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:

1. 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.
2. 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:

There is little doubt which scenario is best for providers to sustain themselves in the long-term, which is why billions have been spent to reclaim customer ownership in the digital era. In the context of logistics, shippers oftentimes have contractual rates that are volume-dependent. This creates a natural limitation to Expedia-like platforms as they presume identical market rates for all visitors, meaning freight forwarders will only be competing against these platforms for customer ownership in the spot market. For volume business, the battle for customer ownership will be horizontal against other freight forwarding businesses.

Those who have taken precautions to sustain customer relationships in a digital logistics market will be better positioned. The digital shipper values convenience, service customisation and information density, and acknowledges that switching costs are low if expectations are not met. This means that we are about to enter a market where customer loyalty is a lot more fluid, which brings us to the importance of lock-in effects. How can we preserve our customers once we have them?

Similar to today where the handshake culture and personal relationship with shippers plays a big role in the forwarding industry, that relationship will continue to be important in a digital market. "People's business" will persist but it will become more about building a customised service experience than having a personal connection. The digital shipper may sound like a hassle to work with, but freight forwarders are just as inclined to offer a customised service experience to sustain competitiveness in the long-term; it sets their service apart and mitigates the risk of customers migrating to competitors.

There are a number of ways to introduce lock-in effects. The simplest way is creating high switching costs: if the shipper is fully integrated with connectivity to his ERP system, then he is less likely to move his business elsewhere as the process is too resourceful. The higher the switching costs, the better the service of a competitor has to be before it is sufficient incentive to act. This can be further enforced with proprietary interface designs, data-based services such as track-and-trace, or a personal dashboard with data visibility. A big share of customers also continue to use the same provider due to simple habit, hence a focus on exceptional user friendliness and convenience can also act as a lock-in effect.

A final strategic instrument can be to form alliances and partnerships with other businesses that allow you to offer new features that cannot easily be imitated by competitors, and thereby regain a competitive edge. We have seen Maersk do this multiple times in recent years with IBM, Alibaba and JDA Software. A variety of novel ideas are bound to emerge in coming years to lock in shippers, perhaps even in the nature of loyalty rewards or switching discounts. But the best lock-in effect will always be that we create so much value through our products and services, that our clients or customers lock themselves in.

To be clear, operating in a digital logistics market does not presume that all freight forwarders digitise their service. It may also be a viable strategy to do the opposite and double down on local presence and face-to-face relationships. But we need to understand the characteristics of the digital market that we are up against. In the final section below we will look at the disruption story of Kodak reminding us why digitising is not enough to thrive in a digital market.

Probably one of the most misunderstood darling stories of digitally disrupted companies is the story of Kodak. Since the company's bankruptcy in 2012, Kodak has become a poster child for innovative incompetence and is often referred to as a prime example of a company that got ruthlessly blindsided by disruption. The real story is quite different: Kodak very much acknowledged the digital disruption knocking on their door, and management undertook incredible, painful measures to transform the business into a digital company. In fact, they succeeded and transitioned from an analog photography business to a digital printing powerhouse, turning over billions of dollars in licensing revenue alone from their 1.000+ image capture patents from the likes of Samsung and LG (read the full story here).

Kodak did not fail because they got caught off guard by digital disruption. The film broke (pun intended) because the planned destination of their digital transforming was always a new way of printing photos on paper, not realising how the progress of other components in the broader ecosystem would eventually eliminate the need for printing all-together. To borrow a quote from Ron Adner, the author of the book The Wide Lens:

The take-away from the story of Kodak is therefor not a lesson of innovative incompetence, but that we need to pay as much attention to the progress of co-innovators within our ecosystem as we do to our own innovation efforts. Regardless of whether the strategy is to excel by being on the forefront of technological advancement, or by adapting business-as-usual and double down on personal relationships, we need to pay close attention to how market dynamics are changing beneath us.

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The purpose of this article was to widen the contemporary conversation happening in the logistics space to how we can position our companies for success in a digital logistics market, rather than the Hamlet-invoked topic of "to digitise, or not to digitise". We are in the midst of a industry-wide transition, and whereas many businesses will come out on top, equally many will perish.

I hope you enjoyed the read. I certainly enjoyed the process of writing it during these times of corona-virus and recession fears. To finish off with, here is a line from PwC's 2016 report on the future of the logistics industry:

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--------------------------------------------------------------------------------------------Disclosure: I am a co-founder of ItsMyCargo - a logistics software business digitising and automating the internal and external quotation process in freight forwarding companies -, hence I have a vested interest in the digitisation of the logistics market. Stay tuned for more articles or follow our LinkedIn page for a constant flow of logistics news and updates.