The Flip Side of Digital Strategies
December 13, 2018
The advancement of digital technology in the last five decades is one the most incredible realities of the modern era. Processing power has reached unbelievable speeds. Smartphones have become hand-held supercomputers. And internet connectivity has dissolved the concept of borders and geographies.
Smartphones have been at the center of this digital transformation. Humans are so dependent on these devices that they spend hours and hours on it to browse the internet, make phone calls, use social networking sites, use various apps, read emails, and play games on it. People also use it to remotely connect to devices at home, purchase travel insurance for trips, or even make purchases based on personalized recommendations.
When we look at this amazing device and think about how it has evolved over the years, there is a sudden realization that digital technology is constantly changing and this change is an ongoing phenomenon. In order to survive in this evolving digital world, your digital strategy too will have to keep evolving. Like many other companies, you too may renew and review your digital strategy annually, instead of changing them according to the progressive developments in digital technology.
However, the speed of digital advancement will outpace most contemporaries and only a few will stand the test of time. In spite of all the preparation and planning, the fittest few will navigate successfully through the pathways of digital transformation. This raises an obvious question – Why do digital strategies fail? While the reasons could be many, here are three of the most common reasons.
Reason 1: Ambiguous definitions of digital strategy
When we speak about digital strategy, you must understand the exact meaning of the term. Some people think of it as a glorified term for IT functions, while others think of it as digital marketing and sales. Very few people are aware of what it means − free, instant, and can connect with people, objects, or devices. 20 billion devices will be connected by 2025. 90% of data has already been taken out from devices in the past two years. Data mining has helped in making analysis which leads directly to higher levels of automation- for both processes and decisions. This gives birth to brand new business models. Telematics has led to so many opportunities, especially for insurance companies. The customer’s driving behavior can be monitored, and data can be collected instantly. This data allows the insurer to price the risk accurately and creates an opportunity to offer direct or instant coverage without the help of an agent. Many companies struggle to adopt digital strategies and the transformation after it, as they are unclear about the definition of digital.
Reason 2: Economics of digital is misunderstood
Companies that have adopted digital, have undergone digital disruption, which has changed the economics of digital competition. Digital disruptions are constantly happening and that too at a faster pace.
Digital is destroying economic rent
The profit earned by companies is not the same as before, as now there is more value for customers than the companies themselves. In other words, adopting digital will increase the number of customers instead of the economic profits made by the company. Those companies that are hoping to convert digital forces into economic advantage are in for a shock. This is because they are using digital to make profits on products and services, which gives the customers the freedom to select only what they need. Digital does away with retailers or middlemen, hence there are innumerable choices, transparent prices, offers, and discounts. Businesses that compete this way, the profits earned are drained off as they cut prices to keep what they have or invest some more in digital to catch up with their competitors. Even though their economic performance deteriorates, they keep track of the performances and competing with other businesses.
For instance, there was a time when there were travel agents who used to be paid by airlines and other providers to obtain customers. Now customers can book flights or hotel rooms at any place and anytime, just with the swipe of their finger, that too for free. No experts are required as people read the reviews on airlines, hotels, places, and more. In enterprise hardware, cloud service providers preferred to forgo their capital investments. Customers preferred storing their data using cloud services rather than physical data centers, as the amount spent in managing a data center would be more than that spent on cloud. The hardware makers went into a loss. By this we understand that customers are the biggest winners, so executives need to understand and learn how to compete and create value for customers.
Digital is driving winner-takes-all economics
As there is a shift from making profit to customer acquisition, the scale and network effects dominate markets, hence economic value rises to the top. Few businesses in hi-tech and media are performing well in the digital age. They use the huge volumes of customer data to their advantage. This information can alert them from potential threats. Teaming up with other businesses can help defend the value chain. Incumbents are under the impression that market share will remain stable, the profitable niches will remain defendable and leadership is maintained by surpassing their rivals, instead of focusing on the digital models that are profitable.
Digital rewards first movers and some superfast followers
Earlier companies used to observe other companies incur the cost of experimentations, as they were unsure whether they would succeed or not. Once they are successful, the rest follow them or invest on making similar products to compete in the market. The very first mover and the very fast followers have a great advantage in the competition, as they learn and develop. They use artificial intelligence to scale up platforms and generate information networks. These early movers also invest in R&D, marketing and sales, and internal operations. They also gain insight from the early adopters.
Reason 3: Neglecting Digital Ecosystems
Digital ecosystems are the need of the hour. Traditional approaches of tracking the moves of the rivals and using the knowledge to optimize value chains is risky.
Industries will soon be ecosystems
Digital players are using platforms to move across industry and sector borders, which is destroying the traditional model. Industries are in fact expanding their ecosystem in order to aggregate the increasing number of customers. The platform enterprises also link traditional and digital companies.
How ecosystems enable improbable combinations of attributes
The fundamentals of supply and demand are turned over by digital platform and ecosystem. To scale to reach an endless customer base, use AI and other tools to enhance the service. For instance, transport and hospitality services are offering global mobility and lodging without owning cars or hotels. There must be a good strategy to broaden your horizon and chances to compete. The competitors can be your partner or frenemy in the ecosystem.
Not all businesses are able to operate in nearly frictionless digital form, as platforms are changing physical markets. This changes the way traditional companies respond. The new digital structure is breaking industrial barriers, opening new avenues for cross functional services and products and blending together segregated markets and value pools. Customers have to be the center of digital activity as they add value.
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