Why Does Transformation Happen Faster in Some Industries?
Article 40: The Physical to Digital Continuum, Part 1
Technology is one of the biggest enablers of transformation across all industries. Yet, some industries are highly tech-enabled while others are still in the early stage of potential transformation. Financial services and entertainment tend to be relatively far along the continuum and many attribute this to higher margins and the ability to invest in innovation. While this is a factor, the biggest reason for the advances in these industries may actually be their balance between digital and physical, or even just the perception of ‘digital-ness’.
Financial Services
Before the 1900s, banking was predominantly a physical industry. Wells Fargo’s logo is a stagecoach because in the 1800s, they were known for using stagecoaches to safely (i.e., with armed guards) carry gold and other monetary assets across the United States. However, the gold and other assets were actually physical manifestations of an intangible value. The offering in this industry is inherently intangible, necessitating a physical representation. Even when people used a draft or check, they needed a physical piece of paper to represent the value. In the late 1800s when Western Union introduced wire transfers, the sender and recipient each had to visit a physical office to provide/retrieve the cash. Contrast this with today, where I can send a Zelle payment without moving from my seat–simply transferring the value from one account to another digitally. Historically, we made value physical because we lacked the capability to deliver it digitally. Since what is of value to the customers is inherently intangible, shifting to a digital-focused approach is much easier.
Entertainment
Theater is a very physical experience. To see a show, you must go to a specific location, which will be decorated in a specific way, with actors reciting their lines at specific times. The invention of movies allowed viewers more flexibility as they could see the same exact show multiple times, but unless they were very wealthy, they still had to visit a specific location at a specific time. Blockbuster provided more timing flexibility, but it wasn’t until streaming emerged that people had true flexibility, leading to more market innovation. Despite the history of beautiful theaters entertainment, much like financial services, can be fully digital because it’s about delivering images and sound to our brain. The physical portion is merely the delivery mechanism.
Supply Chain
Supply chain and logistics have historically been less digital. They involve trucks, ships, warehouses, and stores–it is very physical since the primary driver is the transportation of the physical goods. My first job out of college was working on EDI systems to digitize logistics. Despite significant technological advances since then, many of the EDI systems my peers and I built remain the foundation for global goods management. Change has been slow in this physical-seeming industry. The potential to save time and money by reducing inefficiencies and improving visibility is huge. Numerous stakeholders benefit from better supply chain digitization. Here are a few illustrative examples:
General Public: Food safety risks would be significantly reduced with better supply chain visibility
Manufacturers: Losses associated with bad shipments would decrease
Retailers: Improved inventory control would enhance client satisfaction
Governments: Reduced expenses for customs and other offices due to easier information processing
While the industry can never be fully digital, it can move further along the physical to digital continuum. There is tremendous investment being made which will hopefully accelerate the progress.
Summary
Historically, industries that are inherently more intangible (like financial services) or seem more intangible (like telecommunications) progress faster along their physical/digital continuum. This doesn’t mean that other industries cannot follow, rather it highlights the difficulty of reimagining themselves. Success in a particular area can be a curse, as it often drives thinking on value. Blockbuster didn’t consider itself a provider of movies but a destination for movie rentals. Their thinking tightly linked the store (the destination) and the rental (of the physical tape or DVD) to their value, making leveraging digital in other ways difficult.
Competition from outside the industry itself is often a catalyst, accelerating the physical to digital progression. Whether it is new entrants (neo-banks and Netflix) or forward thinkers within the industry, most companies are reluctant to cannibalize their own profit pools or risk upsetting their customers. However, we are far enough along the continuum now that companies should realize that every industry must continue along to its full digital potential. The companies that will win are those defining that potential state.
Tune in next week for ‘Why Does Transformation Happen Faster in Some Industries? Part 2’ where we define the Digital Centric and Digital Maximizer industries.