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Dissecting Digital Strategy

Naveed Usman

March 05, 2019

Introduction

I’m sure you’ve heard enough hype around digital strategy. That it’s supposed to transform your world, your business and all that jazz. Understandably, it has become an overused term, and therefore can mean a variety of things, based on a variety of contexts. My aim for this essay is to bring you a well rounded definition for digital strategy that isn’t riddled with marketing jargon. That way, when you find yourself challenged on the topic of digital strategy at your next planning meeting, you’ll have a lot more valuable things to contribute.

So what is digital strategy anyways? To answer this seemingly simple question, let’s first consider its base definition. In the traditional sense, the term strategy is defined as “a plan of action or policy designed to achieve a major or overall aim.” As vague as that may sound, slotting the word digital in front of the word, only makes things worse.

A great resource for understanding the essence of strategy, is the timeless article by Michael E. Porter – What is Strategy?. To summarize, strategy is about making choices, Choosing which activities an organization will do, not do, or do very differently, will determine its overall success or failure with a particular initiative. To be clear, performing activities better or faster than one’s rivals is not the aim here, since operational effectiveness is easy to copy. Knowing how best to wield specific tools, technologies or processes better than your competitors does not make you a better company. It only underscores just how generic you really are. Instead, deliberately choosing a set of activities that you know your market will value, and staying true to those activities, will lead to a unique and valuable position that your rivals will be unable to replicate. By choosing the lazy option, namely, blindly copying what the competition is doing, organizations essentially burn themselves out, while attempting to do more than they can feasibly handle.

Digital is more amorphous. If you think about it, the way we currently communicate (and transact) has evolved, thanks in part to the adoption and enablement of digital technologies. Digital allows things to move faster and cheaper. Faster in that access to and delivery of data is pretty much instant. Cheaper in that the cost of physical and material goods have been eliminated, where users are now expected to perform their own self-service, and in many cases, reducing the need for paid labor.

Because there is a new ecosystem, where inputs and outputs can be virtual and connected, new rules have emerged. This is the typical idea behind what constitutes a digital transformation for most organizations. Sadly, many approach the migration to digital as a series of unconnected experiments. It’s no wonder why 70% of business fail to make an effective digital transformation. As Sunil Gupta puts it, in his seminal book, Driving Digital Strategy, traditional companies that wish to successfully compete in this space need not develop smaller think tanks, task forces or outposts, to nibble away at the problem of integrating digital technologies into their workplace, but rather adopt a digital first mentality, whereby they are reimagining their businesses, reevaluating their value chains, reconnecting with their customers, and ultimately rebuilding their organizations. It’s about embracing the power (and limitations) of digital, instead of accommodating it.

Changing Landscapes

In his book, the Innovator’s Dilemma, Clayton Christensen explains the major disadvantages an incumbent business faces when new entrants emerge. Essentially, the rules (infrastructure, technology, customer need) that were necessary to compete originally, are no longer valid, making it incredibly challenging for existing businesses to maintain, and then evolve their business. They have to not only preserve their core, but also fight off new competitors that they never had to consider before. And they’re playing by a different set of rules. What’s a business to do? Abandon the core business, and hope that the next venture that emerges is successful? If it means playing by those new set of rules, while embracing a digital first mentality, then maybe that’s the better move.

Take Sears and Roebuck for example, and their hesitation to transition their business (the third time) in order to meet the needs of a digitally-minded demographic. From the outset, Sears recognized an unmet need and gave rural, unconnected customers the power of convenience, selection and affordably. In the 1880’s this approach was revolutionary, building their empire around two important technologies: a rural-free delivery system and a massive annual catalog. Sears-Roebuck essentially brought the consumer society to every household in America, and was rewarded handsomely for it. They even paid attention to the suburban sprawl of the 1930’s, by partnering with mall operators and commercial builders to develop physical locations convenient to their customers. Then, the Internet arrived, but instead of innovating on and embracing this new technology, they instead accommodated customers, thereby underwhelming the entire shopping experience by unsuccessfully emulating traditional retail competitors, until other, more digitally-minded natives eventually took over.

Best Buy on the other hand, was able to successfully cross over their digital chasm. Instead of ignoring the behaviors customers were clearly demonstrating, they embraced it. Best Buy recognized its value no longer lied in selection and convenience, but rather in exposure, and they needed to do something about it quickly. Heralded as the premier specialty store for all things tech in the 1990’s and early 2000’s, Best Buy operated as a traditional retail outlet. Customers drove to stores, discovered new gadgets, paid the advertised price and if they were satisfied, repeated the process. Best Buy was focused on operating stores in ideal locations and finding the hottest new brands and gadgets to entice customers to keep buying.

But a funny thing happened on the way to predictable prosperity. Mobile devices finally exploded onto the scene, and it changed everything. According to the Pew Research Center for Internet and Technology, by the year 2008, 82% of Americans owned a cellphone and by 2011, 35% of that cohort upgraded themselves to more powerful, internet-connected smartphones. Now, customers had a better choice, anywhere they went, literally at their fingertips. Many of them used those devices to find the same products Best Buy stores were offering, but then would buy them cheaper elsewhere online. But there was a slight problem to this approach. Customers couldn’t really experience these technology products first-hand. So rather than take the risk of purchasing unfamiliar or incompatible tech, customers continued to visit Best Buy stores, but instead, treating them more as a glorified showrooms rather than destinations to purchase products.

This behavior was clearly reflected in their store analytics – and ultimately on the bottom line. In retaliation, Best Buy executives quickly shifted its business model to embrace this customer behavior and pivot the business to be more real estate oriented, rather than traditional retailer focused. In this new approach, Best Buy essentially rented premium real estate within its stores to the major technology brands. Now, Best Buy was generating revenues through subleasing dedicated space in its stores, instead of relying solely on direct product sales (including its derivatives).

Customers were happy because they got to touch and feel new products. Brands were happy because they now had a better channel to promote new products and better understand the voice of the customer. Best Buy was happy because they created a new revenue stream that was predictable and protected from a growing legion of online competitors.

These examples illustrate what happens when organizations pay attention to (or neglect) the adoption to digital. Creating a digitally-oriented organization means scrapping the old ways of doing business, and embracing the brave new world that digital has to offer. In theory, the shift doesn’t sound that risky; go where your customers are and give them what they need. Easier said than done. In my experience, the benefits of businesses and organizations making the transition to digital are not only life-saving, but also open the door to innovations, thanks in part to digital’s innocuous, yet mighty byproduct, otherwise known as data.

Data, as we will see in the next section, not only provides factual information, it is also used to improve resources, processes, products and predict the most likely of customer actions and behaviors. More and more organizations are seeking tremendous influxes of the latter in order to recognize new and interesting patterns about their customers. I pray that they collect this type of information as ethically and transparently as possible. Nonetheless, the results are in. Data at this magnitude not only reveals quantifiable proof of what is happening, it also provides businesses and organizations a unique competitive advantage on how to improve what it offers – when harnessed intelligently and responsibly.

Connecting With Data

Getting into the data is liberating. It’s also a sobering weapon. As previously mentioned, when wielded correctly, it has the power to reveal opportunities never before imagined and help make connections that aren’t so apparent.

Harnessing data analytics to improve businesses isn’t anything new. Businesses and organizations have been tracking performance (the past) in order to see if they can make sense of the present and future for decades. Traditional product-driven companies have historically tracked the movement of their products as best as they can, with the limited data and channels available to them. Some attempt to develop predictive models to assess the likelihood of future customer demand, attrition or pinpoint problems at any point in their organization (including their supply chain). They also use data regularly to identify the most profitable customers, particularly those with the greatest profit potential as well as those most likely to defect. The problem, presented in the traditional sense, is that the older forms of data are usually out-dated, one-sided and disconnected from the customer, revealing a handful of insightful dimensions at best.

Today’s digital products are connected, literally. More and more metadata is being created and transmitted passively about our actions each day. By 2020, it’s estimated that for every person on earth, 1.7 megabytes of data will be created (by and from us) every second. That ever increasing collection of active and passive data will fuel what will be the next evolution in the pursuit to “better our lives”. With the promise Big Data and the Internet of Things, the way new products and services are made, bought and sold are also changing.

For some businesses and organizations, having more data can actually lead to significant improvements with their existing physical products and services. Imagine having useful bits of information flowing into your organization at all times, for almost anything, including opted-in details about how your customers are using (or not using) what you offer.

In his book, Driving Digital Strategy, Sunil Gupta outlines new ways companies can provide value to its customers and create competitive advantages by making data central to its modern-day products and services. Plotting customers and products on a two-by-two matrix, we see the value chain increases as more people use products that are digitally connected.

Digital Strategy Matrix

Digital Strategy Matrix

For example, in the upper left quadrant, as these new breed of products become more aware of its users, they report back vasts amounts of usage data, which in turn improves the algorithms inherent of said product. You see this happening now with Tesla. The more drivers use their vehicles, the more the software records what’s working and what doesn’t. It then shares this anonymous information back to Tesla, where they make sense of the data to improve its previous algorithm. This improvement finds its way into the next software update, thereby improving existing vehicles across the network. And the virtuous cycle continues. In this example, Tesla is successfully reaping the Digitally Enabled Products and Services strategy – which we’ll cover in the next section. The key takeaway here is that each Tesla vehicle gets smarter (and ultimately better) as more people use it.

So which digital strategies should your organization employ? Before landing on a clear answer, let’s examine some common strategic frameworks, and see which ones best fit your organization’s needs.

What’s Your Digital Strategy?

Now that we know that digital strategy is a commitment to activities that embrace digital connectivity, the next step is to define which types of digital strategies make the most sense to pursue. Thankfully, Harvard Business Review has outlined six major strategic frameworks that businesses and organizations can use today, organized into two distinct categories; offensive and defensive.

Offensive
  • Platform Play: attempt to redefine their industry’s value chain so customers and suppliers can interact more directly and benefit from network effects. Platforms have the power to radically alter the way value is distributed in a value chain. Examples include Facebook, Amazon, Apple, Netflix and Google (FAANG).
  • New Marginal Supply: tap into previously inaccessible sources of supply at a marginal cost, often, but not always, in combination with a platform play. Companies that want to sell their wares via Amazon or eBay come to mind.
  • Digitally Enabled Products and Services: create new products or services with digital features, typically to serve new demand. Remember the Tesla example?
Defensive
  • Rebundling and Customizing: Rebundle their products or services to better serve their existing customers. The paywall for quality news content established by the New York Times where people can personalize reading lists and organize the content they read is a good example.
  • Digital Distribution Channels: Most overused strategy. Digital distribution channels are an attempt to make it easier for customers to gain widespread access to their products or services. Think of every business or organization vying for higher positions on Google.
  • Cost Efficiency: Using digital to improve their cost efficiency, typically through automation or cost scaling. In an age where operational excellence is the norm, this strategy looks like it’s aimed at survival rather than creating a source of competitive advantage.

What I’m particularly keen about is how these strategies are organized. Placing them them into categories of intent really help to frame if an organization is undertaking an offensive or defensive posture. Then, looking to which strategy will make the most sense to pursue is the next best step. Cascading from there, your team is bound to find an abundance of tactics to support your chosen strategies, which is beyond the scope of this essay. Just know that without a clear (and agreed-upon) strategy, all the tactics in the world won’t help bring about success.

Kristina Halvorson has a cute story that illustrates the point. Imagine you are a hungry bear in the middle of the woods. Simply put, your objective is to find some food. Your strategy is to go to the river, since that’s where you’re most likely to find some fish. Your tactics are to open your mouth in the water, and clamp down when you feel a fish. The sequence laid out here is straightforward and logical, because its mapped out – in the correct sequence. Following a bad strategy, say forging deeper in the woods, with the same tactics of opening your mouth, and clamping down in the middle of the woods simply won’t work, – and will make you look silly. In my experience, landing on the right strategy, and then assembling the appropriate tactics is the smarter way to go. Sadly, most reverse this very important sequence, and wonder why they get such poor results.

Is this all starting to make more sense? I know there’s a lot to absorb here, but stay with me, as we’re getting dangerously close to the finish line. The next section is the most important, and will give you some practical ideas on how best to proceed when establishing a new digital strategy.

Now What?

Now that you have a better sense for what digital strategy is, and how it could be applied for your particular organization, the last big question remains. Whom will you work with to architect and execute this very important initiative? In my experience, there are three major options you will want to seriously consider. Option A: Maintain the status quo. Option B: Perform the hard work internally. Option C: Hire experienced outside resources.

Perhaps your industry is insulated from needing a digital strategy. Well, at least for now anyways. Doing nothing may be cost effective in the short-term. But inevitably, everything that can be digitized, will be digitized. It’s just a matter of time before your industry get impacted.

Sometimes, performing the hard work of forming a digital strategy internally is a sound choice. In fact, because your internal stakeholders will most likely know the major challenges facing the organization and your industry, they may be the most equipped to tackle the task. However, a major drawback to this approach is that navigating this new terrain without an experienced guide can be quite costly, needlessly challenging and highly perilous.

Your next best option is hire outside resources. Sometimes they can come in the form of digital consultants or full-service digital agencies. Both posses pros and cons, which go beyond the scope of this essay, but so long as you’ve selected an intelligent partner, with deep domain expertise, as well as an impeccable reputation for doing great work, you will find success.