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Q&A on the Book Driving Digital Strategy

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Key Takeaways

  • Typical digital strategy approaches - using technology to cut costs, conducting digital experiments, or setting up a separate unit - often don’t work because digital transformation requires strengthening your core business and building for the future at the same time.
  • Digital transformation requires re-examining all aspects of your business - your business model, your value chain, your customer engagement, and your organization structure.
  • Industry boundaries are getting blurred and are no longer defined by your competitors.
  • Competitive advantage no longer comes from making your product better or cheaper - it comes from building complements and network effects.
  • Digital transformation is like changing the engine of a plane while it is flying - the plane is likely to go down first before it goes up.

The book Driving Digital Strategy by Sunil Gupta provides guidelines and advice for executing fundamental digital transformations in companies, based on lessons from digital transformation at Fortune 500 companies. To be successful you have to fundamentally change the core of your business and ensure that your digital strategy touches all aspects of your organization, argued Gupta.  

InfoQ readers can download chapter one of Driving Digital Strategy.

InfoQ interviewed Gupta about how digital technology is impacting businesses and business models, the benefits of platform businesses and ecosystems, leveraging the power of open innovation, what organizations can do to increase the chance of success of their digital transition, and the impact that artificial intelligence will have on the future of work and on the skills needed to thrive in the digital era.

InfoQ: Why did you write this book?

Sunil Gupta: Much has been written about digital disruption, but I was curious to find out what companies can do to manage and even thrive in this environment. During the last ten years of my research I found that companies’ digital efforts fall under three broad categories: leverage technology to cut costs and improve efficiency; conduct a series of digital experiments; or set up a separate unit to spur innovation. However, often these initiatives lead to limited success. Cost cutting assumes the business model would not change in the future, digital experiments tend to be tactical, and a separate unit does not change the core of a large established business. This led me to develop a guideline for fundamental transformation based on my study of several companies that have successfully navigated this transition. In the past few years when I presented these ideas to executives around the world, they often asked where they can read more about these guidelines. This led me to write this book. 

InfoQ: For whom is it intended?

Gupta: The book is intended for senior executives, such as CEOs and CIOs, who are leading their companies through a digital transformation process. 

InfoQ: How is digital technology impacting businesses and business models?

Gupta: Digital technology is having a major impact on businesses in several ways. First, industry boundaries are getting blurred. Amazon is not just an online retailer competing with Walmart, but it is streaming videos and competing with Netflix, it is competing with Google for online advertising, and its AWS competes with IBM and Microsoft. A healthcare company such as Abbott should be concerned about Apple as it incorporates sensors in the iPhone to convert it into a full medical device capable of measuring blood pressure, body fat, and heart functions. Second, competitive advantage no longer comes from making your product better or cheaper. The rules of strategy are changing, and in the digital era competitive advantage comes from complements and network effects. It might seem strange that Amazon, an online retailer, is spending billions of dollars on producing original content. Until you hear Jeff Bezos say that everytime Amazon wins a Golden Globe, it sells more shoes. Original content is the complement that helps Amazon acquire and retain its Prime members who spend 3-4 times more than non-Prime members. Third, technology has enabled the emergence of platforms that aggregate fragmented demand and supply. Uber and Airbnb are two good examples of this. These platform companies have created asset-light business models that pose a significant threat to incumbents who are saddled with huge costs of fixed assets. And finally, data analytics and machine learning are dramatically changing processes and operations. About 15 years ago, Goldman Sachs had 600 equity traders, today it has two.

InfoQ: In your book, you explored how products-as-a-service are providing outcome-based solutions for customers who don't require upfront payments. How does this work?

Gupta: Philips used to sell lighting fixtures to its customers, but in April 2015 it reached a pay-per-lux agreement with Amsterdam’s Schiphol Airport where the airport only pays for the light it uses. Hilti, the tool manufacturer, introduced a fleet management system in which customers pay a monthly subscription fee to get tools on-demand instead of buying them. These are just a few examples of companies who are shifting from selling a product to creating a product-as-a-service model. This model has been successfully implemented in the software industry - we pay a monthly subscription fee for Adobe’s creative suite instead of buying it in a box. This model creates a more predictable recurring revenue for the firm, it opens up a large market of untapped customers who could not afford to buy the product at a huge upfront cost, it aligns the incentives of the buyers and sellers, and it also creates stickiness among customers. But this model requires significant internal change in the organization.

InfoQ: Platform businesses and ecosystems are on the rise to replace traditional sales channels in connecting buyers and sellers. What benefits do they provide?

Gupta: Platforms aggregate fragmented demand and supply in a very cost-effective fashion. Consumers benefit from access to a vast array of products, and suppliers benefit from access to a large number of customers. By reducing transaction costs, platforms tend to open up new sources of supply and demand as shown by Uber and Airbnb. Platforms also encourage innovation. Google benefits from the creativity of thousands of developers for innovation for its Android operating system. And finally, platforms benefit from network effects - as more buyers come to Amazon, more sellers join it, which in turn brings more buyers, thereby creating a virtuous cycle.

InfoQ: How does open innovation work,and  what are the main differentiators?

Gupta: Companies spend billions of dollars on R&D with the implicit assumption that the best innovations come from within the organization. However, research shows that many times the best ideas come from outside the firm. Open innovation harnesses the creativity and diversity of people outside the firm to address critical questions by organizing contests or creating communities. NASA used an open innovation approach to solve a problem with its International Space Station, even though they hire some of the best “rocket scientists.” 

InfoQ: How can organizations leverage the power of open innovation?

Gupta: Open innovation works best when a problem is well-defined. Creating a contest for a vague question such as “what is the future of banking” is not likely to be successful in this approach. Instead, the issue should be broken into tangible problems that people from diverse fields can understand and tackle. There should be a clear metric for evaluating the results and the contest should be organized to encourage wide participation, since open innovation works best when people with diverse backgrounds and approaches attack a problem. Perhaps the most difficult challenge is internal - it is hard for the rocket scientists of NASA to believe that people outside the organization can solve a problem that they have been grappling with for months or years.

InfoQ: What can organizations do to increase the chance of success of their digital transition?

Gupta: Digital technology creates a lot of uncertainty so it essential that the leaders set a clear vision. This does not mean that they have the crystal ball or a clear road map, but they need to set a general direction for the company to move. Large transitions don’t happen overnight so it is ideal to create a series of stages for this journey. As one CEO told me, it is hard to see the future beyond 5-6 steps, but as we climb the first two or three steps, the fog lifts and we see another three steps. And finally, success depends on aligning the entire organization behind this vision.

InfoQ: What works better in which situations, a short or a long transition period?

Gupta: The speed of transition depends on three critical factors. First, it depends on how fast customers are moving or willing to move in this direction. Often customers are well ahead in this journey and firms need to catch up with them. Second, it depends on what competitors are doing. When the New York Times decided to create a paywall for its online site, most other newspapers were offering their news for free, which made it difficult for the New York Times to move aggressively in this direction. Finally, it depends on internal company factors - can the firm acquire the necessary skills, can it create an organization structure to shepherd this change, can it build a culture where the old and the new businesses cooperate rather than compete, does it have the resources to undergo this transition? Most of the time internal factors are the main determinants of the speed of transition.

InfoQ: What impact will artificial intelligence have on the future of work and on the skills needed to thrive in the digital era?

Gupta: In the 20th century, manufacturing plants were automated by machines that eliminated repetitive tasks such as tightening nuts and bolts on a car. This had a major impact on the blue collar jobs. Today, artificial intelligence and machine learning enable machines to do repetitive tasks done by white collar workers. Google can translate over 100 different languages without its engineers being experts in any language. Machines can read your X-Ray better than a radiologist. Tasks that are repetitive will increasingly be done by machines and all of us will need to retrain ourselves more frequently.

About the Book Author

Sunil Gupta is the Edward W. Carter professor of Business Administration and chair of the General Management Program at Harvard Business School. He is also the co-chair of the executive program on Driving Digital Strategy.  Gupta's current research is in the area of digital technology and its impact on consumer behavior and firm strategy. He has published three books and over 90 articles, book chapters, cases and notes. His research has been well recognized in national and international circles and has won several awards. For the last three years (2016-2018), he has been invited by the Royal Swedish Academy of Sciences to nominate a scholar for the Nobel Prize in Economics.

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