How to avoid digital downfall: the Toys R Us case, part 1

Lessons learned from Toys R Us digital downfall, actionable insights into industry disruption's impacts on businesses and IT, and practical approach to digital strategy, innovation implementation, and digital transformation.

building blocks wooden toy
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Three months ago, the Wall Street Journal reported how increasingly investors and boards of Fortune 500 companies like Ford Motor were firing superstar CEOs for deficient business transformations. Obviously, this trend continues as the New York Times reported last week, Toys R Us, one of the world's largest toy store chains, has filed for bankruptcy protection, becoming the latest casualty of the digital disruption facing traditional businesses.

As per my research, and I guess, following technology vendor recommendations, the company invested in a global digital e-commerce platform to meet the retail industry's disruption challenges. Let's say it straight, the digital platform by itself did not help.

The ambition in this two-article series is to provide, through the digital transformation perspective, answers to the following issues:

  • Why so many business leaders fail to properly address their industry's disruption challenges?
  • What went wrong with Toys R Us?  What the company's leadership including the CIO could have done to avoid bankruptcy filing?
  • What lessons business leaders can derive from Toys R Us story? What's the best approach to meet industry's disruption challenges?

The principles and practices underlying the solutions provided in this article have helped many businesses avoid industry disruption traps. They're part of ITaaSNow digital transformation consulting practices. 

The 3Bs of digital transformation failure

One thing I learned from my long experience leading business transformations and now digital transformations is, they fail for three reasons that I summarized under the concept of the 3Bs of digital transformation failure.

figure 1 3bs of digital transformation failure ITaaSNow Consulting

3Bs of digital transformation failure

Let's explore them!

1. Business issues misconceptions

The first B refers to how well the digital transformation project addresses the company's business objectives (versus IT objectives) and priorities. The problem is, most of them are totally disconnected from the business concerns.

What CIOs need to understand is, the challenges of their lines of business (LoB) is to keep up with the fast-pace innovation competition imposed by technology companies. Apple, Amazon, Google, and Facebook business models are the new standards and your LoBs need to align to survive.

Innovation, short time-to-value, market responsiveness, and business agility are the competitive advantages they're primarily looking for and certainly not IT cost reduction and speedy IT.

To leverage these competitive advantages your LoBs need more than infrastructure migration to cloud and automation toolchain deployments; they want to transform the company into a top leading digital business.

2. Boldness isn't anymore part of IT leadership

The second B relates to boldness and it's the unbelievable notion that your IT executive peers are resisting the changes, they resist the new style of IT. As I've been witnessing it for five years, they're taking time to get rid of their IT tools provider jacket, and hang on the now outdated IT cost savings and speedy IT value propositions.

Just to remind it, the new style of IT is the notion that cloud features — virtualization, automation, on-demand, self-service, and scalability — are leveraged to enable the competitive advantages needed to make the digital business profitable. These competitive advantages include innovation, market responsiveness, and short time-to-value and they're achieved through business agility.

Instead of reinventing the IT organization to better help LoBs, probably influenced by their solution vendors, certain CIOs see cloud computing, DevOps, or Big Data as the means to enable the old value proposition: cost reduction and accelerated IT operations.

Are IT cost reduction and speedy IT operations enough to help businesses succeed in the digital economy? As the Toys R Us case demonstrates, the answer is no.

3. The bargaining power of IT solution vendors

The third B is for bargaining power of solution vendors, it relates to the industry's competitive configuration Harvard's strategist Michael Porter popularized as "the bargaining power of suppliers." In a nutshell, it's the notion that a specific category of industry players overuse a competitive advantage to influence business in their favor.

Typically, IT vendors through massive marketing hypes take advantage of the central role technology plays and its amazing impact on people lives to establish in the business community's mind the erroneous belief that IT on its own can boost the business.

That erroneous vision imposed by technology companies blinds IT leaders and prevents them from seeing that what matters to their LoBs is revenue, and it's generated through activities that cut across the entire business from marketing and IT to sales and post sales. Not only IT!

CIOs must urgently get out of their vendor's bubble and acknowledge once and for all that the revenue expected by the business results from both business and IT operations optimization. Investing only IT didn't help Toys R Us to prevent bankruptcy.

Three fundamental steps that could have saved the company

This is something business leaders and their CIO must be reminded of: the transformation of the business is what matters, not the discrete, isolated, disconnected, and weak-impact initiatives like cloud transition, DevOps deployment or applications migration to mobile.

These micro changes, focused on IT, at the most cut IT cost and speed up IT operations, they're not enough to meet your industry's disruption challenges.
Don't pay attention to those who tell you the opposite, they'll bring you troubles.

Embarking on a threefold purpose business transformation including meeting the disrupted retail industry challenges, adopting innovation as a competitive advantage, and transforming the business model would have been a better option for Toys R Us.

Step 1 - analyzing the disrupted retail industry challenges would have helped to understand that reinventing the Toys R Us was urgent

A big problem with companies today is, their leaders remain trapped in the outdated value creation approach that emerged in the very early internet era. They consider strategy definition a waste of time and think optimizing short-term financial performance while overlooking industry trends, ignoring their most important customers value as well as the ingredients of their longer-term success is what matters.

Did Toys R Us analyze the toy segment of the retail industry? If no, that's why they failed. If yes, how well did they do it?

As illustrated in the SWOT matrix, the rigorous analysis of the retail industry would have not only highlighted how far Amazon was disrupting the industry but also make clear how urgent was the transformation of the company:

figure 2 swot retail industry ITaaSNow Consulting

SWOT Retail Industry 

Indeed, a rigorous, in-depth analysis of the toy retail industry, involving the proper business and IT subject experts would have resulted in a digital strategy recommending the transformation of the company into a provider of new generation toys —Toys 2.0 —  built on cloud computing, mobile, IoT, and AI technologies:

figure 3 digital strategy map ITaaSNow Consulting

Digital Strategy

As illustrated, such strategy which is here only an oversimplified example, would have combined:

  • Cloud's virtualization, internet-driven and on-demand features to challenge Amazon's cost leadership and express delivery competitive edges.
  • Innovation driven by mobile, IoT, AI, machine learning technologies to take lead as to Amazon's little product differentiation.
  • The company's brand equity (reputation) in the toy segment to gain a leading position in the new generation toys business.

My recommendation is, work with an industry analyst alike to rigorously analyze the changes in your industry along with the impacts on your business and the IT organization; you'll get from it the insights needed to properly transform your business.

Step 2 - establishing innovation as the competitive advantage could have helped to meet the disrupted retail industry challenges

Another mistake of companies victims of industry disruption is how they see innovation; they see it either as a sophisticated stuff reserved for elite businesses in the Silicon Valley or as a sophisticated thing complicated to implement.

The truth of the matter is, they don’t understand it and don’t have the choice but to deal with it because, innovation is the primary industry disruption factor.

Contrary to what the vast majority of people think, particularly in IT, innovation is not the sophisticated feature of a technology. From the business perspective, something is considered an innovation if it’s inventive and brings value to both the company and the customers.

Did Toys R Us have an innovation strategy? If no, that's part of why they failed. If yes, how important was it in their plan? How well did they implement it?

Establishing innovation as your company’s competitive advantage is about implementing a three-faceted capability including the innovation culture, the innovation lifecycle, and the innovation portfolio management tools:

figure 4 three faceted innovation ITaaSNow Consulting

Three-Faceted Innovation

Concretely speaking, as I've been implementing it, innovation culture is a work environment  — staff, skills,  values, beliefs, processes, and tools  — specifically set up to capture customers and markets demands, translate them innovate into innovation ideas, and implement ideas into tangible products and services.

The innovation lifecycle structures and shapes the innovation culture. It's a  repeatable process that clarifies through specific steps, the staff and skills, practices and methodologies, and tools needed to translate innovation ideas into tangible products. 

Simply put, innovation portfolio management tool is the software — BrightIdea, IdeaScale, and CA Clarity PPM — that enables the innovation lifecycle.

Opting for an innovation strategy, would have probably helped Toys R Us leverage mobile, Internet of Things (IoT) and Artificial Intelligence (AI) technologies to make differentiated products and services and resist the competitive battle.

My recommendation here is, stress innovation, implement it; it's the competitive advantage that'll help your company keep up with the fast-paced innovation competition imposed by technology companies like Amazon.

Step 3 - aligning the business model to align the competitive forces of the retail industry would have helped to avoid bankruptcy

Business model transformation is the poor relation that has been ignored in today's business practices. Business leaders including your CIO peers see it as the organizational big bang that’ll put the business up and down. 

The reality of business model transformation is, it's about transforming the most strategic piece of your business, the value stream:

figure 5 digital business value stream ITaaSNow Consulting

Digital Business Value Stream

As illustrated, it's the specific set of staff interactions, skills and expertise, processes and practices, and infrastructure and tools mobilized across the organization to create the expected benefits.

Did Toys R Us work on its business model transformation? If no, that's why they fail. If yes, how well did they perform it?

My last recommendation would be, stress your business model transformation, it's the cornerstone of digital business success.

The key takeaways

Despite its devastating impacts on businesses and their IT organization, industry disruption is not only misunderstood but also underestimated. Toys R Us case is the best illustration.

Transforming the entire business to digital and not only IT should be your top priority if you want your company to stay in business.
Cloud transitions, automation toolchain implementation, and legacy applications migration to mobile and IoT are micro changes that won't help to avoid digital downfall.

The digital transformation of businesses is new, it's not easy, and takes totally new visions, approaches, concepts, and tools I discuss in part two of this article: How to avoid digital downfall: The Toys R Us case - Part 2.

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