Stuart Jackson is a Partner and former Global Managing Partner at strategy consulting firm L.E.K. Consulting
Over the past 15 years, there has been massive value creation in digital and high-tech industries. As of this writing, just five tech companies — Facebook, Amazon, Apple, Microsoft and Google – have a combined market capitalization of almost $9 trillion. At the same time, the wealth created by these companies is being recycled into “unicorns” — companies that achieve a valuation of over $1 billion before they even go public. The reason for calling them unicorns was that achieving this valuation pre-IPO was so rare, it was unlikely to see more than a handful. But as of January, there were more than 900 of them. The aggregate valuation of these unicorns was $3.24 trillion.
So what do you do if you are a more traditional business, a manufacturer of consumer or industrial goods, a shipping company, a distributor or another business-to-business services company? Can you aspire to similar valuations? The answer is you need to look hard at ways to bring new technologies to old-tech businesses, not only because this provides opportunities for all sorts of new value creation, but also because if you don’t, it is very possible the next unicorn will be targeting your business with a new tech-enabled business model.
A great example of a low-tech industry that found a way to harness technology is the business of exercise equipment for gyms and homes. With a few exceptions, this has traditionally been a tough business with low margins, weak brands and limited product differentiation. Even worse, consumers were not often enamored with the products the industry produced. The joke was that most of the exercise people got from the machines came from moving the equipment into their home and then taking it out five or six years later when they sold it or moved.
That all got turned upside-down when a new company, Peloton, entered the market a decade ago with its interactive new product features. Here was a business model with high product differentiation, high margins from a recurring revenue stream and, most importantly, customers who fell in love with the product. In just a few years, the company went from nothing to being the highest revenue company in the home equipment sector with revenue around $4 billion. A punishing year has reversed many of its gains — stemming from several factors including customers returning to the gym after a year of pandemic lockdowns and admitted missteps on pricing that made its products seem like inaccessible luxury items. But the company still has many advantages. Of more significance, it opened the way for a new, technology- and experience-driven model for fitness equipment.
Another example is logistics, an industry the world has come to rely on more than ever in the era of Covid-19. Logistics companies have been embracing a range of digital technologies in recent years, particularly in the area of telematics. This refers to the use of connected sensors that provide real-time information on the location and condition of vehicles and shipments. Telematics can be used to provide real-time updates, make adjustments for delays and adjust delivery routes where needed. UPS developed the telematics platform ORION, which is claimed to save around 100 million miles per year, while also providing higher levels of reliability and customer information.
There are businesses in all kinds of relatively low-tech sectors similarly embracing digital technologies to bring new functionality and value to their offerings. This is happening in every sector of the economy. One of my favorite examples is auto salvage, where companies such as IAA have shifted from a business involving live auctions of insurance-owned wrecked cars — sold mostly to local dealers and salvage yards — to an entirely online business model with digital evaluation tools and buyers from across the globe. (Full disclosure: L.E.K. Consulting has worked with IAA.) There have been similar transitions in everything from dental products to storage containers, retailers to metals producers, industrial distributors to leisure products. In some cases, working with a consulting firm can help accelerate the adoption of new capabilities, but such accelerations can only add value after the company acknowledges the need for change.
Making the leap to embrace new technologies is where most companies struggle. For every success, we see 10 more businesses that are simply too slow to change. I think part of the reason is that over the past 15 years, so many companies have been beaten down by demands for cost-cutting by cost-conscious corporate purchasing groups or retail buyers and have become excessively focused on reducing costs. Under those circumstances, it is hard to embrace adding cost, which new technologies almost always do, at least initially. This reluctance to spend is what creates opportunities for well-funded new challengers to come in with a different approach.
These are exciting but perilous times. The opportunities for all types of companies to capture new growth and value creation from digital technologies have never been greater. But the risks of obsolescence and decline for those too slow to adapt have equally never been more dangerous than they are today.
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