Looking back at the last 5 years of this work, we have to admit that, as most others, we concentrated on the typical focus industries: Banking, insurance, energy and automotive. And it makes sense: All four industries are being digitally challenged in recent years and know that they have to adapt quickly.
While we do believe there is still a lot of work ahead of us in these four industries we also asked ourselves, which industries will be next, in particular those that might be off our radars.
But how can we identify those industries?
In order to answer that question, we talked to our clients, industry experts and used our internal expertise. We analyzed 68 industries to find precisely those, which may soon have to deal with new disrupting business models, even though they might seem unlikely at first sight.
We started with identifying industries that seem unlikely to be digitally disrupted. For that we defined a set of criteria that we confronted industry experts with and jointly scored each industry accordingly. Next, we asked the same experts to score a second set of criteria that indicates digital business model innovation potential for the very same 68 industries.
Some results justify the focus on the current four main business model innovation industries, others were the surprise we hoped for.
What are the criterias that make disruption unlikely?
As we wanted to especially identify industries for business model innovation potential that are off everyone’s radar, we first identified the ones that seem unlikely to be disrupted.
When analyzing a market’s likeliness for disruption, it is crucial to understand the barriers to entry, as these barriers prevent newly founded companies from gaining a foothold in the industry and also prevent existing companies from expanding into new markets. The new competition could bring innovation and disruption to the market in order to win market share from established players. Thus barriers that prevent those disruptors, can be seen as barriers to innovation that pre- serve the status quo. We decided to focus on seven resulting criteria:
1) PatentsPatents are legal barriers for competitors as they grant their owner the temporary sole exploitation of certain products or processes under the scope of the protection.
2) KnowledgeMany years of operating in the market will create knowledge and expertise. This leads to an information asymmetry between the established firms and new competitors.
3) Startup CostsIn order to disrupt a market, one has to invest in production, R&D and many other areas. The high- er the investment required, the higher the entry barrier.
4) Distribution ChannelsThis can be a barrier if logical distribution channels have been locked up by incumbents.
5)Brand LoyaltyEstablished players might have gained brand loyalty over time, which can hinder entry of new competitors, as new entrants have to go big on advertising to be noticed.
6) RegulationsRegulations are meant to ensure amongst others a certain level of ethical, ecological, economical, or security standards. This in turn limits the free market and hinders innovation.
7) Economies of ScaleREstablished market participants can achieve cost advantages through high production volumes. New competitors have to deal with lower margins, or expose themselves to the risk of producing high quantities.
Which criterias indicate great potential nonetheless?
As a next step we now had to identify criteria that indicate digital business model disruption potential. We therefore analyzed industries that have been victim of digital disruption and derived criteria that seemed a common denominator. We then challenged these with industry and digitalization experts and subsequently chose 6 criteria to measure the potential of a digital business model disruption in any of the 68 industries:
1) Consolidation of PowerMarkets that are built up oligopolistically - so only a few companies have large shares of the market - create often inefficiencies, which are an opportunity for new entrants.
2) Price inefficiencies for customersIf it is difficult for customers to assess comparable prices for a desired product, new competitors might open up the market to win customers quickly. We saw this with fastly emerging online marketplaces.
3) Consumer DissatisfactionWhen consumer satisfaction decreases, room opens up for new competitors. For example Uber disrupted the taxi market as they developed a more satisfying and convenient solution.
4) External ForcesExternal forces like political, ecological or social pressure can force companies to rethink. For example recent global warming awareness trends influenced consumer behaviour.
5) Economic PotentialThe greater the economic potential in a market, the more companies will want to enter it. Potential leads to increased investments in this market and higher willingness to take risks.
6) Open potential for automisationWhen estimating the potential for automation, we analyzed to what extent processes have already been automated and how much potential there might be left.
After a joint scoring process with industry and digital experts, we mapped the outcome on two axes “Potential for Disruption” and “Unlikeliness to be disrupted”. In a visual mapping we can easily identify the most interesting industries: those on the top show great potential for innovation and industries on the right often seem unlikely to be disrupted.
Potential & Unlikelyness of Disruption in Industries:
The result is our new top 10 list for digital business model innovation in the next 5 years:
2. Creative Industries (except media)
4. Construction & Engineering
6. Health Care Equipment & Supplies
7. Energy and Fuels
8. Health Care Technologies
10. Life Science Tools & Services
When looking at the industries that scored high on both scales and thus made it to the top 10, we were surprised at times and others proved us right on what we are currently doing. Banking and insurance, which are two industries that have recently seen a lot of digital innovation were not amongst the top 10. This was surprising at first but made sense and even proved our model right, when digging deeper. These two industries show high potential to be innovated but are not very unlikely, since they are already in the midst of digital innovation. Most of the processes and solutions have been disrupted or are on the verge to be disrupted for good. Therefore they did not make it to the top 10.
A glance at the chart shows that many industries are clustered together along the diagonal of the two axes. However, this does not necessarily mean that these industries in the same area are alike. As mentioned earlier, “Potential for Disruption” and “Unlikeliness to be disrupted” consist of differ- ent variables. So every industry has an individual potential that is composed differently. This also applies to the market barriers in the respective industries. For this reason, we will analyze three industries in more detail to show how the differences between industries can look like.
Biotech & Pharma
These two industries made it to the top of our table. Due to their strong connection we decided to give a combined deep dive.
Both seem unlikely to be disrupted at first because knowledge is key in these industries and no other industry is as locked up by patents as these two. Additionally it is very expensive to enter the market as not only machinery and labs are costly but approval processes (FDA,EMA, ...) are complex and even more expensive.
However, we see a lot of potential for automation, external pressure and great economic potential. The relatively few but big players in the market are moving slow in the innovation process for several reasons and digitalization gives new incumbents the opportunity for easier market entries. Startups leveraging a fail fast approach stand good chances to tackle big players in digital niches as most established companies in biotech and pharma lack the culture for such speed focused business model innovation approaches.
The creative industries contain a wide range of activities which are concerned with the generation or exploitation of knowledge and information. Arts, design, fashion and other sectors with creativity as its core capability belong to this industry. In this definition media is excluded, because this sector has recently gone through a tremendous digital disruption.
The participation of new market participants is mainly restricted by the existence of the intellectual property protection rights and the existence of the public subsidiaries. The distribution channels are also very locked up by the incumbents of the industry.
The strong participation of public organizations in the creative industries, however, also offers potential, because the consolidation of the market is therefore very advanced. Further, increases in efficiency through the use of technologies are very likely in this area.
Authors: Helmut Kranzmaier (Partner) & Kilian Veer (Partner)