What is “digital”?
Quite a bit is being written these days on the topic of “digital transformation” and “being digital”. It’s a topic being addressed by all major research firms, media outlets and content sites. And, at present, a search for “digital transformation” at Amazon returns thousands of relevant books on topics ranging from strategy to implementation. This, in turn, has led to other large topics that include your data strategy and the rise of the Chief Digital Officer. In fact, it’s quite impossible to avoid the continuous stream of posts, cases studies, articles, books or conferences now dedicated to the topic.
However, even with all the information currently available, the focus is all too often about the adoption of technology and not on how to effect a positive outcome in your business through technology. It may seem like a subtle play on words, but by the end of this article, I promise the difference will be clear.
Your Journey Begins with the Business Model
Why? Well, at its core, your business model defines how your company makes money. And yes, while there are many ways to define your business, it all comes back to the relationship a company has with its customers, and the activities necessary to deliver value in that relationship. More importantly, it creates a “shared understanding” of these things so everyone from employees, to suppliers and customers know how to behave in that business relationship. If digital transformation is about how you might use technology in your business model, you must first truly understand that model.
This means taking the time to understand what your company does, who it does it for and why someone would continue using the products or services offered by your company. Sounds simple right? It’s very likely that your company even has a mission statement on their website guiding the company’s brand in the eyes of the customer. However, does everyone in the company truly understand their role in the business model? Do the employees in each department understand how their work contributes to their respective operational flows and how that work affects the customer? In a startup scenario, do we even know enough to define the business model?
It’s been our experience that many companies, from startups to well established companies, have what we call an understanding gap. If I can point to one single difference between the older, well established, businesses and those excelling in the digital space, it’s a company’s relationship to this topic, and the autonomy with which employees are allowed to affect the customer. Furthermore, we find the older a company is, or larger the employee base, the bigger this problem is for the organization. And every company has an understanding gap, the only real question is how big.
Yes, at their core, business models are simple things. But as you can see, it’s not an altogether straight forward topic. Before deciding how technology will play a role in your business, you must have a firm grasp of the underlying business model.
Next, We Have to Deal with the Element of Time
Believe it or not, time is a very dangerous component of the business model. Cracking the code on a successful business model is a time consuming, challenging and, sometimes, daunting task. As a result, many, many companies shift their focus to optimizing the model. Whether for scale or profit, or both, the new mission is all about protecting the model. Here again, given the effort that goes into protecting the model, companies sometimes become dogmatic about their model and it’s underlying value. Unfortunately, time has a way of eroding the value of the model from the outside.
The easiest example I can provide on this point can be found in the startup world. We all know the business model you launch with will often see many changes before finding its stride. This has everything to do with the assumptions you’ve built your business around. If the assumptions themselves happen to address the needs of current reality, a business can hit its stride very quickly. Just consider all the current digital businesses which now dominate the stock market. From Amazon to Uber to Facebook, the core assumptions in the model addressed reality’s current needs, even when people didn’t realize they were going to need these solutions. For me, the biggest stretch was probably AirBnB. But, in some cases, the business model never finds its stride, effectively killing the startup. In either model, the founders all experienced opportunities to deal with adversity in their model. What we’ve observed in our own work with startups, is that a startup must ensure their core assumptions match current reality.
This is a problem of context and time. Context in that a business, and its model, can not exist without a consuming market. While this does not dictate what your business is capable of, it concretely defines ways in which your company may benefit. Time is a factor in that a consuming market is likely to change as time progresses. Depending on the “context” of the business model, time may have a slowly changing effect, or it may create a “burning business model”. Construction, for example, is a slowly changing market, while the market for messaging apps is evolving at light speed (at least right now).
And this is not unique to startups. When we examine well established companies like Microsoft, IBM or Kodak, elements of this same problem can easily be identified. Kodak is a company who’s business model was fine for many decades. Then suddenly, with the rise of digital cameras and cell phones with cameras, society was able to capture those precious moments and store them digitally. Kodak’s demise is well documented and should serve as good example of companies not quite believing that digital is changing current reality. IBM and Microsoft, however, are both examples of companies in the middle of re-discovering their business model based on this new reality.
Last point to deal with on the topic of time, is the penalty for ignoring the affect time has on reality. Historically, the penalty for neglecting time was not severe as working conditions, as well as society’s relative living conditions, stayed fairly flat for decades. There were advances in manufacturing, materials and business models which have certainly advanced living and working conditions but nothing has generated the kind of advances that technology has in so short a time span. In many markets, the penalty for ignoring the effects of time on your business model is catastrophic. This is the current reality of business and you simply cannot afford to ignore it.
Theory of the Business
Fundamentally there’s nothing wrong with business models as they are commonly practiced. In fact, they can be powerful tools in helping you understand the core mechanics of your business and simplify “shared understanding” of the model itself. But as I’ve outlined above, when we add the element of time, and context to the customer at some point in time, this becomes a more complex mental model. For us, there’s only one device that encompasses all three elements, and that’s Peter Drucker’s “Theory of the Business”. Published two decades ago, this was Drucker’s attempt at explaining his version of a business definition. More shockingly, Drucker has written about his own life-long challenge as seen in this written paper from 1958 in defining something that could be construed as a “definition of the business”. However, in its current form, we’ve found his “Theory of the Business” to be a fantastic mental model for dealing with the evolution of society, and it’s impact on the modern business. Since I’m going to reference Drucker’s theory pretty heavily moving forward, it’s truly worth pausing here until you’ve read it in its entirety.
Now, what we learn from Drucker is that your theory must account for current reality. This means society, culture and environment as it exists in reality. How is this different from having a business model? In Drucker’s “Theory of the Business” he addresses the fact that reality changes. As reality changes, so does the value of your company to your current and potential customers. This allows us, as business owners, to extend what we know about our business model with assumptions which may affect our business. By making these assumptions a part of the model itself, it forces us to constantly re-examine our business when any one of the underlying assumptions change, even if slightly.
Bringing this back to being a digital company, let’s examine what has happened with society over the last two decades. First, the internet is really a thing now. Digital commerce is quickly becoming the default purchasing point for many things in modern society. Next, mobile is overtaking desktop as the default relationship consumers have with many of their products and services. And I don’t just mean in the consumer market. Consider for a second the number of tools which now cater to the mobile friendly business crowd.
We can talk all day long about how the internet is killing things like books, newspapers and magazines. We can talk about how the “digital persona” is killing brick and mortar (not true by the way). But let’s honestly just ask ourselves if technology, and the use of it in our everyday lives is simply part of evolution itself. We are smart creatures. We create smart things, and as a result, society learns to do things even smarter than before. A bit of a positively reinforced feedback loop. This is quite purely the human experience. Putting this evolution of society in the context of business, some of the challenges being faced by companies today have more to do with the evolution of society (and reality as a whole) than it does with “digital”. Digital just happens to be the medium driving the current evolution.
The real question about your business should be, based on current reality, culture and modern society, does the thing my company gets paid to do still have value? If so, how much value? If not, how far off are we? And just as important, when will our value begin seeing a decline in the eyes of our customers and society as a whole? If society’s expectations are becoming more digital, how does our business fit into this new view of reality?
Here again, this must be followed by, what skills are now necessary to deliver this value, to those customers who still value what we do? Because yes, just as changes in society and culture will impact your core “theory”, it will also impact the skills necessary to deliver on your brand’s promise to the customer.
Last, and just as important as the rest of this, is the need to find new theories about your business. Drucker says it very clearly in his article. At such time as you’ve proven your “theory of the business”, you must immediately begin looking for the next theory.
The evolution of society is an external factor to your business and you must keep up, or your business will eventually fall into irrelevance.
What does this have to do with Being Digital?
It should be clear by now that the world is changing fast. In a world being eaten by software, where everyone is learning to code (whether they should or not is a different post), and anyone with a laptop can create noteworthy changes in the market place, how does your business’s value proposition hold up? And, does it have the necessary skills not only to compete, but to simultaneously find the right next theory of the business?
It’s been our experience that many companies are getting caught up in the process of becoming digital, without first addressing the needs of their current “theory of the business”. Sometimes, companies even get lucky in their discovery of success along the way. We call this accidental success. More often, however, these initiatives fail to deliver the business value necessary for the company to continue forward.
Being digital is a powerful tool if, and only if, it’s done such that it leverages your company’s “theory of the business”.
If you try to approach this by first going digital, you may completely miss the mark. Oh, you may become a digital company, but may also run the risk of no longer delivering on a brand promise the world is interested in.
What does this have to do with Being Digital?
Great question and well timed. Now that you have a solid understanding of your core business theory, you can begin exploring how technology may help you deliver on that theory.
Fundamentally, the use of technology in your business can be broken down into three areas of focus.
The first of which, and probably easiest to discuss, is “Operational Efficiency”. This speaks to helping companies work more efficiently on the inside. It often includes platforms which unify the data being created by many off the shelf tools, used to facilitate focused activities in the operational areas of the business.
Next is “Customer Experience”. This is all about how your customers benefit from the brand promise your company can deliver, and the effort required on the customer’s part to utilize that value. Can the customer get to the “value proposition” unassisted, or are there layers of obfuscation they have to navigate? Many of the biggest wins in the digital world right now, are focused heavily on this part of the business.
Last is the core “Business Model” itself. The best example I can give here, are companies like Slack, where their core value proposition is defined by the technology used to build the product. For many, achieving a transformation in the Business Model is what they envision when saying “digital transformation”.
Properly done, being a more digital company not only allows you to outperform your peers, but also makes dealing with the evolving needs of the customer, and society, more feasible.
Why is feature writing about this?
We’re often in a position to help companies decide whether or not software may solve a particular problem. Or, in some cases, whether or not new software helps them deliver more value to customers or partners. And when we stop to evaluate our most successful engagements over the last eight years, all of them had one thing in common. They all had a strong understanding of the outcomes expected by the software being created. More importantly, the outcome itself was measured in business terms. Whether it was operational efficiency or driving value to the customers through a new and innovative experience, the value to the business was clear, and had clear ties to reality.
All to often, however, the focus on creating custom, or hybrid, technologies is too strongly focused on the technologies themselves and not enough on the business outcomes necessary to achieve success. Over time, we’ve developed a process internally which helps us curate a process that not only helps achieve success in business terms, but also helps educate our customers in terms of “being digital”.
This post is actually going to serve as the foundation for a series in which we’re going to share our knowledge, experience and outcomes based on this internal process. By sharing this, it’s our hope that we can create a foundation for our client’s own internal efforts, and begin a conversation with others that strengthen how service providers help companies in similar situations.