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February 26, 2013

Digital disruption will do to you what the Chinese did to manufacturers

Digital Disruption is on everyone's mind. Netflix is replacing people's cable subscriptions. Simple apps like OpenTable and LoseIt! are displacing businesses like Zagat's and Weight Watchers. But if you want to understand why, you need to look back at the 80's and 90's and imagine you are an American manufacturer.

American manufacturers were successful at making quality products at a good profit, and paying good wages to their workers. But we all know now what happened next. The Chinese swept in and took over, leaving much the American industry unable to compete.

The Chinese manufacturers had two things going for them.

First, they had cheap labor. China was full of workers highly motivated to work for far lower wages than Americans. But while this factor got all the attention, it was not sufficient in itself.

Chinese manufacturers also needed access to distribution. They needed infrastructure -- container ships, supply chains and supply chain software, distribution partners, favorable regulations. Note that the Chinese didn't need to invent any of these things. They just exploited the capabilities that had become available.

So their formula was: cheap workers + infrastructure = disruption. The high labor costs and rigid structures of American companies couldn't adjust, and most of them were toast.

Let's fast foward to today. Imagine an innovator attempting to compete with your business. Let's call her Sarah. Sarah is bright and motivated and has identified a customer need that you're unable to satisfy as well.

This innovator has access to lots and lots of free or cheap tools. She can download an Apple SDK for next to nothing and post her app on the app store. Sarah can join 1.3 million sellers on eBay or become a merchant on Amazon. She can buy a URL for ten bucks on godaddy.com, leverage Facebook for marketing, and shift her search ads on Google to take advantage of the trends of the day. Sarah risks very little, except for her time.

Sarah is likely to fail. But Sarah is not your problem. Lots and lots of Sarahs are your problem.They're not all going fail -- some of them are going to succeed, and they will disrupt your business.

Digital Disruption Figure 1-1 color
Compared to before, there are at least ten times as many innovators gunning for your business. The costs of entry are less than one-tenth what they were. So you have to expect to be competing with 100 times the innovation power.

Digital Disruption_Cover 950 x 600It's just like Chinese manufacturing. These innovators are willing to work for cheap or free. And the infrastructure of the Internet and mobile devices gives them an instant portal to compete your business. Cheap digital labor plus digital infrastructure equals disruption. Lots of it.

This is the same dynamic Clayton Christensen highlighted in his book The Innovator's Dilemma -- but it requires so little capital that it happens much, much faster.

Barriers to entry are now obsolete. Deal with it.

If you want to know more about this, have a look at James McQuivey's book Digital Disruption, published today. It analyzes  this trend, how fast its getting here, and what you can do about. Spoiler alert -- you're going to have to be a digital disruptor yourself to compete with Sarah and her thousands of friends. James' book is a manual on how to do that.

Want to know more? Sign up for James' free Webinar or the topic.

Digital disruption is terrifying. But we'll help you deal with it. 



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Taavi Tammpere

Nice picture to illustrate that

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