Disruption Theory is not just theory

The Atlantic Hurricane Season is in full swing, with the African tropical wave generator running at full power firing off potential hurricane storms every couple of days. Stay vigilant and stay informed.

Today, a tale of missed opportunity through short-sightedness and a story of a late starter on the digital journey which is most likely too little too late.

Read on.

Thomas Cook and the impact of not transforming

From the Sunday Times:

“Thomas Cook bosses will hold a crunch meeting today as the fate of the world’s oldest travel company hangs in the balance.

The board, led by chief executive Peter Fankhauser, has been battling to secure an extra £200m of rescue funding to keep the tour operator flying. It made a last-ditch appeal for a state bailout this weekend after its lenders threatened to pull out of a proposed rescue deal, but ministers are believed to be wary of propping it up.”

The outcome of that meeting I guess you already know is that Thomas Cook has is in administration, the worlds' first travel company being the victim of pressure from competitors with very low to no marginal costs.

Thomas Cook is additionally the victim of its decision not to transform into an agile, Internet-savvy business with consequences that run into thousands of job losses around the world and an estimates 150000 British holiday makes stranded unless the UK government can step into charter planes for the rescue, at an estimated cost of £100m.

Founded 178 years ago, Thomas Cook is a giant in the tourism industry, with a breakdown of its sales as 67.8% for flights, holidays, accommodation and insurance and 32.2% in airline services. At the end of September 2018, they owned 186 hotels and had a fleet of 100 aircraft. Its sales breakdown is split between the UK at 24% and the rest of Europe at 66% with Germany alone counting for 37.8%.

As you are no doubt acutely aware, the Caribbean is one of the group's leading destinations and many companies in the region are exposed to the risk of Thomas Cook's impending failure.

Thomas Cook failed to seriously take its business in the direction of digital, instead strategically opting to open and run 563 high-street sales shops, financing much of the expansion in debt that was in-part attractive due to historically low-interest rates in Europe, but servicing that debt, now at around £1.7bn, is expensive, even if it is relatively low, running at around £150m/year.

While the world was transforming digitally, Thomas Cook took the opposite route and is now paying the price with an impending doom unless they can finance their way out of the current hole.

Unfortunately, not not the first time for the group, in 2011, they found themselves in £1bn of debt with a restructuring plan and strategic plan was drawn up to transform and save the group. Fast-forward to 2019, and they are still having difficulties with their transformation.

The fault lies at the very top of the organisation, as is always the case in Digital Transformation. If the top of the tree doesn't get it or doesn't put in place the structure and culture to transform, no amount of effort will allow an organisation to implement and profit from digital technology.

Peter Fankhauser was brought on board in 2001 as CEO promising to use his experience in transforming companies:

"The reality was I knew a lot about transformation, a lot about restoring brands and transforming to the web."

Those words look like puff today, and a look at the board structure reveals not a single manager specialised or experienced in digital.

A failed merger and the digital opportunity

Sainsbury's, the UK supermarket giant, was unable to obtain regulators' accord for a merger with Asda, owned by the US mega-giant Walmart, and as a consequence has decided that now is the time to transform digitally.

Like most Supermarket companies, the pressure to sustain growth in the originally non-digital world has forced them to seek out multiple revenue streams. As such, most of today's supermarkets are no longer distribution and retail businesses, they are that of course, but they are also providers of fuel, insurance, banking and luckily for them, collectors of data.

Since the dot-com era, supermarkets were one of the first businesses to understand the value of data collection and deriving value from it. They quickly implemented loyalty cards and tied offers to the sustained use of them when purchasing groceries. Loyalty cards worked exceptionally well in the beginning, and it is hard to find a supermarket today that doesn't have some form of loyalty scheme.

Like most successful ideas, there are usually many people that have the same idea at around the same time, and as a result, multiple loyalty schemes appeared around that period. Again, like always, various differing implementations lead to a consolidation opportunity, which is precisely what happened when Nectar was founded in 2002 with a value proposition of centralisation of loyalty schemes and hence increased value to users by saving on multiple purchases in many locations simultaneously.

Nectar currently boasts 14 partner companies and over 400 online retailers amongst its offer and was initially conceived to replace four loyalty schemes, of which Sainsbury's was one. In 2018 Sainsbury's purchased Nectar seeing an opportunity to capitalise on the detailed data collection loyalty systems afford.

The problem for Sainsbury's is two-fold; the debt is crippling their opportunity to invest in digital transformation in a meaningful way that stymies reduced margins from its food distribution business. Bear in mind that food counts for 98.2% of its earnings, and like Thomas Cook also stuck in a bricks-and-mortar mindset, owns around 1400 retail locations with high fixed costs.

It is rumoured to sell off its banking arm to help finance digital initiatives, but that only counts for less than 2% of sales and is unlikely to fund a wholesale and profound transformation required to turn the ship around. Most suggest the strategy will be to transform slowly; however, it is unclear how much time is left.

Epilogue

These once giants of the retail industry, have found themselves in deep trouble in a digital world that they are finding challenging to navigate. With one falling in to administration today, with real-world consequences for its employees and customers, the other being pinched on both sides (from more nimble and digital competition and from users increasingly using digital-first services) it's hard to wonder why they didn't understand the inevitability of digital technology and disruption theory on their businesses.

Unfortunately, Thomas Cook and Sainsbury's are not the first, and they won't be the last.

The Future is Digital Newsletter is intended for anyone interesting in learning about Digital Transformation and how it affects their business. I strongly encourage you to forward it to people you feel may be interested. If this email was forwarded to you, I’d love to see you onboard. You can sign up here:

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I really do think you should take the time to read this book.

Talking to Strangers

I get to the heart of why seemingly innocuous encounters can turn into tragic events. It additionally makes you think about yourself and the encounters you have with those strayers around you.

20 September 2019 — French West Indies

Climate Change and Digital Transformation

Good afternoon,

I was about to continue the series on the Digital Transformation methodology for change in organisations, but developments in the France-Antilles situation and the hurricane season led me on a different path. I’ll come back to the methodology in a new email.

On to the update.

Follow-up: France-Antilles

A third proposition has surfaced in the last couple of days to take over the failing old-media organisation, as reported by RCI. The proposal is apparently unpopular as it appears to implement radical reductions in labour costs by reducing staff numbers from around 270 to just 40. The Unions are, understandably, unhappy, and there is a strong chance nothing will come from this offer that is trying to stem 400K€ per month in extra debt. The other option is complete failure with a loss of 270 jobs and, more importantly, the loss of the only daily newspaper in the French West Indies.

I’ve written about what went wrong and how previous strategic decisions inevitably lead to this situation and how others should see this as writing on the wall for their similar organisations. My opinion is based on the elements before my eyes.

It has emerged that the expensive investment of a new printing press made to diversify into other print markets. The absurdity and short-sightedness of this astounds me. Whether or not the machine purchased was productive is irrelevant — it reportedly failed regularly and forced the Newspaper to reduce the number of printed pages per run — as the hard reality of printing is that it is a dying practice.

The European Union, the French Government and many other authorities have mandated that printing non-essential documents be phased out immediately. So what would they print? Birthday Cards?

RCI's article (French), unsurprisingly given that it too is an old-media company, was off by a long way with its suggestions to save FA. It suggested entering the already saturated shop catalogue market where the only result can be a zero-sum game where everyone loses. If they enter the market to gain clients, they'll need to reduce prices; the competition responds with the same cuts under pressure as the customer's cost expectations are adjusted downwards, which in turn leads to lower prices and the ultimate failure of printing companies. Whoever holds their breath longest wins, but nothing is left in the market to monetise meaningfully at the end of the day.

RCI went on to suggest that the new market might generate funds but then in the next paragraph admitted that it is costly and challenging to deliver the printed articles to Guadeloupe and presumably Guyane (they didn't mention). At no point is anyone acknowledging the fact that the entire business model has to be re-thought out, starting from the position of the end-users. Start with the fundamental question:

What is the Job to be Done? 

Until they understand this fundamental question and design a value proposition that directly responds to it, then designs a business model that supports the value proposition, they are going to have a very rough ride, leading to inevitable failure.

As I said before, I believe the business is ultimately going to get bought; although for me, it is nothing more than re-arranging the deck chairs on the Titanic.

Climate Change and Digital Transformation

I'm currently writing while a tropical wave develops in the ITCZ, with a trajectory passing over the Windward Islands according to the NHC. Digital Transformation, it seems, is both a blessing and a burden on the climate. According to the World Economic Forum:

.. a number of challenges will need to be addressed if the full potential of digital transformation is to be realized; some relating to the environmental impact of digital technology itself. For example, e-waste is growing, resulting in lost potential value from reusing or recycling devices, ever-growing mountains of landfill and increasing volumes of toxic chemicals being released into the environment. According to a United Nations study, 40 million metric tons of e-waste was discarded in 2014, of which 7 million metric tons alone were from the United States and 6 million from China.

Data centers also contribute significantly to emissions due to their high power consumption and often inefficient cooling systems. Data centers currently consume 1.5 to 2% of global electricity, a rate that is growing at 12% a year. Consumption is projected to increase to 140 billion kilowatt-hours annually by 2020. That would be equivalent to the annual output of 50 power plants and create carbon emissions of nearly 150 million metric tons of carbon annually.

The largest culprit of all is the cryptocurrency industry. However, let's look at the positive side for a moment to have some balance.

Digital Transformation can substantially help in the event of a climate disaster like the one we've seen in the Bahamas. At every stage, before, during and after, digital tools can help prepare, deal with and recover quicker, better and with more accuracy.

Preparation

Hurricanes are unique risks, in the sense that they are somewhat predictable given that we can discern their formation early and that new prediction models are more accurate thanks to computational advances like ML and a better understanding of the climate environment surrounding the storms; there are more sensors, better satellite imagery and many more advances.

For those of us in hurricane-prone regions, preparation often starts when the local authorities announce the coming of a storm, but much more is possible with digitisation. How many of you, for example, have a complete digital record of all essential documents, like your most-treasured photos, your insurance documents, your identity documents, to name a few? Do you store them out of the region in a safe — from natural disasters — and secure — sufficiently protected by 2FA and encryption — environment? I know I could do better!

What about personal belongings? Have you extensively audited your hi-fi, television, kitchen appliances, computers, phones, paintings, the list is endless? If the worst doesn't happen, how can you justify to your insurance company the real value? Currently, insurance companies tend to allocate an envelope in the event of a disaster, but as more and more issues are going to arise as a result of climate change, insurers are going to become ever more strict in the allocation of indemnities.

An opportunity exists for new business models, whereby insurers take in to account the accurate inventory list to adjust premiums and payouts accordingly. In the US, health insurance companies are already making Apple Watch and other activity tracking devices available to their customers with the promise of reducing their premiums. In Europe and further afield, devices in cars track driving behaviour with benefits not only to the driver in terms of cost reduction for insurance but for all drivers on the road with reduced accident potential. As someone who suffered a significant head-on collision and is lucky to be here, I would like to see that in more extensive use.

There are other natural risks that we cannot predict with much accuracy currently, earthquakes, tornadoes, flash floods as examples. A digitalised inventory tool using your smartphone's camera, machine learning and access to an extensive product database like Amazon's would simplify and speed up the process. Imagine pointing your phone at an article, pressing the shutter, the image treated by AI to add its make and model to your "In case of disaster" list that you share with your insurer. Incidentally, I'm not advocating the actual use of Amazon's database!

When disaster strikes

Better documentation and data collection during a disaster is another area where digitisation could help our collective understanding of what is happening. I'd read about a background app that uses the accelerometers in smartphones to measure the shaking earth and send that data to scientists studying tectonic and volcanic activities. I've no idea if it became a reality, but you get the picture.

Other digital sensors deployed at small cost would provide highly localised data to further our understanding of these phenomena. I am seriously toying with the idea of setting up a weather station in my garden and sharing that data with weather experts.

Recovery

Like for the inventory process before-disaster, the same application could be used to file claims with images showing the before and after the situation with Geo-tagging confirming the claims' sincerity. I say this as fraud is a common occurrence after disaster strikes leading to a lengthening of claims treatment for all victims, not just those attempting to gain something from the situation. Specialist DR offers like those from KPMG have embraced Digital Transformation to streamline claims through the use of analytics and automation.

The use of AI to cross-asses claims for inconsistencies with a regions' or cities damage claims is currently common practice. KPMG can even deploy drones to compare the before and after images coming up with estimates (that go through further validation) of the damage and the potential value of the insurance bill. These are, highly specialised applications, but they give you a taste of what is to come further down the line when the democratisation of the technology results.

Digital is additionally helping with relief efforts after disasters; we've seen digital mapping used to identify those in need in Haiti after the earthquake, online donation systems (beware of frauds) for victims of hurricanes and sites like stormCARIB digitally democratising meteorological information on impending storms.

One last word, I place no judgement on the information I've presented here, whether I think it is good, bad, justified or not, that's not the purpose of this article. I'll leave you to make up your minds. For now, let's hope this hurricane season passes without more trouble, we've had more than enough with Dorian.

The Future is Digital Newsletter is intended for anyone interesting in learning about Digital Transformation and how it affects their business. I strongly encourage you to forward it to people you feel may be interested. If this email was forwarded to you, I’d love to see you onboard. You can sign up here:

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Visit the website to read all my articles and continue the discussion in the Slack group.

Thanks for being a supporter, have a great day.

Don’t bet against the Smartphone

You may have noticed that a couple of things have changed since I started this newsletter in early February. I’m very happy with the way it is progressing. I have kept my promise to provide some news, opinion and help on the subject of digitalisation. 

Firstly, I’ve increased the cadence and I am now writing around two times a week rather than once, with a slightly changed format. I’ve removed the Reading List as it didn’t really bring any value-add to the content, and the newsletter is slightly shorter, with more words per week.

Additionally, I’d inexplicably set myself a publishing deadline for each Friday morning at 10am based on a hunch. I’ve decided to change this and publish as soon as I’m finished, and the statistics show that the schedule change has had no effect on reader percentages.

I’ll continue to work on the format but one guiding principle is to provide thorough, interesting and informative articles on this ever-changing digital world we live in. Thanks for reading.

On to the update.

Last week's Apple event provided much to discuss on the topic of digitalisation in the world. This week I look at Photography, and the impact of digitisation and disruption are having on that industry. Read on.

Photography, one of the original industries transformed digitally

Ever since the Arab physicist Ibn al-Haytham invented the first known pinhole camera sometime around the year 1000, Photography has gone through numerous transitions and transformations.

The act of accurately transferring light on to photo-sensitive film is an incredibly difficult task, with much behind the scenes technology responsible for the result and has been disrupted and transformed over generations. Today's cameras and camera manufacturers have all but finished their transitions to digital mediums, a process that got kick-started when Kodak developed the first digital camera in 1975. Kodak was an American company incorporated 131 years ago and is no longer in business, only the brand lives on.

Kodak serves as a lesson in disruption theory, having reacted reluctantly to further develop and push digital sales through fear of eating into very profitable photographic film and paper sales. Regardless, we can all thank Kodak for their vision to digitise a manual and ofttimes, frustrating experience creating a multi-billion dollar industry for the incumbents and new entrants alike.

As an interesting side note, Apple unveiled its latest iteration of the iPhone, the iPhone 11 and 11 Pro, with a functionality called QuickTake. QuickTake allows the user to long press on the shutter button to quickly record video in lieu of starting the continuous or burst shooting mode as was previously the case. QuickTake was also a digital camera sold and branded by Apple, but Kodak produced.

Kodak, as recently as 2001, resisted the digitisation of camera technology that it had invented and that decision is almost certainly a factor in the companies demise. The brand lives on and is still synonymous with excellent tools in the analogue photographic world.

The second wave of Digital Transformation in Photography

I've previously written about Digital Transformation as a journey, and it not being a project, Photography illustrates this perfectly. Its origins rooted firmly in analogue, the industry was abruptly disrupted digitally, with all the consequences that that entailed following — closures of old business, openings of new digital ones. But that transformation has not ended, and further disruptions and transitions are in progress, with a third wave already started. Before we get to the third wave, let’s take a quick look at the second wave, mirrorless camera technology.

The rapid development of mirrorless cameras is powering a second wave of disruption. Two branches dominated digital Photography up to this point; DSLR (Digital Single Lens Reflex) cameras and traditional Point and Shoot cameras that naturally got digitised as sensor technology were improved.

DSLRs gradually replaced SLR cameras and became the choice for professional and semi-professional users alike. So popular they became, that companies like Canon and Nikon, developed newer models of DSLRs that targeted enthusiasts initially, then general consumers. The last 5 years or so have seen the domination by first-time users purchasing and learning how to use DSLRs, something that was unthinkable less than 20 years ago due to the skill required but also the costs and the reality of failure rates. Taking 1000 photos and deleting 999 to keep that one good shot, costs no more than taking one good shot alone.

Point and Shoot cameras transitioned quickly as well. They offer better and better image quality as the technology evolved and today's Point and Shoot's can range from professional-grade cameras like the X100F from Fujifilm, to more basic models offered by Sony, Canon and other popular brands at accessible prices for anyone interested in photography.

Mirrorless cameras transform the DLSR experience by offering the same professional output, in a smaller and lighter package. Aside from dimensions and weight, Mirrorless cameras are using digital technologies to aid every photographer to take better photos. For example, in-body stabilisation moves the stabilisation motors from the lens, making them lighter, to the camera, where the optical properties mean they are smaller and lighter in the body of the camera than in the lens and are available to any lens now. A gyroscope, some software and two or more piezo motors provide pin-sharp images at long zoom ranges that only experienced professionals could achieve previously.

The Third Wave, Computational Photography

The next wave of Digital Transformation in the industry is the current revolution I alluded to above. The advances made by Smartphone manufacturers, notably Apple and Google are currently re-writing what is possible in Photography all while traditional manufacturers have gotten wrapped up in a race for more megapixels, wifi, more autofocus points and other non-essential specifications and have pursued the development of Computational Photography.

Computational Photography, not only resolves or attempts to resolve the shortcomings inherent in the compromised optics — ‘real’ lenses are big and heavy, sometimes over 1Kg — by using massively parallel processing and sophisticated algorithms to reproduce the same effects. The latest generation photos are indistinguishable from professional photography to the general public.

Apple, Google and others are more concerned with the job to be done, which is to enable anyone to take what are essentially professional-grade photos with the least of effort, using the best camera they with them at all times (1), the Smartphone.

I joked to a friend that Apple announced an advanced camera that just happens to have a phone integrated in it. I was only half-joking because, in reality, smartphones cannot do a phone better than is already the case; they can only develop and improve upon other markets, like Photography, film amongst others.

The Smartphone starts with a powerful processor and an integrated application and operating system ecosystem, that provides lightning-quick autofocus, bokeh, night lighting and, I imagine, plenty more functions in the coming years, all whilst keeping the size of the device small with miniaturised optical elements designed for thin enclosures. Samsung is currently experimenting using the length of the case to provide real focal depth, a few centimetres instead of a few millimetres.

These functionalities are mostly absent from the incumbent camera-first camera manufacturers' devices because they start from the traditional optics point of view. The business then exhibits classic Disruption Theory tendencies that incentivise management to move prices and specifications upscale, in the quest to preserve their margins.

Camera manufacturers are going to need either a miracle or to radically step up their game in digital innovation or risk disruption that puts them out of business. Some might say it is already too late, and I wouldn’t disagree with this. When looking at the data produced by Flickr, one of the world’s most popular photography sharing platforms for both amateurs and professionals alike, over half of the photographers are using an iPhone. 50% of all photos uploaded are from smartphones (see first chart for reference).

To be clear, I’m not saying that DSLRs or Mirrorless Cameras are going to go away completely, I don’t believe that for a moment, but their use will be restricted to a needs base only, that is professional photography by professionals and other specialised applications, for example sports photography, astro photography.

As you have noted, Digital Transformation is not a one-off project, it is an ongoing journey and an ongoing feedback and adjustment loop you need to work on regularly.

Have a great day.

The Future is Digital Newsletter is intended for anyone interesting in learning about Digital Transformation and how it affects their business. I strongly encourage you to forward it to people you feel may be interested. If you were forwarded this email, I'd love to see you onboard. You can sign up here:

Sign up now

Visit the website to read all my articles and continue the discussion in the Slack group.

Thanks for being a supporter, have a great day.

Footnotes:

(1) A quote attributed to Chase Jarvis, a well-respected professional photographer.

A wonderful short film worth watching on a big screen.

U SHOOT VIDEOS?

A Film by Morgan Cooper