And ways of turning them into opportunities for growth.
With all the hype surrounding digital it’s easy to forget that the value such transformation creates for an organisation also poses strategic risks. This can be felt acutely in terms of its non-current assets; the fixed or intangible resources owned by an organisation that it uses to generate revenues.
Whether an organisation has made a strategic investment in digital or is competing in a market being disrupted by it, the long term value of these assets will materially change. Here are some indicative examples of such risks and the strategic opportunities they create for sustainable competitive advantage:
Property unprofitability: as customers switch to “virtual” digital channels for products and services, footfall in physical spaces like retail stores fall – yet organisations still carry the cost of maintaining these properties and supplying them with stock. This is a serious challenge right now for many of the UK supermarkets who are experiencing such increasing dis-economies of scale that could result in an unrecoverable loss of their long term profitability.
Opportunity? This could be an opportunity for diversification – reuse these physical spaces for a different, complementary purpose – like blending customer experiences with other brands to increase differentiation, and optimising and consolidating supply chains. Grocer and catalogue brands are already trialling this together in the UK. More radical moves could include re-purposing these properties to serve an expanded range of digital services – such as acting as a high street located distribution and customer service centre for goods ordered on-line or, alternatively, use them to deliver benefits for local communities or charities to help engender a positive brand image.
Equipment obsolescence: the UK public sector has seen a range of IT-enabled channel shift initiatives being implemented over the last ten to fifteen years. However, the rate of technology change has meant many of these assets have already been written off or are fast becoming obsolete. This can be seen explicitly in the vastly different attempts at centralised on-line citizen and business services implemented by the last two British governments. There is also anecdotal evidence of IT hardware being procured by UK public sector organisations that failed to realise any material benefit – for example, handheld devices that were bought in the mid noughties to help council workers carry out field work now rendered obsolete by smartphones and tablets.
Opportunity? In response, the present UK Government has redesigned the way it procures IT services with an emphasis on sharing and mitigating such risks of equipment obsolescence with suppliers, including the requirement that cost-optimised open source, configurable software and cloud hosting must be used. This application of supplier management means it’s in suppliers’ interests to ensure their procured IT services remain up to date (so they don’t become obsolete) while also materially reducing any potential write-off costs for UK Government. A further option could be to rent them from suppliers (to remove the risk of equipment obsolescence) although this could create other complex, unfeasible risks for UK Government about the ownership and liabilities of such rented services.
Intangibles overvaluation: in this “social media hungry” age where reputation is everything, intangibles are critical assets for any organisation’s growth. These non physical, long-term resources (including licences, software and brand) help an organisation to grow and retain market share. Yet digital disrupters have successfully eroded the value and useful life of these intangibles in many sectors – most noticeably in Telecoms where fixed-line voice licences, text messaging services (i.e., software) and brand, are rapidly losing strategic value as customer loyalty evaporates. In response, many Telcos are pursuing an aggressive ‘digital first’ strategy to drive differentiation and cost optimisation – yet further consolidation of these businesses looks inevitable.
Opportunity? A digital disrupter’s strength comes from leveraging new ways to interact with customers and suppliers without having to make a fundamental change to the underlying product or service. Arguably its weakness is that it can be easily imitated by existing market incumbents (providing they can move fast enough) using a cost or differentiation focus. For example, they “reconfigure” existing intangible assets to engage specific market segments in new innovative ways the disrupters don’t offer because they can’t “change” the product or service itself. Some UK Telcos are proactively targeting B2B market segments with Internet of Everything (IoE) services by leveraging the value of their existing brand and licenced network capabilities. A bolder move could be to exit unprofitable markets like B2C and use these savings to create new “digital intangibles” (such as an IoE design service, apps development, social media branding) to drive strong strategic partnerships with specific B2B clients.
What strategic risks and opportunities do you think organisations face as digital continues to penetrate all sectors? Please share your feedback below.