July 25, 2016
It was the dawn of the digital revolution and we were brainstorming “location-based solutions” for Motorola.
“I have an idea — when you open the weather application, it could know where you are and simply update the local weather.”
“Yeah, yeah. Or you’re walking by a store and it can push a coupon to you to invite you in.”
“Or imagine, with a real-time map and location data, we could essentially create a GPS device inside your phone.”
Those were exciting days of imagining the future. While you now use dozens of apps that benefit from location data, you don’t think about it like that. It’s become seamless. Mobile devices, GPS data, and other technological advances have set the stage for the biggest upheaval that society and commerce has experienced in a long time.
The upheaval is neatly captured in the word “digital.”
A perfect storm of technology advances.
Digital is not one technology. It is a number of technological capabilities that can now be used together. This combination is what makes digital such a powerful platform:
- Devices are no longer inaccessible mainframes or clunky desktop computers. They are hand-held mobile devices and screens of all sizes.
- The network revolution has given us a global, wireless internet that connects all our devices.
- Computing and storage are now a cheap, on-demand utility.
- Programming is no longer an obscure black art. Frameworks and open-source development allow high school students to create viable software.
- Interoperability no longer takes the expensive coordination of two engineering teams. The API (Application Programming Interface) enables the use of separate systems together, without friction.
- Finally, transactions that are critical to value exchange can be executed in an instant. It is the difference between writing a check and using Amazon’s one-click button.
Look at that list. Think through how they combine to create incredible possibilities. Uber is only possible because of this confluence of capabilities — the same capabilities every organization and individual now has access to.
If you’re in an organization struggling to create value, you may recognize digital as the engine of the disruption economy. Competitors seem to come from nowhere to cause pain to your reliable, quarterly growth.
This is why every organization needs to understand and engage with digital. If you still think the value to your business is a refreshed web presence or a mobile app, you’re missing the point.
So, where is the opportunity? What can you start working on? The places where digital can have a big impact in your business will be familiar. However, the rules of the game and what you need to do in each area have fundamentally changed.
5 Areas of Your Business Where Digital Changes Everything
1. Extend or augment your current offerings with increased value.
While this may seem mundane or obvious, the hard part is that you have to do it without charging your customer extra. Extending your current offer can’t be thought about as a way to charge people more. Don’t hold a focus group asking participants, “How much would you be willing to pay?”
Customers are accustomed to products or services being improved over time. Think of the update capabilities inherent in digital products and services. You can create new functionality, deploy the update, and customers receive new value.
This isn’t just for simple apps. Tesla recently added self-driving features to existing customers’ cars. While this was implemented through an over-the-air software download, Tesla had to anticipate the future functionality. They designed it into the mechanics and control systems of the car.
Imagine what this means for the new products and services you’re designing today. Are you considering how you’ll extend their value in the future with digital?
2. Adapt your business model.
Notice how there’s little value in the suggestion itself? There is a lot of rhetoric calling for this kind of change. Startups routinely demonstrate new business models. Large organizations try to create value by adapting.
However, you need to understand and be ready for how hard a business model transition can be. Your business model is the fundamental way value is exchanged with your customers. You have best practices established and millions of dollars invested in enterprise software to facilitate how you do business.
Netflix provides a cautionary tale of what can happen when a company attempts to transform its business model too quickly without respect for the customer relationship.
With online streaming becoming an obvious future for its business, Netflix attempted to separate its business into two — a DVD media subscription and a streaming subscription.
The backlash was swift and harsh. Netflix CEO Reed Hastings reversed course in less than a month. The company’s transition is now happening in a more controlled manner enabled by time.
But there are successful examples. Adobe, maker of creative applications for designers and marketers, has transitioned it's business to a subscription model. Customers no longer buy annual product releases through high profile launches. They pay a monthly fee to always have the latest and greatest versions of the software.
So how can you adapt your business model through digital?
Consider what is happening to value flows because of digital. Models for how customers pay are transitioning from one-time transactions to subscription models. Subscription models provide a smaller, but steady stream of revenue over time.
Your customer acquisition costs should go down. But customer retention becomes strategically important to maximize lifetime customer value.
To begin your own adaptation, start with an analysis of the dynamic and structure of how customers buy from you. Consider the nature of your goods and services and how you deliver them. Then search for opportunities to provide a consistent stream of increasing value over time.
Done well, customers provide your business with a more predictable revenue stream and high lifetime customer value.
3. Change how you market and communicate with customers.
It will not be a surprise that marketing and advertising are being disrupted by digital just like any other industry. But again, it is not because of the surface appearances.
The biggest discussion seems to focus on predicting the transition of ad dollars from TV and print to web and mobile.
This misses the true transformation that is occurring.
Marketing and advertising are no longer about awareness, information, and impressions. As a consumer, I am likely aware you have a new flavor of Mac and Cheese before I see your advertisement announcing it. How? I heard it from the community. Through the social network.
So what is the role of marketing and advertising if it is not to inform and make aware? It is to teach and inspire. It is to help your customers achieve their goals. It is to give them insight on how they can improve and be better. It is to make them a hero.
This is a big shift for any brand or organization that is used to talking about themselves, touting features and benefits and coming up with value propositions. If your immediate reaction is, “But the features and benefits of my product will help the customer,” you need to sit down, drop your defenses, and reflect a little more deeply.
The new goal of marketing and advertising is to create a trusted relationship long before a transaction occurs. Value must be delivered over time without the immediate expectation of a sale or charging for it.
Digital provides a scalable way to deliver ongoing value through technology and strategy. But to take advantage of it, you’ll need to invest in creating digital assets that are of value to your target audience — not clever ads, but useful assets. You need teachers, coaches, performers, and other content creators who know how to help and inspire an audience. Every brand needs to become a publisher of content that is valuable to the brand's customers.
4. Use a portfolio approach in creating new businesses.
Where did that competitor come from? No, it wasn’t an offshoot of your existing competitor. It was conceived and built from whole cloth. Well, from digital whole cloth.
To avoid disruption from unknowable future competitors, it is more advisable than ever to create new businesses separate from the mother ship.
Unfortunately, large organizations are better at killing ideas than creating successful new businesses. But you cannot ignore the fact that people create new businesses daily, and some of them will be your competitor in three to five years. What do you do?
Like any accelerator or VC, you fund a large number of these experiments. You develop and manage a portfolio.
Portfolio economics are different than traditional business investments. In startup portfolio management, the majority of your investments are likely to fail. A few will return their investment. And one or two will provide a disproportionate return. The successes minus the failures will still add considerably to your bottom line.
If you are still evaluating and managing each of your new business initiatives individually, as a traditional corporate investment, your overall performance is most likely very poor. Why? New venture businesses, especially ones that eventually return 10 to 30 times the investment, do not meet a 12% hurdle rate within three years.
Yet digital has made the creation and management of new business portfolios affordable and possible. Barriers to entry have evaporated. A new business can be spun up quickly. Almost any dimension of that business, including manufacturing or a service network, can be run through a globally available supply chain on contract. Once the business is proven and growing, you can make the capital investments to run it yourself.
So, a new management skill is needed — portfolio management. It is both a mindset and a practice. The mindset involves knowing that you can’t predict winners and losers. You need to cultivate a set of possibilities and accept failure as part of the mix. You’re managing probabilities, not certainty.
The practice is in deploying capital over time and assessing the new business’ progress in creating value. Lean startup methods and frequent reviews of customer adoption is critical.
Digital has changed how you should establish and manage new business ideas.
5. Reconfigure how your organization operates.
The final area where figital can have a big impact on your business is in how your organization operates.
Modern business education has spent more than 100 years refining the practice of business management. Business management focuses on clear division of responsibilities and operating efficiency. Leadership takes time to gather data and create long-term strategies to grow the company and organization.
Can you see where I am going with this? Does that sound like the principles that will work in a disruption economy? Business management works really well for a stable, ongoing business.
It is not particularly well-suited for rapidly changing conditions and disruptions happening inside and outside your industry.
You need your staff to dynamically sense change and collaborate across boundaries. You need business units launching new businesses together, not fighting for corporate investment. You need your whole organization to better understand what’s changing in each area of the business.
This awareness needs to lead to an agile pursuit of opportunity. Too often traditional management practice leads to denial, surprise, and long, slow responses.
Where do we see signs of change?
Slack, a real-time messaging platform for teams, has become the symbol of working differently with digital. Workplaces are becoming increasingly collaborative, team-based, and distributed in time and geography.
At Gravitytank, our client is part of our Slack channel so we can collaborate real time. We both benefit through more open and transparent communication. Questions are answered quickly. We shape the work together.
Digital platforms support your need to work differently.
Yes, it has been a rocky road. You may be very skeptical. You may believe these platforms are just a distraction. But the pace of change over just the past five years has been impressive. Slack, Zoom video conferencing, and InVision collaborative-design software bring highly productive tools to collaborative teams.
But it is not just the technology. You need staff and leaders to be thoughtful about how you work. You are no longer managing a slow-to-change stable business. Teams must test and experiment with these systems and how they are used. When they show value, adopt them quickly.
I am certain you are probably challenged by bulky, inflexible enterprise systems. You are going to need to transition your organization off of them over time. Your IT department needs to become nimble and savvy about potential solutions.
They need to think and work differently, too.
Digital is a limitless platform resource.
The areas where digital can have an impact on your business may seem obvious and familiar. What is not familiar is how each of those areas changes in a digital economy — their purpose and dynamic, and your pursuit and creation of long-term value.
Value is being created in a different way than it has been over the past 100 years. The industrial and information revolutions required capital, scale, and time. Strategy could be conceived over a long and diligent planning cycle. Product development cycles were 18 to 36 months.
Digital changes so much of this because it provides a completely different infrastructure to build upon. This infrastructure is available to all. It fundamentally changes how value can be created, how customers are served, and how you sustain and grow a business over time.