Marc Andreessen famously proclaimed that software is eating the world and that the best software companies will win in every sector. The arrival of software and digitalization strategies are impacting every aspect of business and changing the rules of the game in every front. In its pure form, we have the Digital Titans – Alphabet, Amazon, Apple, IBM, Tencent, Baidu, and Alibaba. These titans operate solely in the digital domain and have become a threat to incumbent firms everywhere. Incumbents have to respond by conceiving their own digital strategy.
“Incumbent firms need a digital strategy to respond to the threat posed by Digital Titans”
Take the case of Uber, an upcoming Digital Titan. Its founder, Travis Kalanick, came up with an alternative to the taxi service – he wondered about the many residents with cars who could make a quick buck by giving him a ride back to his hotel. His core idea emerged right then and Uber was born. His plan was to make Uber be like a taxi service to passengers and synonymous to a referral service for drivers. Since every ride seeker would have either an Android, iOS, or Windows phone, an app could connect riders with drivers using their phone’s GPS capabilities.
This idea evolved to include user reviews and driver ratings that took care of the quality of service, and predictive algorithms removed the question of when the ride will actually arrive. In addition, Uber also processes all payments involved, charging the passenger’s credit card, taking a cut for itself (which ranges from 5% to 20%), and depositing the remaining money into the driver’s account, all in the background and completely cashless. This simple idea of matching excess capacity to demand is now being valued over $60B dollars. Uber is the quintessential example of a company that has mastered a particular domain (ride sharing) without investing in physical assets. The age of data and algorithms has announced its arrival to the general manager. What lessons can managers take out of these case studies to compete with Digital Titans like Alphabet?
A manager today has to understand the following 10 strategic aspects of digital transformation:
1. Collect Data to Understand Your Customers
Digital Titans have shifted our attention from the supply chain aspects to the consumption side. Collecting behavioral data from customers is becoming commonplace. Uber gets information about the customer’s credit card, preferred destinations, and locations – even when the customer is not using the Uber app. Ford has the ability to collect information about the driver of the car and their preferences. This allows Ford and Uber to partner with others and create products and services that are of immense value to their existing customer base. For example, Uber has entered the business of transporting patients between hospitals or to their homes using their superior scheduling algorithm. The same service can be used to deliver groceries. It is because of the many possible experiences Uber can deliver that it is given such a high valuation by investors.
2. Leverage the Virtual Product
With the arrival of IoT and sensors, it is now possible to collect information about a product and create a digital version of it. This digital avatar of the product can be manipulated easily to test changes and to create new services and features. Furthermore, companies can use simulation and statistical models to understand what the digital customer prefers and then decide whether to offer those products or services. When Boeing designs new aircraft models, they create a digital version of it and use it to source parts and ensure that the integration with suppliers meets high tolerance standards.
3. Redefine Product Upgrades
Just as digital products are constantly updated and modified, products like a car can be made to behave like a digital product. Unlike software upgrades, automobiles get upgraded every four to six years. When a Ford car has the ability to add apps to its interface, each app can provide the driver with a different user experience. With software and apps, car companies can upgrade cars like software companies upgrade software. For example, Tesla is able to download software into the car and change its functioning overnight. This same principle can be applied to modify any networked product that includes software driving its behavior.
4. Use Analytics and Experimentation
Digital Titan Alphabet is known for its obsession with data and using analytics to make product decisions. Every feature that it releases is tested with its user base, and the test results dictate if the feature is added to the company’s offering or discarded. In fact, entire product decisions are based on usage data. As another example, Ford ran 25 mobility experiments to decide what new services it must add to its portfolio. These experiments were run on a global basis and resulted in several new products and services that were added to the car.
5. Treat Data as a Product
Digital is largely about data. Every company has information about its products, customers, and the environment. The data they collect should be treated as an asset. It should have high quality, security, and access rights. Once they have achieved these basic qualities, companies can provide interfaces (i.e., APIs) for third parties to use their data. These interfaces can also help companies infer the value of their data assets by providing controlled access for others to experiment. Facebook’s social graph, for example, is a data asset that Facebook uses to provide superior advertising services to its customer base.
“Companies should treat data as an asset”
6. Understand Algorithms as Codified Know-How
Autonomous vehicles, manufacturing robots, recommendation services, and digital assistants are driven by algorithms – encoded rules of operation guiding how customers interact with products and services. In the era of digital customer experiences, algorithms are strategic organizational assets accumulating organizational learning, perfected through experimentation. Digital Titans Amazon and Alphabet place great effort into improving and protecting their algorithms, as they harbor the essence of the digital experiences these companies offer to their customers. Furthermore, algorithms encapsulate decision biases and need robust governance systems. Managers in software driven companies need to understand the algorithms hidden in their workflow and systematically analyze them to eliminate bias.
“Algorithms are strategic organizational assets accumulating organizational learning, perfected through experimentation”
7. Be a Digital Innovator
Digital Innovators use the modern infrastructure (frequently provided by the Digital Titans) as interlocking building blocks to conceive new and interesting products and services. They use the same infrastructure to perform low-cost experimentation and improve the velocity of products to markets. These digital natives know how to use their networks for finding resources, mentors, and partners. A manager who trains to become a digital innovator is only limited by their imagination. A manager who hires digital innovators and trains employees to innovate with digital technologies prepares the organization for a digital transformation.
8. Strive for Platform Business Models
A platform company has a product that performs a vital function that is of use to many in the ecosystem. They make it easy for third parties to write applications that run on top of the platform. Finally, they have a vibrant ecosystem that allows developers to thrive and earn credentials. A classic example of this is Apple and its app marketplace. Developers learn Swift and are able to participate in writing apps for third-parties that look for applications that run on iOS. As more apps are written, the value of each app goes up along with that of the platform. In addition, developers specialized in the platform are sought-after by companies. This virtuous cycle allows companies with a platform business model to dominate in many markets.
9. Think Ecosystems, Not Competitors
The rules of digital competition are different. Companies compete as part of a team in an ecosystem, and partnerships are critical to ensuring competitiveness and securing success. A software company like Workday develops software using tools provided by vendors like Microsoft and uses Amazon to host its software in the cloud. It also relies on hardware manufactured by Apple or Lenovo and uses it to display reports generated by its software. This is the general logic by which every company will operate going forward. The ecosystem model creates dependencies and unique positions for companies to leverage. Similarly, changes in dependencies cause shifts in the power structure within ecosystems.
10. Create a “Digital You”
Millennials joining the workforce today are expected to have 20 jobs during their careers. In addition, the skills required by each job may vary and they are expected to adapt. The future workforce needs an online presence and a strong reputation on sites like LinkedIn, Quora, and StackOverflow to present credentials to recruiters. Companies need to be ready to use these networks and accept the new forms of credentialing. In addition, recruiting today is more of a pull than a push strategy. Techniques like inbound marketing, pioneered by Hubspot, are key for both the workforce and companies looking for talent; creating a strong online presence is critical for all the agents in a digital ecosystem.
By Ruben Mancha (@RubenMMancha) and Bala Iyer (@BalaIyer); Originally published on LinkedIn.