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Digital by Design

The real story of digital and what it means

30Jan

It would seem the term Digital is here to stay although it may actually mean different things to different people and is now banded around as the answer to almost everything these days.

Confusion reigns as to what digital really is and involves, although many naysayers are already predicting its demise and that digital is already dead.

I often flick through strategic slides of businesses found hidden in the ‘investor tab’ on the corporate website (as if they are embarrassed and want to hide it). It would seem there is an army of CEO’s mentioning digital in the context of 'I have to do and say something about it', and many powerpoint decks announce various programs and efforts for the organization to become a digital business. There seems an obsession to launch various initiatives labelled as digital that are completely separate to the main corporate agenda, and not digital at all.

Some CEOs go to video and bang on about the importance of digital but fail to explain why, or understand the fundamental implications. A scary thought if you hold shares in these businesses.

Other CEOs commit their business to a digital transformation journey without really understanding end game and place an extraordinary level of trust in third party consultants and suppliers who claim to be able to get them there, wherever there is. A bit like business process re-engineering bandwagon in the early 1990’s where everyone was apparently doing it but nobody could tell you the end game or why?

Some CEOs announce investments in Digital Labs (Garages, Skunk works, Sandbox) yet completely misses the point. Many use these interventions as digital soundbites so they come across 'as in the know', but then use it to track and follow new entrants, discover new tech partly to justify the hiring of a Chief Digital Officer which again misses the point. It all sounds rather cool and a appears to be a positive call to action to say the organization has a Digital Lab without understanding the rationale. And yes some even hire ex Google guys and put them in a lab and keep them away from the rest of the business.

This is why CDO (Chief Digital Officer) roles are often associated and confused with other titles Chief Disruption, Chief growth, and Chief Innovation and so on, when actually the end game is the same. For example, if the business is a digital business (by design) there is no need for a Chief Digital Officer, instead there will be a growth Officer who will be driving the growth (operating) Model.

Digital by Design or by accident?

For me digital is a concept, an ethos and a way of thinking and thus is really quite simple.

I get asked to define it (digital) in the context of an organization as many struggle to find the right answer that feels right, for them anyway. For me what lies at the heart of digital thinking and behaviour is the need to find new addressable markets offering growth opportunities for the organization. To spot opportunities that require new ways to attract and excite customers. The very basic concept to deliver specific outcomes and experiences with a simple ROI being lots of ‘happy returning’ customers.

In the purest form, digital could be seen as a transportation layer as part of a growth model (discussed later) that makes it easier for customers to buy products and consume services and for organizations to create and fulfil customer demand delivering new value and experiences at a value based price.

So, by will, it be digital by design think Airbnb, Alibaba, Uber which leaves the question: can an organization migrate/transform to becoming a digital business?

I remain a big fan of growth (operating) models as perfected by Airbnb and Uber in particular, which has enabled them to find growth opportunities and discover vast addressable markets and press home the advantage, to control large segments of an addressable market from an angle not seen before.

growth models are a significant progression in operating model design (simplicity) and they work in what is now described a digital economy. Some would argue they represent phase one of the fourth industrial revolution #4IR only time will tell.

Rather than getting bogged down in the wider debate questioning, if digital transformation is possible, lets explore the underlying issues and challenges for all businesses, which is where to find growth.

Could it be: growth = Digital * Addressable Market

If you believe that China has fuelled global growth through industrial expansion or artificially through central government manipulation and control. If you question why OPEC has artificially kept oil prices high or why central banks have allowed too much currency in circulation (primarily US dollar as the reserve currency) or why investment bankers have recently shared $49billion in bonuses at a time of austerity a few months after be bailed out by the tax payer. Then if you also question why economists are questioning the basis of GDP as a useful economic indicator to real growth, then growth opportunities might feel a long way away.

Real growth appears hard to find, or is it?

The global demographics also makes interesting reading given there are apparently 500+ million new middle class in China, India and in other places consuming stuff. There is a millennial generation consuming more and more online and through digital means and the World is getting clogged at the top end with old people as longevity increases. There remains 2.5 billion people unbanked and double this number who don’t have access to the right products and services to secure and protect their future. 90% of the people who are lucky to have a pension (savings) are not saving enough, and where the welfare state by design is struggling with the western economies reliant on debt to close what is now an impossible prosperity gap start to withdraw public services.

I would argue there is abundant opportunities for growth, disruption and to turn markets and customer propositions on their heads. Digital is the opportunity to reach them.

The strategic subtext to the digital question is how to find growth and for me this is the fundamental misunderstanding of organizations both large and small. The point is so often missed.

Forget robotic automation stories that say machines will replace jobs, we have been here before with the birth of computing. That the fourth industrial revolution will consume us all or that Blockchain will free us all from centralized government control. Whilst these have an impact they are not yet fundamental to organizations and markets, but will mature, requiring the CEO to add these to the corporate strategy at some point.

The number one question for CEOs should be how and where to find growth and how is it new entrants seem to find it (first).

New digital entrants do not see the layers and only think about delivering value via specific outcomes through experiences. They try to get to the future first. They are often growth models in their purest form.

Growth and the addressable market

Growth opportunities are actually everywhere, albeit some would say the size of the addressable market is not increasing as much depends on what is considered the addressable market. It comes down to perspective.

There is growth and there remains a lot of opportunities at the moment. But it is also clear that many organizations do not see everything as addressable. The primary reason is the operating model will not allow the organization to follow well trodden paths and argue competitive differentiation which means (eroding) shaving margins and discounting to maintain market share. Going down this path is a bit like WWI trench warfare gaining a yard here and losing a yard there. An incrementally stagnant business model, hence 52% of Fortune 500 businesses have disappeared, gone bust or fallen from grace.

This is where corporate strategy based on doing more of the same with incremental improvements collides head on with a digital strategy that targets real growth opportunities not traditionally seen as addressable are not happy bedfellows. And this is why any CDO role (in any guise) has to work alongside the CEO with the remit and support of the board. But someone has to take responsibility for finding and delivering growth and the CDO is responsible for this.

Another reason why CDO’s skills sets involve many facets and experiences making them a rare breed indeed. Above all any CDO should have experience and understanding of how to use digital growth models and the process fordigital by design to reach new addressable markets.

There are 6 levels of digital maturity I have identified (another paper) which fuels the operating model debate that defines the organizations digital future. If it were left to me I would impose growth model principles and staff the organization accordingly, changing the structure of how the work is performed around seizing a market the support the 'towers' within the growth model.

The exam question: how does the organization create and fulfil new growth versus supporting the current model that delivers current income streams?

There it is. The flexion point of going or being digital.

#Hint: They cannot coexist in the same operating model.

Without doubt this is the thorny and contentious issue and where the outcome is often a compromise (fudge) that leads to a painful digital transformation journey that is neither one thing or another as new layers of coloured lipstick are added. The board is unable or unwilling to decide and commit, thus choose what they see as middle ground which will ultimately strand their strategy between opposing forces.

Just ask Sony back in the day when they were the largest record label and manufacturer of MP3 players led (controlled) the music world. They allowed a new business model to consume music designed by Apple to take their business while they were wide awake. The principle reason being that Sony executives refused to cannibalise current revenues in search of new growth and go after the addressable market.

When management complains of a lack of growth they are referencing this through the eyes of traditional markets and ways of reaching and delivering products and services. They are blinded. Like skiing in a ‘white out’. You can only react to what you can see close to you.

The sub text is that management are confirming and accepting the limitations of the operating model, a model they have defended for so long making endless promises that could never be delivered regardless of effort. But now management have, or perceive to have, a digital get out of jail free card.

In this context digital is seen as trying to do the right thing and where it ends up as an opportunity for some smoke and mirrors (lipstick) options in an attempt to paper over the cracks because one cannot be expected to place ones revenue at risk. This dilemma is not discussed in modern organizational and management theory texts that all of a sudden look very out of date.

Convention suggests that when industry growth slows organizations seek safety in mergers and combine operations to apparently deliver performance improvements, cost savings and better returns to shareholders. Others with similar mindsets drive market consolidation thinking this will protect them and extend the corporate life of the enterprise, when in fact it is often the first phase of the end game.

What is really going on here?

Conventional organizations are restricted by conventional thinking and behave in terms of competing for more market share, focus on economies of scale and now all of a sudden think digital will save the day and deliver something miraculous. But fail to recognise this is dinosaur thinking.

Or do they think they can disguise what is about to happen.?

Hence the question digital by design or by another means?

So let us discuss what is meant by addressable markets rather than simply refer to it as growth. The difference is the ability of organizations to effectively compete for new customers in new markets traditionally not seen as natural hunting grounds. Digital growth models allow different options for organizations to address markets otherwise unavailable.

Digital is the key to growth.

A good example are financial products sold through a disintermediated market structure (sales and advisory layers) where the apparent cost to create, sell, support and administer these products make them quite expensive to buy and by default socially excludes large portions of the market, simply not recorded as addressable. In fact often not mentioned at all.

The excuse has always been financial products are regulated, complex, involves underwriting risk, requires effective compliance and must be auditable and has to be sold through financial intermediaries who also have to make a margin as they have to deliver advice. Thus the focus is to sell products into markets where a sizeable margin can exist and profits taken along the supply chain.

The reality is most financial products are aimed at the top end of the market for this reason and because the providers need to make a certain margin and why fees and charges are often not fully disclosed. In most cases the consumer ends up paying for the inherent inefficiencies of an organizations bloated infrastructure, legacy technology and inefficient processes that create unnecessary levels of friction in a wrapper that confesses to treat the customer fairly by design.

Many financial products have been designed around inherent inefficiencies of the market structure to feed many mouths, rather than to deliver the specific outcome (experience) for the end customer. This is why new entrants are strategically collapsing markets, removing the disintermediation and giving customers what they want on their terms at a price/value that delivers the right outcome.

For example: by removing process friction and enabling customers to serve themselves I was able to address 14m new customers larger competitors were unable to reach because the cost to acquire a customer having built a digital growth model platform was £0.20p versus £200 market average. Disrupting a market where the bigger competitors struggled and creating a new opportunity to move into their traditional markets and make cost/price an issue where before there was limited or no choice.

By design.

Digital by design gets my vote as the rest is just too hard. Transformation is one of those things where few organizations will get there but will probably fall short or end up with different coloured lipstick all over the enterprise.

The strategic concepts being discussed in the board rooms should be how digital strategy becomes the corporate strategy, and how new growth will be achieved by defining how the enterprise goes to market, manages transactions and customers, challenges new entrants to achieve scale and replacing the revenues delivered by conventional operating models.

Digital is not a label, a management theory or consulting engagement. It is not a PR mantra or facade to hide the truth and mask a failing operating model. It offers a significant opportunity to identify and capture growth. And should not be banded around as the answer to everything or taken too lightly.

It is clear the most successful growth models are by design, but it is up to you to decide how you and your organization handles the digital agenda.

Sources

© Digital BOOM 2016

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