Disruptive Digital Innovation – Where the Smart Is

Disruptive Digital Innovation – Where the Smart Is

Digitalization is playing an important role in more and more fields. It is changing markets and allowing new ones to proliferate. This brings with it a number of opportunities for companies and investors but, at the same time, it also creates challenges. 

The depth of digitalization is not only transforming the way people communicate and interact but will also impact the way most things are manufactured. As a consequence, new business opportunities are emerging while traditional markets are being challenged in almost all sectors, along the value chain.

Digitalization should benefit companies that use digital innovation to disrupt existing business models or to build entirely new business cases. Credit Suisse Research has identified the three main categories of beneficiaries:

  1. internet platform (IP) companies that are already well entrenched in the business;
  2. IT enablers that provide critical IT services such as cyber security; and
  3. non-IT innovators that build new business models or transform existing ones through digital innovation. 

Internet Platform Companies in Pole Position

Some of the major winners in digitalization will be the IP companies. These companies benefit from strong fundamental long-term trends that should drive growth for the next five years at least. Today, over 45% of the global population is connected to the internet and, by 2020, this will be almost 55%. At the same time, the average time spent online is steadily increasing, with more and more transactions moving online.

The second and most important source of growth for IP companies is their potential to drive disruptive innovation. Platform leaders such as Apple, Amazon, Facebook, Alphabet (and Tencent and Alibaba in Asia) are completely redefining user experience and expectations.

In Europe, Zalando, the leading fashion platform, has been pushing the boundaries of the fashion retail industry relentlessly. As a result, the company is eating into traditional retailers' business, along with other IP companies that are steadily chipping away at the value chains of non-IT industries. So far, this trend has been most visible in the media, retail, publishing, advertising, and gaming markets. However, it may increasingly spread to other sectors such as the automotive, finance, or healthcare industries.


Online Share in Consumer Markets Has Risen Significantly

Consumer goods markets are shifting toward online services
Source: A. T. Kearny and Credit Suisse, 2016

IT Enablers as the Backbone of Digital Growth

The continuous growth of internet-based services fuels the need for increased data storage capacity as well as data security. According to McAfee, a computer security software company, cybercrime is costing the global economy up to USD 575 billion annually.

Therefore, it can be assumed that cybersecurity will remain one of the most resilient areas of IT spending as the sources and sheer volume of digital threats continue to rise. This should boost demand for security software from companies such as Palo Alto, which provide next-generation firewalls.

Furthermore, innovations such as the Internet of Things (IoT)1 trigger the need to develop secure platforms that allow the monetization of consumer activities. SAP and ams, a semiconductor company, are among the leaders in this field.

Non-IT Players Grasping the Digital Opportunity

John Deere, one of the world's most successful tractor manufacturers, has long been a pure hardware player. Today, the company has integrated sensors and connectivity into its machinery, allowing it to provide farmers with additional services such as soil analysis and real-time weather information. It can also monitor engine performance to prevent breakdowns. Through this, John Deere now has an ongoing engagement with farmers every day, providing them with valuable tools to increase yield and optimize resources.

Credit Suisse Research views industry players such as John Deere and GE and robotics/automation manufacturers for the healthcare industry as the main beneficiaries of digitalization. Another sector to watch out for is consumer discretionary, with companies such as Sony and IMAX tapping into the growing virtual reality (VR)2 and augmented reality (AR)3 market.

Virtual and Augmented Reality – the Next Mega Trend?

With the advent of VR and AR, gaming and films are entering a new era. For example, last summer, Pokémon Go had scores flocking to the streets to catch errant Pokémons and to bond with other players. The game’s phenomenal success, with up to 45 million daily active players at its peak, could be a taste of future growth potential. You can read more on this subject here.

Internet of Things, Virtual and Augmented Reality Made Easy  

1) Internet of Things

The Internet of Things is the internetworking of physical objects (machines, devices, vehicles, buildings). These objects are fitted with electronics, software, sensors, and network connectivity that enable them to collect, exchange, and analyze data.

2) Virtual reality 

Virtual reality is an artificial, computer-generated simulation or re-creation of a real-life environment. It immerses the user in a virtual world.  

3) Augmented reality

Augmented reality is a technology that layers computer-generated enhancements atop an existing reality in order to make it more meaningful through the ability to interact with it.