Driving digital strategy

Digital strategy matters to all business leaders. As the key facilitator of digital strategy, it is essential that CIOs need to understand the latest thinking on digital strategy, so they can help their colleagues to have digital relevance.

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In Sunil Gupta’s book “Driving Digital Strategy,” he explains why incumbents are increasingly struggled as new and nimble players enter their established markets. Disruptors or challengers offer customers new, innovative business models and in many cases redefine long established market boundaries. This poses a significant threat to the old guard especially if they are found to be asleep at the wheel.

For this reason, Sunil suggests that the leaders of legacy businesses need to not treat digital as separate from their overall strategy—they need instead to establish a “digital first mentality.” Sunil suggests that digital transformation requires an organization to strengthen its core while it builds for its future business at the same time.

Paths to failure

Sunil believes there are many paths to failure. He says companies typically take a wrong turn when they create small, independent units. Intuit, before it bought Mint, created an independent business unit that this author competed against. That unit, however, never succeeded because it did not get folded back into Intuit. Another failure point occurs when businesses focus merely on using digital to improve their existing analog processes—here, the focus mistakenly is on reducing costs or improve efficiency. The CIOs that I work with in the #CIOChat have repeated told me that no project should be approved if it doesn’t have an impact the business top line. It is increasingly clear that business investment should move from back office efficiency to front office effectiveness. The final path to failure is doing experiments but not finding an entry into what Geoffrey Moore calls the Transition Zone.

Succeeding at digital transformation

According Sunil, digital strategy needs to be integral to overarching business strategy—it needs as well to be embedded into business operations and DNA. To help business leaders, Sunil proposes a framework for reinventing a business—key is reimagining the business, reevaluating the value chain, reconnecting with customers, and rebuilding the organization.

Reimagining the business consists, according Sunil, of three tasks—scope, business model and ecosystem. Scope starts with a question framed originally by former Harvard professor, Derek Abell, what business are we in? Sunil references with scope, the work of Theodore Levitt. Levitt famously said that the purpose of a business is to create and to keep a customer. Sunil says that Levitt suggested as well that it is a problem when firms focus on products and not enough on customer needs.

As important, Sunil suggest like Jeanne Ross at MIT-CISR that broader business scope requires building new business capabilities. In Ross’ cases, she suggests competitive advantage today involves taking capabilities that others may or may not have and integrating them in ways that create something extraordinarily powerful.

Finally, with business model, Sunil suggests that business leaders need to understand how technology innovation changes the way their firm creates, delivers and captures value. I personally met last week with an instrumentation and a pharma company that were changing their business value propositions from physical assets to digital business services based on the data that the physical assets produce. Sunil calls this transitioning to “product as a service.” Sunil gives an interesting example of The Weather Company which moved from a TV channel to an app to a big data predictive model based on weather regarding consumer choices.

The CX Option

One transformational option discussed by Sunil involves using data and customer information to create a world class customer experience. Here, Sunil gives an interesting example, where the model to drive people to a supermarket includes a symbiotic relationship between in-store restaurants and a cooking demonstration theater.

In the new book by Peter Weill and Stephanie Woerner entitled “What is Your Digital Business Model,” they suggest that CX-focused organizations are focused on meeting customers life-event needs and do so by creating real customer intimacy. They are about providing great customer experiences. MIT-CISR research has importantly found that enterprises in the top one-third of customer experience had 8.5 percent higher net profit margins and 7.8 percent higher revenue growth.

How do you define your business?

Sunil suggests it is a mistake to define your business and your competition in the digital age by the products that you produce and sell. Instead, he says that you should define your business around your customers and their needs. He gives two very different examples—Amazon as an ecosystem player and John Deere as business data service player.

As interesting, Sunil suggests that competition can no longer be defined by traditional industry boundaries. He says there are strategic consequences if leaders define competition by their products. Sunil says this is a strategic mistake because it leaves their companies in an exposed position for new market players. When this happens, companies often miss a shift in customer needs in response to changes in technology. Sunil gives Comcast as an example against Netflix.

Instead, Sunil says businesses need to look at things along a broad system. With this, Sunil makes a bold assertion. He claims that competitive advantage no longer comes from cost, product differentiation, or focus. He declares effectively the core concepts of Michael Porter’s book “Competitive Advantage,” barren in the digital age.

Sunil suggests that competition and industry boundaries must be defined more broadly than before. Part of responding effectively here are business capabilities around customers and mining customer data. Another area where challengers can impact legacy businesses is the value chain—new entrants can use digital technology to disrupt the existing value chain, especially distribution.

Get closer to the customer

Sunil believes that reconnecting with customers matters because digital changes the ways customers search for information and buy products. He suggests that data and customers are critical assets for all companies. These items might not show up on a balance sheet, but they should because of the “data network effect”—data increases in value the more that is collected. Delivering of this potential, however, depends on data governance and stewardship. With good knowledge of customers, it is essential that you also drive customer focused innovation. This involves designing your organization for innovation. Sunil reviews open innovation approaches and their potential with internal and external audiences.

Advantage falls increasingly to ecosystem players

Sunil suggests that sustainable advantage comes from offering a system of connected and complementary products and creating a platform with strong network effects and increasing customer switching costs. Sunil says ecosystem players should focus on customer focused innovation. He refers here to the work of Ted Levitt who said people don’t buy drills, they buy holes. They want a solution versus a product.

Sunil says redefining the scope of your business is essential to ensuring the future “right to win” because competition in the digital age comes laterally, from new market players. With emerging lateral competition, legacy businesses need to rethink how they create and capture value—their business model. According to Geoffrey Moore in “Zone to Win,” companies that do not perceive a business model change have a 10 percent chance of surviving digital disruption.

Creating the ecosystem platform

Sunil believes that a platform provides the following

  • Greater access to sellers
  • Better value to customers
  • Market growth
  • Scalability
  • Broader innovation

He says the trick is opening your platform to competitors. You win by creating a central place for customers to transact or solve their problems. The good news is you can earn a portion of the revenue from competitor sales. The goal of product focused companies is to develop the best product and maximize their sales and profits while ensuring competitive advantage through tight control of proprietary knowledge. In contrast, a platform business creates value not simply by selling products and services but by enabling transactions and by creating an ecosystem. They attempt to build a network of third party players who can develop integrative complementary services. They do this by designing systems through APIs and tools to facilitate transactions—often supporting by open and shared systems instead of the closed, proprietary systems of the past.

In this model, Sunil says you shouldn’t view things as a single industry but as a business ecosystem that crosses multiple industries. You co-evolve capabilities around new innovation. 19th and 20th century industry focused on efficiency, but the current era requires coordination across a wide variety of firms to provide a complete and dynamic solution to customers need.

Organizational change requires too

Navigating digital transformation requires organizational change. Like Derek Abell, Sunil suggests that digital transformation involves managing the existing business and building the future business at the same time. Sunil compares digital transformation to changing a plane engine in flight. He shared the change at Adobe where like Vikings they burned the boats so that troops didn’t have an option to go back to old ways of doing business. Clearly, the pace of the transition is important and depends on customers, competitors and the company.

Parting remarks

There are many valuable insights in Sunil’s book especially regarding how digital strategy needs to become instantiated as a part of business DNA. And while I believe the ecosystem player model is a valid model forward, I think there are more paths forward. Not everyone will or should become the Amazon of their industry. There are vendors that need to partner across multiple ecosystems players—like PayPal—to gain market scale and traction. With this said, the time is now to respond and initiate the transition to a digital business.

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