Driving Digital Strategy (Summary and Review)

Many companies fail, despite their best efforts, at reinventing themselves in the digital age. Harvard’s Sunil Gupta, who has worked with top organizations around the globe, presents valuable lessons-learned in his recent book, Driving Digital Strategy: A Guide to Reimagining Your Business.  This post is a summary and review of that book.

 

Introduction:

I really liked the introduction. It introduces success stories in digital transformations within large incumbents and it mentions common pitfalls, such as creating independent digital units unable to deliver lasting impact, running experiments that don’t scale effectively, or focusing on operational rather than strategic transformation. It proceeds to introduce the four sections in the book, symmetrically divided into three chapters each. By the end of the introduction, I was enthusiastic about reading the rest of the book.

DDS review intro

New publication

Business Skills for Data Scientists

Section 1: Reimagine Your Business

Chapter 1: Business Scope

‘The traditional way of providing value to customers has changed dramatically in the digital age’

The book starts with strategic focus, and from the basis that customers, not products, should determine how we define our business. At this point the reader may already sense a central tension appearing throughout the book, that this book is about driving digital strategy, and yet digital can play only a part of a wholistic strategy. Rather than staying wholistic or focusing only on digital, the author provides a mix of modern case studies, research papers, and commentary which loosely center around the theme of digital strategy. This is still immensely valuable, but as I read through the twelve chapters, I did find myself sometimes missing the digital component to what was discussed. In that sense, a different title might have been more suited to the content.

Chapter one opens with a lengthy discussion of Amazon’s development of products and services. More novel for me was the next case study of John Deere, which expanded from a farm-equipment to a farm-management company, adding valuable data collection and analysis services for farmers. The chapter briefly discusses offerings of Netflix and Uber and returns to Amazon, proposing three skills that helped Amazon succeed (customer insights, logistics and tech infrastructure). It continues to discuss how complementary and connected products increase stickiness, referring to India’s Paytm and China’s WeChat, and elaborates on the value of network effects, pointing out how the digital age has made the impact of such complementary products and network affects more important.

The chapter touches on the value of data, using Tesla’s self-driving car as an example and ends with a very brief discussion on the question of when to limit extension of business scope, theorizing on an Apple car as an example.

The case studies in this chapter where interesting, but the bulk of the discussion focused on Amazon, enumerating initiatives that Amazon took. I personally missed a synthesis of lessons learned from Amazon in the formation of digital strategy. I recently read Brad Stone’s detailed account of Amazon’s creation and development (‘The Everything Store’), and, with that as background, the analysis in this chapter of Amazon’s competitive advantages didn’t resonate with me. For example, this chapter didn’t incorporate the impact of market dominance nor the fact that other ecommerce companies are also using data to accurately forecast product demand and pre-stock accordingly.

That being said, I did appreciate the cross-industry, multinational case studies (John Deere, WeChat, Nike and Paytm) and I do agree with his point that competition is no longer defined by traditional industry boundaries, a point which he could have supported a bit more strongly in the chapter. He didn’t really discuss an answer to his closing question of how to avoid overextending.

Chapter 2: Business Model

This chapter, the longest in the book, focuses on business models, going through a series of case studies as it recommends basic principles for modern business models. It starts by introducing the concept of ‘converting razor’s into blades’, a reference to shaving companies selling razors so they can profit from future sales of blades. This theme dominates a chapter focused on service-based offerings and including case studies from

  • the music industry, which lost CD sales revenue and gained concert revenue,
  • the New York Times, which lost advertising revenue but grew online subscription revenue, and
  • The Weather Channel, which navigated a decline in cable viewership and successfully redefined its digital offering by starting with key customer insights and creating strategic partnerships.
  • Eataly, a thriving Italian supermarket/restaurant concept. This study followed a discussion how experience and service-oriented business models can help traditional brick-and-mortar companies avoid the slew of bankruptcies around them.
  • Audi, which has been opening digital showrooms and found that digital orders can have higher average sticker prices (due to selection of more expensive options). Also interesting was how buyers were willing to purchase without test driving. This is a topic definitely worth exploring in more detail.

The chapter touches briefly on marketing and social media and more extensively on synergistic and experience-based strategic components. It spends several pages elaborating on the benefits of a product-as-a-service business model, asserting that product differentiation is diminishing in the modern economy, and so companies must rely on services for profit and growth

Overall, I missed the digital in this chapter. For example, in a book about digital, I was looking for a discussion of how the proliferation of digital publishing is what drove advertising revenue down for the NYT and led to a decline in sales revenue from music CDs.  I thought the weather channel was the first good strongly-presented illustration of redefining a business model in the digital age, and the chapter gave a good discussion of how it leveraged its assets and reputation and how it formed successful partnerships. The chapter mentions agile only briefly, although I would say that the ability to be agile is a key benefit of the digital age and deserves quite a bit more space.  Virtual reality, another innovation of the digital age, is mentioned briefly but will reappear in chapter five. Likewise social-based marketing was mentioned briefly but will be covered in chapter 9. Overall, I see this chapter not so much about understanding digital as about recommendations for general business models. Still, the case studies are interesting in themselves.

Chapter 3: Platforms and Ecosystems

This book very much pushes the concept of creating an open platform / ecosystem, as described in this chapter. The chapter opens with the case study of Gelato, a Norwegian company which is defragmenting the printing industry by connecting print shops with customers around the globe. This fresh example is yet another of the transactional facilitators (‘platforms’) with which we have become so familiar from the likes of eBay, the IOS app store, Upwork, etc.  The chapter enumerates advantages and challenges of platforms (e.g. access to sellers, value to customer, ease of joining, asset-light, scalability and facilitation of innovation). The challenge in running a platform is that you lose control of quality in product and delivery.  As an interesting contrarian example, Zappos started as a platform and then moved to sell its own stock only. The chapter asserts that Indian company Flipkart illustrates the dangers of moving to a platform, but then the book’s explanation of this story suddenly stops without finishing.

The next section discusses companies which have created platforms in addition to their existing product offerings. The narrative starts with Google’s acquisition and development of the Nest smart thermostat product, but most of the discussion in this section is about GE, which recently realized that most value in the coming years will come from software and analytics, rather than physical improvements in equipment. GE therefore made a concerted effort to develop better methods for collecting and analyzing data from industrial equipment. GE’s internal efforts in this area were subsequently released to the public in its Predix platform.

The chapter now briefly turns to the banking sector, where Goldman Sachs shocked the market by making available its proprietary SIMON product, which allowed Goldman to increase stickiness and to take a commission from sales of competitors’ products (SIMON allows users to analyze risk or construct portfolios).

The remainder of chapter three gives practical advice for how to launch a platform, such as tips for reaching critical mass, facilitating transactions, managing partners, and running governance. A fair portion of the discussion is focused on payment technologies. Especially interesting is the question he raises of how open to make a platform to outside influence / development (think Android vs. IOS). The final section briefly discusses Facebook’s problems with governance during the 2016 election campaign.

Overall, I personally felt the book did well to devote considerable space to the topic of this chapter, and the Gelato story was a nice, unexpected example. However, I again felt the chapter was missing the connection to ‘digital strategy’. The concept of being a general distribution portal is not in itself new, and some of the points regarding supporting platforms could have been made for traditional retail malls, but what I was looking for in this book was the digital aspect. For example, in digital we are providing not only the physical infrastructure but also the data portal, so 3rd parties are sharing their data, including customer clickstream data. We also need to consider geo-political factors, such as the EU’s GDPR, which impacts any company with even small numbers of EU customers. We need to consider what types of technologies to make available to users of our platforms (e.g. Apple has a proprietary language for its IOS store, while listing on Amazon requires minimal technical expertise).  Although most of these are tactical rather than strategic, they are examples of possible topics one might expect to form the building material of a book focused on digital strategy.

On a more positive note, I particularly liked the illustrations of GE and Goldman, which showed the process these large, established companies followed in providing a digital product / service / platform.  I also liked the last section of the chapter, as it enumerated practical tips for developing a business platform and introduced the question of open vs closed platforms

 

Mind Map of Part One

Mind Map for Driving Digital Strategy Part 1

Section 2: Reevaluate your value chain

Chapter 4: Rethinking R&D and Innovation

The chapter discusses the advantages of crowd-sourcing difficult problems, also referred to as ‘open innovation’.  It opens with the story of NASA opening to the public a difficult problem related to the international space station.  Amazingly, almost half of the over 2k submitted entries outperformed NASA’s internal solution.  The chapter goes on to give additional successful crowd-sourcing activities and explains why crowd-sourcing is so effective, why participants choose to take part, and, finally, some practical considerations for creating your own crowd-sourced problem. I felt this chapter was a good overview of an increasingly relevant topic, albeit without a direct connection to the concept of digital.  One could have added Kaggle to the list of examples.

Chapter 5: Operational Excellence

I felt the book hit its stride in this chapter, particularly in its discussion of how digital is ushering in industry 4.0 and its elaboration on the importance of this transformation in terms of efficiency and quality.

The chapter starts by using the exploding Samsung Note 7 fiasco to introduce the need for quality control.  It then introduces the concept of Industry 4.0, which encompasses a paradigm shift of decentralized machine to machine communication to guide production, resulting in increased flexibility, stricter quality control and advances in predictive maintenance. It describes developments in this area by Siemens and General Electric (GE), including the recent Predix platform that GE has made available for wide-scale use.  A number of pages are devoted to the realized and potential commercial benefits first of 3D printing and then of virtual and augmented realities (VR/AR), providing both a nice introduction to the areas and doing a good job highlighting their importance.

The next section discusses how technology is changing various points in the supply chain, such as advancements in the monitoring of inventory, fulfillment of orders and routing of delivery vehicles.  In this section, I would have added more about forecasting demand and pre-stocking, although these topics are touched on elsewhere in the book.

The chapter closes with a focus on services: how Goldman Sachs has automated parts of the IPO process, Deloitte uses machine learning within audits, and law firms benefit both from marketplace platforms as well as text-based AI tools.

Chapter 6: Omnichannel Strategy

Overall, this chapter gives several good insights related to migrating to and navigating omnichannel, so as to avoid cannibalization and not upset 3rd party distributors.  The insights were clear from the case studies cited.  The section on physical stores was interesting but provided mostly specific technology solutions, rather than insights for general application.  It would have been interesting for him to further explore the concept of ‘trying things’ in a retail store, connecting back to his earlier discussion of drivers who purchase cars after few or even no test drives (chapter 2).

The chapter starts by raising the question of how to avoid channel conflict, both internal (online vs. brick-and-mortar) and with 3rd party distributors.  It advises that channels be complementary, not substitutionary, across products, customers and customer lifecycles.  The book lists examples for all three, touching again on how digital sales facilitate product customization, leading to higher sales value.

The chapter discusses how hotels and airlines struggle to draw customers away from online travel agencies, albeit not offering the reader solutions to the problem.

The next section touches on the underperformance of store beacons and lists specific digital tools that companies have created to deal with four consumer pain points related to shopping in physical stores (finding things, trying things, paying for things and returning things), appropriately summarizing this section by quoting Jeff Bezos’ statement, “the goal of a company should be to remove friction for consumers”.  The chapter ends with two more examples:

  • Disney World using digital to track visitor movement, schedule access to rides, and improve overall customer experience and
  • Amazon products and innovations (again), now focusing on those available in physical stores (groceries, proprietary hardware, and Amazon Go) and citing the statistic that only 15% of US retail sales are currently online (which is itself a motivation for Amazon to expand offline)

 

Mind Map of Part Two

 

Pt 2 Reevaluating value chain

Section 3: Reconnect with Your Customers

Chapter 7: Acquiring Customers

The chapter starts with the story of Chase’s Sapphire Reserve card, whose sign-up benefits in 2016 were so attractive it was estimated it would take over 5 years to recoup the promotional investment.  Chase justified the investment based on the lucrative demographic profile and high retention rate of the subscribers, with plans to cross sell additional products to them.

The next section on customer lifetime value makes a good point that should be obvious to readers of this book: acquisition success should be based on future spend and retention rather than short-term metrics (such as acquisition cost).  At this point it presents what is termed ‘The 200-20 Rule’, which was for me the most useful new insight in the book up to this point. In short, the 80-20 rule doesn’t factor in the loss from certain customers, when keeping only the top 20% would provide 200% profit (the graphs provided make this clear).   The 200-20 rule underscores the importance of acquiring the right customers.  The first section ends by describing practical reasons why tracking customer value is easier said than done.

The next section, ‘How to acquire’, describes four moments of truth, from online search, to purchase decision, to product use, to advocacy.  It gives examples how companies have used digital technology to better understand and improve response at these moments, particularly by personalizing marketing content.  Several studies are cited:

  • An MIT study of the improvement generated by modifying the style of content to match the visual style of the target,
  • a study showing retargeting works better when content is general aligned with past browsing rather than repeating the specific browsed content,
  • the author’s own study showing how using special promotions to acquisition customers has a negative long-term impact, and
  • two studies concluding that world-of-mouth and referrals bring customers with higher long-term value than those acquired through traditional marketing efforts.

There are several paragraphs about social media, largely disparaging the concept of social influencers. The chapter also presents a case for making online discounts available but harder to find.

It continues with an analysis of the conversion funnel for an online campaign of a Spanish bank, an analysis that will seem perhaps very basic for anyone familiar with ecommerce.  It closes by advocating benefits of a freemium model for product promotion and then touching briefly on the concept of dynamic pricing, a technique fitting naturally with digital and perhaps deserving a fuller discussion.

Chapter 8: Engaging Consumers

This chapter explores ways to engage customers without running “annoying ads”.  It starts by citing studies and statistics demonstrating how modern digital advertising is largely unwanted and ineffective, particularly over mobile devices.  It presents two innovative case studies:

  • Tesco’s station-wall-ordering-system in South Korea and
  • Unilever’s entertainment channel for feature phones to reach underdeveloped parts of India.

These two campaigns provided customer value without annoyance, each utilizing unique aspects of mobile devices.

The next section focuses on MasterCard’s (MC) journey to reinvent their ‘Priceless’ marketing campaign.  It describes a 7-step data-driven process, illustrated primarily by MC’s newer ‘Priceless Cities’ campaign, starting with the creation of an emotional spark, feeding off consumer input and optimized with real-time data.  The campaign resulted in a spend increase of 50% by engaged customers during the campaign year. Four lessons from this case study:

  • Speak to a broad topic relevant to customers: (another illustration: Dove focused on beauty rather than on soap, bringing the message to an emotional level);
  • Shift from storytelling to storymaking, using social media to gather customer input;
  • Be consistent with brand value (citing Pepsi’s recent marketing disasters); and,
  • Don’t forget to persuade as you seek to entertain.

The section on moment-based marketing recaps an earlier HBR article by the author related to the concept of “micro-moments”:  the 4am message as opposed to the 5pm message.  Micro=moments are important when consumers check phones 150x per day.  It illustrates with three case studies:

  • Sephora, which created an app allowing in-store customers to immediately see product ratings and reviews;
  • Red Roof Inn, which was able to target ads to travelers as their flights were cancelled, and
  • DBS Bank, which integrated public data into an app helping in selecting a new home.

The chapter closes by giving advice how to win micro-moments:

  • focus on customer intent and the context within the broader customer journey,
  • classify moments into coherent groups (e.g. research vs. purchase), providing information useful for the moment,
  • create snackable content (Safeway’s Facebook videos are 15-20 seconds), and
  • provide content that loads quickly.

Chapter 9: Measuring and Optimizing Market Spend

Measuring and optimizing marketing effectiveness is still hard.  This despite advances in click tracking and analysis of customer (big) data journey.  We are tempted to rely on correlation, without proof of causality (he provides an interesting spin on this in the context of big data).  The author conducted a study demonstrating “a Facebook ‘like’ has no impact on the attitudes and buying habits of either consumers or their online friends.”  Other studies suggest that much of what we call social contagion is actually attributable to ‘homophily’, the tendency of similar people to form social bonds.  The discussion moves to the value of pay-per-click advertising, where studies show how strong brands such as eBay benefit little from pay-per-click advertisements, while lesser-known brands benefit significantly.

The chapter then gives a brief overview of five commonly-used attribution methods and a case study of attribution through experimentation (a bank’s A-B test). It also discusses longer-term effects of viewing ads.  The chapter closes with a brief discussion of the interplay of online and offline, mentioning Facebook’s Lift tool, which uses A-B testing to measure offline impact and citing statistics from in-house studies by certain companies on the impact of marketing campaigns across channels.  This section does not, however, provide much practical advice on the subject, and it doesn’t mention complications due to cookie deletion, ‘walled-gardens’, and cross-device activity.  In that sense, the chapter is somewhat academic rather than practical.

 

Mind Map of Part Three

 

Pt 3 Reconnect with Customers

Section 4: Rebuild Your Organization

Chapter 10: Managing Digital Transition

This chapter focuses on transition of top-level strategy. Much more difficult than starting from scratch, a transition by an incumbent with existing assets and demanding shareholders, entails heavy risk and uncertainty over a rapidly changing landscape. The chapter starts with two examples of companies who made risky decisions to counter dangerous revenue declines:

  • The New York Times, which steered its primary revenue source from advertisements to paywall, and
  • Adobe, which purchased the data tracking firm Omniture to broaden scope in the face of drastically declining revenue from creative software.

(He also briefly mentions cases from Amazon, Walmart and GE)

He compares digital transition with changing an airplane engine mid-flight.  Drawing on his own interview notes, the author describes the turbulent transition period for Adobe and how its executives communicated both internally and with the markets. The stress of this transition is demonstrated by the fact that more than a thousand Adobe customers filed a petition against Adobe’s new subscription model on Change.org (Adobe stuck to its guns). In the end, Adobe’s stock rose 400% in the five years following the announcement of this major undertaking.

Regarding speed of transition, there are two opposing schools of thought:  those who try to get the pain over with as quickly as possible and those who think transition should be cautious.  The book doesn’t advocate one over the other, but does advise to

  1. understand consumer behavior;
  2. understand your known and potential competitors, keeping in mind that what works for them might not work for you and that your list of potential competitors is expanding as industry boundaries break down; and
  3. consider the skill set within your own company.

The author observes from his research that transition typically involves three stages:

  1. Internal applications for cost reduction (often requiring difficult breakdowns of silos);
  2. sharing technology with clients; and
  3. opening up platforms to third parties.

He illustrates these stages with examples from GE, Goldman Sachs, and Amazon and ends the chapter by listing examples of internal changes (staffing, release cycles, marketing, etc.) that these companies needed to make to accommodate their initiatives.

Chapter 11: Design and Organization for Innovation

I personally found this chapter especially insightful, as it walked through three case studies to illustrate innovation strategies and the organizational choices that led to their success or failure.

The first case study is for Finansbank, a Turkish bank which launched an independent, digital-only bank, Enpara.  Although Enpara proved to be very successful, the leadership of Finansbank’s was not able to bring it back into the mother ship, a failure attributed primarily to culture clash.

The next case study is a success story led by Ajay Banga, the president and CEO of Mastercard (MC).  The majority of the chapter lays out the philosophy used to guide innovation at MC.  MC requires its innovation labs and accelerators to work on a central architecture and to align with central strategy and vision. They focus on three areas of expansion (core, growth, and development), with three guiding operating principles that are important to MC (B2B2C, govts as key stakeholders, and cybersecurity).  MC focuses on five elements to accelerate innovation:

  1. Innovation through an internal, but independent lab
  2. Tapping into external ecosystems. This is done by locating labs and accelerators in key geographies (such as Silicon Valley) and not only launching new labs but also investing in a variety of small- to mid-sized startups around the globe.  (I particularly admired the thinking and explanations for this point)
  3. Joint ventures and direct investment
  4. Acquisitions & Partnerships. To this end, local country managers must be made aware what to keep their eyes open for
  5. Internal competitions / hackathons, eventually culminating in a winner owning a new business line

The chapter ends with a case study of how Goldman Sachs, jolted by the impact of Dodd-Frank and the Volcker rule, launched Marcus, an online consumer-lending tool, and SIMON, a platform for structured notes which we’ve seen already in chapter three.  Here the book repeats a bit the story of SIMON, but also elaborates on internal change management and the formation of two internal groups:

  • The Principal Strategic Investment, managing a billion-dollar portfolio and functioning as part VC and part private equity, and
  • The Digital Strategy Group, which included heads of business units to help ensure coordination and implementation of initiatives.

Overall, I found these case studies from Mastercard and Goldman to be quite insightful in the area of managing innovation within a large incumbent.

Chapter 12: Skill, Capability and Talent Management

This chapter was interesting but didn’t strike me as especially useful, and it heavily promoted a certain product called ‘Knack’.  The first half of this final chapter introduces basic concepts of Artificial Intelligence (AI) and speculates on the proportion of jobs that may become automated.  These few pages form a good starter for cocktail party conversation, but otherwise didn’t strike me as having practical value for the reader (disclaimer: I wrote a book on this topic and am perhaps a bit more critical than most).

The second half of the chapter focuses on talent: recruitment, training, reviews and retention.  It highlights the general need to hire more digital specialists and discusses new digital tools being used to screen candidates.  To introduce the need for new methods to screen talent, the author quotes a large software development company as having “evaluated hundreds of thousands of IT professionals and found no significant relationship between a college degree and success on the job.” Most of the discussion in this section now focuses on a Silicon Valley startup called Knack.  The next section on training also focuses largely on the example of the Knack product.

Moving on to discuss performance evaluations, he sites three problems with traditional systems:  They are time consuming, perception-based, and infrequent.  He mentions several companies which have developed apps facilitating real-time feedback.  He then, yet again, refers to the capabilities of Knack’s products, in context of an application for Royal Dutch Shell. He closes the chapter touching on how existing work in customer churn prediction is being extended to the challenge of predicting employee churn.

Here the chapter and the book ends. What I missed was something of an overarching summary of the contents or closing advice for readers.  Leafing past the notes and index, I did find the acknowledgements section worth reading, as it gave more background to the contents of the book.

 

Mind Map of Part Four

 

Pt 4 Rebuild Your Organization