A savvy CIO certainly follows what happens in other markets and the effects of technological disruptions in various sectors of the economy. This keeps awake a lot of people, but it is no longer a question of “if” there will be an Uber in your market, but “when” it will happen.
What I will share here is something already happening in Brazil and how the CIO can help your corporation and even have a more strategic role with the arrival of these technological disruptions.
The constant cheapening of technology, lots of money for risk investment, added to an increasingly entrepreneurial mindset will continue to create new startups that revolutionize market segments that previously lived in relative protection.
What Uber is doing with taxi drivers is an example of what may happen in any market. The arrival of a startup with a simpler product, cheap and easy to use, can shake a particular industry. Uber is the most emblematic example, but there are many other cases: Netflix for the Cable TV, Nubank for financial institutions, Whatsapp for telecom, Airbnb for hotels, QuintoAndar for real estate and so on. And we are talking only about companies that are already operating in the Brazilian market. Examples are even more numerous in the American and European markets.
I was in a Brazilian bank where Nubank credit card is starting to bother. This bank wants to create a similar product to compete directly with the “little purple” card. When we started a brainstorming session about the possibilities for the new product, then started to cry: “Wait, this is a bank with decades of history, with cards that generate a lot of profit for the corporation! We can not do that! Moreover, I will pick a fight with another department”. It is likely that all this is really true, but startups do not know it and follow through with its expansion plans. Established companies have their commitments which were built with governance and with its stakeholders. A new business does not have these bonds and will use this as a competitive advantage.
What happened in that bank is the classic situation posed in the book “The Dilemma of Innovation” (by Clayton M. Christensen). Basically a business grows on a successful business model that generates profit and an alleged solidity. Comes to technological disruption and allows small competitors to create a new generation of products, simpler and more accessible, operating in niche markets that generate lower profit margins than the already established business. The traditional company initially despises the new players. This can happen for small-sized market issues where new players act, the lower margin of those products and a number of other commitments already established.
New players start to grow and gain more market share, cannibalizing the margins of the established company. This dramatically reduces the responsiveness because the margins are now smaller, older clients may already be seduced by the novelty and the acquisition of the new player may be out of the question for its appreciation. To illustrate, the estimated Nubank valuation is $500 million (March / 2016), a price that few credit card market competitors would be willing to pay.
Once IT is always related with the disruption, the CIO is in a unique position to support the business strategy. Some of the actions it can take are within its scope of action and in others it may be an expert advisor. Below are some actions that can be implemented now to go through the dilemma of innovation without being swallowed by the Uber of your market. They are listed in descending order of responsibility of the CIO.
Creating a bimodal IT is the handiest way for the CIO to create an environment favorable to greater impact innovations. Mode 2 should be closer to the business to create more disruptive and less incremental innovations (leave that for mode 1). Mode 2 team should have a very different mindset from the traditional IT team. Giving high importance to predictability and governance is a disadvantage in the mode 2. The suppliers will also be of another kind, smaller, more nimble businesses bringing ideas and unconventional solutions to the problems presented. The limitation of this approach is that many disruptions involve a change in the business model, something that is beyond the IT responsibility.
A step beyond the bimodal IT is to create a committee with the areas of business and IT thinking innovation as a venture capitalist does with the portfolio of startups. Companies that make a detailed analysis of ROI have great difficulties to deal with disruptive technologies because they require market data that are not yet available. A venture investor knows that from every 10 initiatives, 7 will completely fail, two will have some success and one could become a star. He reserves a budget for this and establish success metrics and failure for each initiative. Fail and learn from the failures is an important part of the process.
Approaching the startup ecosystem and learn from them is also an option. It is interesting to absorb a more entrepreneurial culture, work with open innovation and acquire stakes in promising startups. Itaú and Bradesco banks respectively created the accelerator Cube and InovaBRA. The insurer Porto Seguro created the accelerator Oxygen, where the CIO Italo Flammia has a strategic role.
Another way to deal with the disruptive players is to assemble separate operations with a lower cost structure, leveraging disruptive and without the ties inherited from the traditional business technologies. It is very likely that this new organization cannibalize part of the parent organization in the market, but this is a lesser evil. In Brazil there are already banks and insurance companies with independent operations projects to operate in the digital market, with simpler and cheaper products. The next few years will be busy in this matter.
Finally, the acquisition of startups that are already positioned as possible champions of their sectors is also an option. The advantages are clear, because the business is already in a more mature stage, which can become highly profitable within the range of an established company. Moreover, the acquisition cost can be prohibitive. In addition, the cultural shock risk is also considerable, and may jeopardize the investment and an intangible benefit, which is to bring a new DNA for the organization.
These actions can make established businesses seize the opportunities brought by technological breakthroughs in an active way, rather than only being expoesed to the threats brought by innovation. The important thing here is the sense of urgency because digital transformation is already knocking at our door and it’s better to be prepared when the “Uber of my market” appears.