digital pivot

July 5, 2017

“Most cars don’t improve over time. By contrast, Model S gets faster, smarter, and better as time passes… [It] actually improves while you sleep. When you wake up, added functionality, enhanced performance, and improved user experience make you feel like you are driving a new car. We want to improve cars in ways most people didn’t imagine possible.”

If this sounds like science fiction, it is not. Tesla Motors has been pioneering the design and delivery of electric vehicles with over-the-air software updates for over a year now. Elon Musk, as the founder of Tesla, has challenged not only the design of electric cars but also how it is personalized and serviced. Every major global automaker is now in the midst of assessing how best to transform their business operations for the digital future—when cars are best seen as computers connected to the cloud.

But what does it mean for executives who are not in the automotive industry? It simply means that the digital transformation of automobile is not an exception, but hints at the shape of things to come as a wide range of products become smarter, infused with sensors, software, and connectivity to the cloud. In other words, every business will become digital, if it is already not. This digital transformation of industries and companies is happening, as I like to say, because of ‘powerful computing, pervasive connectivity, and potent cloud’. We have seen computing power grow exponentially and at lower and lower cost (Moore’s Law), the value of networks grow as they increase in size (Metcalfe’s Law), and more data being transmitted with greater reliability and at reduced cost using cloud computing technology (Bandwidth Law). Companies such as Tesla, Netflix, Uber, Amazon, Google, Facebook, Fitbit, Apple, and others have developed their business models taking advantage of these three laws. Now, every company must assess their relevance in the digital world.

It is easy to consider Google, Apple, Samsung, and IBM as digital companies because they deliver digital products and services. But so are John Deere and BMW, which are reimagining their products as part of digital ecosystems in agriculture and transportation respectively. It is straightforward to say that Tesla, Uber, Twitter, and Airbnb are digital companies as their products and services are enabled through digital devices and interactions. But so are companies such as GE, Siemens, Philips, Whirlpool, Rockwell, Tata Motors, L&T, and Bosch. Every industry faces its own digital future, and by extension, every company in it does as well. If your business is not taking advantage of the new functionality provided by these three laws, then you are already behind.

You may still be not convinced that digital technologies are core to your business. Just do a thought experiment by answering the following questions:

  • How would sensors, software, and connectivity change the value delivered by your physical products?
  • Are big data, analytics, and artificial intelligence likely to impact your business processes, and how you make key strategic decisions?
  • Does the social web (for example, how consumers interact with each other on Facebook or Twitter) shape your customers’ actions, interactions, and consumptions?
  • How could mobile apps infused with conversational capabilities (for example, Apple Siri, Google Assistant, and Amazon Alexa) enhance your services to individual consumers and enterprise customers?
  • Could robotics, drones, and 3D printing redefine your supply chains and business models?
  • How might cognitive computing algorithms and machine learning proficiency influence your business operations in the future?

I am sure that at least one, if not more, of these questions has made you think seriously about your ability to compete in the future where your industry and business models would be fundamentally impacted by digital technologies.

Why should you—as a smart manager—spend your valuable time to think about digital technologies instead of delegating it to someone with deep technical expertise? It is because it is not about designing the technical infrastructure but about architecting the business for the digital age. We are at an inflection point where old definitions of industries, competition, and organizations do not make much sense, but we do not yet have new ways to delineate and demarcate pockets of value created by digital technologies. The old rules of strategy and management— experimented and perfected in the industrial age—do not appear useful, yet we do not have new rules of management or value creation and capture. We see companies born digital in the post-industrial age such as Alphabet (parent of Google), Apple, Amazon, Facebook, and others emerge with principles and practices of management that are very different from the companies like the ones you manage today. So, you must prepare your business to compete in the future where the drivers of value creation and capture will be through digital capabilities.

In my book, I argue that your ability to win in the future is shaped by your ability to compete against the actions of three types of ‘players’ across three ‘phases’ of transformation.

types of players

The first type of player is your current competitors— the incumbents in the industry you compete in. You know them well because you have competed with them in the past and the chances are that you have a good understanding of what they could be doing with digital technologies. But you must assess how you stack up against two other types of players—technology entrepreneurs and digital giants. Ambitious, upstart technology entrepreneurs have brazen and audacious views on how they can disrupt and reorder the business world. These are PayPal in financial services, or Uber in automotive, or Netflix in media and entertainment, or Flipkart in ecommerce. They are funded by venture capitalists who act as catalysts for them to innovate with digital technologies and disrupt status quo business processes and practices laden with inefficiencies. The digital giants are the likes of Amazon, Apple, Alphabet, Microsoft, and Facebook today. In the future, they could be Samsung, Alibaba, or Baidu. These giants have expanded their scale and scope to go beyond passively delivering IT products and services to influencing the business rules in many sectors. Just think who defines the business rules in telecommunications (Apple and Google), who directs the future of advertising (Google and Facebook), who leads in the digital transformation of retailing (Amazon and Apple) and who influences the digital transformation of automobiles (Google with Waymo and Android Auto and Apple with CarPlay). The larger question is: how might these digital giants influence other sectors such as healthcare, financial services, entertainment and media, and others over the next decade? More importantly: how might they affect your industry as it digitizes?

phases of digital transformation

  • experimentation-at-the-edge: The three phases of digital transformation occur concurrently. There is an embryonic phase of exploration that I call ‘experimentation-at-the-edge’. Here, the three players experiment with ideas—such as delivery by drones (Amazon) or internet connectivity with balloons (Google’s Loon project)—that may one day appear far-fetched concepts in patent applications but very soon can become real with actual prototypes and experimentation in the field. Some experiments enhance the current ways of doing things while others challenge and disrupt the status quo.
  • collision at the core: The next phase sees genuine tension between established ways perfected in the Industrial Age and new digital ways experimented just recently. I label this phase ‘collision at the core’, where digital rules challenge traditional industry practices and pre-established rules of engagement. Uber and Airbnb challenge status quo just as much as Apple does in the retail financial services with Apple Pay, or Amazon does when it introduces Amazon Go—physical retail format without checkout counters.
  • reinvention of business models: The third phase is where digital ways of thinking are no longer an afterthought. Instead, industry incumbents, tech entrepreneurs, and digital giants (or various combinations of these) work together to solve core problems for consumers (individuals and businesses) by using digital functionality. Here, the main strategic question is: what thorny problems for individual and business customers can we solve by putting digital functionality at the core? In doing so, how could we deliver better value than previously unimaginable? We see the beginning of this phase in the transportation sector where the business model is shifting from ownership of cars to ridership as personalized service. And we will see many arenas redefined by players working across traditional industry boundaries to solve thorny problems.

Managers should look at digitization not as a matrix of technologies but in terms of how three types of players across three phases of transformation, experiment, and execute new ways of solving problems by taking advantage of digital technologies. Individual technologies—such as Internet of Things, cloud computing, 3-D printing, drones, blockchain, artificial intelligence, and machine learning—may seem like they belong in the province of technical experts. They do, but collectively they usher a new business infrastructure where traditional business models become outmoded. We have already seen rapid and powerful ways the digital giants (Apple, Amazon, Alphabet, etc.) and ambitious technology entrepreneurs (PayPal, Tesla, Netflix, and Uber) have disrupted traditional industries to create and capture business value away from historical leaders. This trend will only accelerate and it is time for leaders in traditional industries to take notice and strike back. Time is against you and you cannot afford to procrastinate.

In my book, I lay out a rule book to guide you to effectively embark on your digital transformation journey. At minimum, stress-test your business model against alternative scenarios of digital future: Will you be relevant when your industry digitizes? Will you be able to maintain your top line sales growth and bottom line profits as digital giants and ambitious entrepreneurs influence your industry with web scale and speed? Will you be able to attract the required digital-savvy talent to help shepherd your organization through this pivotal period of transformation?