This content is part of a program managed by the Economist Intelligence Unit, sponsored by Accenture and Pegasystems. “Digital Evolution: Adapting Business for a Digital World” aims to shed light on the world of digital business—the strategic imperatives, challenges, complexities and pitfalls. All “Digital Evolution” content can be found here.
A lot of companies like to think that they’re surfing the digital wave. In reality, for many, digital is more akin to a tidal wave that is undoing everything in its path and forcing organizations to reconstruct business models and operations.
Since many companies have integrated digital in a specific sequential way, they often view their digital activities in silos and are unable to see them as an integrated, cohesive whole. This inability to see the big picture can provide competitors with an entrée to disrupt.
The scope of digital transformation is often more vast than it first appears. Consider the auto industry. On the one hand, digital has ushered in supply-chain improvements like just-in-time manufacturing and new levels of price transparency. On the other hand, digital has changed consumers’ expectations and desires around the very concept of a car. These days, luxury and the driving experience are still important, but buyers usually want connectivity, too. They want Internet access—not just being able to plug your phone in and play Spotify, but full-on connectivity—including vehicle analytics, preventive maintenance and location-based services information.
Add to this the potential emergence of self-driving cars or transportation services like Uber and Lyft, which fundamentally challenge the very idea of vehicle ownership. Clearly, digital transformation changes many assumptions inherent in traditional business models about consumer expectations, the hierarchy of competitors and overall operational efficiency.
This might seem overwhelming, but it doesn’t have to be. In fact, four levels of digital strategy are available for companies to consider when addressing the digital evolution of their industry:
Level one: Marketing, Sales and Customer Experience
For most companies, the digital transformation began 20 years ago in the form of two-dimensional websites, with the emergence of the World Wide Web prompting an immediate need for Internet-based marketing. This has expanded to include other, now common, digital channels across apps, eCommerce, social media, CRM and customer experience. The hotel industry gives an illustration, with wearables like the Apple Watch being used to open room doors, eliminating the need for room keys or even hotel check-in. As a soft drink maker, Coca-Cola would appear to have little natural crossover with Spotify; however, the two have a mutual goal of wooing young consumers and, in 2012, announced a global marketing partnership.
Level two: Operations
This includes IT modernization, process automation and employee workflow; it is largely focused on the substantial efficiencies digital can bring to a company’s operations. 3D printing, for instance, would fall under this—as would transitioning legacy IT systems to the cloud.
Level three: Products and Services
Products and services can be thought about in two ways. One is the enhancement of existing products and services through digital, for example, GE’s application of an analytics capability to a jet engine provides new engine maintenance service capabilities; Berkshire Hathaway uses real-time flight data reporting to power its new digital-based Air Care travel insurance.
The second way to think about a products-and-services-focused digital strategy is around new value propositions based on new digital technology. Examples include blockchain and peer-to-peer lending systems, which provide payment and other services at lower costs and outside of the traditional banking infrastructure. Another is healthcare, where digital creates new opportunities—ranging from real-time personal fitness tracking to personalized, outcomes-based treatments and superior prescription adherence via digitally enabled molecules and real-time sensory-based medical alerts.
Level four: Business Model
This level is particularly powerful as it encompasses the other three levels as well as an enterprise-wide strategy that includes new digital operating models, greater focus on innovation and cross-functional collaboration, new ecosystem partnerships and other new ways of doing business. Silicon Valley is the natural place to look for business model innovation, for instance, Over-the-top media companies like Netflix’s or Wealthfront’s algorithm-driven wealth-management services.
The challenge of digital evolution
Since the scope of change is so broad and rapid, it can be challenging for leaders to understand their emerging digital strategy options. Most companies still process digital at levels 1 and 2—marketing and operations. They do this despite the emergence of competitors across sectors that are looking to lead overall sector transformation through their focus on levels 3 and 4.
Crafting a successful digital strategy requires an understanding of digital’s overall strategic impact on a sector. That requires understanding how competition is changing and how customer expectations are shifting. If a company is still working on basic digital tactics while the competition is casting a broader net, then they risk missing the boat.
It’s important to assess the full extent to which digital is changing business. If a competitor is successfully executing across the four levels and you’re not, it’s potentially a real threat. In this expanded view, though, competitors may very well not be limited to the usual suspects, as start-ups, tech giants or other digital leaders target the value chain. Like a tidal wave, you’re a lot better off if you can see it coming from far away.
Ryan McManus is a director in Accenture’s Digital Business Strategy practice,@RPMcManus