10
Investing in Key Assets and Capabilities
Some companies operate in rich media environments, with audiences composed of technologically savvy conversationalists and critics, who are active consumers, as well as creators, of content. Other media enterprises operate in an environment where their audiences are more oriented to passively consuming content on fewer platforms. Their customers tend to be media spectators, instead of creators.
Strategy is about marrying the key resources that a company possesses, such as its tangible assets and its assorted capabilities, with the expectations of its customers. Consider the strategic choices confronting leaders at these four small companies, two start‐ups and two century‐old community newspapers. All four have annual revenues in the millions or less, but they face the same issues as billion‐dollar media enterprises.
theSkimm was founded in 2012 by two young producers at NBC, who had met in Rome while college students. With $60,000 in seed money, they launched a free daily email newsletter that targeted urban women, ages 22–34. The newsletter summarized the most important news and trends of the day in a conversational, casual tone. Its brand promise: we’ll tell you what you need to know so you don’t embarrass yourself when you are talking with friends. By 2017, the company had multiple online products (including Skimm Guides and Skimm the Vote), a staff of 45, and five million subscribers to its daily newsletter. Analysts estimated it had $4.4 million in annual revenue, much of it from advertising messages targeting subscribers. In early 2017, the founders received $8 million in venture capital from 21st Century Fox to invest in video. This infusion of cash values the company at $55 million. TheSkimm’s strategic priority: deciding how best to invest the new round of capital for the greatest ROI.
Scalawag was founded as a nonprofit magazine in 2015 by three recent college graduates with a Kickstarter campaign that raised $31,500 and allowed them to publish their first issue. The magazine, which is printed four times a year, has more than 1,000 subscribers. The term “scalawag” refers to Southern whites who supported Reconstruction in the years after the Civil War, and Scalawag, the magazine, covers the politics and culture of the New South in long‐form articles that resemble those in The Atlantic. Scalawag publishes two new articles a week in its free online newsletter, “This Week in the South.” In addition, the editors curate and link to what they consider the most interesting stories on the South published in sources as varied as Rolling Stone and Politico. Revenue comes from subscriptions to the magazine and a variety of fund‐raising efforts. While Scalawag pays its freelancers for the photography, poetry, and articles that run in the magazine, the regular staff receives only a small monthly stipend or hourly wages as of 2017. Scalawag’s strategic priority: moving beyond start‐up mode and gaining firm financial grounding.
The News Reporter was founded in 1896 and is located in rural eastern North Carolina in the community of Whiteville. In 1953, the News Reporter became one of the smallest papers ever to receive the prestigious Pulitzer Public Service Medal for its courageous reporting on the Ku Klux Klan’s infiltration of local police and fire departments. The News Reporter, with a print circulation of 10,000, serves readers and advertisers in one of the poorest counties in the state. While the paper was an early digital pioneer and has an active website and social media presence, print revenues associated with the twice‐weekly newspaper have declined significantly in recent years, prompting concern about the long‐term viability of the company. The editor of the paper is the third generation in his family to lead the paper. He is hoping his youngest daughter, who is in college majoring in journalism, will return home and assume the mantle for the fourth generation. The News Reporter’s strategic priority: establishing a five‐year business plan that allows the newspaper to remain family‐owned and family‐operated.
The Pilot was founded in 1920 and is located in Southern Pines, an affluent retirement and resort community in the Sandhills region of central North Carolina. Like the News Reporter, the Pilot, which has a print circulation of 12,000 readers, is family‐owned and family‐operated. The publisher estimates that Southern Pines retailers draw customers from five surrounding counties. Anticipating that income from the twice‐weekly newspaper would decline, the publisher began diversifying, purchasing other assets, and starting new products in the mid‐2000s. By 2017, the Pilot also published three city magazines (distributed in major metropolitan areas of the state) and two telephone directories published in adjacent counties. It also owned and operated a digital ad agency, as well as a local bookstore. The rear entrance to Fort Bragg, one of the largest military bases in the country, is adjacent to the city limits of Southern Pines. As a result, the area has attracted a sizeable number of young residents in recent years, with officers stationed at the base purchasing homes in the area. In an attempt to better serve these new residents, in 2016 the Pilot began publishing an online email newsletter, “created by millennials for millennials.” The content is similar to theSkimm, but locally oriented. The publisher realizes he must come up with more digital products and services to reach these new residents, many of whom are not interested in reading a print newspaper published twice a week. The Pilot’s strategic priority: selecting the next digital project.
The characteristics of the audiences of each of these four media enterprises vary dramatically. The audience for theSkimm, for instance, is much younger and more technologically savvy than that of the News Reporter. Similarly, the resources available to each of them vary significantly. After years of living frugally, theSkimm has just received a significant cash infusion while Scalawag still couldn’t afford to pay its permanent staff a regular salary in 2017.
How do the leaders of each of these media enterprises use the limited resources and assets that they possess to best advantage so that they meet the expectations of their customers and maximize their return on investment? In this chapter, we will develop a digital strategy map to help media entrepreneurs—those leading small start‐ups, as well as large legacy enterprises—align their company’s unique value proposition with their available resources as well as the media environment in which they operate. This will help managers of these four small media enterprises prioritize investments in key assets and capabilities that ultimately drive transformation and profitability.
Among the questions we’ll consider:
- What is the type of media environment in which a digital enterprise operates?
- What are the key resources and assets that a company has available to meet the expectations of its current and future customers?
- What is the framework for aligning the media environment with a company’s key resources?
- What are the pathways to digital transformation?
- How do you determine where to place your bets to ensure profitability of the entire enterprise?
Understanding the Different Media Environments
Digital strategies are built on a company’s promise to deliver unique value to its customers, in ways that differentiate it from competitors. In Chapters 6–9, we explored how to segment customers based on their wants and needs, identify the most promising and profitable customers, enhance relationships with them, and choose beneficial partners. Now let’s consider the dynamics of the media culture or environment in which an enterprise operates and interacts with the various consumers of its products and services.
Sociologists David Altheide and Robert Snow observed that media cultures form or “coalesce” around various content formats. The culture is determined by how an audience chooses to interact with the content provided by the medium. Their two influential books, Media Logic and Media Worlds in the Postjournalism Era, were written prior to the digital era. However, their observation seems as relevant today as then, especially given the interactivity, immediacy, and interconnectedness of Internet‐enabled communication.
Altheide and Snow referred to media “cultures.” However, the term “culture” carries various meanings in various disciplines of study. Therefore, to avoid confusion in this chapter, we’ll be referring to media environments. Specifically, we’ll want to know the degree of involvement of an audience—or a customer segment—with a specific medium’s content and format.
In an attempt to understand the various ways people interacted with social media, Forrester® Research has developed a schematic “technographics ladder” that segments consumers of social media content based on their behavior. At the top end of the ladder are the people who are the most actively involved with social media. This includes people who create and upload blogs, articles, and video (the creators), or post ratings and make comments on the content others create (the critics). In the middle of the ladder are the collectors, who actively save and share content and links, and will vote or “like” certain postings, as well as joiners, who maintain a social media profile but only infrequently post comments or share material. At the lower end are spectators and inactives. Spectators read blogs and ratings, and watch video or listen to podcasts, but don’t actively comment, share content, or create any postings. Inactives might have joined in the past, but no longer interact with social media.
A similar sorting technique can be used by any medium—from newspapers to magazines and television shows—to determine the dominant media environment in which they operate. Is a majority of the audience actively involved and interacting with the content they are consuming—creating and posting comments and actively saving and sharing material? If so, this is what we will refer to as a dynamic media environment. In such an environment, customers want to be active participants in conversations with each other and they want to interact with the content they consume. Stated another way, they place a high premium on interactivity and connectedness. By providing many opportunities to interact and connect, a media enterprise creates a unique value proposition that engenders customer loyalty and attachment to the medium.
At the opposite end of the spectrum are the customers who consume content, but don’t expect to actively interact with it. They watch, read, or listen to the content, and may even share it on occasion. They can be very loyal readers, listeners, and viewers, who place a high value on the news, information, or entertainment provided by a media enterprise. However, they have no expectation of carrying on a robust, ongoing conversation with others or with the media enterprise. This is what we will refer to as a passive media environment. Generationally, millennials (born between 1980 and 2000) and gen Xers (born prior to 1980) are more likely to expect and demand active involvement than baby boomers (born between 1945 and 1965). However, this can vary considerably by geographic market, or by the characteristics of certain types of communities built around shared interests, affiliations, or backgrounds. For example, those in university communities or wired urban centers may expect and demand more involvement, regardless of age. Similarly, subscribers to conservative blogs may be more likely to join an online forum to critique the opinion of others, or add their own views.
Using the schematic in Figure 10.1, we can see that Scalawag and theSkimm operate in the most dynamic environments. Millennial women, the target audience for theSkimm, actively engage with the content, as well as the various products (Skimm the Vote) and services (Daily Skimm calendar app) that the online enterprise develops. Similarly, Scalawag is aimed at an audience that cares about the New South and the social justice issues it confronts—from drug abuse in Appalachia to political shenanigans in state legislatures. Both audiences expect and want to be involved in advancing the conversation—online and offline.
Figure 10.1 From passive to dynamic: the media environments for four digital enterprises.
The Whiteville News Reporter is on the opposite end of the spectrum. It serves a geographic community with an older audience that does not necessarily expect or demand a lot of interactivity or involvement with the paper or its website. The newspaper’s subscribers rely on the paper’s Twitter feeds and Facebook posts to inform them of major news. Although they may share links with others, they are not inclined to interact with the online content posted by the News Reporter.
The Pilot is somewhere in between the two extremes, and is encountering a much more dynamic media environment. The Southern Pines and Pinehurst retirement and resort community is more affluent than Whiteville. Many of the retirees in the community have served as executives in major corporations or at high levels in state or national governments. They are often active Facebook users and are comfortable expressing their opinions online and in letters to the editor. The demographics in the community have begun changing in recent years as the families of young military officers stationed at nearby Fort Bragg have moved into the area. Like the readers of Scalawag and theSkimm, these younger subscribers want and expect to be digitally connected to their peers, as well as to the content that they consume. The free twice‐weekly online newsletter, Sway, launched by the Pilot in 2016, was designed to reach these young families in a way that the newspaper and glossy monthly print magazine, Pinestraw, didn’t. Much to the surprise of the Pilot, a sizeable portion of the early subscribers were retiree baby boomers who liked the conversational, breezy prose of Sway.
As the Pilot example shows, digital technology can change the dynamics rather quickly in a community, especially given the swift adoption of smartphones, which has made it possible to stay connected even in the most out‐of‐the‐way places. Understanding the degree of involvement expected and demanded by an audience is the first step in prioritizing digital investment. The next step is to identify which resources your company possesses that can be used in your strategic transformation efforts.
Identifying the Key Resources Available to Your Company
A balance sheet lists a company’s tangible and intangible assets in a manner that makes accounting sense. But it does not begin to account for all the resources that a typical media company can use to transform its business models. Perhaps the best way to begin identifying those resources is to ask: What key resources support our value propositions, customer relationships, and revenue streams?
Key resources include:
- capabilities your company possesses that have a significant value to current customers and prospects;
- relationships with suppliers, vendors, competitors, and employees, as well as established and potential partnerships with other firms;
- the various channels for reaching and engaging with current customers and prospects.
In fact, the most important resources or assets are likely to be intangible ones—your company’s capabilities. For example, theSkimm began with only $60,000 in seed money. However, early on, it identified an intangible and very valuable asset—its capability of producing engaging and conversational online content for millennial women. It leveraged that capability, along with its digital marketing expertise, to rapidly build an audience of 3.5 million subscribers in 18 months.
In The Essential Advantage, management consultants Paul Leinwand and Cesare Mainardi define capabilities as:
the interconnected people, knowledge, tools and processes that establishes a company’s “right to win”’ in a business or industry. The “right to win” is a clear path to sustained profitability, higher market share, or both, supported by [a company’s] critical set of capabilities.
To identify the scope and scale of your company’s capabilities, ask these questions:
- What is the unique value proposition that we currently deliver?
- What capabilities currently support that?
- Given the way consumer tastes and expectations are changing, what capabilities do we need in the future to continue delivering a unique value proposition?
A recent survey by the consulting group Strategy& found that two‐thirds of 2,400 senior executives believed their company did not have the capabilities to create value, or win against a competitor. “It’s much harder to build capabilities than to leverage what you already do exceptionally well,” say Leinwand and Mainardi. Therefore, they recommend identifying three to six “first‐in‐class interlocking capabilities” and then building a strategy for growth of revenue and profits around harnessing those resources, doing what your company does better than anyone else. This is in contrast to traditional strategies that often focus on responses to competitive threats or seizing market opportunities, without first considering whether a company has the resources to prevail.
As with the media environment, the “resources” available to a company (including its tangible and intangible assets) can be ranked from high to low (Figure 10.2). Due to an infusion of $8 million in venture capital in 2017, theSkimm ranks high on available financial resources, and has developed significant intangible assets—including digital capabilities around the creation, marketing, and distribution of its engaging products and services. Scalawag, in contrast, has many fewer financial resources to tap at the moment. However, it has attracted an affluent and engaged audience, and produces and curates quality content on social justice issues that it may be able to leverage to attract more resources—from nonprofit foundations or other sponsors.
Figure 10.2 From low to high: the resources available to four digital enterprises.
The Pilot has aggressively diversified its revenue and profits, and today the newspaper is one of many products in the company’s portfolio. Along the way, it has developed significant capabilities. On the content side, it has created and distributed print and online lifestyle magazines and telephone directories for other markets, a subscriber‐based digital newsletter, and short videos. On the marketing side, it has launched an in‐house digital agency providing a variety of marketing services for local businesses.
The News Reporter is in a much less affluent market and much more dependent financially on the profitability of its newspaper than is the Pilot. However, the newspaper has moved quickly to attempt to transform itself—creating special online “pages” for its readers, publishing a twice‐yearly lifestyle magazine, maintaining an active social media presence, and launching a small in‐house digital marketing agency.
As these four examples show, when you consider your company’s capabilities as resources that can be strategically deployed to transform your business model, even cash‐strapped enterprises are wealthier than they realize.
Developing a Digital Strategy Map and Framework
Let’s now create a grid that overlays the media environment in which an enterprise operates with the available resources that can be used to strategically transform a business. There are four resulting quadrants in Figure 10.3.
Figure 10.3 Environment and resources: putting it together.
The horizontal axis in Figure 10.3 represents the resources, ranked from high to low. Available resources include tangible assets, as well as processes, activities, and capabilities that a company can leverage. The vertical axis measures the degree of dynamic involvement by the audience with a medium and the products and services it produces. Dynamic audiences are more oriented toward being active creators of content, conversationalists, and critics. Passive audiences are more oriented toward being spectators. Let’s see how this might be used by the four media enterprises to plot their current position in Figure 10.4.
Figure 10.4 Map of digital transformation for four media enterprises.
The News Reporter is in Quadrant One (low resources, passive media environment). This is the most challenging quadrant on the map, but it is not without opportunity to move forward with digitization. The News Reporter’s digital initiatives have included: limited products and services, including the creation of “Sports of All Sorts” and the lifestyle section “POP” (both are digital products aimed at building engagement with a younger audience); marketing and distribution efforts (its use of social media to market its content and the establishment of an in‐house digital marketing agency); and limited efforts at digitizing its supply chain (contracting with a digital service to design websites for its advertisers).
Scalawag is in Quadrant Two (low resources, dynamic media environment). Scalawag, the print magazine, is supported through revenue from subscriptions and nonprofit funds. Scalawag’s digital initiatives are limited to the creation of one product (a free weekly email newsletter) and the marketing and distribution of this newsletter. However, it has a very engaged audience that it might be able to leverage for fund‐raising efforts.
theSkimm is in Quadrant Four (high resources, dynamic media environment), operating in a dynamic media culture with significant available resources, as a result of receiving venture capital funding of $16 million over five years. theSkimm began life in 2012 in Quadrant Two (low resources, dynamic media environment), but rapidly built its engaged millennial audience to 3.5 million subscribers in 18 months with a carefully curated collection of articles in its daily digital newsletter that was viewed as "accessible" by its target audience. theSkimm’s platform has now expanded to include not only the Daily Skimm, but also Skimm Ahead, Skimm the Vote, and Skimm Guides, which include Snapchat recommendations, a brief on the Panama Papers, and an update on what the Kardashians are doing. theSkimm implemented a grassroots approach to growing the audience rapidly and has about 13,000 “Skimm’bassadors” spreading the word. Skimm’bassadors get rewards such as tote bags and other swag for telling their friends to sign up and read. theSkimm’s digital efforts to date include development of products and services, as well as marketing and distribution efforts.
The Pilot is also in Quadrant Four (high resources, relatively dynamic media audience). The Pilot has a diversified portfolio of products and services. (It also owns and operates a brick‐and‐mortar retail outlet—a book store.) Its website has more than a million visitors a month. Recent digital initiatives include: products and services (revamping the newspaper website in 2010 to provide blogging tools, multimedia, and user‐generated content and launching Sway in 2016); supply chain (outsourcing its printing operations); and marketing and distribution (launching an in‐house digital marketing agency in 2016).
It is worth noting that two of the four enterprises moved from one quadrant to another between 2012 and 2017 (Figure 10.5). theSkimm began life in Quadrant Two (dynamic audience, low resources), in the same place where Scalawag is currently located. The Pilot was in Quadrant Three (high resources, passive audience) in 2012, having focused primarily on diversifying its portfolio of print products. Both companies were able to move into a more attractive quadrant by being very strategic in using all available resources and being very disciplined about how they prioritized their digital efforts. This suggests that this strategy framework can also be used as a Digital Transformation Map, that guides and prioritizes digital investment strategies for each of the four media companies.
Figure 10.5 Moving across the grid: the transformation of theSkimm and the Pilot.
Digital Transformation Pathways and Strategies
There are four strategies that all media companies—regardless of size and scale—can employ to digitally transform their business models. They can create digital products and services, develop digital marketing and distribution capabilities, digitize their business processes and supply chains, and disrupt the ecosystem with a digital innovation. Here’s how these four strategies have been used by our four small media enterprises.
- Products and services: This is the first digital strategy employed by most media enterprises, including both start‐ups (such as theSkimm and Scalawag) and legacy enterprises (such as the Pilot and News Reporter). Print newspapers typically begin this effort by digitizing content that has been created for their newspaper or magazine and placing it on a web platform. While this initial step is important, it does not reflect the totality of the digital transformation of products and services. The product or service must also be adapted to account for an audience’s consumption habits, considering how the audience is most likely to access the material (e.g., on a website or through a mobile app), and the various ways in which customers will use and share the content. Also, most media enterprises begin by digitizing all their content, without differentiating between their most valuable and least digital assets. By not prioritizing the most valuable franchises, they expend resources (time, attention, effort) on digitizing content that creates very little value to consumers.
- Marketing and distribution: Half of 1,500 companies surveyed in 2017 by McKinsey & Company had made efforts to digitize their distribution and marketing. This made strategic sense, according to McKinsey, “given the extraordinary impact digitization has already had on customer interactions and the power of digital tools to target marketing investments.” This level of digital media transformation for media companies most commonly deals with issues around pricing, promotion, and distribution. All four news outlets—theSkimm, Scalawag, the Pilot, and the News Reporter—use digital tools to promote their products and services to subscribers and potential subscribers. This includes their use of social media and the repackaging of previously published content for free online distribution. Since Scalawag is nonprofit, all of its digital marketing and distribution efforts are aimed at increasing the number of subscribers to its print magazine. However, many of the marketing and distribution efforts of the other three outlets focus on advertisers. Subscribers to the Daily Skimm receive the newsletter for free, but theSkimm delivers its mobile‐optimized email in such a way that it can provide very specific targeted information to its advertisers, garnering higher advertising rates per thousand than similar online news publications. Minute targeting is less important to the Pilot and News Reporter. Both of them have focused on creating in‐house digital marketing agencies that provide advertisers with a variety of online services, ranging from SEO (search engine optimization) to website design.
- Business processes and supply chains: This next level of digitization involves reducing, streamlining, or eliminating low value‐added costs. The McKinsey study found that digitization of the business processes and supply chains had a significant impact on profits. Yet only 2% of companies surveyed by McKinsey reported that this was a primary focus of their digital transformation efforts. Many newspapers and magazines, such as the Pilot and Scalawag, have outsourced their printing and/or distribution processes. But most efforts to digitize the supply chains in media companies have not progressed beyond these two processes. News outlets usually begin their journey by digitizing their products and services, as well as their marketing and distribution efforts. Many have not yet focused on aligning the digitization of all business processes and supply chains with the products and services they are producing or with their marketing and distribution efforts.
- Ecosystem disruption: This involves the creation and marketing of a new digital platform, product, or service that revolutionizes the way customers interact with a medium. The result is the creation of a new space that is distinct from the existing contested space. The disruptive digital innovation creates new benefits and services for customers, while simultaneously reducing costs. The biggest return on investment, according to the McKinsey study, goes “to those that initiate digital disruptions. Fast‐followers can also reap significant payouts.” But, in general, an eco‐system disruption can only be attempted by a media company after the other levels of the digital transformation and integration have been fully achieved.
In deciding which of the four digital transformation strategies to prioritize, media enterprises need to consider how to best utilize their available resources (most especially intangible ones, such as their capabilities). Among the questions to ask: How are you going to build the necessary capabilities for each strategy? In what order will you do it? What changes will this require you to make to your business structure or your portfolio of products and services?
Here’s how each of four media enterprises could use the Digital Transformation Map to guide future investments and priorities.
Quadrant One: Low Resources, Passive Media Culture
Digital Transformation Priority: Digitizing High Value Products and Services
Media firms in this quadrant, such as the News Reporter, are challenged by both their available resources, as well as the environment in which they operate. This requires strategic discipline. Leaders of these companies should focus first on identifying and prioritizing the digitization of the products and services that support their unique value proposition. To successfully leverage limited resources, these media organizations should study how current and potential customers prefer to receive and interact with their products and services, and then design their digital products and services to meet their customer expectations and needs. This may involve breaking the media organization’s mass audience into many smaller, micro‐segments, and designing digital products that are substantially different from the legacy product. For example, research has shown that readers of the News Reporter place a high value on its coverage of local sports. Usage of the paper’s website spikes on the day of the week when it publishes “Sports of All Sorts.” One possible next step would be the development of a weekly subscription sports newsletter that could also be ad‐ or sponsor‐supported.
Quadrant Two: Low Resources, Dynamic Media Environment
Digital Transformation Focus: Products and Services, as well as Marketing and Distribution Efforts
Media firms in this quadrant, like Scalawag, are challenged by available resources, but are advantaged by the engagement and involvement of their audience. Their focus should be on enhancing high‐value features or services, without significantly increasing the cost base. These could involve both online and offline products and services that serve a dual marketing purpose. For example, the nonprofit Texas Tribune, founded in 2009, produces and distributes long‐form online articles about Texas politics, government, and social issues, as well as reams of data about various legislative bills. It serves a very engaged audience similar to that of Scalawag. To raise awareness, the Tribune held forums around the state in 2010, interviewing legislators and politicos about important issues confronting the state. By 2014, those forums had become must‐attend events, and the Tribune received significant revenues from the fees charged to corporations that sponsored the events. By 2017, the Tribune has gained funding from nonprofit foundations and for‐profit corporations, subscribers and from a variety of products and services.
Quadrant Three: High Resources, Passive Media Environment
Digital Transformation Focus: Products and Services, Marketing and Distribution Efforts, as well as Business Processes and Supply Chain
Media organizations in this quadrant should be following rapid prototyping to continue to innovate and introduce products and services, or marketing and distribution efforts, that add value for either subscribers or advertisers. Additionally, they should be reducing, streamlining, or eliminating costs through improvements in business processes and their supply chains. The Pilot was in this quadrant in 2006. Over the next decade, it greatly expanded its products and services, developed new marketing capabilities, and outsourced all its printing. It continually invested in the development of new products and services that engaged both the retirees in the market, as well its young military families. As a result, it moved into Quadrant Four.
Quadrant Four: High Resources, Dynamic Media Environment
Digital Transformation Focus: Products and Services; Price, Promotion, and Distribution; Business Processes and Supply Chain; Creation of New Ecosystems
Media firms in this quadrant should be well on the way to fully digitizing their products and services, their marketing and distribution efforts, as well as their business processes (including their supply chain). They may then be able to invest their resources in identifying an uncontested space (not currently occupied by a competitor) and proceed to create new platforms, products, or services that attract customers to that space. theSkimm could conceivably create such an ecosystem disruption with its new video products.
Building a Profitable and Sustainable Business Model
Think of a strategy statement as having two parts. The first part articulates and canonizes what a company will do—the goals it will pursue and how it will accomplish those goals. The second part is unspoken, but just as powerful. It exposes, through omission, what a company will not do.
The above strategy framework prioritizes digital investment based on available resources and the dynamics of the media environments, however, it does not preclude the possibility of constantly reassessing your priorities or adjusting strategy. As discussed in Chapter 4, in order to keep pace with changes that are occurring in the marketplace, businesses need to have a strategy for transforming their business model at an average annual rate of 6%. That is why leaders of media enterprises need to be constantly evaluating both their cost and revenue structures.
In a 2017 study, McKinsey & Company surveyed executives at more than 1,500 companies, including 86 media enterprises, to gauge the impact of technology on their business model and bottom line. The media, retail, and high‐tech sectors had been the most aggressive in adopting and integrating digital technology into their business processes. Executives in those industries estimated that at least 50% of their business processes were “digitized.” However, even they concluded there was still much more they needed to do to transform their business models. Executives told McKinsey that the most immediate financial impact of digital technology was often a decrease of both revenue and profit. However, “bold, tightly integrated digital strategies” improved profitability.
Driving profitability begins with the elimination of costs associated with products, services, processes, and functions that add little value. Yale professor Richard Foster identified three types of cost reductions in Creative Destruction: Why Companies that Are Built to Last Underperform the Market. Incremental cost reductions are just that, the sort of adjustments that companies make each year, based on projected revenue. Significant reductions of 10% or more often involve the elimination of a product or service. Transformative change of a business model, he said, occurs only when a company succeeds in cutting expenses by 50% or more. That is why he argued that CEOs of established firms confronted by a disruptive innovation—such as the Pilot and News Reporter—must attempt to shed costs associated with the legacy technology (print) as quickly as possible. Funds freed up from shedding legacy costs should be invested in building customer value with the new technology (digital).
In The Essential Advantage, authors Leinwand and Mainardi detail a four‐step process for calculating costs and then aggressively eliminating the expenses that do not contribute directly to a company’s value proposition. The process begins with itemizing and categorizing all costs on four dimensions:
- Lights‐on expenses: The bare minimum an enterprise needs to stay in business. This includes the cost of facilities, as well as other operational expenses. Estimated to be 10% of total costs.
- Table stakes: This is what an enterprise needs to maintain its current position in its market. It includes marketing and production costs. Estimated to be 20–30% of total costs.
- Capabilities‐driven costs: Costs that support an enterprise’s unique value proposition and allow it to “play to win.” This, the authors estimated, is 20–30%, and “usually deserves more.”
- Everything else: This includes whole functions, such as logistics and distribution. Estimated to be as much as 50%.
Only capabilities‐driven costs differentiate your business, the authors argue, and ultimately drive profitability. Therefore, every other type of cost should be scrutinized. Can the product, business unit or function be sold, outsourced, streamlined, or shuttered? Every dollar a company can save by trimming costs in these three categories—lights‐on expenses, table stakes, and everything else—frees up resources for developing capabilities that drive value and profitability for the company.
After calculating the cost of the entire enterprise, as well as each function or capability within the enterprise, media enterprises then need to match the costs with the revenue from each of the digital transformation strategies. There are a number of ways to measure profitability: at the product, project, or customer levels. In general, the profitability of digital products and services can be measured at both the product level (with marketing and distribution costs allocated) or at the customer level. (Chapter 8 explains how to calculate Customer Lifetime Value for each customer segment.) The profitability of digital transformation efforts involving marketing and distribution, or those concerned with business processes and supply chains, can be measured at the project level.
Ultimately, the profitability of any digital transformation strategy is captured over time in a company’s EBIT (earnings before interest and taxes), which was discussed in detail in Chapter 2. The 2017 McKinsey study found that “current levels of digitization have already taken out, on average, up to six points of annual revenue and 4.5 points of growth in EBIT. And there’s more pressure ahead, our research suggests, as digital penetration deepens.”
However, the McKinsey research indicated that
the more aggressively companies respond to the digitization of their industries—up to and including initiating digital disruption—the better the effect on their projected revenue and profit growth…[B]old, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t…and the biggest payouts will go to those that initiate digital disruptions. Fast‐followers with operational excellence won’t be far behind.
Four Small Companies at a Strategic Crossroads
Leaders at each of the four small media enterprises in this chapter—theSkimm, Scalawag, the News Reporter, and the Pilot—are at an inflexion point in 2017. They have limited resources, so they must make difficult decisions about where to invest, prioritizing only a few of the most promising projects. They must be disciplined and focused in implementing their strategies. They must also be rigorous in assessing whether their investments have a positive return, pulling the plug when necessary.
theSkimm and the Pilot have the most resources to invest, and they operate in dynamic media environments. Both have been successful in recent years in transforming their business model. Their primary strategic challenge is prioritizing their investment spending so they achieve maximum return. In contrast, leaders of Scalawag and the News Reporter have little room for error. The three‐year‐old nonprofit Scalawag is still trying to gain a toehold in the market. It has few resources, but engaged subscribers. Its founders are passionate and committed to the cause—social justice—but they would also like to draw a regular salary. The News Reporter was an early digital pioneer and has continued to innovate. The century‐old, Pulitzer‐Prize‐winning community paper has created digital products and services that are popular with its audience and offered its local advertisers a variety of digital services. But its revenues have declined significantly in recent years. The paper is located in one of North Carolina’s poorest counties. “We know there are a lot of quality of life issues here…that will affect our future,” said Les High, editor of the paper. “And if we don’t cover them, no one else will.” High is the third generation of his family to work at the paper. The decisions that he makes in 2017 may well determine whether a fourth generation owns the paper.
Summary
In this chapter, we developed a digital strategy map that leaders of media enterprises can use to prioritize their investments and projects. Every entrepreneur needs to consider the unique characteristics of their market and their business operations when developing digital strategies.
Some enterprises have significant resources, other have limited resources. Resources include not just the assets listed on a balance sheet, but also a company’s capabilities. We defined capabilities as the interconnection of people, knowledge, tools, and processes that contribute to a company’s value proposition and give it a competitive advantage. Similarly, some media enterprises operate in rich, dynamic environments. Their customers like to be engaged in creating content and connecting with it. Other media firms have customers who prefer to be passive spectators.
With the strategy map we sought to match the dynamics of the media environment with the amount and type of resources that leaders of media enterprises can use to transform their business. We identified four quadrants and four pathways to digital business transformation. Each quadrant is ranked according to the amount of resources available to the media enterprises (ranked from high to low) and the type of environment (ranked from dynamic to passive). Each of the quadrants has a strategic priority for investment. The four pathways to business model transformation are:(1) creating digital products and services; (2) developing digital marketing and distribution capabilities; (3) digitizing business processes and supply chains; and (4) disrupting the ecosystem through innovation.
In order to free up dollars for investment, companies must be diligent about constantly re‐evaluating their cost structures. Recent studies have shown that digital technology initially depresses earnings for most companies. However, companies that aggressively pursue integrated digital strategies are most likely to survive and thrive in the years ahead.