Image by Jan Smith (jemasmith) via Flickr (CC by 2.0 license)

By now we all know: there are many ways digital technology can disrupt business models and long-stable patterns of industry competition.  Understandably, managers trying to get ahead of the change and help their companies survive tend to view their own particular situations as uniquely stressful and intractable.

But despite all the rapid change, certain patterns do seem to emerge from all the chaos.    I view these as “types” or “tiers” of disruption, and to keep things simple I usually try to boil it down to just three.  This rough framework helps me quickly get oriented when faced with a new digital business challenge.

 Type 1: Transformation of Market Demand

The most profound industry-level transformation occurs when digital technology changes basic patterns and levels of demand for a product or service.  The obvious example is media.

To quickly review a familiar story: the advent of digital distribution channels – legal and otherwise – fundamentally changed the nature of market demand for music.  People still wanted music – lots of it, actually – but the price they were willing to pay for it dropped precipitously.  Also, most listeners wanted the freedom to purchase individual songs without being forced to acquire entire albums – so songs once again became the primary unit of music consumption and production.  The music industry has never been the same since.

A similar shift is happening now in the world of video entertainment.  Consumers watch “TV programming” in ways that are very different now than they were even five years ago, forcing TV producers and distributors to rethink business models that had been stable (and highly profitable) for decades.

Of course, media is not the only industry undergoing fundamental disruption.  Think of how email transformed the economics of the US Postal Service.  How VOIP services have gradually eroded telecom companies’ wireline profits.  How Google and Craigslist have reduced demand for yellow page directories and newspaper classifieds (oops – media again, sorry).  Or how online training and learning options are reshaping market demand for traditional post-secondary education.

These are all examples of fundamental digital disruption – cases where new technology fundamentally reshapes patterns of market demand for specific products and services, forcing some traditional competitors out of business while allowing new types of providers to thrive.

Type 2: Transformation of Shopping & Purchase

For businesses undergoing this type of disruption, market demand for underlying products and services may be largely unchanged, but the means of shopping and purchase certainly have.  The financial services sector offers many examples: consumer banking, investing and stock trading, insurance – even financial planning and advice.

In these cases, new digital technologies haven’t fundamentally changed demand for these services – people still need insurance, for example, in more or less the same quantities as before.  However, for most consumers, the process of buying insurance is fundamentally different than it was a decade ago, and providers who are heavily dependent on large agent and broker networks (for example) are at least having to explore direct-to-consumer models as an alternate means of distribution.

The travel and hospitality sector is in a similar situation.  People still need to take business trips and vacations, but the process of buying tickets and booking travel has been transformed by OTAs, online direct selling, various online aftermarkets, discount providers, and so on.  Just ask a live travel agent – who must now compete on very different set of capabilities vs. the pre-internet era.

Ironically, the retail sector is a tricky case.  A few years ago I would have put retailing in this Type 2 category, since the general need to shop for things seemed more or less constant.  (You only need so much ketchup and toothpaste right?)  Now it’s clear the change is more profound.  The proliferation of digital touchpoints and “anytime, anywhere” access to all kinds of shopping experiences has increased the general demand for shopping and transaction, changed the nature of competition, and fundamentally altered what it means to be a retailer (or at least: a successful one).  This seems like Type 1 disruption to me, with profound implications for demand and retail business models.

Type 3: Transformation of Communication

For industries in this category, general demand remains the same, as does shopping and transaction.  However, all is not so simple: the nature of customer interaction, engagement, and education has changed.  Marketing, at a minimum, must evolve to keep up.  And this category includes many types of consumer-driven businesses that live or die by marketing.  CPG products, for example, are still purchase through physical grocery stores (despite becoming increasingly available online). However, the ways in which CPG companies reach and engage consumers has been radically altered; marketing and promotion is a whole new ballgame.

Also affected by Type 3 disruption are high-consideration purchase categories like real estate, cars, and consumer durables.  Here the extended pre-purchase “consumer journey” (which includes extended learning and education phases), as well as post-purchase customer service, are just as affected by digital technology as higher-funnel activities like brand- and awareness-building.

Similarly affected are complex service categories like medical care, as health services are increasingly researched online but still largely delivered in person (despite continuing advances in remote care technologies).

 Implications…?

As you can see, these categories aren’t entirely mutually exclusive, nor are they set in stone.  Specific industries can and will shift categories as technology and consumer behavior continue to evolve.  (To be honest, it’s tough to think of an industry that wouldn’t fall into at least one of these categories.)

Nonetheless, as a framework for understanding the impact of digital technology on different industries and businesses, this categorization can be a rough guidepost.  Because of course: each type of disruption requires a different type of playbook or strategic approach to navigate successfully.  That’s a topic for a future post.

In the meantime: if you have a different framework for understanding digital disruption, please let me know.  The rate of change is only increasing, and often many lenses are required to bring the picture into full focus.