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Can your strategy thrive in a digital world?
It started with a straightforward question. Someone in the Starbucks marketing department in 2010 asked: “Wouldn’t it be great if we had one of those prepaid, stored-value cards?” Starbucks created one. That soon led to another enhancement, which was a loyalty program: after customers bought several drinks, they could get a free latte or other drink. Then the program grew into one with the ability to send gift cards, because one in seven adults receives gift cards during the holidays. Soon thereafter the card became a mobile phone app, and the focus turned to improving the customer experience in Starbucks stores. Starbucks found that when mobile pay solutions were offered, three things happened: it was more convenient and faster for many customers to pay that way; order details were conveyed more effectively because the customer entered the specifics of the order; and it increased the throughput or number of customers a store could serve at peak periods by more than 10%, mainly because the customer didn’t have to search for exact change to hand the barista. Speaking of baristas, Starbucks studied what was the biggest determinant of whether a customer would return to a store, and it was the barista. Does the person know you? Is he or she smiling? If so, most customers would come back. If the place is going crazy with orders and lines are moving slowly, customers usually don’t come back as quickly. Therefore, Starbucks went from improving the customer experience to looking at how baristas could be freed up from certain tasks so they could spend that time interacting with customers and improving the customer experience. It’s like a digital horizon. You move forward and solve one problem, and now you see other opportunities on the horizon that you couldn’t see before, according to the company. Starbucks is now spending roughly 40% of its efforts on digital activities. Critical intellectual property used to be things like a recipe for a beverage. Now it’s become an algorithm that predicts customers’ propensity to buy, based on hundreds of customer preferences tracked by Starbucks. Among the next challenges Starbucks is tackling: how to leverage real-time data to suggest alternative locations for faster service, based on up-to-the-moment assessment of lines and throughput times. We’re so far past why “digital” is the trend for the future, you need no convincing. We suspect you may be thinking: “My company is already digital. We have been all along. In fact, we were an early adopter. What can you possibly tell me that I don’t already know?” This chapter won’t try to convince you that digital technologies are important and worth investing in; you know that already. It’s about helping you see that digital is likely much more far-reaching than your organization currently thinks, regardless of your industry. In fact, asking “What is our digital strategy?” these days is too narrow. Rather, companies and their leadership should be asking “What is our business strategy in a digital world?” If you are not, there’s a very good chance you’re thinking about digital incorrectly. How can we be so bold? We suggest you take the next two minutes to consider the following questions. You’ll get the very most out of this exercise if you don’t look ahead for our take on the answers. We say yes it is, for starters. But to thrive, the marketplace now requires you to think about digital across the following seven dimensions (which we’ll discuss in more detail later): You may say, “That describes the entire company.” We again would say that you’re right. Look at Figure 12.1. Figure 12.1 Reframe the question All companies are somewhere in the continuum from Digital 1.0 to 3.0. Also, a single company may not neatly fit into one of the levels, but each business unit may be in a different phase. To better understand which phase your company is in, consider the following: At the phase 2.0 stage, the operative word is what, as in: “What do we have? We have a chief digital officer and a new mobile app, and we recently launched new connected devices.” When you’re defined by digital in the phase 3.0 mindset, you go beyond the what and get to the who, the how, and the why. Who is responsible for digital? Our CEO. How do we make decisions? By regularly stress testing our decisions and direction with specific questions. Why are we so obsessed with this? Because digital is driving dramatic disruption in business models, and fueling new opportunities for traditional and nontraditional competitors alike. More about those later. Jeff Bezos, founder of Amazon, has this to say: When people say that an entrant is disruptive in an industry, what they really mean is that customers are adopting that new way. At Amazon, we’ve had a lot of inventions that we were very excited about, and customers didn’t care at all. And believe me, those inventions were not disruptive in any way. The only thing that’s disruptive is customer adoption. If you can invent a better way, and if customers agree that it’s a better way, then they will use that.1 It’s therefore useful to look at the fundamental changes in the marketplace from the customer’s perspective. The sections below illustrate what we suspect many people think to themselves: “I don’t need to go out and shop; I can shop from my phone or desktop. They’ll deliver it wherever I want.” “I used to expect goods to be delivered in weeks or several days, and it was always a range. I now think anything longer than two-day shipping is too long. And more and more I’m hearing about same-day or even two-hour delivery.” “There used to be a handful of airlines, and you needed a travel agent to get the inside scoop on good flights. Now I expect real-time prices, price-drop alerts, and tools that tell me that if I can travel a day earlier or later I can save a bundle. If I want, I can plan every bit of the trip separately based on genuine reviews of airlines, hotels, restaurants, and even Lyft drivers.” “I’m not limited to what the local store has in terms of colors, sizes, and models. I can get any of them, as long as they’re available somewhere, or can be made to order.” “I’ve moved from essentially being on a local island to being in an international network. Retailers overseas are vying for my business, with very similar delivery times to what the retailers in my city can provide.” “I used to rely on advice from ivory-tower, local ‘experts.’ My neighborhood doctor told me I had arthritis without even examining me. Now I can rely on huge online resources like the Mayo Clinic and WebMD for professional guidance, not to mention people on YouTube and elsewhere. It turns out I don’t have arthritis at all. I’ll still go to doctors, but I’m much more informed now.” “Of course companies think their products are great, but I rely on crowd-sourced, real-time reviews of products and service providers. You can just tell when it’s a fake review or a real one. Besides, Amazon, TripAdvisor, and others allow you to review the reviewers!” “I pick up a few extra bucks driving for Lyft. I do get reviewed by customers, but I can review them too if they leave my car a mess. It’s the same with Airbnb.” “Size mattered in the past. Sears was once everywhere and had the best selection of tools. Now I can go online to Amazon—I don’t care where their physical locations are—and sort by reviews. The top result for a highly specialized tool might be a woman making them in her garage workshop.” “I used to play catch-up with getting more storage capacity and computing power for my desktop computer. I played the game of ‘What speed is your CPU?’ Now no one cares, because the computing is being done in the cloud. Plus companies now hand out terabytes of online storage for free.” “I could tell you in the past who was big. It was the big store down the street, or the big scientific instrument company with the phonebook-sized catalog that got printed once a year. Now I can’t tell who’s big, because a small company can have a better and more detailed website than a big company. And products from the big and small guys get delivered to me just as quickly. In fact, the small company uses Fulfillment by Amazon and I have its product at just about the time that the big guy is telling me my order ‘is in process and will be leaving the warehouse shortly.’”
People still love to be pampered and waited on. Just because a service can be do it yourself (DIY), that doesn’t mean the done for you (DFY) market has gone away. Look at the explosion of home delivery for meal kits, wardrobe outfit packs, and the like. Make it easy and tell a great story, and many people will pay extra for that. It’s pretty clear that customer expectations are disrupting traditional business. So how can you grab more than your fair share of the market by having the phase 3.0 mindset that’s defined by digital? We suggest that you focus on the following seven areas: Most companies have a handle on their core customer segments. What we have discovered is that most of their perspectives are static, rearview-mirror-based instead of forward-looking. Push the boundaries from the current state to the ideal end state. How do customers do their research for your product or service? Who are the key influencers along the way? What sources and tools do they use? When working with a major entertainment park, we found that while many of their experiences were immersive digital ones, the shopping, researching, ticketing, and fulfillment operations were painfully paper-based. A journey mapping should define seamless experiences, recommendation engines, and embedded commerce tools. These not only should increase speed and ease of use, but allow for moments of “surprise and delight” along the way. We list customer journeys as the first dimension because they need to guide discussions from the CEO down, on a regular basis. Leadership must address: Review the websites and offerings of your suppliers in order to determine if they are going directly to your end customers, thus devaluing your leverage. Keep up with regular advances in logistics, the Internet of Things (IoT) (connected devices), 3D printing (additive manufacturing), artificial intelligence, and other technologies that can reduce downtime, lower operating costs, and shorten delivery times. You don’t need to be expert at them, but you do need to be exposed to developments. This will allow your brain to synthesize it all and prompt you to think, “Hey, wait—what if we could use X to do Y in our business?” It used to be easier: you had a sales force and an advertising/marketing budget, and you drove traffic to your store/website/distribution channel. Now that mechanism is different because so many other factors influence customers. If you’re a sensor manufacturer selling to engineers and designers and have a website with product PDFs and a sales force, what do you do with millennial decision makers who won’t come to your website, and instead use expert communities to drive decision making? Tool-and-die companies have been around for centuries. One such company studied the customer journey and discovered that 71% of its new prospects had done all of their research before they ever talked to salespeople. As a result, this company digitalized its engagement model, not only creating more content than ever before, but distributing it to those places where their prospects researched potential products, instead of waiting to react to a sales call. Why are video bloggers and influencers so important in many categories like fashion, cosmetics, travel, technology, and financial services? They have large followings who trust their recommendations (over those from manufacturers) because they are often authentic and transparent. You should research where the conversations and reviews are happening with your customers, and make plans to engage with them there. It’s remarkable how many products have terrible (and sometimes highly biased or bogus) reviews on Amazon, yet the seller never engages with reviewers. It’s a great opportunity to correct misunderstandings, explain features, and, if necessary, show how you support issues that arise with buyers. These conversations are happening not just at Amazon, but also on product and user forums, social media, and sites like Quora, where people can ask questions of experts. If you sell Business to Business (B2B), don’t assume you’re protected from social media conversations; take a look at your brand voice and the topics associated with your company on social media. There’s a good chance you’ll be surprised at how individuals are talking about you. Of course a major goal of companies in this competitive environment is to maintain margin and drive profitable growth. How are you regularly getting acquainted with automation advances in your industry and in industries from which you can borrow concepts? Key standard back-office processes such as finance, human resources, sales and marketing, and customer operations are major targets for automation that not only can preserve or improve your margins, but also can align with the DIY desire of many consumers. Aggressively explore robotic process automation (RPA), chatbots, and other technologies that can dramatically change the game. How has your organization embraced different types of data and analytics? Are you embedding other technologies like machine learning? How can you further monetize data? What services can be developed to enhance value, margin, and competitive advantage? It may be tempting to think, “We’re doing the best we can because we’re overloaded with data,” but the goal has to be moving beyond collecting even more data, to driving more insight. What internal management reports do you regularly review that did not exist two years ago? If you’re reviewing basically the same information, you may be standing still in a fast-moving environment. Our approach to risk management goes beyond traditional categories to include cybersecurity, tax, legal, and regulatory, as well as talent and reputation. The need for this holistic view was highlighted when it became apparent that there were political repercussions to sharing one’s personal life online, sending social media companies scrambling to adapt their privacy rules—and quite possibly their core business models. Most organizations look at digital risk solely from a cybersecurity lens, because that’s what’s in the news every day. That is critical, given the abundance of data and the multitude of devices getting connected. And as connected devices permeate businesses, organizations have to think about cyber risk not just within their four walls, but in a distributed environment. In other words, your machines are at risk, sitting at your customer sites, embedded with sensors to drive remote diagnostics; they, too, can be the target of hacking. With the advent of massive online shopping, states are finally catching up to the opportunity to collect more sales tax. Stay on top of local initiatives in the jurisdictions where you operate. Not only are people becoming more connected, but so are countries. They’re beginning to share tax and revenue data in real time, in order to prevent companies from exploiting unintentional tax havens. We covered this more in Chapter 9. If you operate internationally, you must stay on top of tax developments continuously, or risk substantial fines. Hot topics include intellectual property decisions, who owns content, who controls internet access, etc. Not only are these issues continuously evolving, but they can differ dramatically around the globe in areas like data privacy and ownership. We’ve all heard the stories of kids in garages creating the next hot app and retiring before they’re old enough to drink. Just as athletes are being scouted in high school, major corporations are actively scouting and connecting with young, conspicuous talent. What are you doing to be aware of garage R&D in your industry? Are you watching what’s being said about your organization on Glassdoor.com and other sites? Do you have Google Alerts enabled so you find out at least as soon as your competitors do? (You should assume they have Google Alerts set up about you. You might think about reciprocating.) Attracting, retaining, developing, and leveraging talent can make or break an organization. New types of talent (digital, analytics, robotics) are critical to future growth, yet sometimes are not integrated into the pulse of the organization. Leveraged correctly, your talent is your best marketing engine; ignored or engaged only through one-way declarations, and your brand will drop precipitously. Look at your strategic plan for the next few years, and go back to your plan from three years ago. Are the competitors the same? Are the key trends largely the same? If so, it’s a good bet your business strategy may potentially be looking only at incremental effects versus transformational ones. Is your organization viewing digital opportunities through each of the four lenses of Build versus Partner versus Invest versus Buy? Each has pros and cons as well as a potential role to tap into digital transformation opportunities. Many organizations think that Build is the solution to everything, believing that they know their business best and want to maintain control. Conversely, other companies use precious capital to buy companies without truly assessing the best way to integrate and drive step-function growth. The reality is that organizations need to begin by looking outside-in to determine the potential moves that will resonate, and then use the Build/Partner/Invest/Buy filter to determine the best way to proceed. You may ask how you can possibly be expected to stay on top of all these areas and still run a business. We have the following three responses: You may also think, “We’re too small to have to worry about all these factors” or “this doesn’t apply to us” for whatever reason. It may be true that certain factors are currently not relevant. For example, you may not be doing business in other countries, or some emerging trends may not be as significant in your sector. Be careful not to let reasons such as these keep you from doing some serious thinking about your digital capabilities and transformation opportunities. In EY’s experience in more than 150 countries, these are the kinds of questions that modest-size (as well as large-scale) companies should be asking. In our digital world, these have become fundamental business questions in order to keep up, not to mention drive profitable growth. It’s true that the scale of a smaller company is different, but the questions are not: Am I engaging with the customer? Am I paying attention to what my customer is now expecting from me, my competitors, and other industries? Am I operating efficiently? Am I improving my processes in order to maintain margins? These and the other questions we covered are all very much relevant to businesses of any meaningful size. Earlier we talked about the continuum of phases 1.0, 2.0, and 3.0. Similarly, every business of every size has to make a decision about where and how it wishes to embrace the reality of business strategy in a digital world. You risk being left behind by your customers. Sure, some customers are friction-based. It’s too much of a pain to move their business. But when a competitor does crack the code on making it easy for frustrated, sedentary customers to move, these standing-still businesses will find themselves in a digital sinkhole: the ground seemed solid, until it completely gave way. These companies finally get moving, but seem to always be a few miles behind the curve. They use technology without any innovation. They’re the ones with so-called brochure websites that are little more than online phone books. As customers, we encounter them every day, and are more than happy to leave them when anything better comes along. These companies keep an eye on the pioneers. They use technology quickly but with little innovation. A lot of money can be made this way, if the company is fast enough and has strong sales and delivery systems. Then again, no one remembers the second person to fly across the Atlantic. It’s certainly a risk to be too early to the party. Jeff Bezos acknowledges a string of failed products that Amazon had high hopes for. However, the strongest companies look at failure as experiments to learn from. There is the inevitable pushback by armchair sports fans who “knew it all along” that the product or service would fail. Then again, when the innovation does succeed, the company gets to enjoy the disproportionate attention that accompanies new products and services. In addition, early adopter customers are willing to pay a premium for bragging rights. __________________ Is one option the best? No. But we submit that the companies adopting one of the first two options are destined to fight for the crumbs. Get accustomed to the reality that we all need help. We can’t build it on our own. We can’t learn it all. Even the companies with the deepest pockets realize this, and don’t try to grow all capabilities internally. They buy talent. Even then they have to make choices and not get into certain markets because they made the conscious decision to focus on other markets. The key is to be regularly reviewing new information, and regularly making those conscious decisions instead of reactive moves. Make sure your company is reframing the question from “What is our digital strategy?” to “What is our business strategy in a digital world?”Extending the reach of digital
Who’s the digital disruptor?
Location
Time
Selection
Two-way reviews
Size
What has not changed?
Focus on seven dimensions of digital
1. Outline your customer journeys
2. Identify opportunities and threats in your supply chain
3. Monitor marketing and sales channels for changes in how your customers make decisions
4. What can you automate?
5. Are you putting data to maximum use?
6. Have you updated your risk assessment in these four areas?
Cybersecurity
Tax
Legal and regulatory
Talent and reputation
7. Where are organic and inorganic investment opportunities?
Feeling overwhelmed? Join the club. But there is a way forward
This is for certain
Option 1: Standing still
Option 2: Grudgingly moving in reaction
Option 3: Becoming a fast follower
Option 4: Innovating
Note