Digital is disruptive. Mix the ingredients of low-cost connectivity, rich data & analytics, pervasive automation and innovative new models and the results can be explosive. We’ve seen the impact on music, books and travel already, but no sector will remain intact. As noted in my previous post, one mistake that executives make is focusing on the tactical at the expense of the strategic. Here are the six strategic questions that digital poses for every business, and which every CEO should be able to answer:
1. Should we find a new business model or stick with our existing one? IBM famously transitioned its business model from selling hardware to selling services. Some businesses (e.g. making photocopiers, delivering letters) have poor prospects in a digital world, whilst others (e.g. making 3D printers, delivering parcels) will likely become more attractive. Even business models that appear quite resilient (e.g., car manufacturing) can be disrupted as competitors discount the core product with offsetting revenues earned from data-driven business models. Firms need to re-evaluate their strategy in a digital context and take a clear decision on whether to ‘stick’ or ‘twist’. Trying to pursue both paths without a clear decision should be avoided.
2. What will be our source of competitive advantage? Digital both changes the competitor landscape and erodes historic sources of advantage. New competitors may bring previously un-imagined and highly differentiated customer propositions (think Netflix). Global price transparency may undermine a local pricing advantage (think Amazon). Digitally augmented products may bring differentiated features (think Nike). Historic sources of advantage, such as a large store network with high fixed costs, may turn into future sources of disadvantage (think HMV). At the same time, new sources of advantage (e.g., rich data sets, pricing algorithms) are emerging. Firms need to take a clear decision on how they will compete in future, then build or buy the capabilities to match.
3. Do we have the right network of partners? Collaboration is much simpler with digital. Suppliers and distributors can be added (or removed) from your network almost at the touch of a button. Collaboration with adjacent industries (e.g., banks with retailers) can drive value for both parties through data sharing. Digital leaders orchestrate eco-systems of partners that create value for the whole network. Firms need to take a fresh view of their networks and seek to orchestrate purposefully.
4. Is our cost base sustainable? Digital brings enhanced price transparency to most sectors. Consumers can find the lowest global price for most products. Corporate buyers are constructing algorithms to collate and compare quotes from B2B sellers. With few exceptions (e.g., luxury goods) this transparency brings cost into sharp focus. ‘Born-digital’ companies such as Amazon are also born low cost. Incumbents will often have to commit to radically different cost structures if they are to compete.
5. Are we investing enough? For mature enterprises on a quarterly earnings tread-mill, large-scale investment can be difficult to justify. But that very investment may be critical to long-term success. Digital leaders typically make large bets over multiple years. The P&L upside justifies firms investing an average of 10% of their profits each year into digital, but few firms are reaching that level. Firms should quantify the value at stake (both opportunity and threat) from digital and invest proportionately.
6. Do we have the right leadership? Leaders who have the skills to craft and execute a digital vision are in short supply. Leaders who have been successfully pursuing one business model for many years may lack the flexibility to adapt. Leaders who are steeped in digital and its potential may lack the broader management experience to take on senior management roles. Firms need to bring more digital talent into their leadership teams, and invest in helping existing leaders to better understand digital and its implications for business.