Between 2000 and 2015 the digital economy grew an estimated 2.5 times faster than GDP, with this trend further accelerated during the pandemic.
According to a recent Kearney survey demand for online products and services increased 300 percent. And while the end of COVID restrictions brings people back to the mall, more than 50 percent intend to shop even more online.
It’s hardly a surprise that an increasing number of companies have started to develop digital business models, with 44 percent already having a digital-first approach and another 45 percent planning for it. Executives note benefits such as improved operational efficiency, faster time to market and the ability to meet customer expectations.
But what about those who have not started yet? “Some companies—often family firms—never move beyond discussion. Others hope for a quick fix. They fast-track the hire of a CDO, introduce influencer marketing, or sell directly to end consumers without a clear strategic agenda for digitalization. Neither of these solutions is likely to succeed this way,” says. Miroslav Lazic, a partner at Kearney Digital Transformation practice.
It takes a carefully orchestrated approach to turn your business digital. Here are four strategies that worked.
Leverage existing capabilities
When Ian Watson became the CEO of Hotter, a UK shoe manufacturer, his business was under considerable pressure. The company specialized in comfort footwear for older people. But the expensive UK-wide retail network found it more and more difficult to operate profitably. Then came the pandemic and Watson decided to accelerate digitalization efforts. Now even older folks have started to get comfortable with buying online.
While new digital capabilities were built the key to a successful transformation was a carefully orchestrated use of existing capabilities. The company still had veterans from an old mail-order business and knew how to run the logistics that enable delivery.
It also decided to fully integrate a down-sized retail network into the new digital world. Customers come in to capture their feet on 3D scanners. “To start with, staff were a little reticent” Watson admits. “But soon they realize it makes for an interaction they did not have before, for example, being able to explain that you are wearing a standard fit but need a wide and perhaps you need a product that offer more stability or cushioning. How often had they approach a customer asking whether they need any help in the past. With the answer being no, this was the end of the conversation. This new technology just enables conversation and a personalized product recommendation.”
Once the scan is uploaded it is also easy to order shoes online—importantly enhancing the ‘comfort’ proposition that drives sales. Rolling out the new digital business model turned out to be a big success. In July Hotter sales were up 82 percent compared to the same month last year.
Digital transformation will always require companies to build new capabilities—e.g. in terms of front- and back-end software—leveraging existing capabilities gives them an early edge and makes for better integration of the old with the new.
A key question that Kearney’s digital practice asks is how much autonomy local units should have during digitalization. Lazic elaborates: “A global system can cost millions. And you never know whether it works. Regulation and sales channels are different.”
So rather than setting up a company-wide system, it makes sense to initially provide some local autonomy while coordinating with HQ. It’s cheaper and allows units to find solutions that work for them.
In stage two it will then be necessary to find more integrated solutions. It’s not a sign of bad planning but a realization that digitalization requires an evolutionary approach. Some systems turn out to be more effective, technology improves, and markets transform. Simply taking an off-the-shelf solution and rolling it out won’t work.
Open Strategy can facilitate such a process. Barclays’ UK retail business, for example, involved all its 30,000 employees when it first developed a strategy for the new digital era in 2012. Not only did this provide the space where employees could work out how their operations can transform, it also inspired further digital initiatives. One of them is the Digital Eagles initiative, a group of people who help employees to navigate the new digital world.
Develop your own digital business model
“We are the Uber of X” has become a common way to pitch a new startup. The assumption here is that Uber’s business model can be adopted in many different industries and geographies. For those new to the digital world the question is whether they should take a similar approach. Can they copy a successful digital business model used elsewhere? Maybe not Uber, but from an industry with similar characteristics?
Let’s take a manufacturer of kitchen appliances. They could be tempted to pick up best practices from cosmetics, an industry that is ahead in terms of digitalization. Leaving the teenage market aside, they target similar consumers after all. So in the new digital world cosmetics and kitchen appliances both want to build direct-to consumer channels. But the former can achieve this relatively easily by building an online shop that influencers can use to benefit from sales they initiate. For a kitchen appliance manufacturer, the interaction with customers, however, cannot stop at the point of sale. They need to build products that are digitally enabled. For example, a fridge that can tell you when the milk is finishing.
The insight here is not to disregard best practices entirely but to carefully consider what’s applicable and what’s not. And as Sebastian Schoemann, global co-lead of Kearney’s digital practice emphasizes: “Technology should not be the starting point at all. At the beginning you need to ask more general strategic questions.”
What do our customers want? Are there specific needs we can serve better through new digital solutions? Will our customers (or new customers) pay for such services? Based on these questions you can start building your own unique business model that includes technological considerations and draws lessons from others only where applicable.
In The Three Princes of Serendip the protagonists always make discoveries that they were not actually looking for. Corporate history is full of similar stories, including the discovery of X-Rays, Viagra, and Teflon.
While increasing numbers of companies provide room for serendipity in research—for example by allowing staff to spend time on their own pet-projects—they hardly do so with regard to more strategic initiatives. To manage digital transformation this is what they have to do.
For starters, it is hard to predict which technologies will prevail. When developing a new kitchen appliance, for example, you are faced with multiple competing technologies facilitating connectivity. Rather than betting entirely on one it makes sense to use platforms that enable flexibility in the future.
Secondly, many mid-sized manufacturers historically had full control over their products. Digital solutions require expertise they don’t have in-house. Building such expertise is often not feasible. They are competing for scarce talent with technology giants and sexy startups. Even if they manage to hire top talent, the existing culture and organization restrains them. It is better to work with outside partners and give up some of their control.
Finally—as mentioned above already—local autonomy in the digital space might seem a bit chaotic, but it is simply an admission that it is not possible to fully know which solutions work best. It is better to let a thousand flowers bloom.
Digitalization is not simply a technology exercise
As companies get ready for digitalization, they need to realize that this is only in part a technology question. First and foremost, this requires them to revisit their strategy. And once they embark on that journey, it is time to move into change-management mode.