Digital changes pose a threat and an endless number of opportunities for companies. In this context, reinventing a business in this new world is no easy task. Harvard Business School professor Sunil Gupta has written a book called “Driving Digital Strategy: A Guide to Reimagining Your Business.” In the book, he argues that companies need to re-examine four fundamental aspects of their business to thrive in the digital era.
Sunil Gupta is the Edward W. Carter Professor of Business Administration and Chair of the General Management Program at Harvard Business School. Digital Journal spoke with Professor Gupta to discuss his insights into digital transformation.
Digital Journal: How important is digital transformation for business?
Sunil Gupta: Digital technology is changing the business model in almost every industry. Technology is blurring industry boundaries as Amazon clearly demonstrates. Amazon competes with Apple in tablets, Google in search advertising, Walmart in commerce, Microsoft in cloud services, and Netflix in video content. In this new world competitive advantage no longer comes from being cheaper or better; instead you need to build complements and network effects.
Amazon sells Kindle cheap in order to make money on e-books, and its video on demand drives the acquisition and retention of its Prime members. As it attracts more customers, more sellers come to its platform and this network effect makes it difficult, if not impossible, for any other player to compete with Amazon even if they have better and cheaper products. This shift in business model makes it essential for every firm to rethink the fundamentals of its business.
DJ: Is this so for all types of businesses?
Gupta: Digital technology is affecting every industry, although some industries have been affected more than others. Technology has disrupted the retail, media and entertainment industries for more than a decade. And now almost every industry, including B2B and service business, is feeling its effects.
DJ: How much of this need for change is driven by the firm and how much by the consumer?
Gupta: Change can be driven by both the firm and the consumer. Often digital technology changes consumer behavior that poses both a threat and opportunity for a firm. For example, Comcast faces a threat to its cable business as consumers cut cords and subscribe to streaming services like Netflix. However, this also offers an opportunity to Comcast to increase its penetration of high speed internet that is necessary for these streaming services. Firms can also initiate change to leverage the advancements in technology. Industrial giants like GE and Siemens are embedding sensors in their machines to collect data, do predictive maintenance, and enhance the design of their products.
DJ: What are some of the barriers to digital transformation?
Gupta: By now every company recognizes that digital transformation is a necessity. However, most companies struggle to clearly articulate the roadmap for this transformation. In my research I found companies typically follow three approaches. First approach is to use technology to cut costs and improve efficiency. While it is always a good idea for a company to cut costs and improve efficiency, however if this is the only focus of a company, it risks becoming the most efficient but the most irrelevant firm as the industry shifts dramatically.
A second approach is to run a series of digital experiments since the future is uncertain. Again, this sounds like a reasonable approach but the reality is that it leads to hundreds of tactical experiments in a large firm that often do not lead to a strategic change. The third approach is to set up an independent unit or startup within the large organization to spur innovation. However, this is no different from launching a speedboat to turn around a large ship – often the speedboat takes off but the ship barely changes direction.
A second barrier is finding the right talent, developing new skills, and creating the right culture for change. A third barrier is the inability of many senior leaders to deal with the ambiguity and flexibility that this environment demands. As one senior executive told me that digital transformation roadmap is like climbing a ladder in a fog; you know the general direction of where you are going but you can’t see more than 4-5 steps ahead of you, and as you climb the ladder the next few steps become clear that may require a shift in your direction and strategy.
DJ: How important is digital strategy?
Gupta: Digital disruption in every industry clearly suggests that digital strategy must be at the top of the agenda of every CEO. As business leaders define their digital strategy they should keep three things in mind.
First, digital strategy must be an integral part of the core strategy of the business since firms need to strengthen their core business and build for the future at the same time. Second, strategy means a roadmap for the long run and not a series of tactical moves that may give the false sense of progress.
Third, digital transformation requires a careful examination of all aspects of business – its strategy, its operations, its customer engagement model and its organization structure.
DJ: Is there one ‘strategy’ or does this differ for different organizations?
Gupta: While there are some common principles and guidelines that I suggest in my book, every organization has to carefully examine its own situation to decide which aspects it should focus on at different stages of its journey.
DJ: What makes for an effective strategy?
Gupta: An effective strategy offers a unique value to consumers, builds a sustainable competitive advantage, and creates a business model to capture value in order to be economically viable. Put differently, the basic idea of an effective strategy has not changed; what has changed is how firms create value for consumers, how they capture value, and how they create sustainable competitive advantage.
DJ: Who should lead digital strategy in a typical organization?
Gupta: Digital transformation touches every aspect of a business – its strategy, operations, customers, and organization structure. Therefore, it has to be driven by the CEO. In many cases, a CEO creates a team to develop a digital strategy but its ultimate success depends on the CEO’s commitment to drive this change.
DJ: How can organization culture change to accommodation digital initiatives?
Gupta: Digital transformation often requires new skills that poses threat to long-time employees of the firm. Imagine how a journalist or an editor who grew up with the print newspaper feel as the firm transitions to a digital world. Often companies end up running two parallel organizations for a few years, e.g., a print and a digital newspaper, or a physical and an ecommerce retail operation.
The key challenge in this situation is to manage the potential conflict between these two groups and allocate resources appropriately. Some companies, such as Unilever, have adopted a “reverse mentoring” program where a young digital savvy employee brings his senior manager up to speed on digital skills, while the senior manager mentors the junior partner on business strategy.