Follow the leader, particularly when traveling into unfamiliar territory. This is sound advice, but what if leaders go down a path that your company cannot follow? Then the company must define a different path.
We’re all familiar with the leaders commonly associated with digital business such as Amazon, Google, LinkedIn or Facebook. In fact, these firm names have become synonymous with their strategies, leading to plans that call for “Amazoning the market” or “Becoming the Facebook” of an industry. Pursuing a strategy based on mimicking these digital leaders assumes adopting their business models with a focus on exploiting scale efficiencies, generating advertising revenue or offering “freemium-based” products. However, these strategies set a path that many companies find difficult to follow with their established revenue streams, concentrated customer bases and margins that do not allow for giving products away for free.
So what is the digital strategy for those enterprises?
It is a strategy based on defining a new path — one based on building a digital edge by combining the digital and physical worlds rather than substituting one for the other. Those combinations increase the accessibility of new sources of customer value to expand the potential of digital business. Defining value at this digital edge also helps to create addressable revenue that reflects the best of the digital and physical worlds. The process begins with expanding the definition of value in a digital world.
Separate Value From Revenue
Value is often overused and misapplied in business strategy, particularly when strategies refer to value, but the discussion is really about revenue and cost. Companies that equate value with revenue believe that the “moment of value” occurs at the moment of exchange. However, viewing price or cost as a proxy for value limits strategy decisions by concentrating them on narrow financial considerations. There is more to value than cost or price.
Seeing value primarily in terms of “what people will pay for” reduces innovation to a zero-sum exchange between cost and profitability. That exchange defines the path to commoditization. Creating a sustainable digital edge involves using digital technology to realize new forms of accessible value that provide a basis for addressable revenue. Executives need to start with a greater value perspective, and that requires creating some distance between these two concepts.
Create the opportunity for new ideas
Separating value and revenue opens the door to new thinking about how to use digital technologies to achieve new outcomes. Without the room created by opening that door, digital technology becomes just another way to do things faster and cheaper. Companies can use the idea of focusing on the outcome first as a tool to open the imagination to innovative new value sources realized through digital technology.
One way digital technologies make these other values accessible is by allowing customers to recognize value within their natural behavior. For example, Royal Caribbean delivers value within its passengers’ natural behavior by allowing diners to select their restaurant of choice at the time when they are actually hungry. Transport of London helps travelers reach their destinations by providing real time information on operational performance. And what if doctors and nurses could communicate and treat patients within the natural flow of patient care?
Children’s Hospital Los Angeles Found That Patient Value Led to Indirect Revenue
In 2011, Children’s Hospital Los Angeles (CHLA), a leading pediatric hospital in downtown Los Angeles, California, moved into the Marion and John E. Anderson Pavilion; a new 480,000 square foot, 317-bed hospital that is a $500 million digitally enabled facility. When CHLA embarked on its ambitious building project, it decided to build digital density into the hospital with a primary goal of “improving patient outcomes by eliminating information as a cause of patient harm.” 1
CHLA didn’t say, “Let’s build a new facility to house more patients and increase revenue,” or “Let’s make sure to digitize all of our patient records because a new facility allows us to build certain technological capabilities.” Instead, CHLA created a goal based on value to the customer — in this case pediatric patients — not financial metrics, staff reductions or revenue. When CHLA targeted improving patient outcomes, it focused on reducing the communication errors that contribute to 70% of patient harm.2 To solve this problem, CHLA digitized its clinical areas tying all information related to an individual patient into the child’s patient record.
In the new facility, when a patient needs a test, the resources are scheduled, the staffing resources are committed, and everything is scheduled into the patient’s record. The IT team prioritized digital communications to make test results and diagnostic images the highest priority so that when the results are ready; they are immediately available in the patient’s record, and nurses and doctors receive an alert. Digitalization removes the common phrase on television medical dramas, “Is the test back yet?” from the process. By updating physical processes in this digitally dense environment, CHLA not only eliminated patient harm, it freed up 66,000 nursing hours.
A hospital that sought to increase revenue by saving money might have reduced staff. But CHLA stuck to its goal of improving patient outcomes, putting the additional nursing hours back into patient care. The result? Healthier and happier patients and an enhanced ability to win more research grants and attract more world-class researchers because of the volume and quality of high-quality data available from its digital density. In this case the value of improved patient outcomes was readily accessible to the patients and that led to additional sources of revenue based on the value and quality of patient information that generates research grants and attracts top-level researchers.
Expand the Value Horizon to Match the Expanding Digital Market
As CHLA’s experience indicates, value flows from the ability to meet customer needs. How an organization sees value and where it sees future potential is limited only by its mental model for customer value. Organizations can expand the value horizon by considering value from new, different points of view.
Consider the limitations of thinking about value in terms of price and performance and how it blindsided the smartphone market. In 2007, Apple released the first iPhone. Critics pointed out that it cost $600 and had no physical keyboard, limited email options, and no copy-and-paste functionality.3 Clearly from a price and performance basis, the iPhone did not match up. But what was overlooked is that there is more to value than price and performance —in the case of the iPhone, the value of the apps and the personal value of being associated with the product. These sources of value were not recognized or simply dismissed at the time by market watchers and analysts who could not see beyond feature, function and price.
Organizations can expand the value horizon within a strategy by applying new ways of thinking such as:
• Tapping behavior as a source of customer value
• Expanding the scope of value beyond economics
• Innovating value by eliminating contradictions and conflicts
Tap Behavior as a Source of Customer Value
Behave! It is an imperative when actions do not meet expectations or fit into an assumed social context. Research into brain and behavioral science highlights the role of behavior in decision making and therefore in business.4 Digital technology makes behavior an addressable source of value and a consideration in forming digital strategy.
Dr. Susan Greenfield, Oxford neuroscientist and author,5 describes the changing perspective on value, “I think that we’ve moved on beyond the 20th century goal of more innovative commerce, goods and services where you just own something. What we are looking at is experience-based scenarios where what you are delivering is a product that also comes with a experience, where you feel you’re buying much more than what you’re actually getting.”6
Concerns about the influence of technology on how our brains work notwithstanding,7 technologies such as social media and mobile communications go beyond traditional notions of usability. These technologies enable companies to engage and incorporate customer expression, choice, judgment and action as sources of strategic leverage. Realizing the potential of behavior and digital strategy requires broadening a view of value to incorporate behavior and choice.
Intrinsic value comes from how customers look at and feel about themselves. Digital technologies provide a way to deliver contextually relevant information in support of these sources of intrinsic value. Charles Schwab and Co. uses social media to invite an exclusive community of active online traders to share and rate ideas, strategies, opinions and more.8 This creates a source of value based on how traders feel about their strategies. Digital signage in London and other cities provide bus and train arrival times, giving passengers more confidence and the ability to choose how to travel through a city.
Consider: How will your organization incorporate personal experience, knowledge and preference into the customer value equation?
Extrinsic value derives from how customers compare themselves to others. Digital technologies enable companies to go beyond the value of branded or positional goods that consumers believe say a lot about themselves. A U.K. bank demonstrated this with a prototype that allowed customers to evaluate their personal progress against their financial goals compared with others who have similar goals. The prototype combined social networking and data analytics with the online banking software. The comparison influences behavior and provides a personal experience simply by tapping into how customers look at and feel about their progress relative to others. This source of value is particularly powerful in industries where there is an extensive gap between the time of purchase and the time of value realization, such as with insurance, financial products, exercise equipment, automobile purchases or home purchases.
Consider: Where do opportunities exist to enhance your customers’ standing with others or give them greater confidence in their decisions and actions?
Digital technologies provide new choice mechanisms and options for digital strategies. Customers select for themselves, via mobile or tablet computers or even by simply walking into a store. The impact of choice can be powerful in reducing internal complexity and cost while enhancing the external experience. Royal Caribbean’s use of digital signage gives the company real-time information into restaurant capacity and demand while eliminating the need to plan, communicate and handle exceptions associated with prescriptive dinner reservations.
Consider: How can turning over process responsibilities to individuals simplify your operations, reduce costs and deliver a personalized experience?
Expanding the Scope of Value Beyond Economics
Digital technologies have the capacity to go beyond delivering better or cheaper products and services. They have the ability to create a broader range of value. As customers, communities and societies demand more from companies, products and services, the concept and context of value is expanding beyond simple economic terms of price/performance.
Economic value, the type we are most familiar with, is measured in financial returns on the capital invested in a company. Assessed by profitability, cash flow and market value, economic value provides a way to reward investment risk. HFA used digital technologies to make its operations more efficient, reducing costs and improving performance in handling new digital licensing requirements.
Shared value exists when both the firm and society benefit from business activity. Described by Michael Porter and Mark Kramer’s Harvard Business Review article entitled “Creating Shared Value,”9 this source of value comprises the practices that simultaneously enhance competitiveness and advance the economic and social conditions in which the company operates, leading companies to invest in and develop local resources rather than simply exploit them. United Stationers’ use of digital technology to support local customers banding together into virtual vertical businesses provides an example of building shared value from a digital edge.
Sustainable value exists when a company enhances its ability to operate profitably into the future, which includes using renewable sources and processes that will not destroy the environment. Characterized by John Elkington in 1989 as the “triple bottom line,”10 sustainable value is the foundation of efforts to measure the economic, social and environmental impact of a company. SFpark,11 San Francisco’s digital parking system, creates a platform which goals include reducing congestion, improving air quality and raising safety.
Personal value is the value individuals seek and receive through associating with their employers. Digital technology tools change the ways in which people leverage their personal connections and accelerate the pace of work, transforming the employment relationship from an exchange of hours for wages to one based on providing a platform for employees to achieve their personal goals and objectives.12 Rabobank’s initiative to apply digital technology to “unplug” employees has allowed them to work at times and places that make the most sense, raising employee and customer satisfaction.13
Innovating Value by Eliminating Contradictions and Conflicts
Contradictions exist in every business and can be a source of value delivered by a digital edge. Contradictions are the hard spots in strategy presenting either/or choices. Many of these tradeoffs are created by the limitations of physical resources and operations. One way to consider the strategic value of competing beyond a contradiction by being both while everyone else is either/or. That was the disruptive force behind the quality movement as it resolved contradictions between cost and quality in manufacturing and service processes. The contradiction of high-quality product at a low price gave Toyota and Honda an advantage in the automobile market for more than 20 years.
When companies realize how digital technology resolves a contradiction for customers or in their business model, they find an opportunity to create a digital difference. CHLA provides more hours of hands-on patient care in a digital environment. Royal Caribbean passengers enjoy personalized experiences amid thousands of others. In later chapters, we’ll discuss additional examples of how contradiction creates value.
Creating Accessible Value
New ways of thinking about value expand the range of value possible through a digital edge. Accessibility refers to the ability of customers and companies to use solution features and functions. Innovation comes from considering how digital technology features or functions push the frontier of accessible value.
Pushing that frontier to its edge starts by realizing that accessible value exists across multiple dimensions, from economics and pricing to ergonomics and physical properties. Digital technologies change the accessibility of new combinations of information, processes, facilities and behaviors that lead to new solutions and performance levels. How customers recognize, select and apply these capabilities forms the crux of customer accessibility and part of a digital edge strategy:
• FedEx Ground uses digital technology to expand its package-handling capacity and efficiency, reducing its costs. It uses that digital edge to expand its potential market by sharing part of that efficiency with customers in the form of more competitive shipping prices.14
• United Stationers uses digital capabilities to increase customer and resellers access to its supply chain and marketing capabilities, improving the customer’s/resellers’ ability to market, sell and serve its end consumer.15
• IONX, a developer of ultra-low-power wireless telematics solutions for railcars, uses digital technology to give railroad operators, shippers and others in the transport industry real-time information on railcar fleets and their conditions. This information improves the efficiency and security of railroad operations.16
Each of the examples above creates value for the customer either by lowering prices, increasing capability or supporting their operational efficiency. Increased accessibility does not automatically connect with growing revenue, however. Making that connection requires thinking in new ways about revenue addressability and pricing.