The impact of digital on strategy design

An increased number of companies are currently in the middle or embarking in digital transformation. These companies have been forced to adapt to changes in how customers interact, engage and behave. Forced to react from the emergence of digital disrupters. Whilst the impact of digital disruption & transformation is a well covered topic, the impact of digital on the overall strategy design process is less understood.

In this article, I will present my point of view on how digital is changing the field of strategy thinking /formulation – digital is becoming a core part of strategy design and delivery.

The rise of digital and its impact on strategy thinking and process

The digital revolution (and its impact on businesses) is 20 years old, starting with the democratisation of the internet from the mid 90s. In its first phase, (1995-2005), most corporates used the internet primarily as a communication/marketing channel to promote their product/service  - a small number of industries were impacted early on by digital disruption [music, media, newspaper]. In most cases, companies did not build internal digital capabilities, rather outsourced their corporate websites to specialised web agencies. The second phase started around 2005- 2007 driven by the confluence of three factors colliding : broadband penetration reaching scale (speed), the iPhone introduction (internet going mobile) and Facebook expanding beyond educational institutions (social media going mainstream). From that point on, those three elements combined (broadband speed, mobility and social media) changed how consumers research, interact and experience products/services. In addition, computing power reached sufficient scale to lower the barriers to entry for small players/start-ups with easier access to assets, resources and technologies.

By the early 2010s, digital escaped its initial core use (digital marketing channels) to start impacting companies operating model (business model, products/services value proposition, organisational structure, data analytics, project delivery). The source of value creation shifted from upstream (e.g sourcing, manufacturing, logistics) to downstream activities (e.g customer experience, customer engagement …). I would recommend to watch the following TED video (https://www.ted.com/talks/joseph_pine_on_what_consumers_want) to understand the evolution of value from goods, to service, to experience. In a context of increasing commoditisation, customer experience is becoming the new currency of economic value – the key differentiating factor that pulls (or pushs) consumers to your products/services - this is now the customer experience economy.

Digital impact on strategy formulation process

1. Assess

The first step of strategy design is to conduct a current state assessment (from a business and industry context)- looking at external (industry analysis, competitors scan…) and internal factors (products portfolio review, competitive positioning analysis, historical financials …) to establish a baseline view of the company issues and opportunities. In today’s strategy review, it is critical to apply a digital lens – looking at the impact of digital disruption on market structure, competitive landscape as well as conducting an internal digital maturity review. For example, market can be disrupted in a very short period of time- Uber, founded in 2009, has radically transformed the taxi industry. Incumbents in this industry, such as Cabcharge (an Australian taxi charge card payment provider), are being forced to redefine their growth strategy, value proposition and investment plan (to remain relevant in an industry disrupted by Uber).

As a result, a review of how digital impact market structure/competitive landscapes has become a critical element of the current state assessment review.

2. Define

The second strategy design step is to define where and how to grow [value creating growth] – by leveraging the analysis in step 1, you should have uncovered areas of opportunities/and pain-points to fix.

When defining growth – it is important to explore the three ways to drive value creation : revenue growth, capital efficiency, operating margin - those three combined drives economic profit and return on invested capital (ROIC). Reputation/brand equity is also a key value driver to protect value. There are multiple ways to positively impact those three value-drivers. For instance, revenue growth can be generated by innovating products/services, entering new markets, cross-selling/up-selling existing products to your existing customers, reducing existing customer attrition. You can extract capital efficiency by optimising your inventory, payments processes, improve utilisation of your tangible assets (property/equipment). You can yield operational efficiencies through improvement in production efficiency, service delivery, logistics and distribution, sales force effectiveness. Defining how to grow is a function of a careful analysis (done in step 1) of the external market structure and the internal performance of your value creation system which determine the growth/optimisation opportunities.

As digital is increasingly impacting external market and internal value drivers, strategic options are likely to be heavily influenced and shaped by digital considerations.

3. Choose

At this stage, you have formed a clear strategic vision, objectives and identified a number of strategic options for growth. You then need to rank those options (according to their value impact) taking into consideration their feasibility (does the company have the capability to deliver those initiatives ?). Increasingly, companies are incorporating the human elements (desirability) to test (and further filter) the strategic initiatives that are likely to be more successful- especially for the customer-facing ones. For industries facing increasing commoditisation of their product/services, enhancing customer experience has become the key strategic priority to protect/growth revenue [operating efficiency/capital efficiency would not matter if you can not generate revenue].

As a result, it is likely that digital technologies would influence the selection of the strategic options. Digital drives economic and experience benefits : enhancing customer experience/customer insights (revenue generation), generating cost savings and operational efficiencies (operating margin/asset efficiency) and protecting brand equity/reputation- below a summary of key digital benefits on value-drivers

4. Plan & Execute

At this stage, you have formed your strategy blueprint with clear strategic options- the next step being crafting the delivery roadmap and projects workstream for each initiative. Digital has also changed the method of project delivery with the rise of agile ways of working. This change has been driven by the need for speed and innovation – corporates are looking to mimic the digital leaders (e.g Netflix, Google, Facebook, Amazon..) using agile for the development and roll out of new products and services. In addition, digital is impacting on how employees communicate with the use of digital communication platform (e.g Slack.com), collaborate with the use of digital workspace (e.g Mural.co) and participate in the innovation process (e.g Spigit.com).

As a result, digital is changing the traditional ways of project delivery to its core (beyond IT project delivery), with new digital tools for employees to work, connect and collaborate.

Digital is changing the strategy design process  - impacting each step of the strategy development from current state assessment, growth opportunities identification, strategic options prioritisation to strategic initiatives delivery – to the benefit of increasing informed and demanding generation of digital customers.