In the lead up to participating in the Arabian Business Digital Forum, Wes Schwalje, Chief Operating Officer of Tahseen Consulting, sat down with Arabian Business to discuss the Arab region’s quickly growing digital economy and how regional businesses can prepare for a digital future.
Arabian Business: In a world where everything is digitized, businesses need to pursue innovation to disrupt their own business model before the competition does. How are you seeing this happen in this region?
Schwalje: In order to answer this question, we must first define how we measure innovation. If we use company spending on R&D as a proxy for innovation, the UAE ranks 22nd in the world and the highest in the Arab World according to the World Economic Forum Global Competitiveness Report. So the UAE is a good bellwether for how the digital economy is disrupting incumbents in the region and how incumbent firms are investing to avoid disruption.
The Abu Dhabi Innovation Index and Innovation Survey, which was conducted in 2014, sheds a bit more light on the kinds of firms and sectors that are spending the most on R&D and innovation. This research shows that only very large firms, primarily in the oil and gas, manufacturing, and business services, are really investing in R&D and innovation. However, when we scratch the surface a bit more, we see that the majority of these firms are allocating their R&D funds to acquiring machinery, equipment, and software. It seems more likely that industry incumbents are spending on R&D to secure their current market positions rather than investing in R&D because they want to grow by developing new products. So when we say innovation in the Arab World, for the most part this still means acquisition of technologies from abroad by large companies.
This raises a very important question for the region – what about the other 90% of firms in Arab economies that are SMEs? How are they innovating? If we look at the Global Entrepreneurship Monitor surveys from the UAE, only 2.3% of businesses in the UAE have tech-based business models. Low rates of technology infusion in SMEs are quite consistent across the region. In many Arab economies, including the UAE, the majority of SMEs operate in sectors where innovation is less of a competitive factor. So a key issue that Arab nations are struggling with now is how do we make our SMEs more innovative?
Arabian Business: Customers have been spoiled by the likes of Amazon and Apple, and now expect every organization to deliver products and services swiftly and with a seamless user experience. How can non-tech companies meet these expectations?
Schwalje: Given the industrial structure in the region, a better question might be, how can SMEs compete with larger incumbent competitors at the national, regional, and international levels? In my opinion, technology-based digital disruption is one competitive strategy but is not always the answer. Tahseen Consulting’s research on effective competitive strategies in the region shows that non-tech companies can compete by pursuing a number of paths to competitive advantage including
- Embracing being an underdog – whatever industry you are in view the best in class competitor as the company you need to beat
- Dominating a niche that is untapped
- Outperforming in areas where flexibility and agility are advantageous
- Delivering more personal customer experiences
Arabian Business: Data is king in the new digital world, how important is it for companies to be collecting and analyzing customer data? How well do companies in the region really ‘know’ their customer?
Schwalje: It is absolutely critical for companies, big and small, to be collecting and analyzing customer data. And one of the most interesting applications I think is in pricing. Dubai is a testing ground for dynamic pricing – companies and government agencies are using dynamic pricing to maximize revenues and smooth demand. In the UAE in particular, I am very excited to see how things evolve with the application of AI in dynamic pricing strategies due to the stratified structure of the labor market and wage level differences. Right now many people are familiar with peak pricing due to the popularity of ridesharing technology companies. But there are a whole host of other dynamic pricing strategies that can be leveraged by companies with better customer data such as segmented pricing, time-based pricing, service time pricing, advanced pricing, and bulk pricing.
Arabian Business: Few established companies are ready to face the implications of digital change. Do you think they really realize how fast the change needs to happen, or how transformational it needs to be?
Schwalje: There are several reasons why established companies have not embraced the digital economy in our region
- Market structures that lack competition
- Governments are both a regulator and operator or key shareholder in several industries
- Public policies that establish unnecessarily high barriers to entry for technology-driven upstarts
- Digital skills gap
- Fear of the unknown – how will automation affect impact jobs?
Internationally there is this looming black cloud proposition that businesses need to pursue innovation out of fear of being disrupted by the competition, but perhaps companies are a bit isolated from this in our region. I think larger companies do realize that they need to change, but I would argue that some companies are isolated a bit from the sort of competition which would really force them into an innovate or perish scenario. For example, how is it that Dubai only had online grocery delivery in 2013 when the first online grocery store in the US IPOed 21 years earlier? Why did it take us 2 decades to make this change?
Arabian Business: If you could offer advice to companies here in the region, what concrete steps should they take to pave the way for a digital future?
Schwalje: As a region we need to transition from innovation acquirers to innovation originators. When companies are asked what stands in the way of innovation, the top answers we consistently hear are the market is dominated by established enterprises and innovation costs are too high .To fix this I think there are two key areas of focus: We need a serious regional dialogue about competition policy that promotes technological innovation, price competition, and consumer choice. We also need a concerted effort by governments in the region to provide funding to help SMEs research, develop and commercialize new technologies, and accelerate the adoption and adaptation of these technologies – this perhaps could be funded by countries across the region through micro surcharges like the Innovation Dirham. But these surcharges must be linked to tangible results and the funds must trickle down to SMEs.