Understanding factors that lead to digital disruption and competitive advantage through the use of digital disruption : an explorative study

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Understanding factors that lead to Digital Disruption and

Competitive Advantage through the use of Digital Disruption

- An explorative study -

Master program: Thesis Executive Program in Management Studies

Name student: Andri Bonte

ID-Code: 11016817

E-mail: andri.bonte@student.uva.nl

Date: 31-1-2018

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STATEMENT OF ORIGINALITY

This document is written by Andri Bonte who declares to take full responsibility for the

contents of this document.

I declare that the text and the work presented in this document are original and that no sources

other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of

completion of the work, not for the contents.

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ABSTRACT

There are various factors leading to digital disruption and factors that play a role in maintaining digital

disruption. This thesis describes the most important factors that contribute to digital disruption and

competitive advantage through the use of digital disruption. The framework of Lanting (2017) is used as

blueprint for this research. Qualitative research is conducted in the financial service industry in The

Netherlands by means of semi-structured interviews. Interviews are conducted with people at (senior)

management level, (business) consultants, innovators, scientists, experts and entrepreneurs. The outcome

of this research shows that there are few differences according to the Lanting model. The new model shows

additional factors, gives more direction to the factors and gives deeper meaning of factors explained by

Lanting. Organizations should use the factors of the new model to reach digital disruption and/or maintain

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Acknowledgment

This thesis is the final work of my study at the Amsterdam Business School. I would like to thank some people that have helped me tremendously during the study and the thesis process. First of all, I want to thank my

supervisor, Associate Professor (Reader) in Management dr. Chris Williams. Thanks to his wise advise and positive way of thinking he helped me enormously during the thesis process. I wish to thank all the people I have interviewed, without their participation it would not have been possible to work on this thesis. I wish to

thank my employer who made it possible to do this study and has given me all the space I needed to study. Finally I want to thank my wife Sarah, who has given me great support during the master.

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1. Introduction

“Digital disruption can be seen as a transformation of digital technologies and business models.” (Oxford College of Marketing).

For firms it could be challenging to keep in pace with their environment related to the dramatic technological changes. The last few months I have visited many events that were organized by my firm, related to new technologies. In these events information was given about new digital (disruptive) technologies and the endless opportunities these technologies could bring to firms. The topics that were discussed were related to blockchain, artificial intelligence, robotizing and so on. When I spoke people afterwards I could notice excitement for the near futures possibilities related to these technological opportunities. However, If I asked managers which technologies would be implemented, and when and how, the answers became a little bit vague. How do you know as an organization that these new technologies will be embraced by your clients? What organizational changes are needed to reach digital disruption? What other factors play a role in reaching digital disruption? A lot of research is going on at the moment, and my company is recently started to explore partnership’s with start-up firms in financial technology. The message of the board of my company is that there should be rapid cost reductions because our customers demand cheaper products. One way of doing this is to invest in, and adapt to new technologies. Should my organization experiment and see what’s happening? Should my organization work with start-ups, or is it better to outsource technologies? What other factors contribute to competitive advantage through the use of digital disruption? In this thesis I want to get answer on these questions. Based on a book of Menno Lanting (2007) called “De Disruptieparadox” I want to get deeper insights in the factors that, according to Lanting (2007) lead to digital disruption. Furthermore I want to find out if there are other factors that are important to reach digital disruption. The world of digital disruption is a fascinating one. By means of this thesis I hope to give some managerial insights in the way an organization could deal with this fascinating world.

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2. Literature review

2.1 Definitions of Digital Disruption

There are many definitions of what digital disruption includes (see table 1). Digital disruption can be seen as a transformation of digital technologies and business models. The existing value of products and services of firms can be impacted by these disruptive transformations (Oxford College of Marketing). According to Lanting (2007), the definition of digital disruption is that an existing market will be suppressed because one or more innovations will take care of a new interpretation about the augmented value of a product or service. There aren’t much firms that are disruptive, so it results very often in disappointment for these firms (Lanting, 2007). Christensen (1997) mentioned in his book “The innovators dilemma” that disruptive technologies bring very different value propositions. Disruptive technologies are technologies that are in the beginning inferior to the mainstream technologies when compared with performance. They are the new technologies and it is

questionable which technologic meaning the market has given to these technologies. Disruptive technologies promise lower margins, not greater profits. Disruptive technologies are commercialized in emerging or insignificant markets, and leading firms most profitable customers can’t use products based on disruptive technologies. Most companies that have a practiced discipline of listening to their best customers and identifying new products that promise greater profitability, are rarely able to build a case for investing in disruptive technologies until it is too late. Another important factor related to disruptive technologies and related to the innovators dilemma is that organizations should invest in disruptive technology when new markets are considered and carefully developed around new definitions of value. (Christensen, 1997). Yu and Hang build on the work of Christensen and clarify the concept of disruptive innovation. Instead of continuing with the term disruptive technology used by Christensen, they call it disruptive innovation, because the innovation of business models is also involved. Furthermore, they provide a definition of what disruptive innovation actually is. According to mainstream studies there are two views related to technological innovations. There is the view that technologies can be revolutionary, radical and discontinuous. The other view is that technologies can be evolutionary, incremental and continuous. Digital disruption seems to be more discontinuous in nature. (Yu and Hang 2010). But what exactly is disruptive innovation? According to Yu and Hang (2010) there are 3 views of what constitutes a disruptive innovation. The first is that disruption is a

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8 relative phenomenon. New strategies or actions that are relative to the current business model of an

organization are less disruptive than when these strategies or actions are completely new for a firm and not related to their current business model. Second, disruptors are not necessarily startups, even incumbents with high-end technologies can survive by concentrating on the demands of their least price sensitive customers. Finally, disruptive innovation is not the same as destructive innovation. Destructive innovations, with high performances and low cost directly affects the mainstream markets. A normal disruptive innovation normally focuses on low cost and initially, lower performance. (Yu and Hang, 2010). According to Karimi and Walter, a technology is disruptive when the use of it generates services or products with different performance attributes and these services or products might not be valued by the current customers of the organization. They state that disruption is not an event or an immediate phenomenon but a process that can take several years or decades. Sometimes a disruption is quickly and completely, sometimes slowly and incompletely. (Karimi and Walter, 2015).

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9 Definitions of Digital Disruption

“Transformation of digital technologies and

business models. Existing value of products and

services of firms can be impacted”

(Oxford College of Marketing)

“Technologies that are in the beginning inferior to

the mainstream technologies when compared with

performance”

Christensen (1997)

“Disruption is a relative phenomenon” Yu and Hang (2010)

“The use of it generate services or products with

different performance attributes and these services

or products might not be valued by the current

customers of the organization. It is not an event or

an immediate phenomenon but a process that can

take several years or decades. Sometimes an

disruption is quickly and completely, sometimes

slowly and incompletely”

Karimi and Walter (2015)

“An existing market will be suppressed because one

or more innovation(s) will take care of a new

interpretation about the augmented value of a

product or service”

Lanting (2017)

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2.2 Factors leading to Digital Disruption

In the book “De Disruptieparadox” of Menno Lanting (2017), the author describes factors that lead to digital disruption and factors that have a certain paradigm in relation to the success of digital disruption. Lanting states there are four main factors that leads to disruption. This factors are:

- assemblage of innovations; - changing value networks; - new business models; - new organization structures

ASSSEMBLAGE OF INNOVATION

New technology rarely leads to disruption. When a new technology ensures that it creates a new product, service or process we speak of innovation. But when different new technologies (or different new innovations) come together it can give a new vibe to markets, products and/or services. In this way, an assemblage of innovations can lead to digital disruption.(Lanting, 2017). The article of Johnson gives deeper insights in what an innovation actually contains. According to Johnson there are five forms of innovation. First; innovation is related to any change in a product or service range of an organization that it will take to their market, usually via R&D departments. Second; innovation is a change in the application from the original purpose of the product or service. Third; innovation has to do with a change in the current market to serve others in the market. Fourth; innovation has to do with any change of products and services related to the original operational and logistical design. And the last form of innovation is innovation that focus on the development of the current business model of the organization, away from its current or previous business model (Johnson, 2001). In a study of Perez , the author wants to find out what the interrelationship is between the diffusion of new technologies and economic development. The “mode of development”, which is a pattern of growth is provided by successive technological styles, or as Perez pointed out, a constellation of interrelated innovations. In other words, the successive modes of development through the years, is responding to successive technological styles. Technological styles evolve from the peak of one long wave to the peak of the next long wave. If a peak is reached, this can

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11 result in crisis of a certain point in development, because the limits of the potentials are reached. A new wave of technological styles will result in the next modes of development. (Perez, 1983). In a certain way, this can also be described as a “disruption”. In this way, both Lanting and Perez pointed out that

assembling innovations (Lanting) or a constellation of interrelated innovations (Perez) leads to a disruption.

CHANGING VALUE NETWORKS

According to Lanting, another important factor for disruption is changing value networks. When technological innovations come together it can create a new value network for customers. For example: the combination of digital photography and the use of smartphones as cameras resulted in a changing value network for customers. The meaning of photography was changed from taking picture with a camera and print the photo’s in a photoshop to, taking photos with your smartphone and immediately see the photos on screen. Lanting states that companies rather stick to the needs of their customers in the short run (what do they want today) instead of looking forward and ask their customers demand in the long run. There might be a risk that these companies ignore ascending technologies because their customer don’t demand it now. (Lanting, 2017)

Another example of changing value networks are imperfections in a value network.

Christensen calls these imperfections “asymmetries of motivation”. Asymmetries of motivation has to do with the satisfaction of customers in a certain market. In other words, are those customers satisfied by the available products/services in the market? If new entrants are motivated to serve less profitable customers in less attractive tiers of the market, the established businesses will be more motivated to move to the more profitable customers. Also, disruptive technologies appeal most of the time to customers who are unattractive to incumbents. Disruptive technologies are most of the time small adaptions to known technologies, but incumbents have a lack of motivation to win this battle from entrants. Incumbents focus on day-to-day internal competition for resources and don’t have a good look at the small disruptive innovations. And so, the disruptive technologies have the chance to become bigger and bigger and defeat the market one day when customers have a new vision on products and services in a new created value network. (Christensen et al, 2002). Asymmetries of motivations also can relate to the way an organization wants to do something totally different than their competitors. Uber, for example, wants to find out how

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12 every Londoner could be a taxi driver instead of how to keep the taxi prices as low as possible. (Lanting, 2017).

NEW BUSINESS MODELS

According to Lanting, a firm that generates new technologies (or new innovations) needs an innovative business model. Or in other words, the technological core of an innovation generates value to a consumer. A business model shows the products or services of a firm and how these products or services will be realized. Lanting argued that it is important to test an innovative business model at a regular basis. Like financial audits are done at a regular basic, so should business models be tested and improved. In business model innovation there are three strategies, “keep on going”, “attack” and “divide and conquer”. In the strategy “keep on going” a firm doesn’t renew itself but continues the it works. Often, this is possible because of high financial buffers. The strategy “attack” is about taking a whole new business model. Leave the old way of working and try to disrupt the existing market or search for new markets. The last strategy “divide and conquer” is about going on with the current business model and on the same time launch a new, innovative business model. If it doesn’t work, a firm can fall back on the existing business model. If it works than a firm can adapt the innovative business model. But the combination of two business models in one firm is not easy. That’s why it is better to start a new organization next to the existing organization. Lanting also argued that established firms most of the time focus on increasing their “sustaining innovations” A sustaining innovation is a technological improvement of a product or service without a business model that supports this improvement. In other words, it can be seen as an incremental

innovation and it finds it origin in the way established firms listen to the wishes of their current customers in an existing market. Lanting argued that this is a logical consequence, because the management of an established firm is focused on new innovations without changing the whole business model of the

organization. It is more difficult for established firms to change the business model as a result of changes in the value chain. (Lanting, 2017). According to Chesbrough (2010), new business models will enable firms commercialize new ideas and technologies. Often, firms haven’t the ability to innovate their business models. In table 2 is indicated what Chesbrough’ definition of a business model contains.

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TABLE2CHESBROUGH’S DEFINITION OF A BUSINESS MODEL

Chesbrough invented in his research at Xerox Company that there was an important aspect between new projects that get a chance to develop in Xerox’s R&D system and projects that don’t get a chance to prove themselves. The difference was that projects that get a chance fitted well with the current Xerox’s business model. Chesbrough argued, based on his research, that companies can gain at least as much value by

developing their business model as from developing an innovative new technology. But, companies have much more sense about how to innovate technology, than how to innovate their business model. So, companies have to develop their capability to innovate their business model. New technologies are often a result of

experimenting. In this way, new business models are not superior foresight ex ante, but because of trial and error and adaption mainly ex post. According to a study of Zott, there are three key aspects in business model innovation novelty: lock-in, complementarities and efficiency. These aspects often conflict with traditional configurations of firm assets, managers are likely to resist experiments because of their ongoing value to the company. (Zott et al, 2011). Also Christensen mentioned the tension between disruptive innovation and the existing business model on which the current technology is based. For incumbents, the gross margins for emerging technologies are much lower than the profits from the current technology. (Christensen, 1997). Chesbrough found a different barrier to business model experimentation. The success of established business models is influencing the information of the decision process. The “dominant logic”, which means how a firm is able to create and capture value is very powerful and is strongly related to the current business model.

Number Definition of a Business model

1 It articulates the value proposition

2 It identifies a market segment and specifies the revenue generation mechanism (for which users is the technology useful and for which purpose is it useful?)

3 It defines the structure of the value chain, which is required to create and distribute the assets 4 It details the revenue mechanisms

5 It estimates the cost structure and profit potential

6 It describes the position of the firm in the value network by linking suppliers and customers 7 It formulates the competitive strategy so a firm can remain its competitive advantage

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14 Because of this, new information that fits the dominant logic of the firm will be adapted earlier than

information which does not. A risk related to business model experimentation is that this dominant logic can miss valuable information of new technology. To overcome the problems related to experiment with new business models, managers need to have authority to undertake experiments and actions based on the results of their tests. Organizations also need to identify internal leaders that focus on business model change and delivers better business models for the company. Also, the organizations culture must embrace the new model and in the meantime maintaining the effectiveness of the current model until the new model takes over the old model (Chesbrough, 2010).

NEW ORGANIZATION STRUCTURES

According to Lanting, a final factor that leads to digital disruption is new organizational structures. Firms should be able to respond on changes, they must be volatile. In practice, established firms have more trouble with this than new firms. The reason is that established firms are trying to generate value form their existing

organization structure while it is better to create new concepts. Christensen and Bower argued in their work that new disruptive technologies has been know and in some cases are developed inside the existing, established firms. But not all new disruptive technologies are adopted by this established firms. A reason for this is the resource dependence of these firms. “A firms’ scope for strategic change is strongly bounded by the interest of external entities who provide the resources the firm needs to survive” (Christensen and Bower, 1996: 212). In this case, the external entities are the customers of the firm.

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2.3 Factors leading to Competitive Advantage through the use of

Digital Disruption

Lanting states there are factors that contribute to the success of firms through digital disruption. These factors have different paradigms in relation to success. The factors appointed by Lanting (2017) are:

- fast versus slow;

- opportunities versus threats; - ratio versus emotion;

- exploitation versus exploration

FAST VS SLOW

According to Lanting, there are 3 important factors that influence the speed of implementation of a digital disruptive innovation. The first one is about the “tipping point” of the market. It’s not that much the speed of the innovation or technology, but firms have some trouble to estimate when a new technology will impact their business. According to Lanting, the “tipping point” or the moment that a critique mass is reached is when 10 till 25 percent of the market embraced a new technology. A second important factor is the recognition of new disruptive technology. A lot of managers don’t recognize disruption, because disruption is creating new markets that are not in scope of the managers. A third important factor is the right timing. Some innovations are very popular in a short amount of time. But even quick as they appear they disappear. So a firm should think carefully to incorporate new innovations or markets. (Lanting, 2017)

There is a lot of theory about speed of implementation. Speed of implementation is related to the organization’s ability to improve its organizational learning in a certain time. Organizational learning is the ability of a firm to build, create and implement knowledge. Speed of implementation is also related to the extend in which a firm is able to implement new technologies/processes in the system of a firm in a certain time. Literature about speed of implementation suggest that balancing speed is the best strategy for firms (Barkema et al, 2002, Zahra and George, 2002, Levinthal and March, 1993, Bharadwaj, 2000).

As stated before, disruptive innovations like digital disruption have impact on the existing value of products and services of firms and on their business models. (Oxford College of Marketing). Furthermore, digital

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16 organizations, this might bring some tension about whether to react quickly on these events, or wait and see what happens in the industry. Radical changes could be related to speed. In the article of Barkema et al, the authors state that the rapid innovation of technological breakthroughs is not unique, new economies have emerged approximately every 50 years. But there has been a shift from moving input and outputs, to technologies that focus on moving information and knowledge. As a result of this, there is more focus on globalization. In this global competition, firms should focus on their development compared to their rivals. Organizational learning and innovation is not the most important factor anymore. Many firms have fallen behind, because they have focused on rapid change and innovation, and not on the development compared with their rivals. This is well known as the “Red Queen” effect, firms that learn and innovate in response to their competitors intensify their competition more. And because of a more intensifying competition these firms are triggered to learn and innovate more and faster. Firms that accumulate competitive experience and learn from it in a fast way become more potent. (Barkema et al., 2002). This is related to the absorptive capacity theory of Zahra and George, they state that if organizations are able to acquire and assimilate knowledge and transform this in their own organization, and are able to exploit they have reached realized absorptive capacity. This realized ACAP has a positive relationship on performance (Zahra and George, 2002). The ability of a firm to compete, depends on time and history, a firm that does not have time available faces a significant disadvantage. But in a time of radical changes in the environment this Red Queen effect may not work for firms. There is little time for organizational learning so even firms that have knowledge may become vulnerable. (Barkema et al., 2002).

According to Levinthal & March, learning has to cope with confusing experience and the complicated problem of balancing the competing goals of developing new knowledge (exploring) and exploiting current

competencies. Organizations have the tendency to overinvest in exploitation and do little in exploration. This is because the return to exploitation activities are more certain and closer in time than the return to exploration activities. Learning speed can be fast, but rapid learning in the short-run is likely to prevent the discovery of superior alternatives in the long-run. Slow learning is often seen very skeptical, but under conditions of complexity and rapidly changing environments, it may produce superior outcomes. (Levinthal & March, 1993). Firms that have the tendency to speed up their processes of learning and innovating to remain competitive can be caught in a vicious cycle, the “speed-trap”. This speed trap weakness firm performance according to an ethnographic study of an internet start-up. Important for firms is to find a good balance of speed, different

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17 organizational processes requires different paces. (Barkema et al, 2002). Bharadwaj states that firms should do more than “just” invest in IT and this requires time and effort. Many firms face organizational barriers related to changing IT. Many established firms have problems to quickly covert to new systems and the current IT systems are inert to the changes that are needed. This results in competitive disadvantage for these firms. (Bharadwaj, 2000). The effective use of time is a very important competitive factor in most businesses and time delays that occur are related to technical and managerial design factors. Taking a closer look at managerial factors, it is seen that managerial factors have something to do with delays in decision making and inadequate skills. It is important to identify the components in the system that are time consuming and efforts to

overcome waste of time are important. This can be done by integrating some elements, so the process can be more efficient. Furthermore, carry out decisions that are delaying the core process of the business may help too (Bhattacharya,1996).

OPPORTUNITIES VERSUS THREATS

According to Lanting, it could take a while before the actual disruption of some technology is felt in a market. Some breakthrough innovations be implemented in a fast way (in a short time) by organizations, but it takes a longer time for those innovations to stabilize. These innovations could in the end disappear or could be dominating the market. Because it can take a while before the real impact of a disruption affects a market, disruption shouldn’t be seen as a threat but should be embraced because of the chances it will yield. So, organizations should be thinking of new concepts all the time and how they will implement these

opportunities. A good thing of disruption is that it will increase a market in the beginning. An example of this is an app for the stock exchange. Because much (especially younger people) find the market for stock exchange to difficult, there are many apps developed that respond for this “problem”. Now, the market for stock-exchange is increased. Another example is AIRBNB, technology increased the market of hotels because more people stay overnight. So, hotels can profit from this disruption. According to Lanting, many firms (especially in the banking industry) did not much on taking chances that occur. They were too much focused on dealing with the financial crisis than looking at the changing value networks and the demands of their customers. The period in which disruption enlarges a market, is a very good time for established firms to adapt their business model, organization structure and culture to the changing environment. (Lanting, 2017).According to Gilbert and

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18 Bower, a firm should approach a breakthrough technology as a threat and a opportunity on the same time. The way an organization reacts on disruption has influences of how the managers of the organization propagate this into the organization, how the managers organize the response and how the managers allocate the resources. In case of a threat managers have the tendency to overreact, and to use too many resources too quickly. In case of an opportunity the managers have the tendency to commit insufficient resources to its development. According to the authors it’s better not to see disruption as a threat or an opportunity but look to both perspectives. Use the adrenaline that a threat creates, but on the same time use the creativity that an opportunity efforts. Especially incumbent organizations have the tendency to ignore an innovation. A tactic to help the organization to act on disruption is to label the innovation as a threat. In this way it tends to free up resources and create organizational commitment. On the other hand, by framing a disruption as a threat it creates some frightening by employees. This could have impact on the creative thinking.

The authors give some tools to help dealing with this issues. The first tool is “separate for better performance”, so separate a business unit in the organization from the core business model of the organization. These units will be more innovative and have a higher market-penetration rate. An organization can also start a new venture. The second tool is “fund in stages”. It is not guaranteed that the people in this separated business unit will manage the business as an independent opportunity. So top management should control the flow of the investments. The third tool is “cultivate outside perspective”. Do not use employees from the existing business in your new business unit. Their thinking is based too much on the core business of the organization. The fourth tool is to “appoint an active integrator”. Most of the time this will be an executive that actively manages the tension between the parent and the new venture. The fifth tool is to “modularize integration”. Established organizations have the tendency to integrate new businesses as soon as possible in the existing organization. But disruptive technologies will be applied in new ways with new customers. Over time, integration might be an option. Important by an integration is that the two organizations remain their own work process. It’s a good idea to use a modular approach to integrate. The sixth and last tool is “consider acquisitions”. This might be a good idea if the core business remains viable because starting a new business unit in the organization or a new venture is extremely challenging to execute. (Gilbert and Bower, 2002).

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RATIO/EMOTION

According to Lanting, sometimes success can’t be explained rationally. Not so long ago, most of the managers used the “Blackbarry” telephone. Suddenly the Iphone took over the success of the Blackberry. The Iphone was a totally new concept and a different experience for managers. Lanting argued that not the ratio but the emotion was the main factor that determined the success of the Iphone. Nowadays emotion will become more and more important. It’s not the ratio of consumers that decides what will be a success or not, but often it is the emotional factor. For example: “the future is about taking a picture instead of making pictures” is an emotional factor that could make a world of difference in the experience of customers. Facebook’s aim is to give people more power to share the world in a more connected way. (Lanting, 2017). In an article of Zhou et al about brand community, the authors found out that brand community is not only important for the company-to-consumer paradigm, but also for consumer-company-to-consumer communication. It is important for organizations to commit the customer to the organization (or the brand of the organization). One way of doing this is to

organize a brand community where consumers could interact with each other on the platform of the

organization. Here it is also important to reach brand commitment. To achieve this, companies must cultivate consumer emotions. (Zhou et al, 2012). In an article of Kulviwat et al, the authors stated that many scholars and practitioners have tried to understand factors that influence technology acceptance. According to the authors, consumers adapt high technology if they enjoy the experience of using the technology. They tend to reject this technology because of fear. The authors found out that perceived usefulness of a technology contributes to a positive attitude towards adoption and the adoption intention. Also emotional factors like pleasure and arousal have a positive effect on the attitude towards adoption and the adoption intention. (Kulviwat et al, 2007)

EXPLOITATION/EXPLORATION

According to Lanting, organizations have the tendency to focus more on exploitation than exploration. In table 3 the definitions of exploitation and exploration are showed. Because of this, most organizations don’t innovate as much as they should do. In this way these organization’s aren’t disruptive at all. Lanting argued that the things that are called “innovations” are most of the time small contributions of an existing product or service. Most of the existing organizations have trouble to innovate because there focus is mainly on short

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20 term success and the maximalization of shareholders value. These organizations use their resources to reach their goals instead of experimenting and finding out how they could use these resources for innovation. According to Lanting organizations should be ambidextrous, this means that organizations should be both explorative and exploitative at the same time. (Lanting, 2017) This is also what Zahra and George describe with their theory about absorptive capacity and realized absorptive capacity (see factor fast versus slow). Also mentioned; organizations have the tendency to overinvest in exploitation and do little in exploration. This is because the return to exploitation activities are more certain and closer in time than the return to exploration activities. (Levinthal and March, 1993) The theory of He and Wong also emphasises the importance of ambidextrous organizations. The main reasons are that:

- ambidextrous organizations drive superior performance over time; up to 9 times more compared to single focused organizations;

- By putting people together and letting them work with each other on exploiting and exploring activities, the organization becomes more autonomous;

- A more autonomous organization is more likely to engage in radical (disruptive) change. (He and Wong, 2004).

Factor Definition

Exploitation Firm behaviors characterized by refinement, implementation, efficiency, production and selection. It is associated with mechanistic structures, tightly coupled systems, path

dependence, routinization, control, bureaucracy and stable markets and technologies. More certain returns and closer in time.

Exploration Firm behaviors characterized by search, discovery, experimentation, risk taking and innovation. It is associated with organic structures, loosely coupled systems, path breaking improvisation, autonomy and chaos and emerging markets and technologies. Variable returns and distant in time.

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3. Critical thoughts, research question and initial model

In his book, Lanting (2017) described factors that are leading to digital disruption. Also he described factors that are important for the success of digital disruption. In the literature review I found many articles that described the factors of Lanting in a more common way. But I didn’t found a lot of literature about these factors in relation to digital disruption. In the article of Yu and Hang, the authors give an overview of inhibitors and enablers of disruptive innovation. The authors used extant literature of Disruptive Innovation Theory in their paper. They defined 4 perspectives; internal, external, marketing and technology. An inhibitor or problem for disruptive innovation could be for example limited experience of senior managers. An enabler for disruptive innovation could be to create a core team that thinks of disruptive ideas and in the end tries to implement these ideas. The authors suggest for further research and a more complete analysis for disruption factors through a larger empirical study that tries to compare which combinations of the enablers are the most important. According to Yu and Hang the research that is executed so far on factors of digital disruption is only the beginning. In all theory-building processes there is room for future improvements in different aspects. (Yu and Hang, 2010). Based on the theory of Yu and Hang and their encouragement for further research, I want to find out if the Lanting model is complete. There could be other factors leading to digital disruption that are not mentioned in the Lanting model. Or the factors described by Lanting aren’t important enough to lead to digital disruption or lead to competitive advantage. Also, it is interesting to find out if there is more to say about the factors that leads to digital disruption which are described by Lanting. The same can be said about factors that leads to competitive advantage through the use of digital disruption. Lanting’s factors are paradoxical;

sometimes it is good to be fast related to digital disruptive innovations and sometimes it is good to be slow and wait and see what happens. I want to find out if more direction can be given to these and other factors. For example: “fast implementation of innovative disruptive technologies will contribute positively to competitive advantage.”

To answer these questions I formulated the following research question:

What are the factors that lead to digital disruption and which factors contribute to competitive advantage

through the use of digital disruption?

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4. Methodology

Topic and research method

In my thesis I want to research the phenomena “digital disruption”. What are the factors that lead to digital disruption and which factors contribute to competitive advantage through the use of digital disruption? To find an answer to my research question I’m going to conduct an explorative case study. A case study enables me to find answers on ‘how’ and ‘why’ questions, and in this way I can take into consideration how the context influences the speed of implementation (Baxter and Jack, 2008). A case study could be used when seeking for an answer to a question that can explain the casual links in real-life interventions that are too complex for a survey to research on (Baxter and Jack, 2008; Saunders et al., 2016).

The method that I will use is a semi-structured interview method. A semi-structured interview method gives the opportunity to ask purposeful questions and listen to answers carefully to be able to explore the answers further in my research. Semi-structured interviews are ideal to learn to understand what the context in a certain situation is. (Saunders et al, 2016).

To pay attention to confidence and relevance, interviews will be conducted with different people in the financial service industry in The Netherlands that deal with questions about digital disruption in their work-environment.

I will interview people at (senior) management level, (business) consultants, innovators, scientist, experts and entrepreneurs at firms in the financial service industry.

The quality factors of my design according to confidence and relevance will relate to my research as follows:

Confidence: “the degree of certainty with which the researcher can posit that results are the outcome of a legitimate research process”. By interviewing different people at (senior) management level or consultants at firms in the financial service industry in the Netherlands, my data collection will be a enumeration of relevant attitudes and perceptions.

Relevance: “The degree to which research relates to (and challenges) theory as well as a common understanding”. I want to enlarge the framework for digital disruption in the financial service industry.

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Research field and collecting data

To answer my research question I have conducted my research in the financial service industry in The

Netherlands. I was looking for people in the financial industry that have some experience with digital disruption in their work field. Mainly, I have contacted the interviewees through snowball sampling. After an interview, I asked the interviewee if he/she knows someone in his/her acquaintance circle that have experience with digital disruption and can help me further with my investigation.

I have send all my possible candidates an e-mail in which I explained who I am, what I’m studying and what the purpose of my research is. I have asked the possible candidates to think about the question or they are able to help me. Further I have indicated that when the candidates think they could help me, they can send me an e-mail or contact me by phone. The possible candidates I have approached all were able to help me with my research. In table 4 the persons who I interviewed are displayed.

Number Gender Profession Sort of industry

1 Male Business Consultant Pension

2 Female Innovator Banking

3 Male Chief Technology Officer IT

4 Male Scientist Innovation

5 Male Partner Consultancy

6 Male Manager Consultancy

7 Male Founder Fintech

8 Male Entrepreneur Banking

9 Male Expert Innovation

10 Male Manager Pension

11 Male Director Innovation Pension

TABLE4OVERVIEW OF INTERVIEWED PERSONS

Three of the 11 interviewees are working in the same company, but in different units and in different functions. From there work experience they were able to give me additional information about my subject.

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25 The interviews take place at my office or at the office of the interviewee. One interview was by telephone. All the interviews, except the one by telephone, are recorded.

My initial plan was to perform 15 interviews. But when I reached interview number eleven, I noticed that the answers that were given largely were the same. So, I found out I reached the point of saturation of my data. There were no new insights that I could use for my investigation.

The way I conducted my interviews was semi-structured. For every interview I had the same questions, but these question were mainly meant to make adjustments if the answers were not focused on the topic

anymore. The interviews lasted approximately 40-50 minutes per interview, except the interview by telephone. Unfortunately the interview was quit unexpected and because of time compressing the interview was done in approximately 15 minutes. The people I interviewed where al highly educated. The ratio male – female is 10:1. The age of the participants is unknown.

I started with the interviews in November 2017 and my last interview was in the end of December 2017.

Research processing and data analysis

In appendix 1 the transcribed interviews are added. I have coded the interviews with the application NVivo, which is a coding program. First of all I performed open coding. Open coding is a line-by-line analysis of the transcribed text. I have added codes to every unit of text in order to create categories. With the program NVivo I could check how much interviewees have referred to a category. Based on how often categories were mentioned by my interviewees I formed themes. The themes are included in my new model.

Secondary data

I also used secondary data for my research. By using secondary data I performed some triangulation. Triangulation means that I have used different methods to collect data. By doing this, the researcher can validate some of the outcomes of the primary data. The secondary data I used is from a magazine for managers. The magazine contains an interview with mister Amir Arooni, who is Chief Information Officer at Nationale Nederlanden Group. The interview contains valuable information that is related to my topic. The name of the magazine is “management scope”. In the reference list more additional information is given. I have also use a book which I used to better understand what the business model canvas contents. This book is called: “Business Model Generatie” and in the reference list more additional information is given.

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5. Results

This topic contains the results based on the data collected in the interviews. All the findings based on my interviews will be presented in the new framework. (see figure 2).

The interviews resulted in many factors that leads to digital disruption and competitive advantage through the use of digital disruption. By means of coding, the factors have finally resulted in main factors which are displayed in figure 2.

In table 5 and table 6 all the factors that came forward in the interviews are visualized. The factors are divided in most important factors and less important factors. For determining what is an important and what is a less important factor I checked how often a factor was mentioned by interviewees. To check this, I have used the program NVivo, which is a tool for qualitative research.

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27 Most important

versus least important factors

Emerging factors leading to Digital Disruption

Definition Mentioned by

interviewees

Most Important

Type of leader/employee The characteristics of leaders and employees needed in organizations

10

Compromising the value chain The way organizations are looking for efficiencies in the value chain in order to make the value chain more compact and efficient

6

Use of customer data The way organizations make use of customer data

6 Use of current technology The way organizations make

use of current technology.

6

Least important

Understanding of disruption The way in which employees of the organization know the meaning of disruption

3

Zeitgeist The way organizations can

benefit from the zeitgeist in which we live

3

Reaching people through internet The way organizations make use of internet to reach people

2

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28 Most important

versus least important factors

Emerging factors leading to Competitive Advantage through the use of Digital Disruption

Definition Mentioned by

interviewees

Most Important

Laws and regulation The strictness of laws and regulations related to disruptive technologies that are imposed to organizations

11

Collaboration with other organizations

The way an organization should cooperate with other organizations

9 Agility of organization The way in which an organization is

flexible and agile

7

Least important

Power capacity technology The way in which Artificial Intelligence technology plays a role in

organizations

5

Investing by the organization The way in which an organization should invest in digital disruptive technologies

5

Environmental factors of the organization

The way in which organizations should take into account environmental factors

5

Rationality versus emotion The way in which organizations should take into account how customers act from rationale or emotional

perspective

5

Big versus small firms The (dis)advantage of a large or small organization concerning digital disruption

4

Age of customers The way in which organizations take into account how older and younger people deal with digital disruption

4

Entrepreneurship within the organization

The way in which entrepreneurship is encouraged in organizations

4 Individualization in society The way in which organizations should

take into account the individualizing in society according to digital disruption

3

Luck Luck as a reason for success 2

Choices made by executives The choices that are made by executives

2 Ethic factors The way in which organizations should

take into account ethical factors according to digital disruption

2

Fun to work with innovations The way in which organizations manage to make it funny to work with digital disruption

2

TABLE6EMERGENT FACTORS LEADING TO COMPETITIVE ADVANTAGE THROUGH THE USE OF DIGITAL DISRUPTION

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5.1 Definitions of Digital Disruption

In my interviews I asked the interviewees what according to them the definition of digital disruption is. In table 7 the definitions are showed. The answers showed a broad spectrum of insights. There are commonly insights but also a few interesting contradictions that come forward in different answers. Digital disruption has to do with new or existing technologies. Digital disruption has also to do with speed. Digital disruption can be seen as radical change but also as incremental and continues change. Digital disruption creates something totally new in markets, value chains or revenue models.

A commonly understanding of digital disruption between academic literature and answers of my interviewees seems to be that digital disruption has a radical impact. The impact can be in markets, in the value chain of a product or service, in revenue and business models of firms. When digital disruption occurs it will have radical effects. But digital disruption is not something you can plan or you can see coming. Interesting is the answer given by one of my interviewees, who is an innovator: “Digital disruption is not “a moment” that occurs, later in time you realize a disruption has occurred.” (interview number 2). Digital disruption is a continue movement. It is hard to disrupt in one moment, disruption needs little, incremental steps. This correspondents with the view of Karimi and Walter. Their view is that digital disruption is not an event or immediate phenomenon, but a process that take years or even decades. (see table 1).

Also an interesting factor of digital disruption is that it is about choices. Because of digital disruption there is a sort of constraint in the choices that have to be made. Because of all the information that is available and technology is able to predict preferences of people, the choices people have to made will decline. In that way, digital disruption will constraint and narrow the field of vision of people. That can be a benefit. For example, because technology is able to know your preferences for the countries you like to go on holiday, it is easy. At a certain moment you get a personalized offer and the only thing you have to do is accept. On the other hand, digital disruption will narrow the possibilities. If you like to relax on your holidays, there is little chance you get offerings for adventurous holidays. Maybe this is also something you might be interested in, but you won’t get those offerings because you prefer relaxing holidays. Another disadvantage of digital disruption

which is related to the latter example is that is becomes more difficult to look from another perspective through digital disruption. According to a partner: “Because of digital disruption, there will be more strongly formed opinions of your own reality. Everyone is creating their own reality, that’s a danger” (interview number

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30 5). Also an interesting quote from this partner: “Digital disruption is creating a new market, what never was expected”. (interview number 5). That in essence is what makes digital disruption abstract. People are talking about the great opportunities of new technologies in the near future. But on the same time a search took place to find out how the digital disruption will effect a firm or a market and what the disruption will be. Interesting is to find out which factors leads to digital disruption and which factors will lead to competitive advantage through the use of digital disruption.

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Interviewee Definitions

Number 1 “Parties who are able to disrupt markets in their environment with the use of new

technologies in a surprisingly fast way”

Number 2 - “Disruption is not “a moment” that occurs, later in time you realize a

disruption has occurred”

- “Disruption is a continues movement” - “Disruption is personalized, fast and flexible”

Number 3 _-

_“

_{Existing ways of creating value will thoroughly change”}

- “The difference between innovation and disruption is that a disruption goes further than a way of working. The established companies will shake on their foundations by digital disruption”

Number 4 - “ A digital disruption is quickly established and generates unexpected effects

in the society”

Number 5 - “A digital disruption is when a firm fulfills the needs of their customers and is

able to conquer a significant part of the market and is able to change the market from traditional parties to new parties.”

- Digital disruption is creating a new market which was never expected”

Number 6 - “Digital disruptions are disruptive innovations, new creations of things. Even

the existing revenue models will affect by them”

Number 7 - “Digital disruption has something to do with the change in one or more

elements in the existing value chains of digital paradigm’s like the internet”

Number 8 - “Digital disruption has to do with using all the existing technological

opportunities to radically change the activities in a market and effect the existing revenue models”

Number 9 - “Digital disruption is about perspective, business models and information

asymmetry”

Number 10 - “Digital disruption means that you can do everything real time and online.”

- “Digital disruption is about choices.”

Number 11 - “Digital disruption means that the existing world changes. It changes in the

way we do business, we connect and how we interact with each other.” - “Digital disruption means that the existing conventions, parties and processes

will be decorated in a totally new way.”

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5.2 Most important factors leading to Digital Disruption

Type of leader/employee

It is important for an organization that wants to disrupt to have the right type of leader and the right type of employee. Having the right type of leader and the right type of employee in an organization, will contribute positively to the organizational structure of an organization. In table 8 the desired characteristics of a leader are visualized.

Characteristics of leaders

Being a visionary

Facilitating the process of putting the right people on the job and giving trust.

Aligning strategy with operations Experiment, learning and walk the talk Giving up some power to collaborators

TABLE8CHARACTERISTICS OF LEADERS

A leader needs vision. Vision means that the leader knows the direction in which the organization wants to go and is able to communicate this to the employees of an organization in such a way that all the employees are headed in the right direction. According to a director innovation: “It is important to focus and make choices. A leader needs a sharp vision” Not one vision is right and nor one vision is wrong. A vision can be very good. But to consistently execute what you have invented is very crucial. A leader gives direction.” (Interview number 11). Most executives unfortunately aren’t great visionaries. According to a manager: The people that lead the companies are not exactly great visionaries. Often, what you see is that there are managers in the board of directors. They think in short term goals. Where does the money go, instead of which risk am I willing to take as a entrepreneur.” (Interview number 10). The leaders should act like entrepreneurs in order to let the vision flourish some more. A leader also should be able to facilitate the process of putting the right people on the job and give trust and freedom to the employees in an organization. According to an innovator: “A leader should be a networker, someone who can connect people to each other.” (interview number 2). The Chief Information Officer of the NN Group, pointed out that the most important factor related to digital disruption is the factor “people”. “People in the organization with the right mindset will contribute the most to digital disruption. For a leader it means that he or she should give freedom to the employees in the organization.” (Arooni, 2017) Trust is also something a scientist mentioned: “It is not clear what the impact of digital disruption will be on an organization. That’s the reason that a leader should give trust to his/her employees.” (interview number 4). A

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33 leader should be able to align the strategy with the operations. According to a business consultant: “It’s not desirable that employees in the organization invent great things, but that those inventive ideas are not in line with the strategy.” (interview number 1). In the interview with mister Arooni, one question was about how a manager can prevent employees from inventing the same in different places. Mister Arooni answered: “it is about sharing of knowledge and information. This has to do with culture. Culture is something you can’t change easily. So, also in this situation, patience and trust is needed for leaders.” (Arooni, 2017). Another characteristic leaders should propagate is to let employees experiment. According to the CIO of NN: “In an organization that wants to disrupt, experimenting and learning is most essential.” (Arooni, 2017). In such an environment it is also important that mistakes can be made. According to an entrepreneur: “it is important that leaders offer some space to make mistakes” (interview number 8). Leaders should “walk the talk”. If they encourage experimental behavior, they must also exhibit this behavior themselves. Giving power to the employees on the floor is also an important characteristic leaders should have. According to a manager: “in the most established companies the way leaders execute is based on a militaristic way. Our organization structures are based on power. Leaders should not focus on having power, instead they should focus on the way their team can achieve their goal in an excellent way.” (interview number 6). According to the CIO of NN: “leaders should switch from command and control to climate control”. To reach quality, authority is not always necessary. (Arooni, 2017). Also an innovator emphasizes that it is no longer successful when leaders act based on authority. “The main reason is that leaders not have the knowledge anymore, because the world is getting too complex.” (interview number 2). According to a Chief Technology Officer: “Organizations and leaders should have some “luxury” to give up some authority. Self-managing teams are very popular these days. To reach this, mainly in the top of organizations leaders should give up some power. This is still very difficult for most leaders to do.” (interview number 3).

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34 Characteristics of employees Broad knowledge Education Competences Entrepreneurship Out of the box (function)

TABLE9CHARACTERISTICS OF EMPLOYEES

Eight of the eleven interviewees also emphasize the importance of the type of employee as important factor for organizational structures. It is important that employees should have good knowledge regarding to digital disruption. Employees should be able to have an open mind and not only in their current job. Furthermore, they should not only have basic knowledge, but should also be aware of the factors that impact their work in regards to disruptive technologies. According to an innovator: “If employees always have had a background in psychology or communication sciences, their competences are not sufficient to deal with digital customer experience activities. That’s why it is important to educate these employees to make customer experience activities a success.” (interview number 2). Important is also that employees have a high inner motivation to develop continuously. The content of jobs will rotate faster and faster because of digital disruption. A decade ago people studied to be able to perform a function, mostly for the rest of their lives. Nowadays, the role of technology becomes bigger and bigger. It could be that your job doesn’t exist within two years or is totally changed. That’s why employees should be prepared to these changes and therefore education is very important. It’s not necessary for employees to have a technological background. More important is that employees have the right competences to contribute to the process of digital disruption. According to an CTO: “The temptation is that you say it involves inventors and technicians who invent a new technology, which naturally play an important role. But Satoshi Nakamoto, the inventor of the bitcoin, I do not know if you should call him a disrupter. He did not cause the disruption, he wrote a paper. Other people started to run with the idea and built something around it.” (interview number 3). Also entrepreneurship and being able to “think out of the box” are important. To reach this, organizations should adjust the reward system. A scientist argued: “Employees that have some experience with digital products and services increase the absorptive capacity of organizations. These employees could think along what certain implications are for the organization. That’s why employees should explore the possibilities, preferably outside the own organization.” (interview number 4). According to a manager: “In these days we have a description of a function. As employee you should do your “trick” and if you execute it in a good way you get payed for it. More important are the skills of employees. Are you able as an employee to think out of the box? This is way more important.” (interview number 10).

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Organizational structure

If the organization in basic have the right type of leader/employees, the organizational structure, also

mentioned by Lanting, is a factor which leads to digital disruption. It’s recommended for large organizations to break up their bigger organization into smaller parts. By breaking the organization in smaller parts, the organization becomes less inert. Another advantage is that it will be easier to gain finance because the “lines” in the organization are shorter. With decentralized organizational structures the organization stands closer by their customers and so the organization becomes more volatile. According to the CTO of NN: “The broadening of capabilities and the abandonment of silo thinking are the most difficult. The power of organizations no longer consists of bulky departments or budgets, but in smaller teams that trust each other, have a common goal and take full responsibility for that.” (Arooni,2017). If an organization wants to disrupt it doesn’t work if silo’s, departments and job descriptions continue to exist. Also a CTO sees the turn to decentralized organization structures as an important factor. “After a period of punctuality and hierarchy we move on to a society of individual expression and freedom. The turn to volatile organization structures is hip and happening and we have to see if it works eventually.” (interview number 3). A partner argued: “The people on the floor should determine where to go and what the changes are.” (interview number 5). An manager argued: “Most of the organizations that needs to change their organization structure to more decentralisation are somewhat inert in reaching this. A main problem is that mostly older people are in the top of organizations. The older people are used to work in the older patterns of silo’s and departments. So it could be a good idea if younger people move faster to the top of an organization.” (interview number 6).

Changing value networks

Changing value networks arise because of the fact there is more provision of information and customers are more demanding in what they want. So, changing value networks not only arise because technologies come together, but it has also to do with the change of norms and values. According to a CTO: “Organizations no longer have the power to create things, to generate value for large groups. Nowadays, individual customers have the power too.” (interview number 3). According to a partner: “The expectations of customers are risen enormously. The power of consumers is stronger, for example through the use of social media. Organizations will be addressed in a negative way if their service or product is not what consumers expected from it.” (interview number 5). And according to a manager: “Value networks also change because of dissatisfaction

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36 with existing propositions. A smart organization should respond on this.” (interview number 6). According to a founder: “Changing value networks occur because of the transparency that is increased through technology and larger groups could be archived. Imagine that you want to buy tomatoes. The price is € 1,70. Because of

transparency and the use of technology, you could track down on the internet that the price the farmer get for his tomatoes is € 0,05. Likely that you won’t buy the tomatoes because of the price difference between the shop and the earning for the farmer.” (interview number 7).

Compromising the value chain

Compromising the value chain is also an important factor that’s leads to digital disruption. Organizations should always look at efficiencies in the value chain, because if they don’t do that, they will be disrupted in the end. According to a director: “So the next digital disruption is that only a few channels are open, it is the question whether you are that channel yourself. The aggregation level increases. This is a trend that you already see in the outside world, for example in Asia. Where a few parties have the highest aggregation level and dominate channel thinking. If we are no longer the primary channel and no longer do business with a bank but with a platform, everything will change. In Germany there is a party where you can bring your money and that party is constantly looking at which bank you get the most interest and then your money will go there. In an application you can see where your money is and what it yields. So: "bank away". Of no importance.” (interview number 11). Also a manager argued that it is important for organizations to constantly think of value creation: “A few years ago we had Hyves a platform for social media. It had a peak for 2/3 years and then it disappeared. You can see the same at Facebook, younger people are quitting and looking for other platforms. The yellow pages (Dutch: Gouden Gids) existed 100 years, but is not of this time anymore. Because of the digital world,

organizations have to be busy all the time and constantly think of renewal. That won’t stop”. (interview number 10).

Understanding factors that lead to digital disruption and competitive advantage through the use of digital disruption : an explorative study