Digital Strategies…a Practitioner’s Perspective

A few years back something curious happened with the advent of the internet. Thanks to the business press, ordinary, even pedestrian businesses suddenly became glamorous technology companies. Even today, sites that do little more than sell shoes are talked about as the next big technology IPO and their CEO’s are extolled as visionary because they managed to achieve a favorable ranking in the most popular search engines. The fact is that today all businesses are digital, they all make use of the internet, many convey value through proprietary applications and that alone does not make them technology companies, in fact, it makes them little more than ordinary players in their respective industries and markets.

So, what constitutes a digital strategy when everybody is already digitally competent and internet savvy?

If you talk to todays CIO’s they will often suggest that their digital strategy is to move to the cloud. Which one has to wonder does what for their competitive posture in their respective industries and markets? Does it in any way alter their value proposition? Does it improve their customer relationships? Does it improve time to market or increase their customers’ value realization? In fact, it probably won’t have any impact on any of these and reasonably so since its not intended to. Cloud-based architectures might make your technology infrastructure more agile, scalable, and cost effective but it doesn’t necessary improve or enhance the value you create or alter the manner in which your customers experience your value proposition unless of course your value proposition happens to be a brand new web site.

But that’s not unusual or unexpected if you remember that cloud architectures were designed to support transaction intensive, web-based applications. (See  Larry, you evil genius – October 2014 and Forecast, partly cloudy – July 2010) At the same time, billions of dollars are spent each year on ERP, CRM, Financial and HR systems, both SaaS based and on-prem, and for the most part they don’t influence your value proposition or the way in which customers acquire it or experience it, nor are they intended to. They are intended to enhance and influence the efficacy with which the business is managed, they serve the line of business and administrative managers that lie within the boundaries of the business, not outside it. Their supposed value is to lower the cost of existing business processes.

Now, it could be argued that pure internet and social media plays can improve their value proposition by moving to a DevOps /Cloud deployment model in order to improve time to market and in the overall scheme of things that may be true. Cloud computing’s popularity was driven by web start-ups and mobile apps.  But when it comes to the overall economy, brand new, web-site only businesses amount to a negligible fraction of overall business activity.

A Question of Value

Before we get too far down this road it would be useful to frame a few concepts.

Let’s begin by suggesting that the purpose of creating a digital strategy is to enhance how value is created, conveyed, consumed and retained by a particular business, cohort of customers or a value creating collection of networked entities. After all, at the heart of every business endeavor is the creation of value for consumption by customers, owners, communities, employees, etc. Businesses often forget this and get mired solving problems that have little if any influence in creating, sustaining and extending value-oriented processes. That open office knothole your HR department pulled you through last year did what for your customers?

Further, it would be useful to establish a common definition of what constitutes value. Most would agree that value is something that one esteems. For shareholders that could be retained earnings, for customers ease of use, for consumers a sense of well-being. And in this sense value can be persistent or transient, tangible or intangible, measurable or immeasurable. For instance, if a business can substantiate that it always operates with integrity, one would assume that has substantial value even though it may not be something easily codified and measured. Similarly, the ability to capture and monetize something “cool” might also have substantial measurable value, particularly true for media, entertainment and gadgets, but might not last more than a month. For our purposes we will be examining things that from a business perspective exhibit performance and economic attributes that are for the most part persistent, tangible and measurable.

Next, if one subscribes to the simple notion that strategy is the allocation of resources for the realization of outcomes then it’s not a stretch to suggest that a digital strategy is one where the specific application of technology yields some kind of measurable result. Conventional wisdom would argue that ROI or IRR might be a good place to start when it comes to measuring return on financial capital but not all value is rooted in financial capital and qualitative measures such as customer satisfaction and employee retention are equally important. So measurement has to be consistent with the type of resource employed and the expected outcome to be realized. Further, digital strategies need to incorporate most of the standard techniques that are usually applied to the conceptualization of a larger business strategy including SWOT analysis, environmental analysis and competitive response, planning and execution horizons, adjacencies, disruption, etc.

Finally, it is import to bear in mind that the creation and retention of value by a single business entity is just as important as the consumption and retention of value by that entity’s customers and partners and that a comprehensive digital strategy should apply to all of the above, jointly and separately. Recently, it has become fashionable to recommend that digital strategies begin by extending capabilities between trading partners and customers by increasing transparency and digital entanglement. And while this might prove beneficial it would be prudent to begin by examining the strategic digital options within the boundaries of a specific business entity before extending it to customers and partners. Many businesses remain successful by not sharing information even with trusted business partners, this is particularly true in the case of knowledge based service providers who still rely on information asymmetry to protect core competencies from pernicious imitation.

Art or Alchemy?

In the late 90’s and early 2000’s several noted thought leaders including Gary Hamel and Michael Treacy attempted to boil the ocean to distill what makes business entities successful and sustainable. While their analysis took different paths where they ended up had a lot in common. Based on their research most businesses succeed by establishing and nurturing a core set of competencies that create value. Pretty simple really but not many firms recognize, promote and consciously invest in their primary value creating competencies let alone align other investments including information technology to do the same.

In “The Discipline of Market Leaders” Michael Treacy and Fred Wiersema postulated that market leaders closely adhered to one of three primary value orientations. Winning firms were either cost leaders focused on operations efficiency, innovators whose expertise produced value either through disruption or rapid evolution of offers or firms rooted in customer intimacy whose knowledge of the customer facilitates increasing delivery of value. While not all firms could be easily classified as being along only one dimension, most had a dominant value orientation that was augmented by expertise and assets that lay along other dimensions. Similarly, the dominant value orientation was often reflected in the organizational structure and economic model of the firm with allocations of capital to specific value creating and administrative functions clearly evident in both the P&L and Balance Sheets. (see Value Based Strategy Formulation – February 2011). Operational performance metrics also exhibited a strong correlation to the dominant value orientation of the firm.

 

The next important concept is that of core competence. For both established and emerging firms, core competencies represent a unique blend of skills, expertise, technology, behaviors and culture that provide for the basis and persistent differentiation of the value that is created, delivered and consumed by the markets that they serve. C.K. Prahalad and Gary Hamel postulated in “The Core Competence of the Corporation” that the key to business success was rooted in the competence of the organization and not necessary its organizational structure, capital structure or economic model. They cited three importance aspects of competence that bolstered successful firms. First, that it must be able to afford the entity greater opportunity to threaten and service markets.  Next, that it must underlie the basis of the way in which customers perceived and realized value. And finally that it must provide the firm a competitive position that was difficult to imitate. So within each established value orientation is one or more core competencies that reinforce the value creating properties of the firm and afford it greater market opportunities and sustainable competitive differentiation.

 

The last piece of the puzzle would be to conceptualize a digital strategy that is congruent with the entity’s established value orientation and core competencies. While this might seem obvious and straight forward there are numerous aspects that need to be taken into consideration. Almost every business has a backlog of IT projects and they are routinely revisited each year to see if they are still relevant, affordable and achievable given current circumstances and resources. Typically, a number of these projects have already aged out and are no longer relevant. If this seems familiar you probably do not have a digital strategy. Digital strategies encompass the vision, disciplines and skills to successfully conceive, articulate, provision, govern and operate information capabilities that support, extend and enhance core competencies. Further, successful digital strategies incorporate the technical aspects of agility, ubiquity, security, transparency and innovation while promoting measurable improvements to business performance.

The Sources and Uses of Digital Leverage

With the aforementioned concepts in mind it is possible to explore what digital initiatives might have the greatest potential to make an appreciable difference to measurable performance and financial factors.

Each value orientation and competency index has a unique set of attributes with respect to how a particular business entity is capitalized and how specific activities provide returns to the capital that is employed. For these purposes capital need not be purely financial although for some entities it will be. Here it is more useful to conceive of capital as the investable basis from which returns can be generated and upon which returns can be measured.  So, depending upon the particular value orientation, capital can be structural and financial in support of asset intensive business, it can be intellectual in support of innovative businesses or it could be relationship based in the case of entities that thrive on customer intimacy. The investable basis of each entity’s value orientation will often have a profound impact on the boundaries of the firm as well as to what degree digital initiatives can influence that entity’s customers and trading partners. (See The Invisible Hand –  November 2013)

At this juncture is it extremely important to fully understand and be able to thoroughly articulate exactly what business you happen to be in. Seems easy enough but for many businesses that isn’t the case. For example, let’s consider a large Consumer Packaged Goods provider. At first glance you might see a manufacturing entity employing large amounts of structural capital to produce product. Upon closer examination you might determine that it is a product innovator focused on making everything “new and improved”. But then you realize that its primary value proposition is to act as a sophisticated consultant closely engaged with its distribution partners to “monetize” retail space. In truth, it is all three. But in order to fashion a practical digital strategy it may be important to separate the parts in order to address the specific needs of a particular value-creating portion of the business.

The next step would be to identify specific value creating activities inherent in established core competencies and to establish metrics that can associate those activities as returns to the capital being employed.

In some instances the metrics might seem obvious such as for innovators the percentage of revenue derived from the latest release against those of previous iterations. For businesses focused on customer intimacy a simple win/loss ratio might suffice. For others the measures won’t be as obvious, however in nearly every instance for almost every activity a time-based measure can act as meaningful proxy of value creation. The easiest way to think of this would be for every “day” of a particular activity we produce a result that can be monetized against the capital basis that is employed. An easy way to think of this is would be that for hypothetical entity that employs 100 sales people to book $1m in revenue each day so a “day” of sales is worth $1m. Digital leverage results when a change in information technology improves the ratio of monetizeable competency metrics. (see – Sources and Uses of Digital Leverage)

The immediate next step, and it is not a trivial one, is to identify and map promising digital initiatives to value creating activities. During this process it is important to remember that real break-through initiatives may not be obvious and the key to finding them lies not in familiarity with the existing business but in re-imaging what the business might be. This kind of thinking requires a level of abstraction that usually isn’t present in the day-to-day operations of a business and even more rare in consultants who spend most of their time and your money struggling to understand exactly what you do in the first place. Bitcoin may fail but blockchain might reinvent the banking industry. Recurrent Neural Networks may not improve your sales forecast but might propel the semantic induction of patent applications to identify an enormous opportunity that lies just outside the horizon of your domain expertise.

Now imagine that your business has completed the assessment outlined above. Further imagine that your most valued customers and trading partners have before them a similar assessment. Together you might re-imagine the digital boundaries of a shared value creating and consuming relationship, amplify the complimentary nature of your competencies and realize greater value from the business opportunities that you might mutually enjoy.

We take up all of this and more in Digital Strategies…Part II.

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