#ExecTransform - how can you be a digital winner?

Everybody speaks about Digital Transformation and innovation but many very successful executives, who have decades of industry experience but are light on technology knowledge, might feel uncomfortable in an age where new innovative competitors can bankrupt incumbents in few years. This blog post is aimed at explaining digital foundations in an non-technical way that can transform industries and as such are vital for industry veterans to understand.

Success is no longer about scale and efficiency

For decades the winning company had more offices, more agents, more call centres, more marketing budget and focused on running operations efficiently. Higher economies of scale and better efficiencies lead to market dominance.

In the digital age economies of scale are irrelevant. A bank with many branches and agents might be at a very bad competitive position when challenger banks compete via a mobile banking app. By empowering the customer to make any change in seconds from the supercomputer in their pocket, the need for branches, agents, call centres and other former competitive differentiators disappears. Having many employees in dispersed locations becomes a hindrance to compete with a savvy digital and innovative new entrant.

The new digital rules: market fit, speed and ecosystems

A digital challenger will take a fundamentally different approach to launching new products. In a world of cloud computing where anybody can get any type of IT hardware or software provisioned in seconds at extremely affordable prices, the cost of launching a new solution or feature has become relatively low. This means that customers have now become accustomed to choice. No longer can they only choose the bank next door or the telecom services from the monopolist. Customers are now victim of the fallacy of choice. They can get completely personalised services with automatic recommendations. Social networks have created niche communities and can make one mistake into a global PR crisis in seconds.

Innovators no longer ask customers what they want in focus groups because Facebook found out that most of us fit two categories, I.e. we are either social braggers or gossipers. However no single customers in any focus group has ever stood up and said they love bragging or gossiping. Netflix stopped asking customers to rate content when they found out that everybody gave Schindler's List a five star but most secretly watched the 2.4 star Love Island. What customers do and what they say they do is fundamentally different. A digital native focuses on customer needs that customer are not able to express and delivers a ten times better and easier solution than currently available. Examples are all around, pay a tenner and watch all the content you want with a single click on Netflix. Search the world's information in milliseconds on Google. Connect with any friend or colleague on Facebook and LinkedIn. Buy any product on Amazon.

What is that digital stars pursui? The three most important aspects are market fit, speed and ecosystems. Finding market fit for a new product is key when the cost of making a product is low but winning products go viral almost for free and loosing products can no longer be helped with millions in marketing spend in a perfectly transparent digital marketplace. Have you seen any car publicity recently? For sure every day if you just look around you. How many ads did you see for Tesla? By having a Twitter crazy CEO and an innovative product, Tesla does not need to spend billions on marketing its products.

Market fit without speed of delivery is useless. Rocket Internet made billions copying the best American start-ups into global markets and selling the copycats back to the innovators. Netflix's biggest competitor is also its exclusive cloud provider, a.k.a. Amazon. Optimise for speed not only at the growing and operating phases of your new ventures but especially at the creation and incubation. A culture of experimentation and failing fast and cheaply is vital to becoming a digital leader. The worst thing to do is to stick to bad ideas too long. It is a waste of money and gives valuable time to your competitors to come up with something better.

Most large companies are ill structured for the new digital realities. Structures are still reflecting economies of scale and especially efficiencies. Experts are clustered into departments. Each departments has been drained on resources to the point it is still functional but hardly after decades of cost cutting. This is especially true for support functions. Each department needs to use its very limited resources as efficient as possible for which it installed a queue and a process to reject work in the queue. This creates the needs for complex project and programme management structures focused on moving work items between different queues and to oversee the end goals of a project are reached. Many layers of management are needed to control such a complex structure.

If you would organise yourself for market fit and speed, then you are better to copy Amazon's Pizza Teams, Spotify's Squads, tiger teams or whatever other name you want to give small cross-functional autonomous and highly empowered teams. These teams are like bees. They move together with the other bees and create swarms that can afterwards successfully attack even the biggest elephant.

Most venture capitalists don't want to provide start-ups with funding if their business model is about collaboration with incumbents. They do however have no problem spending tens of millions, hundreds even billions on start-ups that have found ways to make incumbents irrelevant. Large companies have only themselves to blame for this because they make it virtually impossible to collaborate with innovative start-ups. Lenghty RFP processes, financial viability studies and other complex procurement, risk and legal processes are there to select yesterday's winners from the magical quadrant, even if their solutions are inadequate for the upcoming digital arms race.

Collaborations between partners and even competitors however are even more important in the digital age than ever before. Network effects explain why companies with less than 50 employees get bought for billions by digital giants. WhatsApp has less features than other competing products. Facebook, it's owner, has built a competing Messenger platform that has a similar number of users and is more feature rich. Why however did they not just build Messenger and saved themselves 19 Billions? The answer is called network effect. If WhatsApp would have been bought by Google than the hundreds of millions of users could have been used to stimulate usage of Google+. In the digital world there is a winners takes most if not all rule. Please name the third and forth search engine, social network, messenger app, ...?

Customers want a fully personalised digital experience which goes beyond products from a single company. This is why digital giants create platforms on top of which ecosystems form. Nokia had technically better phones than the first iPhones and Androids but they did not have an ecosystem of successful app developers that created a network effect. When they, Microsoft and telecom operators tried to launch their own app stores it was too late to matter. Most developers could only support two platforms because the costs per platform where high and the returns on anything but the two winning platforms were low or non-existent. Microsoft learnt an expensive lesson in being late to a digital phone marketplace and made sure that did not happen again with Cloud Computing.

This brings us to the leader of ecosystems and the store that sells everything. If there is one technical term, future digital leaders need to understand it is the word API or application protocol interface. Just like two people need to have a common language to understand one another. Por que si no lo tienen, es its schwierig um samen te werken. APIs are the language computers use to communicate. Amazon has build hundreds of APIs to abstract their marketplace, servers, networks, machine learning, data storage and so on. Its Cloud has revolutionised the world of IT and we are seeing a shift from owning a data centre, servers and software to it all being made available as a service. APIs are one of the core components to create platforms and ecosystems and very few large companies are offering them to abstract complexities in their core business and even to allow competitors to do business on top, as does Amazon very successfully on its marketplace.

Beware of the digital blockbusters

Executives love digital transformation because you can easily explain it on a slide: by using the same digital tools as the innovators you can transform your business in a digital business and have happier customers. What those slides forget to mention is that having a digital version of your existing business is like applying digital tools to the world of renting DVDs. You can make the business more successful in the short term but you will still be bankrupted by the Netflix of your industry in the midterm. The difference between Digital and Innovation is that one uses sprints, scrum masters, UX designers, Cloud, AI and similar to create a faster horse and the other one invents electric autonomous driving cars, hyperloops, superchargers, reusable rockets and more. Don't be fooled into investing millions to become the next Digital Blockbuster. True digital transformation starts by transforming executives thinking first. Why don't you share this blog post and say to the world that you are working on digital transformation and innovation by looking inside first. Executive transformation or #ExecTransform is the first step to becoming a successful business innovator.