Chapter 6 Digital Leverage Points

One of the problems with digital transformation is that digital technology is so ubiquitous that deciding where to leverage it can be a challenge. Following a disciplined approach to address this is possible, as we will see in the following example.

Netflix is probably the best-known serial disruptor in modern corporate history. It has disrupted its own business model at least three times within twenty years (i.e., disrupting store-based rentals with mail-in DVDs and then streaming videos and original content creation) and is now working on its fourth (i.e., leveraging international presence).

What Netflix and other serial disruptors have is the uncanny ability to understand where digital technology can be leveraged the most to create or enable disruptive business models. This is what I call “digital leverage points.”

Digital leverage points are simply the best areas where digital technology can be leveraged.

Netflix’s Digital Leverage Points

Netflix’s multiple disruptions have a few things in common. They are aimed at driving market penetration, along with excellent customer experience and very low costs. Under the surface these are all supported by the company’s ability to react quickly to change, its enviable culture, and a consistent willingness to leverage technology to transform its own business model. Those last three items are Netflix’s digital leverage points.

Netflix’s Record of Repeated Disruptions

What exactly is Netflix? It was founded in 1997 by two software engineers, Reed Hastings and Marc Randolph, to rent DVD movies on the internet. Interestingly, it was previously reported that Hastings had come up with the idea for Netflix after he paid $40 in late fees for an overdue copy of Apollo 13. That story has been debunked more recently by Randolph, who said that it was simply a convenient way to explain Netflix’s unique model. The origin of the Netflix idea isn’t important; it is the ability of the company to keep changing what exactly Netflix is that’s relevant.

The first transformation was the replacement of physical movie rental stores by internet and ecommerce-based subscriptions. When they launched in 1998, Netflix had only 925 movie titles. Netflix had apparently offered Blockbuster a partnership in 2000 but was turned down. In an ironic twist, Blockbuster went out of business, mostly thanks to Netflix, in the next five years. The second transformation was in 2007 when Netflix moved to streaming content. For a low monthly fee, subscribers could access a large library of content on demand. The third transformation came with the creation of original content starting with the launch of The House of Cards in 2013. And Netflix may be transforming itself again for a fourth time with its international business push.

So, how does Netflix continue its enviable record of serial transformation while most companies struggle to transform their businesses even once? Clearly, there are elements related to leadership and its broader organizational culture that make serial transformation possible. But would that explain how Netflix’s transformation is successful in almost all its attempts? The reality is that Netflix is clearly aware of its leverage points of detecting future trends, using its agile culture, and employing cutting-edge technology platforms.

Detect the Disruption Early and Use It

When Netflix was created, all that they wanted to be was the world’s largest DVD mailing company. Then Hastings realized that within five years of Netflix’s inception, internet bandwidth speeds would grow exponentially. At that pace, the customer experience of ordering DVDs and then waiting a few days to receive them in the mail was going to be disrupted by the instant gratification model of video on demand. The move from mailing DVDs to streaming seems logical today, but it was an extremely bold decision at a time when internet speeds were modest and Netflix’s DVD mailing business was flourishing. Today Netflix accounts for a third of all the bandwidth in the US. This ability to detect disruptive forces and leverage them before their competition continues to serve them well.²¹

Culture as a Winning Ingredient

The second leverage point has been Netflix’s organization culture, which is legendary. Netflix truly empowers its employees and minimizes processes that are considered normal by other HR organizations. Netflix treats its employees as “fully formed adults.” The basic assumption is that its employees want to do the right thing for Netflix, and given the freedom they will deliver their best, taking the appropriate risks to innovate. So, there are no expense reports to be approved, you get unlimited vacation, there are no annual performance reviews, and the compensation packages are lucrative.²²

Disruptive Technology

The third leverage point is Netflix’s technology advantage. Netflix chose an extremely scalable and open technical architecture very early on. Whether optimizing their physical DVD distribution systems or streaming video, they have leveraged their technical foundation as a strength. Netflix converts each film into more than fifty versions to reflect different screen sizes and quality and stores them so that the movie doesn’t have to be converted when downloading to match your screen’s size and resolution. Interestingly, Netflix hosts its video streaming at Amazon—one of its competitors.²³ This ability to distinguish between a leverage point and a commodity service is strategically important.

In summary, Netflix continues to transform its business models repeatedly by being disciplined in leveraging its strengths of market agility, culture, and technical superiority. Now let’s contrast that with a case of an organization that was not as fortunate in understanding its digital leverage points.

The McDonald’s “Innovate” Program

In 2001, McDonald’s, the international fast-food giant, set about on an ambitious billion-dollar digitization program called “Innovate.” They would connect each of their restaurants to their headquarters via a global IT network.²⁴ The scale of digitization was unprecedented. It would replace their ten-year-old internal systems with an enterprise resource planning software covering human resources, financial management, and supply chain systems. It would provide these back-office capabilities to more than thirty thousand restaurants globally as well as to more than three hundred vendors in real time.

McDonald’s intent was laudable. It would use technology to do what it did best—provide the fastest and most consistent service to its customers. However, by 2002, McDonald’s had written off $170 million and scrapped the Innovate program.²⁵

Innovate was certainly an ambitious idea. However, although technology in itself wasn’t the big idea, the project was run as a technology effort. Worse still, store franchisees were already skeptical of corporate IT, since a previous IT implementation had ended up slowing down service. Unlike Netflix, which has proven technology capabilities at its core, technology itself was not a feasible digital leverage point for McDonald’s at the time. Instead, the company could have transformed the efficiency of their strong franchisee and vendor models using technology. But that’s not how the effort was executed.

There were also issues of cost, excessive scope, and poor execution methodology, but those are secondary to the issue of understanding the leverage points for the transformation. Whatever the issues, McDonald’s should get marks for pulling the plug on the project rapidly. The only thing that is worse than a bad project is a bad project that drags on.

Understanding Digital Leverage Points

Digital leverage points are strategic areas within an enterprise where technology has the most transformational (i.e., not just automation) impact in the Fourth Industrial Revolution. These are identified through a deep understanding of the organization’s opportunities and strategic choices. This is where the major digital transformation bets need to be placed, such as with digital retail (e.g., Walmart), big data (e.g., most health-care providers), user centricity (e.g., Zappos), and so on. Digital leverage points can be internal or external to the enterprise. Placing digital transformation bets on internal capabilities is equally valid, as with highly efficient logistics (e.g., Amazon), R&D (e.g., Intel), supply chain (e.g., Apple), and others.

Digital leverage points are tailored for each enterprise. They differ from those in other industries and may differ from those of competitors.

The challenge with identifying digital leverage points is that it presupposes a certain level of understanding of what digital technology can do. That’s the dilemma that most leaders find themselves in. If you’re unsure about where disruptive technology can play within your business model, then how do you strategically choose the right areas?

The good news is that there is a deliberate sequence of steps that can be followed here. It doesn’t even need new tools or methodologies, as you will note in the following paragraphs. The answer, once again, is discipline. It involves a deliberate approach that starts with “what’s needed,” then evaluates “what’s possible,” and finally connects the two using structured creativity. Specifically:

Start with business strengths, opportunities, or pain points. This should link to the normal strategy processes. You can’t go too wrong if you’re playing with strategic opportunities.

Understand the digital possibilities. Use internal or external experts to understand what digital technology can do relative to the enterprises goals. A basic level of digital literacy helps move this along.

Translate strategic strengths, opportunities, and pain points into big ideas that use digital. Use creative processes to put together digital possibilities with potential strength or opportunity areas. Using approaches such as design thinking can help significantly.

Now, let’s look at each of these steps in more depth.

Start with Strategic Strengths, Opportunities, or Pain Points

Disruptive transformation comes from one of three areas in any organization:

Enabling new business models

Creating new types of digital product or service offerings

Transforming operational processes for competitive advantage

The starting point with identifying strategic opportunities. There are several strategy development and renewal processes that can help. One of the favorites is the Business Model Canvas.

The Business Model Canvas (figure 12) was developed by Alexander Osterwalder in 2008 to visually depict and align strategic choices in value proposition, infrastructure, customers, and finances. Inserting digital possibilities into the mix can help you identify potential ideas and tradeoffs in new business models, new business offerings, and transformational operational processes.

Understand the Digital Possibilities

The good news about technology is that it is often more capable than we realize. The bad news is that the devil is in the detail. You need to leverage internal and external resources on where exactly exponential technologies can mesh with the opportunities identified in the previous step. Chapter 10, “Staying Current,” helps build this knowledge systemically, but it is possible to address this situationally as well. The key is to understand what the most disruptive technology trends are, as well as to get a firm grasp of their limitations.

As mentioned in chapter 2, institutions such as Singularity University (SU) are masters at identifying future trends. They provide insights into the amazing future but use current tangible examples, which can help trigger other ideas. After all, “the future is already here—it’s just not very evenly distributed” as William Ford Gibson, a science fiction writer who has been called the “noir prophet” of cyberpunk fiction, is reputed to have said. Getting into specific cases where the “future is already here” helps tremendously.

To offer some examples, in several large cities a technology called ShotSpotter uses sensors and algorithms to pinpoint the location of gunshots fired to within ten meters accuracy, in real time. Robots are used in the Middle East as jockeys for camel racing. The power of networked computing continues to explode. Ten years ago, about five hundred thousand computing devices were connected globally in a network. By 2020 that number will be more than fifty billion. Meanwhile the power of individual computers continues to skyrocket. Today’s average phone chip does a billion calculations per second and is the most expensive component in the phone. By 2020, that component will cost just one penny. Meanwhile AI continues to get more and more powerful. It is used to scan tax forms and to write short news updates. Similarly, software robotics is starting to replace many offshore resources in business process outsourcing (BPO). That’s the future that is already here.

Figure 12 Business Model Canvas

To balance the review of future possibilities, it’s equally important to understand the limitations of these technologies. That’s where trusted technical experts can help. To illustrate this with a general example—when leveraging disruptive technology, it’s critical to understand that technology has only one-third of the power when it comes to digital transformation. There are two other forces that multiply its impact (see figure 13).

The first is exponential processes, which is all about eliminating the intermediary parts of work processes to jump directly to the outcomes in as few steps as possible. One example of this is the idea of customer support call centers. Despite Amazon’s ubiquitous retail presence, how often do we call their customer support line? It’s a process that has been almost eliminated by redesigning order management and logistics operations and providing full visibility to customers on their orders as self-service. The second force multiplier is exponential ecosystems. Airbnb and Uber would not have gotten very far without the sharing economy and the ability to tap into an ecosystem of resources that multiplied the assets available to them.

Figure 13 The multiplier effect of technology plus process plus ecosystems

Together, these three capabilities multiply the possibilities when it comes to digital transformation.

Translate Strategic Opportunities and Pain Points Into Big Ideas

The final step is to bring together strategic opportunities and digital possibilities using creative ideation processes. This is more than an exercise in automating the identified opportunities using digital technology. That would be called digitalization (which is the process of automating a task using digital technologies), not digital transformation (which seeks to reinvent the game using digital). Think of the difference this way—while major hotel chains were busy coming up with automated and mobile-based check-in systems in the early 2000s, Airbnb quietly eliminated the whole idea of a check-in desk. True digital transformation requires not just automation but reimagination.

The best tool that I have come across for the purpose is design thinking. The human-centric approach, the ability to generate many ideas quickly using brainstorming, and the ability to turn abstract ideas into tangible prototypes and to test them all make design thinking an ideal tool to frame the big idea (see sidebar).²⁶ Tools like design thinking use the power of creativity to blend together the business opportunities identified in the first step and the disruptive technology trends of the second into a coherent set of digital leverage points.

In summary, digital leverage points are the best transformation choices made possible by digital technologies, processes, and ecosystems. Turning digital leverage points into big ideas is a key discipline for successful transformation. The simple three-step process described above first identifies strategic leverage points, then understands digital possibilities, and finally uses design thinking–type techniques to come up with the big idea.

How Design Thinking Can Be Used in Real Life: Bank of America’s “Keep the Change” Program

“Design thinking is a design methodology that provides a solution-based approach to solving problems. It’s extremely useful in tackling complex problems that are ill-defined or unknown,” according to the Interaction Design Foundation, a leading design thinking education nonprofit. Though design thinking has been popular with product designers and other creative experts for a while, it is now being used in many different circles.

The “Keep the Change” program from Bank of America is an excellent example of design thinking. In 2004, the company hired a design firm to help identify innovative ideas to encourage boomerage women to open more bank accounts. The team did extensive research, including following members of their target audience to learn their habits and practices.

At the end of that, they stumbled upon two insights. First, they discovered that boomer-age women had a hard time saving. In many cases it was due to a lack of a routine to help facilitate saving. The second insight was that people seemed to round up their transactions because it was easier for them. This eventually led to the creation of the “Keep the Change” program that was launched in late 2005. The idea was simple. Customers with a Bank of America debit card could choose to round up the charge for any purchase and move the rounded-up portion of the charge to a separate savings account. Bank of America also matched the rounded-up amount for a period of three months and up to 5 percent of the annual spending up to $250 annually. By 2010, the idea had generated ten million new customers and helped their clients save $1.8 billion.

Chapter Summary

Leverage points are essentially your strategic strengths and opportunities that best leverage digital. You identify these using a deep understanding of your organization’s business opportunities and strategies.

Leverage points need to be translated into big ideas for digital transformation. The three steps involved are as follows:

Start with your strategic opportunities or pain points.

Understand the digital possibilities.

There is a perfect storm of exponential technologies, exponential processes, and exponential ecosystems that can be used to disrupt just about any area.

Translate your strategic opportunities and pain points into big ideas that use digital.

Design thinking is an excellent tool to come up with new, breakthrough ideas, even in complex situations.

Your Disciplines Checklist

Evaluate your digital transformation against the questions in figure 14 to follow a disciplined approach to each step in Digital Transformation 5.0.

Figure 14 Your disciplines checklist for digital leverage points