” All of the larger companies are under increasing pressure, not just for profitability but for growth. And again, when you think about growth for a large company, it tends to be framed as make vs. buy. You either create the capability internally, or you go out and acquire it. Now, increasingly, there’ s a third path to growth, which is rather than make or buy, how about connect and mobilize and capture some of the value from that service to your customers? That’s, in the end, a very appealing growth path in terms of its economics: much less investment required, much shorter lead times to generating revenue, and potentially very large profitability over time.
TANYA OTT: What advice would you have for companies that are considering doing that kind of collaboration?
JOHN HAGEL: I think one of the big issues that we work with large companies around is the notion to move beyond just a transactional mind-set in terms with connecting with and mobilizing these third parties. A lot of the value that’s potentially available for both the large company and the small company is by creating much deeper relationships among the participants so that everyone is learning faster. So, for example, one of the interesting things that these platforms offer, potentially, is feedback loops where you can now provide much richer feedback to the participants in terms of what’s really working and what’s not working—in terms of what customer demand is, what kinds of things customers need and want. And that helps the participants become much more creative, focused, and effective in terms of addressing these rapidly changing needs. One of the things that eBay did in the early days of its platform business was to create communities where these small businesses that were starting to participate on eBay, many of whom had never run a business before, could come together and share ideas and thoughts about what does it mean, how do we run a small successful business. What are the challenges we’re going to face? How are we going to overcome those challenges and become even more successful? So focusing on that learning opportunity, we think, is ultimately where the greatest value is going to get created, because we are in a business world that’s more rapidly changing, and we’re learning faster. Improving performance faster is going to be critical to success, sustained success.
TANYA OTT: Does the larger traditional company really need the small collaborator or connector to do that? Can’t they just create that feedback loop themselves using technologies that are already existing and leveraging them?
JOHN HAGEL: They can, potentially, theoretically. I guess one of the fundamental trends we’re focusing on in this research is the increasing potential for fragmentation for what we call product and service businesses. So coming up with creative new products, getting them into market quickly, accelerating adoption of those products and services: It is far easier for creative talent to go in and create a small product business than ever before. You know, 50 years ago, if you wanted to be in the product business, you needed to be a mass-market product company, and you needed scale. Increasingly that’s no longer necessary. And in fact, scale becomes an inhibitor, if you will, because again creative talent typically thrives in smaller, more autonomous kinds of business environments, rather than being part of a large, standardized business operation. So we expect over time, [in] more and more markets and industries, the product part of the business is going to fragment. And the challenge for large companies, rather than trying to compete directly in terms of products, is how can we provide platforms or services that will help these businesses to be successful and deliver even more value to the marketplace?
TANYA OTT: You title your paper The hero’s journey through the landscape of the future. Who’s the hero? And why?
JOHN HAGEL: At one level, the hero is all of us. We picked that metaphor image because of the classic narrative structure of a hero who faces an unexpected, significant challenge and overcomes the obstacles to become successful. And I think, at one level, that addresses all of us as individuals in our own lives as we’re facing the challenge of a much more intensely competitive world out there where, no matter what credentials of experience we have, we’re only as good as our most recent accomplishment; and if we’re not continuing to improve performance very rapidly, we’re going to be stressed and marginalized. So that’s a huge challenge. And then if you flip it to the company dimension: companies as heroes, in terms of facing mounting performance pressure and finding ways to overcome that in order to actually become much more successful than they were to begin with by harnessing these forces and really finding ways to build more value around the forces.
TANYA OTT: So what are the options for large companies, then?
JOHN HAGEL: Well, as companies face this restructuring of markets and industries, I think one of the interesting opportunities is to figure out how to leverage assets and capabilities that they have today that still will provide significant scale over time. So one option is a whole set of scale-intensive, what we would call infrastructure, services. It could be running a manufacturing plant, logistics system, or data center—things that required economies of scale to be successful, and that these smaller product and service business would benefit from connecting to. So if I’ve got an interesting product, and it takes off, I don’t want to build a manufacturing plant myself. Why don’t I just go contract it with somebody who’s got a larger facility that I can tap into? On the other side, I think a big opportunity for large companies is around what we call the “customer agent business.” As we mentioned earlier, we as customers are facing more and more choices and have more and more freedom to move from one product to another. Increasingly in that kind of world, we’re going to value somebody who knows us really well, can become a trusted advisor to help us sort through all the choices and make sure that we’re getting the best option that fits our individual needs, and is increasingly recommending things as opposed to just waiting for us to ask for things. And we believe that sort of thing has very strong economies of scope. The more I know about you as an individual customer, the more helpful I can be to you as an advisor. And the more other customers I know, the more helpful I can be to you as an individual because I can see patterns among people like you. So we see that as having a significant opportunity to build very large businesses around.
TANYA OTT: I’ve been talking to John Hagel of Deloitte’s Center for the Edge in Silicon Valley. He’s got more ideas about what companies should consider if they want to remain competitive in this quickly evolving digital world. You can read up on it in his article The hero’s journey through the landscape of the future at dupress.com.
I’m Tanya Ott for the Press Room, a production of Deloitte University Press. We post new podcasts twice a month, and if you subscribe, you won’t miss a single one. You can check out our archive at dupress.com where we recently had a really meaty conversation about the opportunities and dangers of the Internet of Things.
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