The value chain in the days of Digital Transformation

How does digitization impact the value proposition of companies? How can CEOs anticipate transformations to offer new services to customers?

(Originally published on Ingenium Magazine Jan 8, 2020, link to the article: https://www.ingenium-magazine.it/en/5-suggerimenti-per-ceo-che-guidano-la-digital-transformation/)

We are in the “Digital Era” where everything changes very quickly, in society as well as in business, where in just a few years the way of relating and communicating with the customer, of innovating, competition and the very nature of competitors, right up to how decisions are made, increasingly driven by data which have become a strategic business element, have changed.

The deepest change which characterizes the business world (and that is totally correlated to the greatly talked about “disruption” which is often cited during discussions concerning digital transformation) concerns the digitization of the value chain in which the company operates: from the creation of the product/service up to the delivery/performance to the final customer and the after-sales relationship services. Digitization has radically transformed the (increasingly circular and less linear) forms of the value chains in which companies operate, the players who take part in them and the relationships of strength between them. Digitization changes (and sometimes destroys) the value the company “delivers” to the customer, creating new players and new values very quickly. These profound impacts force CEOs to rethink organizations in order to anticipate change and to continue to provide value to the customer.

5 tips for CEOs who drive digital transformation

1) Focus on Customer Value. While until a few years ago the main objective of the company was to generate profit for shareholders, today the main objective is to create value for the customer, because it is important to monitor and anticipate the changes in value which technological innovations enable so as to keep the company “relevant”.

Structural reasoning in terms of “value” for the market and continuously analyzing: in which business do I operate? become fundamental. Whom do I sell to? What value does the customer receive? What is the actual reason the customer buys my product or service? Are there new needs induced by technology or new ways to satisfy the same need?

This way of thinking is not yet so widespread and a widely known example comes from the music world, where if we focus on the value chain we see how the value proposition of the market has radically changed, new players allow to enjoy only one’s favorite tracks and not the whole album, to enjoy these on demand and everywhere, suggesting to the consumer new tracks to his/her taste and so on. A few players have disappeared (think of physical distributors) and new ones have been created (think of online platforms or big digital distributors like iTunes). The overwhelming power of record companies has drastically decreased and, de facto, the power of the two ends of the chain has increased: content creators on the one hand, i.e. musicians who can self-produce their music more easily and reach their customers through digital platforms, and on the other the distribution platforms to the end customer. In fact, the value chain has changed from its content creation to its forms of use, with much broader and more articulated, customized and tailor-made value “benefits” which have brought a change in consumers who have taken up the new value proposals that traditional industry did not offer.

2) Focus on “customer experience”. Having a clear understanding of the value that our offer delivers, it is necessary to focus on customer experience. With digitization, the strategy and ways to relate to customers have changed completely, customer networks have emerged, where customers communicate with each other and no longer receive information only from the company which produces the product/service, but interact with other consumers through digital platforms.

“Customer experience” competition is increasingly fierce and, according to the so-called “equivalent experience” law, our customer’s best experience always sets a benchmark even if “experienced” in other markets. The challenge today is to reinvent oneself, by comparison not only with “symmetrical” competitors in the same market, but also with the experiences offered by completely different sectors.

3) Be agile. The company must adapt quickly and be truly agile: it is not just a matter of adopting agile and fashionable organizational practices and models, but of agile thinking.

The change of mindset is crucial. Analog companies operated in a linear world of “planning and control”, where predicting the future was possible (and expected), the environment could be controlled and “best practices” could be replicated. Today this is not so, given the unpredictability of business, the digital mindset abandons the logic which aimed at replicating past successful formulas, and incorporates the need to continuously innovate, experiment and learn (Continuous Beta). It is not just a question of replicating the past, but of creating a new future.

4) Be Smart. In other words, “Be Data Driven”. It is necessary to have clear strategic business objectives as a prerequisite to be able to focus and select the relevant data and to obtain support from these for defining the direction and the decisions to be taken. To be Data Driven means promoting a Data Oriented culture as the core of corporate life, as well as to use architectures and methodologies to produce, obtain, exploit data within a business logic.

5) Be Platform Oriented. The platform business model impacts all sectors, and can be taken as a reference for a business model capable of generating value, facilitating direct or indirect interactions between two or more different types of customers. The platform facilitates the relationship between different types of customers, it creates the experience of the service and above all it leads to scalable business models, where, in fact, one does not own the “means of production” but the “means of connection”, enabling new ways of responding to customer needs. Having a strategy which incorporates the business model elements typical of platforms, understanding and anticipating the impacts which existing or potential platforms will have on the market in which one operates is at this point inevitable.

Filippo Di Cesare