Digital business: six strategic debates before going digital
Six keys to unlocking a digital business
More and more companies feel a quasi-unbearable pressure of building a digital business. The larger the company, the higher the pressure, especially for firms listed on the stock market. The first step of reassuring investors, or adopting the fashion of “digital”, deals with the hiring of digital experts, or renaming the titles of a bunch of employees to “digital something”. Of course these – and many others – are just tactical responses, which are meant to camouflage the inherent lack of strategic clue in the digital business, with some level of activity.
In my view a compelling digital strategy does not exist. A firm needs a compelling strategy, and this strategy needs to have a relevant digital component. Adding digital as a silo makes it easier in the short-term, but it also make it easier to fail in the longer-term. Any strategic conversation on a digital business, should consider the following six internal debates:
1. Empathic Approach
Building a digital business begins with a deeper, more relevant, and more empathic customer understanding. This is true for two main reasons: first and foremost, any drastic, technology-centric, unexpected change requires education. And education – like self-education – thrives on the right balance of intuitive interfaces and easily accessible functions; both of which require extensive empathic design work. In addition to that digital technologies are known to be crossing the chasm when they fit the right insight platform: sometimes convenience is key, some other times it is just not enough.
A digital business is not constrained by traditional physical elements of distribution and complexes route to markets, and therefore, makes it possible and sustainable to target niche consumer groups or product categories. In addition to that, digital business in the Industry 4.0, allows for advanced customization and tailor-made products, through additive manufacturing and robotics.
From a business point of view, long-tails require a renewed business mentality, rid of large numbers and efficiency figures, as well as a tailor-made business model.
3. Creating and capturing value
A digital business redefines the power structure of the industry, by connecting actors in the value chain that might not have been connected before. In addition to that, they reshape the value creation process. In this sense, developing a digital business requires a good strategic understanding of how value is created in the ecosystem, and how it is captured, by whom and at what stage. An interesting example comes from the digital food delivery industry. The “app”, which is the ecosystem builder, matches a restaurant, a delivery person, and the customer, by promoting the restaurants on its platform. And, of course, by promoting the platform to prospective customers. It also might process the payment from the customer, to the restaurant and to the courier. In conclusion, the firm behind the “app” needs to decide whether or not it charges:
- the restaurant a fee per delivery, an advertising fee or a subscription fee; or even a marketing fee;
- the restaurant a transaction fee for the payment;
- the courier a subscription fee, a variable fee for access to the platform, and/or a fee for processing the payment
- the customer a subscription fee, a fee for delivery, and a fee for processing the payment.
A digital business often relies on platform markets to build their business model, by creating networks/communities of users, and by dictating the rules of communication/ engagement among those users. Platform markets have an intrinsic advantage: they create high switching costs, and leverage network effects, by distancing competitors for those same users. However Platforms also prequire functionality innovation, to retain and/or increase usage of the platform itself. And platforms markets evolve through winner-takes-all battle, where technological and functional innovation dominates (e.g., game consoles markets).
5. Platform Envelopment
In a platform-based digital business, envelopment is when a network-sharing competitor enters a functionality market by adding it to their current bundle, by effectively stealing consumers from the original introducer of the functionality. The most known example is Windows, including Video-streaming services to its operating system, by reducing its users needs to download and install RealPlayer software. Another example is the “Stories” functionality, which SnapChat pioneered, and Instagram/ Facebook, which had a large shared user base with SnapChat, enveloped.
Current research suggests that platform envelopment might be overcome by either of two defense strategies: opening the platform, by enlisting new allies in adding functionalities to the platform itself; and/or by copycatting the attackers’ bundle, by creating a switching barrier for users.
6. Beyond Non-incremental technology
Traditional large firms tackling the development of a digital business, find a technological challenge, because their usual incremental approach to substituting technology. In most large corporations inbound marketing/ CRM and ERP are – for example – threated as independent silos, because, among other reasons, the main users of those systems belong to different functional organizations. Those silos get upgraded incrementally, which is probably the most cost-efficient and undisruptive way of doing it. Unfortunately a digital business cannot be scaled effectively with this traditional mindset. A newer, more holistic, approach to technology is required.
Building a digital business is not an easy task. While there is plenty of pressure for “doing digital”, few strategic decisions need to be made, before a single line of code is written, or a new director of digital experience is hired. These strategic debates begin with a stronger, deeper and more relevant consumer and/or customer insights, before tackling the long-tail, the business model and platform decisions. Serious what-if analysis needs to be carried around platform envelopment, before even beginning to discuss the digital technology part.