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You can’t avoid the digital dimension of your business

by Rita Gunther Mcgrath: Associate professor at Columbia Business School.
Asking what your digital strategy is today is a lot like asking what your electricity strategy was at the turn of the last century. Seems absurd. Yet both questions reflect how a shift in an underlying technology fundamentally changes what is possible.

Electrification of factories and plants took a long time. I mean, a really long time. Usable electric light bulbs were invented in the 1870’s. Thomas Edison built electricity generating plants in New York City and London in 1881. Yet, by 1900, less than 5% of mechanical drive power was supplied by electric motors. Instead, the last-generation technology, steam power, stubbornly remained the go-to technology for manufacturers. The norm for factories at the time was that they were powered by a central source - a massive steam engine or a river, for instance. That meant that every operation within the complex was designed around the logic of a central driveshaft, with ingenious devices connected to it by pulleys, ropes and ties.

Once small electric motors were introduced, it became possible for every station in a factory to operate on its own power, when and as needed. But to take advantage of that new capability required rethinking everything - how equipment was built and used, how workers were recruited, trained and paid, how costs were allocated, and a myriad of other major shifts in operations. No wonder the early factory owners balked at making such a momentous shift. Indeed, just as leaders today try to do what they have always done but use digital to make it faster and cheaper, leaders then tried to use electricity but to keep their factories more or less the same.

Eventually, of course, the old steam engines simply were not able to compete with new firms taking advantage of the brand new capabilities electrification offered. One example was Ford’s invention of the production line, which revolutionised manufacturing, making formerly expensive and inaccessible goods affordable, and ushering in an era of skyrocketing productivity.

This story is analogous to where we are with digital today - while companies that have embraced it are reaping massive rewards, the vast majority are still lumbering along with their equivalent of the steam engine.

What does “digital” mean and why should we care?

As Ryan McManus explains, to say that something has a digital component to it means that you have added a layer of information and connectivity to it. That could be information and connectivity between people, between things, between pieces of software, you name it. While this seems simple enough, once something is solely no longer in analog form, vast changes in what is possible - along the lines of the vast changes in what was possible with the advent of electricity - occur.

Several revolutionary qualities of digital goods bear mentioning.

Perfect copies. The first is the potential for creating virtually unlimited perfect copies of the original. In an analog world, a physical product, such as a photograph, requires an effortful process of chemical reproduction to copy. Digital photos? No trouble at all. Further, they can be widely shared, each version a perfect replica of what came before. Absent this quality, streaming of content would be prohibitively expensive.

The downside of course, is that when you have a potentially unlimited supply of something, your ability to extract a price for that good drops dramatically. That in turn means that the value for a customer is going to shift from possessing the physical thing to doing something desirable with it. In other words, from product and service value to the value in interactions.

We see this in the music business. As the price of a single song has gone to virtually zero, artists are finding they can only earn a living doing that which is scarce - going on tour and giving an irreplaceable live experience, in which customers pay for the interactive aspect of the experience.

Combination and recombination. A second property of digital goods is that they are far easier to combine and recombine in new ways that simply can’t be organised manually. In an early example, the SABRE airline reservation system used electronic records about passenger reservations and seat availability to match the two electronically. Prior to that the job was done with scribbled notes stored in lazy Susan type lockers. Very inefficient, and a big barrier to the post-war growth of the airline business.

Once, however, reservation data are available instantly and accurately, lots of other possibilities open up. One can find out which seats and times are more popular and price accordingly. One can come up with another digital offering - frequent flyer miles - to enhance customer loyalty to a single airline. One can extend the information to staffing schedules. These are all examples of how you can increase value by recombining digital properties in some way.

Ease of experimentation.
Together with the recombinant quality of digital is the vastly decreased cost and vastly increased ease of experimentation. Just as workers in newly motorised factories could experiment with getting the best out of their workstations, workers using digital tools can engage in tinkering and experimentation without much need for resources or permissions, since the cost and risks are relatively low.

All of this has huge implications for how business models are designed in the digital age. When entirely new classes of value open up, the old business models won’t allow you to capture them, just as steam powered plants couldn’t compete with electrification.

Big opportunity or big problem?

Leaders are therefore on the cusp of needing to make fundamentally important business model choices. It begins with coming to grips with whether you see the potential offered by digital as a big opportunity to be seized, or a big problem to be avoided. You are much more likely to succeed if you take an opportunity lens to the digital revolution.

Newspapers, for instance, generally viewed the advent of digital as a threat, hived off their operations into a “digital division,” left their basic operations unchanged and were ultimately unsuccessful at holding back the digital tide. One shining exception was Norwegian operator Schibsted which both embraced digital technologies and compensated its executives for keeping customers with the company, no matter which channel they elected to use.

One of the better known stories of a company that used digital smartly to give itself an edge is Domino’s Pizza. The company was in the doldrums after its 2004 IPO observers charitably called the period “uninspiring”. In 2009, the company caught the public’s imagination with a fairly audacious ad campaign featuring then CEO J. Patrick Doyle and other Domino’s employees acknowledging that for a lot of customers, the product itself was lacking. Simultaneously, the company began to aggressively invest in its digital strategy behind Doyle’s simple mantra of “making ordering as easy as possible.”

One early controversial decision was to insist that all franchise operators adopt a single Point of Sale system. In many other companies, franchisees were given leeway to purchase their own systems, but as we’ve seen, this completely undermines the potential of a digital architecture by locking valuable data away in separate systems. With Doyle as its indefatigable champion, every way in which the customer experience could be made easier through the use of digital technologies was explored and funded. The company also forged an unusual alliance between its technology and marketing arms - leveraging the new potential of digital to connect authentically with customers.

As a commentator for the Motley Foolobserves, “In 2009, 20% of Domino’s sales were happening online - by 2018, that figure was up to 65%. More digital ordering means more rich data collection for Domino’s, and the ability to push more users to its loyalty programme efforts.” Building a digital business model offers a tremendous advantage.

Some guidelines for developing a digital friendly strategy

Begin with frictions. Every established business does things a certain way because it was easier or more convenient or simply because it was possible at the time. But each of these activities are likely to create frictions that a digital solution might address. Imagine the possibility of digitising operations to eliminate glitches and barriers - for instance, German metals services giant Kloeckner started its digital journey by getting rid of manual faxes. You can start with these kinds of problems, too.

Consider new kinds of value that might emerge from interactions. As Erich Joachimsthaler points out, conventional views of strategy often rest on a zero-sum attitude towards value. Instead, imagine the value that could be created if digital interactions can be facilitated. He uses the example of John Deere, which starts by helping farmers get better yields, but facilitates interactions between seed producers, fertilizer people, chemical companies, local governments - and so on, creating value-generating activities for all.

Consider re-architecting how work is done (not all at once, please!). One of the biggest impacts of digital, accelerated of course by the pandemic, is to change the nature of how work is done. Many organisations are using technology to reframe how they do business. At ING, for instance, conventional silo structures were replaced with more agile ones in which small teams could move quickly to solve complete complex problems with an architecture suitable to fast-moving technology enabled work. A variant of this is a call for “permissionless” systems in which those closes to problems can take action to resolve them.

Digital really is revolutionary, not evolutionary


As Jeff Bezos likes to observe, you can anchor your strategy on what is unlikely to change. Customers are almost never going to say, “I love Amazon, but I wish they would charge me more and deliver more slowly.”

As with electrification, capturing the benefits of digital means re-imagining how your business works. My best advice here is to think boldly, but experiment cheaply and quickly to see which of your guesses about how digital could help your business thrive in the future.

Useful resources:
Rita Gunther McGrath
Rita McGrath works extensively with leadership teams in Global 1000 companies who wish to develop their capability to drive growth.
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