Author: Anand Divekar
The Digital Transformation Series
Becoming a digital business
New revenue sources for digital businesses
The age of algorithms, sensors, mobility, online-social, cloud, data and virtualization has arrived. Based on Moore’s law, exponential advances in computing power, storage and memory have occurred in the last couple of decades, contributing to the growth and democratization of the internet as well as the development of powerful mobile and fixed computing devices. Powerful cloud-based data centers are now serving a growing list of needs of corporations and consumers. Global access to knowledge via the internet and the blurring of lines between physical, digital and biological space have moved us closer to an all-digital age.
The First Industrial revolution occurred with the discovery of steam power to drive machines. The Second Industrial revolution was enabled by electricity which drove mass production. The Third revolution was driven by electronics and information technology. We are now living through a Fourth Industrial revolution, an age in which digital technologies are becoming an integral part of every aspect of business activities and our personal lives.
Businesses should be actively evaluating these changes and the threat of competition in their industry. As consumers, business customers and other stakeholders become more tightly integrated with the digital advances in devices, services and capabilities, any business which is left behind will be faced with existential risks over a period of time.
What is Digital Transformation?
Digital technologies help virtualize real world objects, processes, concepts and communications, enabling them to be managed and manipulated in virtual space. Virtualization simplifies and enhances the ability to manage things by abstracting and even concealing sources of friction inherent in the physical world. By embracing digital, businesses can access a rich set of controls, functionality and data which help more effectively manage the thing being managed.
Technologies included most frequently in current digital playbooks include social, mobile, cloud, data analytics and the Internet of Things. Emerging technologies in varying stages of maturity include robotics, artificial intelligence (deep learning, facial recognition, etc.) augmented/virtual/mixed reality, voice recognition, natural language processing and others.
Each technology has its own strengths. When combined with other technologies in the context of business goals and processes, the results can be a game changing set of capabilities capable of dramatically moving the needle as regards operational improvements, customer satisfaction and competitive differentiation. The results can also help with the design of improved products, services and access to new markets.
The cloud is an example. When a business moves its IT systems to the cloud, it gains several benefits including the conversion of capital expenditures to operational expenses and gaining business agility in configuring on-demand resources, while reducing the need for internal IT teams to manage IT infrastructure and operational processes.
Digital transformation refers to business performance improvements via changes to IT infrastructure and business processes resulting in new digital capabilities, cost reductions and increased customer satisfaction. It could also refer to a new set of strategic goals for a company in addressing additional market segments with a new set of services resulting in new revenue sources.
New business capabilities (use cases) enable businesses to improve operational processes and customer services, while generating more data on process metrics. Such changes also require organizational changes to support the new technologies and processes. New skillsets will be required and existing teams may need retraining in order to operate these new capabilities as they are brought online.
Embarking on such changes requires a planning effort to clearly articulate goals, phases, milestones, budgets, timelines and other aspects of a comprehensive digital plan. Many businesses start by targeting internal benefits such as cost efficiency and business agility (via cloud-based IT capabilities which can rapidly adapt and scale to the changing needs of the business). Such improvements quickly extend to providing better services to customers and improved capabilities for internal operations teams.
Marketing is a prime example of the potential for improved capabilities. Campaign management in the digital world has seen big improvements due to the emergence of social networks and new vendor tools which facilitate digital campaigns. These campaigns generate a lot of data on mobile and web-based customer behavior (clicks, conversations, likes, product ratings, etc.) which make it easier to calculate ROI. The ability to monitor customer behavior (customer journeys are describe in more detail below) can help automate web and mobile content generation, which facilitates customer transactions, builds a better understanding of customer behavior and segments, and improves future campaigns.
Businesses in every industry should already be evaluating the benefits of digital transformation. Those who are not, run the risk of irrelevance as competitors establish/grow their market share.
Key Business Trends
More enterprises are managing disruptive risks via the VC model: Young, resilient startups in Silicon Valley and elsewhere continue to enter markets with new digital-enabled business models which chip away at the dominance of established players, legacy rules and regulations. With an eye on risks to their own survival, enterprises in banking (Citigroup), consumer goods (P&G), auto manufacturing (GM Ventures), software (Microsoft Ventures)and other industries have responded by starting their own venture groups which work with and invest in promising fledgling companies. Young companies which demonstrate the ability to innovate, acquire customers and deliver on their growth plans have a good likelihood of being acquired before they become a threat to such established enterprises .
The growth potential of digital-enabled companies is proven: In the past, it might have taken up to twenty years for a business to become a billion dollar business. In recent times, Silicon Valley startups with business models based on digital technologies (for e.g. Uber and Airbnb) have shown it is possible to do it in just a couple of years. While other resources such as financing and skilled, aggressive teams are needed for the kind of success displayed by Silicon Valley unicorns, this level of market growth would not have been possible without digital technologies.
Business agility and competitive performance: Digital technologies have made it possible to rapidly build, test, deploy, adjust, modernize and continually improve the performance of customer facing software. The Agile/Scrum paradigm of software development is based on early and ongoing inclusion of the business (usually marketing) in the creation, prioritization and realization of software goals, using small in-house developer teams working in 4 to 6 week sprints to build deployable capabilities. This enables marketing to quickly create new campaigns, collect and analyze data, make adjustments as needed and tweak strategies to achieve more in less time and with smaller budgets. These changes can have an immediate impact on business revenues and mindshare with customers..
Automation & risks to jobs: On the horizon, new technologies including intelligent robots, virtual and augmented reality, machine/deep learning, natural language processing etc., are already showing significant promise. Disruption across industries will continue to chip away at what were traditionally physical activities. Entire categories of the workforce will be at risk in the future as artificial intelligence and robots merge into intelligent machines, capable of replacing humans and driving down the cost of performing various job types such as auto and truck drivers, radiologists, lawyers, doctors, financial advisors and others.
This NY Times article contains a graphical chart which shows job vulnerability to automation based on four categories: 1) physical work; 2) communication and critical thinking; 3) operating machines and processes; and 4) clerical and service work. Per the chart, jobs based on physical work are more vulnerable while jobs which require critical thinking are generally safer from AI-based automation. Jobs related to ‘operating machines and processes’ as well as ‘clerical and service work’ are mixed..
Becoming a digital business
It is difficult to provide a list of all the use cases which benefit from digital technologies so we decided to focus on two of the most commonly occurring areas below. Every industry is already in the process of adopting digital technologies, although SMB (small and midsized businesses) may be lagging. It is critical for every business, regardless of industry, to evaluate its business processes and customer services in light of what the competition may already be considering. Being a leader in this space will pay dividends while the laggards could face severe headwinds if they wait too long.
Digital ad revenue in the USA was $72.5 billion in 2016 and will likely approach $80 billion by the end of Dec 2017, per data reported in the Internet Advertising Revenue Report. Mobile ads accounted for more than half of that spending — $36.6 billion (in 2016), which is 51 percent of the total. Video advertising grew to 53 percent to $9.1 billion, social media spending grew more than 50 percent to $16.3 billion and search grew 19 percent to nearly $35 billion.
These channels represent the new battlegrounds for advertising and customer acquisition. They have facilitated billions of eyeballs, clicks and transactions in virtual space, across a multitude of devices, often more than one device per user. Big data technologies enable the data collected to be analyzed by companies.
In the hotel industry, marketing, CRM and loyalty programs are being adapted to the digital world. Every aspect of the customer experience is analyzed to differentiate service and deliver personalized messaging targeted not just to specific customer segments but to individuals as well. The digital marketing strategy consists of an advanced content management system, with custom content and dynamic webpage generation on the front end, with data analytics and CRM systems on the back end to identify the most likely prospects using data generated from campaigns, user navigation, CRM and social sentiment data. These high value prospects are then targeted with the appropriate content at the most opportune times based on available data. The use of advanced analytics can also help identify similar prospects who are then targeted via email marketing to raise ROI.
Paid search can help identify and analyze user intent, helping to send the user to one of many dynamic customized landing pages, based on matching user intent with specific advertising copy. Landing pages can also be customized based on user location, traffic source, advertising campaign, etc. Using a combination of landing pages with creative and user interface features which support multivariate testing, help increase online conversions.
These marketing techniques translate well across industries and businesses interested in leveraging data to better meet the needs of their current and prospective customers..
Operations Management Processes
Just as mobile phones and social networks generate large volumes of data in the internet of people, the introduction of IoT sensors and supporting systems has created smart connected products (SCPs) and volumes of data related to the internet of things. Although security remains an issue which is avidly discussed as an Achilles heel for secure IoT, deployments have already generated huge benefits in many industries. Consumer IoT is and will likely remain a smaller segment than the industrial IoT, but both segments are growing rapidly and forecasted to be multi-billion dollar businesses in coming years.
In the manufacturing industry, IoT sensors are being added to equipment such as turbines, washer-dryers and other equipment with rotating parts to enhance the equipment reliability and servicing function. These sensors generate data (such as vibration frequency measurements) which can be used to detect impending failure of spinning parts in a process called prognostic health management. When the measured frequency lies within a specific frequency band, the equipment is known to be healthy. When the frequency falls outside the band, a failure can be generally expected (based on factory testing) within a certain period of time.
When such an event occurs, it is detectable via data analysis. The first option is for the manufacturer to make a remote repair. For example Tesla often uses software uploads to its cars to fix problems or when there is a new software version. The second option is for the manufacturer to interpret the data and determine the best course of action, which may require a site visit by a qualified technician. In the latter case, the manufacturer’s service department communicates with the customer to set up a preventive maintenance appointment. The manufacturer then deploys a technician who already has a detailed diagnosis of the problem, a recommended repair process, and, often, the needed parts, potentially saving time and expense for a parts order followed by a second trip. The benefit to the customer is minimal downtime in a scheduled time slot instead of during business hours, when downstream impacts might be damaging to business revenues and company reputation.
This capability is highly beneficial for a customer who cannot afford down time for key equipment, especially when there are many hundreds, thousands or millions of units deployed in the field. Data generated from such installations is a source of continuing improvements to failing parts and lead to improved equipment designs in the future. By enabling a proactive, data-based approach to maintenance, the manufacturer can perform periodic risk assessments, augment or override the regular periodic maintenance schedule and ensure minimization of downtime in operating assets.
Business considerations for going digital
Many industry gurus have written about their beliefs that every company will need to become a software company in future and avoid obsolescence by developing digital capabilities. Becoming a software company entails developing internal software capabilities and undertaking the organizational and cultural changes needed to achieve the goals in a digital roadmap.
The options for every company are to either build the software capabilities internally or partner with consulting firms to fill this gap. The decision is not an easy one to make, since internalizing digital capabilities entails hiring skilled staff including data scientists who are in short supply, making this an expensive strategic option. The associated costs make this impractical for many businesses.
Internal capability building: A relatively recent example of internal capability building can be seen with the GE Digital initiative and the Predix platform built for industrial IoT applications. GE is on the path to becoming a software company, likely at a very high cost. This is a gamble which will position the company to win, given its huge stake in industrial IoT. The many capabilities they have built for themselves and their customers, have successfully generated a competitive moat which will be difficult for competitors to breach.
Partnering to build capabilities: Partnering may be more practical financially but may be prone to issues due to the sharing of consulting resources with other clients. Skilled resource availability on short notice may be compromised. Further, partnering can hamper the opportunity for organizational learning and complicate the ability to own and control data, operational strategies and intellectual property.
Both options are accompanied by the need for cultural changes within the business due to the needs of the Agile development and DevOps processes, data management processes and the need for rapid decision making to support business agility and market demand changes. New revenue sources for digital businesses.
Data Exhaust and Digital Journey data
In the consumer space, data exhaust refers to the data collected by a website as a consumer makes choices related to navigating a website. Data exhaust consists of the various files generated by web browsers and their plug-ins such as cookies, log files, temporary internet files and .sol files (flash cookies). Individual navigation choices are captured in these files, hence an analysis reveals key information which can help improve a marketing campaign or website navigation in general. Marketing groups place a high value on data exhaust files.
Digital journeys reflect data collected on a consumer’s shopping journey, across websites, devices and time, until a decision is made to transact. Digital journey data reveals even more about the consumer such as whether peer opinions and ratings were sought prior to a purchasing decision, which devices were used for research versus the final transaction, the considerations impacting the user’s choices before the final decision was made. It can impact ad placement across multiple devices with the intent of influencing the consumer’s final decision.
Companies should strive to develop the ability to control digital journeys in order to improve revenue prospects. Controlling the customer’s digital journey can be achieved via best practices which focus on keeping the prospective customer engaged while discouraging exploration of competing products.
Data sharing synergies
Businesses often convey their data to third parties for analysis, monetization and sometimes for regulatory reporting. Machine generated data (MGD) is generally considered to be the property of the machine owner, not the manufacturer. However, uncertainty emerges when the machine is on a lease holding arrangement. By definition, the data is owned by the title holder. But the title holder may not physically control the data. Further, when data is copied or transmitted, control of the data follows it (referred to as usage rights). Transfer of ownership requires legal documentation to convey title. The title owner can copy, distribute and create derivative works based on the data.
Consider the manufacturing example above. The synergies are undeniable. The data in isolation is useless to the customer, but it helps the manufacturer provide timely service and improve future products. As such, it is beneficial to both parties to cooperate on data sharing, provided it does not raise any security conflicts for the customer. The data portion of the contract between them should therefore make it clear that data will be exchanged in return for incentives such as discounts.
New markets driven by data
A recent example of how data can transform the future prospects of a company is the July 2017 announcement by Roomba, a manufacturer of robotic home vacuum cleaners with an 88% market share. The company states that it plans to generate revenue by selling mapping data of customer homes and floor plans (with customer permission) to companies such as Apple, Amazon and Google parent Alphabet, who could presumably use it to offer improved smart home services in the future. The data collection is based on cameras and sensors in upscale versions of the device and has been ongoing for the last couple of years. The company envisions smart air conditioning units that alter airflow based on the room, smart stereos that adjust acoustics to fit a space and smart lighting that lowers when the sun peaks through your window — all based on maps provided by Roomba technology.
It is imperative for businesses in every industry to carefully evaluate the prospective short and long term benefits and costs of converting to a digital business. Delaying could mean the loss of customers to agile competitors and a loss of market relevance. Most businesses can achieve some quick short term wins based on an analysis of costs, business pain points and needs. Such wins can save costs and bolster confidence in continuing down the path of modernization.
Although the landscape looks complex in the beginning, there are tried and true processes for organizing the work and prioritizing it so that a CEO can make the necessary decisions on where to start. We recommend starting with an assessment of the business, its IT infrastructure, operational processes and the customer base. Our next paper in this series will cover some of the generic strategies which can be used to start the process of converting to a digital business..