Is digital transformation fuzzy ?

We have heard many CEO's say “It is a digital era and we need to pivot ourselves and?take this business to another trajectory using it as the lever”

I have asked myself about the shape and size of Digital transformation and why would it take businesses to another height, especially those that have been around for a few decades. Clearly, there is something that they see which I don’t after 3 decades of working with technologies.

In the next few pages, I will try and outline my understanding of this part of evolution and together with you I will learn it a bit more. ?I shall start with a short narrative below.

Satya Nadella said Microsoft had no enterprise software presence about 10 years back and they had to put in a lot of efforts to walk that path which they did it through digital transformation. What does he mean by that ? There are two things he is essentially saying, one of which is Microsoft had to learn how to enter the enterprise side of business engagement over and beyond licensing, secondly they had to start a new business segment that grew from zero to a multi-billion dollar business in a few years using some ubiquitous technology that does not need door to door salesmen. He feels Microsoft needed a digital transformation to achieve both these goals.

What did Microsoft do when they created such a billion dollar business in a few years ? They just moved Microsoft office suite of product ?from DVDs to cloud at a few dollars per person per month. Of course, for Microsoft it took a little while to acknowledge that consumers today have moved on to consumption economy , no more will they pay for a DVD and software update assurance that spans 3 years at a hefty one-time cost. Buyers had already tasted Amazon or Ebay and they knew what it is to be in a “buy , try or?retain , return” economy.

Given this story, let us then try and define Digital transformation.?To define it ; it is the experimentation?with?technology which when deployed ?in all areas of the business , fundamentally changes how value is delivered to end customers. Phew !

I must admit that these big words are such a put-off.?Now, if you challenge each of these words in the sentence above you will end up in whataboutery. I shall try to simplify the words and make it more meaningful for you. Here goes; since mid-1990 there is a steady stream of technology that has been introduced in organizations. These technologies have largely been used to tie all the interdepartmental ways of working so that tasks move from one end to the other , till the finished goods are delivered to the customer. This would mean that you will use product management systems to manage your product, supply chain system to deliver your finished goods to the sales or warehouse locations, financial systems to record transactions, HR systems to manage workers and production systems to plan production.?If you ask yourself once, what value did all these interconnected pieces of software bring to the table ? You will realize that this brought transparency, a flow of tasks that is akin to a manufacturing shop-floor where raw material moves from one line to another. But the biggest shift was in terms of agility ! No wonder, we only talk about speed in everything we do these days. How many of you have heard about words like “go-to-market strategies” or “speed is the essence” or “faster, better, higher”. All of 1990s?digital initiatives were aimed at getting the product to the retailer faster than competition , therefore we had the ERPs, CRMs, SCMs, HCMs, MRPs and APOs of the world which deluged the market.?If you spoke to the organizations of that era, they would proudly present their digital transformation work, they had done around ERPs, material planning and financials. But in today’s world you will call it hygiene, isn’t it ? It is not what you will have in mind when speaking of digital disruption or transformations. Digital transformation is a bunch of tools that makes an organization reach out to its customer faster to impact the sale. That said, I would predict that digital transformation technologies should only be about a new business model , a new way to sell and service our customer. No wonder, you hear and see about all these new tools like Block-chain, artificial intelligence, robotics process automation, application programming interfaces, social and mobile apps. None of these were invented to make your financial system more robust or fail safe, nor did it come in to being to give your employees a work-life balance, it all came into being so that we could add speed and scale to reach our customers.

?In a digital revolution it is all of these and more where you engage with the customers , tailor your products and deliveries of finished goods as per his requirement and convenience.?This is what creates value for a customer. In short CV = (Perceived benefits – cost). Let me try and correlate that with a perceived value that consumers gain from using a platform called SHEIN (She in). Most of us have heard of Zara ?a popular fast fashion brand of the 1990 that essentially researched the fashion shows around the world and brought latest fashion to consumers at an affordable price within 21 days, which can be dumped post use. H&M, Gap, Zara ?were replaced by “ultra-fast” fashion brand like Shein. While Zara brought out fashion in 21 days Shein’s claim to fame was just 1 day. How can someone possibly achieve this in such a complex industry which is largely driven by human instincts, timing and celebrity followership with a shelf life of a few weeks only ? Of course, Digital Transformation ! Shein crawls all the fashion websites for new trends, walks through all the social media posts from facebook, twitter or tiktok and uses?artificial intelligence to define what is in vogue. This information is directly passed to their outsourced production and supply chain units, thereby shortening the lead time. Back in those days where Zara had middlemen and scouts , Shein had cut the intermediaries and connected the customer to manufacturing (C2M or sometimes called DTC in the fashion world). Shein has clocked $10 B in sales in a matter of a decade and is among the top 10 trendy company’s in the world.

Speaking of which, I shall talk you through the TikTok story. It started off again in China as a video app called Douyin which encouraged people to create short 15 seconds content with background music, touching the creative instincts of human beings. They realized humans are impatient now and 15 seconds is about all they had. Today Tiktok has 1.5 Billion subscribers which the sellers are tapping to influence sales. For a fraction of the cost sellers are able to reach out to the world and TikTok earns its revenue from these advertisements while influencers make their money from influencing sales. A complete win-win for everyone. Imagine how blissful it will be if you are able to mine active user data every minute using Analytics and Artificial intelligence, to know their preferences. I will not be surprised if they become the next media mogul of the world, given the rate at which they are posting short news capsules !

Moving away from the corporate world let’s talk about sports and digital transformation in that arena. You may think sports is all about sweat and labor on the field, but you will be surprised at how various clubs are using Digital engagement to understand and sell to their fans. Football clubs in UK , Spain and Italy have created digital Fanclubs which helps the fans to engage with their clubs regularly. 99.5% fans don’t get an opportunity to reach the football field, but they have this innate desire to be part of the gang. Clubs have created online presence to keep their fans together, through which they are able to sell subscriptions, crowdfund their expansions and also sell them merchandise.?The day Messi joined Paris Saint-Germain jersey sales worth $100 M happened.?You will be surprised how clubs are deploying digital technology to scout for players that fit their requirements. Clubs have introduced block-chain technology to enable fans to have digital collectibles like signed posters or signed Jerseys.

Given the examples above, I am quite surprised to see the rapid enhancements in the digital transformation area which has grown on us stealthily without us realizing that we have become commodities, that too within the last decade.

Digital transformation is broken down into 3 parts which are buying the digital asset, putting the asset to use and enabling the labor to use the asset. Like any traditional business , it is the capital deepening ratio which determines how productive the worker is, thereby how soon we can produce and sell in the market (productivity per employee or sales per employee , rings a bell?). If you leave that aspect momentarily , the key is how can we capture the customers imagination , how we can get customer feedback and how can we engage the customer to take that “buy” call.?Therefore , for any industry digital transformation is all about bringing in top line , bottom line is an add-on bonus.

Below, I am presenting the state of digital transformation across select industries;

From the illustration above you can clearly see that there are a lot of “grey” which means there are more laggards than leaders in the transformation journey. Hospitality, Healthcare, Fitness, Entertainment, agriculture?and real estate industries have a fair bit of catching up to do.

In order to understand why some of the industries are behind here are a few examples

Hospitality ; Booking.com just disrupted the hotel industry completely in 2 decades. It is hard to believe that they took off after the founder realized that only Hilton offered online room booking services way back in 1996.?The birth of Booking.com and today it is by far the largest OTA (travel agent). Did the hotel industry lose out in the bargain ? I would believe so , as any hotel website would provide the same features as Booking.com but customers still prefer to book online at Booking.com and not the hotel website. They charge a 30% commission on gross ?booked value which wipes out the profit of the hotel. Booking.com had realized 2 decades back that customer is the new oil. A hotel may have customers residing in their property management system, but not on a booking engine, therefore they can’t provide the level of analytics and interactivity that Booking.com can possibly provide. But the moot question to ask here is, could the hotel industry not envisage this new digital tsunami and prepare for it , maybe have their own booking engine ? Could the big hotel chains not gang-up and build their own booking engine ? ?What is stopping them from doing it now ?

Another example from food industry are the food delivery apps. They have cracked the art of customer interaction. They realized long back that customers just want to eat good food at an affordable price. There was a huge untapped home delivery market way back in 2010. Lo Behold , food ordering app! The delivery app is a mere aggregator, the biggest asset they hold is the customer. They charge a commission of 20-22% which effectively wipes out the gross margins of a food delivery business.

I was surprised to note that Under Armour a large sports apparel / shoe brand came up with a fitness app called MyfitnessPal in 2005. It is a nutrition guide app, which they sold off successfully for $345 M. Their app strategy may have tottered a bit, but they are holding on to their own Mapmyride app. Now if you look at it carefully, the strategy was to gather insights from customers on their running pattern, their fitness trend and be able to carve out specific offerings to them. Apple and Nike have invested in ?fitness app now, which tells me that they are building their digital assets. This would get them customer outreach (emails, phones, daily status updates), customer interactions by targeting specific sales to them and ultimately close transactions quicker. A proof in point is that the jogger sale for Nike has gone up by 3 times based on analytics and deeper understanding of their customer data from the fitness app.

Google recently invested in Nest which is a thermostat company. Eh , what ? But come to think of it , Google will now have all the household energy utilization data which they can now trade with the utility companies. It will help energy companies to manage their distribution and last miles better.

Digital transformation is not a once in a lifetime activity, it is not one big application that will run into millions of lines of code and cover everything under the sun that may remotely relate to individuals or customers.?Digital transformation may be achieved through the following three areas

1.??????Process transformation ; The world is going gaga over Domino’s Pizza and how a pizza company has transformed into a technology company. Domino’s has set a vision that customers can order from any device and from anywhere. Which means that the customers can order on facebook messenger, whatsapp, TVs , practically any device you can think of. This is a visionary statement coming from the CEO which catapulted Domino’s to hire?400 software engineers comprising of 50% of their HQ workforce. They will deliver using drones , driverless cars or bikes and delivery boys at the doorstep. Result ? Share price of $7 in 2006 is now trading at $500

2.??????New business opportunities; Imagine a motor insurance company that can monitor its customer behavior on a daily basis. The company could pivot itself using digital transformation platform and deep analytics supported by machine learning to provide “by the kilometer” insurance package rather than a bundled offering. Napster had online music, Apple sells it , Google sells hotel rooms, Amazon resells its internal IT infrastructure under the aegis of AWS.

3.??????Change in your business domain ; Digital will give you the opportunity to exit your traditional business and launch into something new. I shall take a hotel chain as an example to accentuate my point. We know that there are 3M hotel rooms globally and total procurement of $60 B. Assuming 5 hotel chains collaborate and create a sourcing platform?that morphs into a Marketplace connecting thousands of food, furniture or other supplies vendors worldwide and helps hotels source at the best rates. It is a win-win for vendors and buyer organization, it will save the vendor sales force expense while giving them visibility into a large cart , on the other hand give transparency to buyers and hotel owners. That said if a few hotels could get together , co-create this platform, get vendors listed and extend this for procurement the valuation of such a platform will grow to 10x in no time. Unfortunately, there is only one example of this sort where Marriott, Fairmont and Hyatt got together and co-created a platform. Similarly, a fitness club need not necessarily be a fitness club forever. It could morph into a connected equipment marketplace, ?fitness app , a platform to connect personal trainers and customers or simply a social influencer site. ?A story like TikTok !

Should we talk about the largest benefactor of a digital revolution , the government; The biggest fillip to digital transformation will be government agencies. Imagine how the bureaucracy can be reduced if the government decides to digitalize itself.?If a government could provide its citizen with a secure one-time digital identity?it would become easy for them to interact with their citizens. But, today, each agency stores a different identity and has a different way to assess you. Imagine if your digital identity could span across all the government departments it would become so simple to vote online or even file taxes , isn’t it ?

There are three constraints that hold back big nations from completely transforming into a digital nation;

1.??????Government does not trust their citizen , citizens don’t trust their government

2.??????Personal identity data should only be sought “once” and not many times. By that logic , citizens only need to visit the government agency for childbirth, marriage or disputes, rest can be transacted over internet

3.??????Make the security of identity and related transactions (tax, land ownership, wealth) watertight to be stored in digital vaults.

In my ending note I quote a famous CEO ” Corporations that regard and pursue digital transformation in a multi-dimensional way will find greater success than those that don’t”

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