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May 13, 2015

9

CxO Transformation Dilemma: Digital Businesses and Innovation Clockspeed

by Ravi Kalakota

“The retail industry is in the midst of a seismic shift. We can bemoan changes in the marketplace or embrace them.”  Target CEO Brian Cornell 

DigitalUnicornsEvery CEO today must have an answer to the question, “What is your digital strategy?”

Consumerization, prosumerism, crowd sourcing, sharing economy, millennial experiences, omni-channel services and other digital-enabled transformations are challenging the status-quo.

Few things have jumped into the consciousness of business executives as quickly as digital business. Executives realize that their companies must succeed in creating transformation through technology, or they’ll face destruction at the hands of their competitors and next generation “unicorns” –  Uber, Airbnb, Netflix, Amazon.com, Pinterest, Google/Nest etc. – that do.

TechTarget’s Tom Goodwin had an insightful observation:  “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.” All are Asset-lite digital businesses.

These new-age firms have an inherent advantage. Digital startups  by their very nature tend to be more user-centric, for several reasons:

  1. They are often founded on the premise of improving or simplifying the lives of end users;
  2. Their business is built from the user’s perspective, rather than on an established business model;
  3. The digital platforms (applications and infrastructure) on which they build their products and services enable a much higher degree of user centrism;
  4. They lack the legacy infrastructures, bureaucracies and operating models that force many traditional companies to continue thinking from the “inside- out” rather than from the “outside-in”.

There in lies the classic Innovator’s Dilemma made famous by Clayton Christensen

Seven Core Principles of Modern Digital Enterprises

Improving customer experience results in lower attrition.  This is one of the core principles of business.

With respect to customer experience and engagement, the separation between technology, customer and business has vanished with digital. While some innovative companies have already embarked on their digital transformation journeys, many more are struggling to get the execution model right around these 7 execution principles.

  • Engagement at scale by leveraging the web and technology to build brands and engage customers
  • Engagement is more important than commerce or transactions… effective digital engagement of customers is at least a top-five priority in every company
  • Leveraging social intelligence and capabilities
  • Work and processes are collaborative, mobile and real time.
  • Data is the core and is available in formats that are digital, sharable and structured.
  • User Experience is intuitive
  • Mobile First is the new design principle of digital – over 70% of consumers are using Mobile as their primary device

Engagement at scale is one of the core differentiators of the modern digital landscape.  Pinterest is an online pinboard, a social networking service, that allows people to collect and organize items of interest, so they can be viewed by others. Pinterest in a span of three years has more than 75 million users (more than 85% are women).

Pinterest in 2014 gathered 20 terabytes of user generated data each day, and have around 10 petabytes of data in S3.  Instead of building their own infrastructure, Pinterest uses the cloud service, Amazon Web Services (AWS),  Amazon’s S3 (Simple Storage Service) and Amazon’s EC2 (Elastic Cloud Compute).

According to Ryan Park, operations engineer for Pinterest, “The cloud has enabled us to be more efficient, to try out new experiments at a very low cost, and enabled us to grow the site very dramatically while maintaining a very small team of 2 people.” The advantages Pinterest is leveraging: (1) elastic capacity; (2) quick and global deployment; (3) No CapEx, no initial spend; (4) Pay as you go, for what you use; and (5) Automation and Reuse.

Engagement at Scale (and Engagement in Real-time) is something very few large corporations using internal data centers can match or support. Plus they would need years to build something capable of doing this. By then the marketplace has moved on to something different. This inability to match the development and engineering speed of pure digital firms is corporate innovation and marketing dilemma.

DigitalTransformation

Digital Transformation…. More than technology…it’s about the Multi-Level Change

The Digital Advantage

Digital transformation has hardly been uniform across or within industries.  It’s clear that some industries surpass others in their transformation. It’s also no secret that within every industry, we find digital novices, the beginners, the evolved, and the mature, and everything in between.

In a 2 year study of 400 large firms – it was found that digitally mature companies outperform their competitors.  The world class digital firms are making digital marketing and customer engagement a high strategic priority.  Take for instance Banking. Customers are increasingly engaging with banks through digital channels which enables them to reduce service costs.

So in digital, what separates good from great firms? What does world-class and high performance mean? We know the typical thing to avoid or overcome… lack of leadership and alignment among management, legacy IT systems, conservative culture, and a lack of talent and skills.  What we are still developing are guidelines/rules around what managers need to really do to become best in-class.

DigitalAdvantage

Source: Capgemini & MIT Sloan Management Review, The Digital Advantage: How Digital Leaders Outperform Their Peers In Every Industry, 2013

The Digital Transformation Challenge

Even as CEOs push forward with their digital agendas they are facing significant transformation headwinds. There is a lot of work to be done: most executives estimate that at best, their companies are one-quarter of the way toward realizing the end-state vision for their digital programs.

Executive leadership must be the stewards of the new digital mindset and skillsets. They must recognize that the separation between technology and business has vanished.

CxOagenda

One of the companies that i consider digital best in class is JP Morgan Chase, whose digital strategy for retail banking is shown below. JP’s customers are increasingly engaging with them through digital channels which enables them to reduce service costs at the branch and call-centers.

Digital is embedded and core to all of the retail banking strategic themes: Acquire and deepen relationships; Rapid adoption of digital capabilities as customers continue to change the way they bank with us; and Drive down expenses.

JPMC digitalstrategy

Source: JP Morgan Investor Day

What makes JP Morgan unique is that executives are systematically transforming a super-tanker and repositioning it for digital.  Jaime Dimon, like many of his executive peers, rate digital transformation as “a matter of survival.”

What does “Good” in Digital look like?

As businesses continue to embrace digital tools and technologies—especially when engaging with customers—C-level executives have to step up their own involvement in shaping and driving digital strategies. This is vital to the success of digital programs, as lack of senior-management interest and support is the primary cause of transformation failure. Getting the right organizational alignment is critical to seeing real business impact from digital.

DigitalConnections

Additional Resources and References

  1. Digital Marketing Architecture:  CMO Martec Playbook
  2. Digital Architecture 101
  3. Digital Integration – Why do you need a new breed of innovation vendor/partner
  4. Digital 101 – The Basics
  5. Due to abundance of VC funding chasing deals, there seems to be an explosion of me-too digital business models.  As The Wall Street Journal recently reported, “There’s an Uber for everything now. Washio is for having someone do your laundry, Sprig and SpoonRocket cook your dinner and Shyp will mail things out so you don’t have to brave the post office. Zeel delivers a massage therapist (complete with table). Heal sends a doctor on a house call, while Saucey will rush over alcohol. And by Jeeves — cutesy names are part of the schtick — Dufl will pack your suitcase and Eaze will reup a medical marijuana supply.”
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