The rise of the digital disruptors

 

How a new force in the Indian economy has upended the traditional formula for growth

Report | June 2016 | Kanvic Grey Matter

by Deepak Sharma, Ravindra Beleyur, Vlad Flamind, Gehan Wanduragala, Guillaume Santesmases

A new force in the Indian economy has upended the traditional formula for growth and is impacting every industry

Digital disruption is now a major force reshaping the new era for India Inc. From being a laggard at the start of the dotcom boom in the 1990s, India has now emerged as a leader in digital innovation. Globally, India now has the third largest number of start-ups1. Funding for digital start-ups has skyrocketed over the last two-years with particularly intense activity in India’s e-commerce space. In 2015 alone, over USD 9bn was invested in technology start-ups, around 50% of the total investment the sector received in all previous years2. The effect of this massive capital infusion will undoubtedly be felt in the coming years as these companies rapidly scale-up new business models.

 

The motivation for the flood of capital into the Indian tech space is based on the rapid rise of its internet user base. India is ranked either first or second globally in monthly active users for most internet leaders such as Facebook, WhatsApp, Twitter, and YouTube3.

The growth in internet users has been driven by the penetration of mobile internet. Around 65% of India’s internet traffic comes from mobile, second only to Nigeria4. While smartphones arrived later in India than in other countries, growth is fast catching up. In fact, Kanvic analysis5 shows that smartphones are driving India’s e-retail growth along the same trajectory as China’s.

 

Digital innovators in sectors including retail, transportation, food services, healthcare, finance, and education are all posing a threat to incumbents. For example, India has become one of the largest markets in the world for taxi aggregators like Uber and home-grown Ola Cabs.

 

Digital disruption will not only impact businesses through changing consumer behaviour. The impact will also be felt internally as digital technologies transform the way work is done. For example, India’s large IT sector has been a key contributor to the country’s growth story and a major generator of employment. Yet in 2015 the leading IT exporters added 24% fewer employees than in the previous year due to increased automation6.

 

While the march of automation and artificial intelligence may be most advanced in the IT sector, the proliferation of such technology into other industries is inevitable, and it will profoundly alter the capabilities and cost base of companies. Those that fall behind in the race to digitalisation will be at a competitive disadvantage.

Here it is important to stress that digital is not just a flavour of the moment. Tech company valuations may rise and fall, and many current high flyers may fall by the wayside. However, the shift to digital is of profound and enduring importance for every company. This is because digitally enabled organisations compete in very different ways to traditional businesses.

Central to the business model of many digital disruptors is their ability to insert themselves between suppliers and their customers, capturing both the customer relationship and the valuable data about them. These large amounts of real data can then be leveraged through their analytics capabilities to gain further insight and strengthen their hold over the customer. For example, housing.com - a prominent start-up in the Indian real estate sector - provides price heat maps and a child friendliness index of different areas in a city to help house hunters assess the attractiveness and suitability of a location.

 

Digital disruptors also bring the capability to rapidly aggregate unorganised players and give them the tools to compete with the market leaders. This potential is particularly potent in India, where many industries remain largely unorganised and most labour is engaged in the informal economy. Whether it is taxi and auto rickshaw drivers, tradesmen, mom and pop retailers, or delivery drivers, digital players can tap into a huge pool of unorganised suppliers to rapidly achieve scale.

 

Further, digital players are not tied down with the legacy costs of existing infrastructure. Instead they are able to bring new technology and business models to market quickly, giving them a competitive advantage in today’s changed world.

 

Lastly, digitally enabled companies are more nimble thanks to their typically asset-light model and technology centric approach. This means they need to add fewer people and less infrastructure as they grow - lowering costs and allowing faster scale-up. For example, India’s leading brick and mortar apparel retailers had sales between Rs. 1,000 to 3,000 crores in 2015 after being in business for 15 to 20 years. In comparison, online fashion retailer Jabong scaled up their business to cross 500 crore in only 3 years.

 

The rapid rise of digital disruption in India, its huge potential across industries, and the unique advantages of digital players, mean that every company must put digital at the heart of their future growth strategy.

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