Will conventional businesses die out?

Tuesday, 06 Mar 2018
Will conventional businesses die out?
Stand for the rights: Hundreds of drivers of conventional taxis stage a rally at Gladag traffic circle in Surakarta, Central Java on Tuesday to protest ride-hailing apps. (JP/Ganug Nugroho Adi)

Digital technology has disrupted the conventional economy. In Indonesia, this digital disruption has occurred mostly in the transportation services and retail sectors. 


The operation of internet-based ride-hailing services like Go-Jek, Grab and Uber has shaken the taxi business, which led to street protests by taxi drivers and the enactment of Ministerial Decree No. 108/2017 to appease them. In turn, the new ministerial regulation has drawn protests from ride-haling drivers. 


In retail, the rise of online retail platforms, such as Lazada, Shopee and Tokopedia, have changed consumers' shopping trend toward internet shopping, depressing the sales and profits of brick-and-mortar stores. 


There is no sign that the digital disruption will end soon. Rather, it has spread to finance and healthcare services. The rise of financial technology (fintech) has led to the birth of a variety of financial products that challenge conventional banking. 


One such example is peer-to-peer (P2P) lending that allows individuals and small businesses to obtain loans from individual lenders without providing collateral and with lower interest rates than banks' lending rates. Another example is e-payment services, combined with e-money provided by non-bank enterprises, such as Go-Jek's Go-Pay service and Doku's Wallet. 

Meanwhile, the effect of digital disruption in healthcare services is much milder, as telemedicine has not yet been fully implemented. Nevertheless, the situation might change soon as healthcare consumers embrace telemedicine. 

The experience has caused shock and bewilderment among professionals and the general public. They know that digital technology has brought tremendous benefits to the economy, but feel nervous when dealing with the transformations in the way we do business. 

The most obvious transformation is how digital technology is changing our behavior in selecting, transmitting and processing information within an organization. The dispute between online transport and conventional taxi services is a perfect case to understand this transformation. 

Taxis are one of the most regulated industries in the world. The government sets the industry standard in minute detail, from zoning and price ceilings to operational procedures, to ensure that customers have a satisfactory experience. 

Nevertheless, this regulatory system works under the assumption of asymmetric information, in which information about actual customer experience is too costly to be used as a measure of driver performance. In other words, the government and taxi companies use regulatory standards in place of customer reviews to ensure that the customer gets quality services for the fare they paid. 

Digital technology has reduced the cost of obtaining, transmitting and processing customer reviews to measure driver performance. Uber, Go-Jek and Grab utilize this technology to revolutionize the taxi industry, not only in the policy aspect, but also in its organizational structure. 

Using this technology, these companies partner with self-employed individuals, both experienced and inexperienced, to provide on-demand transportation services without adhering to the existing regulatory standards. Of course, this method exposes customers to poor services, but in return for such an unpleasant experience, customers can directly assess the quality of each individual driver and downvote poorly performing drivers in the ride-hailing labor market. 

This organizational shift toward self-employed drivers has shaken the foundation of the taxi industry that relies on a centralized firm to enforce regulatory standards. But will this change send all conventional taxi companies to their demise? 

The answer is no. Rather, some will survive this digital revolution by learning to collaborate with their digital competitor through a strategic alliance. The partnership between O-renz Taxi and Grab in Surabaya, and between Blue Bird Group, the largest taxi company in the country, and Go-Jek at the national level are good examples. 

These alliances will provide opportunities for conventional taxi companies not only to learn and integrate digital technology into their existing business infrastructure, but also to adjust their organizational structure so they can use this technology optimally. 

Interestingly, strategic alliances between industry incumbents and their digital competitors are also happening in other sectors, such as the financial services sector. 

In this sector, alliances are emerging between P2P lending startups with banks and other financial institutions. For example, Banks Sinarmas is partnering with Modalku as its custodian bank, providing security for individual lenders through the Modalku platform. In another example, insurance company Zurich Topas Life is collaborating with Investree in offering the Digital Credit Protection credit insurance scheme to protect individuals and small business owners who borrow money through the Investree P2P platform. 

The digital revolution shocked the Indonesian economy by positioning incumbents in direct competition with rapidly growing digital enterprises. The incumbents fought back for their very survival. In many situations, they used their lobbying power to halt the progress brought on by digital technology. Some, however, have found a better way to face this challenge by collaborating through strategic alliances.

The situation creates a dilemma for the government on how to respond. Regulatory lobbying by incumbents is inevitable, but the government could encourage collaboration through strategic alliances as a win-win solution while fine-tuning its regulatory framework to embrace the new digital era. 

The only problem with this approach is that there is no formula on the most efficient form of strategic alliance. Economists and business scholars are still debating on how to come up with such formula. Nevertheless, we must stay optimistic on the way forward. 

As Harvard's George Baker and his co-researchers wrote in their seminal paper on strategic alliances, firms have invented far more ways to work together than academicians and scholars have ever expressed. 


source: The Jakarta Post