24/04/2020 by Martin Landgraf 0 Comments
Why Digitising Is Not Enough to Thrive In a Digital Logistics Market
When markets digitise, the eroding threat of disruption comes about in two waves. The first wave is the one that everyone talks about praising the benefits of digital innovation and how the industry is going to change within the next few years. The second wave is the one no one talks about, but that is the devastating wave that will be the slow demise of many businesses.
Without throwing any punches, let us address the neglected topic of why digitising by no measure is enough to thrive in a digital market. By drawing parallels from the most misunderstood disruption story of our time, we will challenge contemporary LogTech discussion and make the case that own innovation efforts matter little unless aligned with the broader direction of the ecosystem surrounding us. The article is meant as a contribution to how forwarding businesses can prepare and sustain themselves in a digital market, and equally it is a call for decision-makers to consider the characteristics of such a market in own innovation efforts.
But first, can we just agree that the logistics industry has already been operating with information technology for decades? We were one of the early markets to adopt IT processes during the 80's and 90's ranging from transport planning and scheduling software to web-enabled communications and telematics. The difference this time around is that we are seeing a shift in power dynamics from logistics experts to consumers, and that entails a whole new practice of business ignited by digital disruption where the shipper is front and center.
The problem today is no longer that digitising is not a topic of conversation in the forwarding industry. On the contrary, everyone seems to be talking about it. But the conversation lacks depth: we are stuck discussing whether or not to digitise when we should be tackling the far more pressing question of how to position ourselves for success once the forwarding market is digital. By now, there is no fighting the trend that the industry is digitising, but that does not presume that all successful businesses will operate digitally. You can be successful in a digital market even if you continue to operate the traditional way - in fact, it can be a prosperous competitive advantage if you manage to find your defensive niche and stick to it.
Business-as-usual will not be your demise; not understanding the market dynamics and luring dangers of a digital market will be. And the dangers are the exact same whether you digitise your business or not.
We can break down the two waves that incumbents are hit with when industries digitise:
- The first wave is just before digital disruption hits. The innovation tends to come from new entrants challenging the old guard or from conglomerates reinventing business-as-usual, and the next few years are spent with the rest of the market adapting and catching up. During this transition period a lot of new opportunities appear in the market, and you can expect to see countless of upstarts attempting to seize the moment. The industry becomes trendy, institutional investors start directing their focus, and there is a massive surge in media coverage.
- The second wave is a slower, far more dangerous and subtle change. Market dynamics begin to alternate: some are enforced, others are weakened or cease to exist. An example is that customer loyalty tends to dramatically decrease in digital markets as relationships become much more fluid. Switching costs of changing providers are also significantly less in a digital market, making customers more prone to hand their business to others for a small gain that would previously not have been sufficient incentive to change provider.
The second wave is the one we will address by introducing two overarching concepts to the contemporary discussion of digital logistics: Customer Ownership and Lock-in Effects. Put differently, we will explore who owns the business of the shipper and how we can secure a shipper's business in the long-term once we have it.
The aspect of who owns the relationship with the customer is a precursor to who has the power in a digital market. Take the consumer flight industry as example: booking a flight with SAS through Expedia is a different affair than booking a flight directly with SAS. In the prior case Expedia has our business. Next time we need to book a flight we will likely return to Expedia and compare airlines again, and we might go with Lufthansa instead of SAS. Our loyalty lies with Expedia rather than the airline. In such a setup, providers have little control of how their service is being offered and cannot differentiate themselves to end-customers. The format and service display is fixed by the platform and identical for all. Flights have essentially become a commodity of business.
In the latter case the airline owns the direct customer relationship, which opens up for a variety of features that were not feasible to utilise with Expedia as intermediary. These features create value for customers that cannot easily be imitated by competitors and hold true for any industry including logistics.