2.1 What Is Digital?
We learned in elementary school that a homonym is two or more words with the same spelling or pronunciation but with different meanings. Honestly, I never thought about the words “digital” being a homonym until a discussion with one of my business leaders. It went something like this:
“Our CEO wants to go after Digital in a much bigger way” was the start of the conversation.
“Great” I exclaimed. “But where does the CEO want to focus our digital efforts?”
“That is the problem. He talks about needing a Chief Digital Officer to lead the efforts. However, when we talk he seems to be saying he wants to go after digital marketing” the business leader explained.
“Well there is a big difference between digital marketing and digital transformation” I responded. “When you say digital transformation, what are your thoughts?” I asked.
“Oh, you know, really changing our focus to the online channel. Like omnichannel retail, where the customer experience is truly seamless. That is what you believe too isn’t it?” he asked.
“It is part of it,” I said. “But I think we have three different views of what the word digital means. Our CEO limits it to digital marketing, you see it as our omnichannel initiative, and I see it potentially encompassing the majority of our business processes. Perhaps we should classify discussions as little “d” digital and big “D” digital. Little “d” is focused around the online, e-commerce, customer experience space. Big “D” is talking about how we change our culture, our business models, processes and associated technology to transform the company.”
This conversation illustrates one of the biggest issues companies face in digital transformation. The word “digital” means different things to different people. This example was a conversation expressing views of three C level executives in a Fortune 250 company. Most people would expect these executives to be of like-mind on the definition of “digital.”
I suspect this same conversation happens on a more frequent basis than any of us would like to admit. Digital is a great industry buzzword, and there are hundreds of books and articles (not counting this one) written on the subject. However, even if we all read the same book our understanding of “digital” would often be shaped by our place (and perspective) within the organization.
Make no mistake; digital technology will touch all parts of the organization. Those companies that develop a cohesive vision for the end state will be the ones that succeed. Stephen Covey’s second habit is vital here. If you want to succeed, you must “begin with the end in mind.”
To envision the “end,” you must first understand the potential impacts of digital technologies in your organization. At its core, digital technologies will impact our relationship(s) with our customers, how we use data, and the jobs/roles that exist within our companies. Let’s discuss each one of these impacts in more detail.
2.2 Digital’s Impact on Customer Relationships
Plain and simple, businesses don’t exist if they don’t have customers. It is incredible to see how many businesses don’t evolve to the changing desires of the customer. I vividly remember discussions in the late 1990s with our business leaders on the pros and cons of having online sales. Our business leaders at the time were more concerned about what the impact online commerce would have on our retail stores and less about the way our customers would use it.
Still, we are all customers. Sometimes the easiest way to think about how things should be is to just take a walk in the customer’s shoes. What do they expect? Are you providing it? If not, what is preventing you from providing it? Are you allowing old habits or sacred cows to get in the way of how the customer wants to work with you?
When was the last time you opened an encyclopedia? When was the last time you pulled out a map on the side of the road to determine how to get to your destination? Digital disruption in music, maps, knowledge, movies, photography, and books has changed the way we consume content. In each of these industries, the core content has not changed, but the consumption model did. What if Rand McNally, Encyclopedia Britannica, Borders, Blockbuster, Eastman Kodak, and Camelot Music had been first movers to the new way customers wanted to consume their content? Would they be leaders now? Can you imagine the discussions in their corporate offices and boardrooms when these changes began emerging in their respective markets?
This entire process is described extraordinarily well in Clayton Christensen’s book, The Innovator’s Dilemma. To this point, Dr. Christensen asserts that innovation is on an “S-Curve.” In other words, until a customer base is established, innovation will provide a minimal return. Once the customer base is built, subsequent innovation yields increasing value. However, this reaches a point of diminishing return at some point as the most valuable product extensions are exhausted (Christensen, 1997).
Dr. Christensen further illustrates that incumbent companies have shareholders and large customer bases they must appease. Shareholders want to see increased sales and profits while customers continue to buy the company’s familiar products. New competitors often emerge on the fringes of the product. These new competitors aren’t encumbered with sales or customer expectations. Not burdened with these expectations, the new competitors can focus their attention on growing their niche through increasing innovation. Incumbent companies, faced with decreasing value in innovation in their product set and customer demands for improvements in their existing products, do not pursue new products. Once the incumbent begins losing market share to the new competitor it is generally too late to stop customer shifts, as the new company and incumbent would be at opposite points on the innovation S-curve (Christensen, 1997).
Of course, it isn’t just about providing the customer with what they want; it is also about providing them what they value. Sometimes this means providing it even before they know they value it. Consider laptops, tablets, and voice integration. Customers weren’t screaming for these, yet now we find them indispensable. Innovation is a critical ingredient in understanding the constant evolution of customer habits.
Before imparting on a digital transformation journey, it is critical for the organization to have a deep understanding of their customer. This understanding is not limited to past transactions and relationships. Do we understand the core value we provide to customers? How do the services and products we provide help or enhance the customer’s life? Are these services or products relevant in the future?
Often companies can shape these questions based on their current product sets or services. For example, Kodak introduced the first digital camera to the market in the mid-1970s. However, Kodak did little to further this new technology, and other companies overtook them in the minds and wallets of the customers. Was Kodak’s slow adoption of digital photography due to the fact they absolutely dominated the film marketplace? Did they merely reshape the question of relevancy to their biased view of the market?
Organizations must be open to having discussions that will challenge the core of their product and service offerings. Having the courage to admit what got us to this point won’t take us forward is difficult for any leadership team. However, organization leaders must have this courage and take a candid look at their business through the eyes of the customer. This step requires considering every customer interaction that occurs today and those interactions should occur in the future.
When you consider your customer interactions do you feel you have all the information needed to affect a positive outcome? Are old habits of doing business interfering with how your customer connects with your organization? For example, consider the fundamental problem of out-of-stocks in retail brick-and-mortar stores. If a customer goes into a store and the product they want isn’t there, what does the customer do? What does the store do? Can the retailer reserve product at another nearby store to fulfill the customer’s need? Can they order the product for the customer and have it shipped to the customer’s home? If the store has one or both of these capabilities is it easy for a store associate to execute? Do sales associates follow up on the sale after the fact to make sure the customer was satisfied?
These are the types of services that are expected in today’s environment. If a retailer can’t offer these services, they run the risk of losing market share at an alarming rate. Why? Because it is all too easy for the customer to walk out of the store click on the Amazon, Alibaba, or FlipKart shopping cart on their phone and place an order.
Even fashion-forward brands are not insulated from this behavior. Amazon and other pure-plays are rapidly building design capabilities to allow them to offer comparable fashion-forward products. In fact, industry analysts predict Amazon will surpass $20B in private brand sales by 2022. For a given shopper, will brand name win or will convenience win?
For retailers the question has to be when does customer experience win over product?
Deaf Diagnostic
Successful digital transformation centers on providing new and improved customer experiences. Organizations must continuously monitor and analyze customer preferences and trends. In-depth customer knowledge is essential for the design and implementation of digital products and services.
Of course, it is nearly impossible to talk about customer relationships without discussing the concept of customer experience. A broad definition of customer experience is the sum of all customer responses to interactions with an organization. This definition extends over the full customer lifecycle with the organization.
With this in mind, can we have strong customer relationships without having a great customer experience? Numerous studies have been conducted on customer experience. These studies concluded those organizations that have the best customer experience maintain the highest degrees of customer loyalty and increased revenues.
As described, customer experience is a sum. For example, an organization can have great products, a great website to buy from, and quick shipping. All of these capabilities result in a positive experience for the customer. However, the same organization could have complicated and frustrating return policies. In this example, a customer who buys and has never returned a product would likely have a different viewpoint of the organization than a customer who has attempted to process a return. The organizations with the best customer experience continuously monitor customer sentiment at all points of interaction (direct and indirect).
If your organization is in touch with your customer’s needs and you are actively engaged in building relationships on their (the customer’s) terms, you have the guiding light for your digital journey. Absent this knowledge, your journey will struggle to gain traction and direction.
2.3 Digital’s Impact on Organization Data
Nothing underscores the significant changes of digital more than data. In 2013 there were 4.4 zettabytes of data in the world. That number is projected to rise to 44 zettabytes by the year 2020. Now, unless you happen to be in IT, that statement probably doesn’t mean that much to you. Let’s put it into perspective. More data was created in 2015 and 2016 than in the previous 5000 years of humanity. By the end of 2016, we were producing 2.5 exabytes of data each day. This amount of data equates to 250,000 copies of the United States Libraries of Congress! In short, the amount of data generated every second is exploding (Kanellos, 2016).
What is driving this? Quite simply it is the number of devices producing data. Smartphones and their associated apps generate tremendous amounts of data. The number of Smartphones has grown nearly 50% in the past 3 years. However, other connected devices are growing at an even higher rate. Connected sensors exist in everything from watches, clothing, sporting goods, cars, and appliances. We live in hyper-connected times, and this level of growth will continue at an accelerated rate for the foreseeable future.
Consider a tennis racquet manufacturer embedding sensors in their racquet. These sensors provide information to the player such as how often the ball is hit in the middle of the strings versus the side. Alternatively, consider a retailer offering special promotions to customers to encourage the use of the retailer’s mobile application in their brick-and-mortar store. In these scenarios, the organizations are finding ways to learn more about their customers and in return are giving something of value to the customer.
The sensors in the tennis racquet are a great example of the pervasive nature of digital technologies. Without changing our behavior, we are suddenly able to collect information from basic activities. Another such technology is radio frequency identification (RFID). You may be seeing these tags on apparel and other items you are purchasing. These tags allow tracking of lifecycle activities for a product such as manufacturing, shipping, receiving in store, and customer purchase.
Let’s look at distributors and retailers that choose to use RFID tags to manage their inventory. We, as consumers, are accustomed to seeing the Universal Product Code (UPC) barcode as a way to identify a product. When we check out in a convenience store, the cashier scans the barcode, and the price is associated automatically with the product. Behind the scenes, the barcode is used to manage inventory. Assume we are buying a Diet Coke. The store scans the barcode and rings up the sale which decrements inventory. The store can look at their inventory system and see they have 100 Diet Cokes still in inventory. The UPC Code identifies the specific type of product, and the convenience store maintains an inventory record for each UPC code. If the store stocked 400 different products, this means they would have 400 inventory records in their system.
When we add RFID to this equation, we add much more capability. An RFID tag not only identifies the specific type of product but also identifies the specific product itself. In other words, I am not buying a Diet Coke; I am buying this one, unique Diet Coke. In addition, RFID codes can be read using technology that does not require a direct line of sight. In other words, we can scan all of the products passing a particular point in the store. We can also write to the tag as part of a scan process, allowing us to record when the product is sold. With these innovations we can now track the age of our inventory, we can track its location, and we can determine if a product has been purchased or shoplifted. However, this comes with a price. RFID tags are much more expensive than a UPC tag. Also, the infrastructure needed to manage RFID is much more costly than UPC scanners. Finally, our inventory system must handle unique identifiers. If the convenience store had an average of 30 of each product on hand, it would mean the store would now have 12,000 inventory records as opposed to 400 in the UPC world. If the convenience store were part of a chain of 1000 stores, it would result in 11,600,000 more inventory records to manage for the entire chain.
We have established digital technologies generate more data. Organizations must determine how to use this data to differentiate their products and services. Digitally astute companies understand the data at their disposal. They are active in the collection and cultivation of the data to improve their business outcomes. These companies also look for ways to use digital technologies to get more information from their customers. Essentially, these companies are excellent at connecting the “data dots” at their disposal.
Take a typical home improvement project, carpeting, as an example. An average customer will make over five visits to various stores during the initial shopping (or “incubation”) cycle. A typical retailer probably doesn’t know if the customer is in their store unless they buy something. As such, it is tough for the retailer to understand how to best reach and influence the customer. What if the retailer had a way to capture these initial interactions? Even something as simple as offering free (small) carpet samples in exchange for information (email or mailing address) would give the retailer a chance to connect with the customer after they have left the store. Of course, this would require consent from the customer. However, customers will often provide information if they perceive they receive something of value in return.
Assuming the retailer captures the customer’s interest it can begin providing education, incentives, and related products/services to influence the customer’s purchase decision.
Now let’s take it to the digital level. Again, let’s assume the customer opts-in for receiving communication from the retailer. Using interactive technologies on the customer’s mobile phone the retailer can collect pre-purchase information about the customer’s intent. Let’s assume the retailer offers a mobile application that helps the customer measure how much carpet and pad is needed for their project. The retailer now knows not only the customer is interested, but also the size of the project.
The retailer can use the mobile app to ensure their pricing and promotions are competitive with their competition. The retailer can also provide helpful information on services like home décor design and installation. The retailer can offer augmented reality experiences so the customer can see what the carpet would look like in their house. The retailer can provide bundled deals including such items as carpet, carpet pad, light fixtures, and paint as most carpeting projects lead to other changes in a room.
Once the customer purchases the carpet, the retailer can continue to provide information such as warranty, stain resistance treatments and other care options for the carpet. Since the lifespan of most carpets is about 5 years, the retailer can provide pre-emptive information to the customer on carpet “deals” as the 5-year mark approaches. The retailer can also use industry trends in carpeting, known customer preferences, and their product information to personalize messaging to the customer.
To quickly recap, in this digital example, the retailer was involved with the customer from ideation of the project, purchase, installation, post-project care, and retirement/replacement. The retailer is viewed as knowledgeable and helpful by the customer and will likely be the choice for repeat business. Providing this level of seamless, integrated service is what we mean by “connecting the data dots.”
It is not a stretch to say that all companies that hope to succeed in today’s economy must be “data companies.” Technologies such as sensors, beacons, e-commerce, mobile, and social media create vast sums of information. The companies that understand how to use this information to improve business outcomes will be the companies that win.
As I referenced in the preface, I served as the curator for the 2018 Retail Digital Adoption Survey, performed in conjunction with Cathy Hotka & Associates. This comprehensive survey measured, not only the adoption of digital technologies across retail but also the steps retailers were taking to prepare for and execute digital efforts. As I analyzed the survey results, a group of companies emerged that were far ahead of their peers in their adoption of digital technologies. These companies were labeled “Digital Leaders.” The peer group, labeled “Digital Explorers,” was still in the exploratory stages of their digital journey.
The Digital Leaders achieved a 6% CAGR in revenues from 2016–2018. Digital Explorers revenue growth was relatively flat over the same period. In addition, the average price-to-earnings ratio for a Digital Leader was more than 80% higher than Digital Explorers.
In the 2018 Retail Digital Adoption Survey, the Digital Leaders were much more active than their counterparts in the use of big data and advanced analytics. Eighty percent of Digital Leaders had completed at least a portion of their implementation of new analytics capabilities compared to only 38% of their peers. Digital Leaders clearly understood the importance and power of analytics to shape and drive their business (Stone, 2018).
2.4 Digital’s Impact on Roles and Responsibilities
Any time we talk “transformation” we know there will be impacts on the roles and responsibilities within our respective organizations. Digital Transformation is no exception to the rule. Digital Transformation will impact everyone within an organization.
In its 2014 study The Digital Tipping Point, the strategic consulting firm McKinsey, sited the top two impediments to meeting digital goals at larger companies were (1) difficulty finding talent, and (2) organization structure not designed appropriately for digital (Willmott, 2014).
We will cover talent issues in more depth in Chap. 8. Regarding item (2), many companies heavily invest in their command and control, hierarchical structures. These companies have many layers of management and decision-making. I recall dealing with a very large company (revenues in the hundreds of billions of dollars) while working on a cloud service for business intelligence. To move forward with a $300,000 annual contract the organization required six approvals, including two by Senior and Executive Vice Presidents. Obtaining authorization for this small deal took over 7 months. More telling was the project had an anticipated annual benefit of greater than one million dollars. Obviously, this was not a speed model.
The focus of an organization shifts to speed during digital transformation. Operational speed comes from digitizing information, rationalizing, streamlining, and automating business processes. Enabled by automation, the organization can move to more frequent information event cycles. An event cycle is simply receiving information and taking the appropriate action. Emerging technologies such as machine learning (or AI) allow organizations to automate and optimize processes that have typically required human intervention. While technology plays an important role in enabling this transformation, it is the imagination of the business in rethinking process flows that provide the big unlock. Imagine taking a basic replenishment process from 3 days to minutes. When data is fully digitized, processes reworked to remove unneeded interventions, and computing cycles optimized to run around the clock, this type of radical reduction is attainable. The question then becomes how do we use shortened process cycles to find new avenues for growth.
Understanding the customer impacts, how we use data in driving business results, and how our roles and processes will change, provides an excellent foundation for defining the meaning of digital transformation. However, we do not achieve this level of change and disruption in our organization following traditional methods.
2.5 The Importance of a Digital Platform
In its essence, digital transformation is as much or more about changing organization culture than merely implementing a new set of technology. In fact, technology is merely the enabler or catalyst for the change. With this in mind, organizations need to have an eye on the bigger picture. Being able to compete in an environment where competitors and challenges emerge at an unprecedented rate. Being able to compete in an environment where business cycles are continuously under pressure and customer preferences, and tastes change on a routine basis.
In a digital world, any number of factors can influence the competitive landscape, including geopolitical changes, societal changes, customer behavior, and technical progression. Said another way, we aren’t transforming to a new static state, we must transform to enable change in our organization. The ability to anticipate change, embrace change, and view change as an opportunity, not a hindrance doesn’t come from a single technology project. It doesn’t come from a set of technology projects. It comes from building a platform that allows the organization to quickly identify and pivot to capture new business.
A digital platform enables speed, agility, and innovation inside the organization. Said another way, digital transformation is not about a technology project to implement a capability or even a set of capabilities. It is not about a singular or collection of “products” to deliver specific outcomes. It is about transforming the business to be able to react quickly to changes and capitalize on emerging opportunities.
Professor Clayton Christensen of the Harvard Business School touched on this at a conference I attended recently. In his address, Dr. Christensen noted there are essentially three types of innovation at play as companies seek to grow. Innovation that targets efficiency seeks to do more with less, eliminate jobs, and increase net cash flow for a business. Innovation that targets sustainability seeks to make great products better, improve product margins and market share. The objectives of disruptive innovation are to make products accessible and affordable, create new jobs, and create new forms of growth. Dr. Christensen went further by saying that short-term pressures often dictate what should be longer-term growth strategies. For example, instead of reinvesting profits to find new growth platforms, more and more companies have opted for stock repurchases and dividend payouts. While popular among shareholders, it does little to position companies for future growth opportunities.
As I reflected on Dr. Christensen’s words, I was intrigued by what companies sincerely hoped to achieve as they pursued digital technologies. Were they trying to become more efficient or were they investing in digital to unlock new growth opportunities?
I believe a significant number of companies look at technologies such as artificial intelligence (AI), Internet of things (IoT), and advanced analytics as ways to become more efficient, improve or sustain market parity, or all of the above. As an initial entry into digital transformation, perhaps these are appropriately modest goals. However, the real value of digital transformation comes from the ability to gain more insights into the wants and needs of our customers. These insights provide the ability to develop new products and services that may take us on a different journey than the one we initially envisioned.
Think about Amazon. It started by selling books in 1994. Today it sells a myriad of products and services, all from the same underlying platform. Amazon even learned how to expand its technical capabilities to move into an entirely new business with Amazon Web Services (AWS). AWS is now the industry leader in Cloud Infrastructure Services, more than three times larger than its closest competitor. Amazon was not concerned about traditional business adjacencies. They had developed a platform of technology and processes that provided tremendous flexibility.
This platform is what sets Amazon apart from many of its competitors. Amazon’s platform enables its ability to quickly build and launch new business models.
Consider the Amazon Echo. Amazon launched this product in 2014 essentially creating the voice-activated speaker segment. It now owns over 70% of the new market. Amazon launched this leveraging its B2C network and even used its top customer base (Prime members) in the beta testing.
I recall joining a new IT organization as a CIO shortly after the IT organization had moved to a new shared service function. The leaders and associates in the organization weren’t clear how they should move forward. They had a new leader and were in a new function within the company and didn’t feel as they had a real identity.
We, as an organization, addressed this identity crisis by spending time reflecting on our purpose. “Why” we existed as an IT organization, “what” services did we provide, and “how” did we measure our success. We developed a single graphic that illustrated this understanding, and it became a fixture on the walls of cubicles, meeting rooms, and the like.
Businesses that hope to transform digitally will need this same type of understanding. Digital can challenge the very fabric of “why” an organization exists. In addition, typical business adjacencies will probably be too restrictive in a digital world. Once the business envisions itself as a digital entity, new adjacencies will likely evolve that had never been imagined before.
As we discussed earlier, organizations must have a solid understanding of their customer’s needs and wants before attempting digital transformation. This same understanding extends to employees and business partners. Scanning your environment is essential to preparing for digital change. What are your customers saying and doing? What are your competitors doing? What are your business partners doing? Are there experiments or tests going on in your industry that you should be observing? Are there developments in other industries that could impact your business? This type of environment scan is critical to understand your immediate challenges.
Using the environment scan as a foundation, can you envision what your business will look like in 3 years? Will you still be competitive without change? Asked another way; is what differentiates your products and services today, relevant in 3 years? Each organization will ask and answer these questions in a different fashion. Each organization will arrive at an inflection point that drives their digital journey. Being digital isn’t about following others, it is about establishing your own, unique course and vision.
To capitalize on this vision, the adoption of a platform for change is essential. Technically speaking, a platform is a framework of technology, process, guidelines/rules, and supporting business structure that enables an organization to build and deploy multiple business capabilities or models.
Building a platform isn’t accomplished with a typical project orientation or mindset. A platform requires business leaders to think about their investments in business process and technology differently. The new digital world it is all about speed and agility. A hierarchical structure that requires numerous levels of reviews and funding just won’t work.
We will cover approaches to building a digital platform in Chap. 7. In Chap. 8 we will outline more details on the impact digital transformation will have on individuals within the organization. Suffice to say, the old methods yielding 2–3-year duration program/projects before delivering any tangible value are no longer plausible.
2.6 Defining Digital Transformation
Let’s recap. We have talked about the impact digital transformation will have on our relationships with customers, how we use data, and how we structure our companies. We have discussed the importance of considering digital in the context of a “platform” versus a “project.”
Before finalizing a definition for digital transformation, it is crucial to consider the second word, transformation. Merriam-Webster defines transformation as “an act, process, or instance of transforming or being transformed.” Transform is further described as “to change in composition or structure.”
This level of change highlights another key distinction between transformation and a simple technology project. A standalone technology implementation does not require change in business process or structure. When we speak of transformation, we can infer that the composition or structure of the targeted business function and its associated processes will be altered.
Armed with this information, we should be able to agree on a definition for digital transformation. For purposes of this book and discussion we will describe digital transformation as the following:
Digital transformation is the development of a unified platform, consisting of systems and processes exploiting digital technologies in a manner that fundamentally changes how the organization collects and uses data to positively influence customer interactions.
While somewhat broad, this definition establishes essential boundaries for what we mean by digital transformation.
There are some key points to be stressed in this definition. “Fundamentally changes” in the collection and processing of data will obviously mean huge changes to roles and responsibilities in an organization. We will cover these changes later in more detail in Chap. 8. As we discussed earlier, “customer interactions” in this context includes the entirety of “customer experience.”
However, remember, this book is called “Digitally Deaf” for a reason. We are going to identify the most common reasons companies struggle with identifying digital opportunities and executing transformation. We will use the digital transformation definition as a benchmark throughout this discussion.
With all of that in mind, let’s begin with the most fundamental issue many companies face, getting the executive team and organization to align around the mission.