Playing To Win
What is Digital Strategy, Anyway?
These days, the strategy subject about which I get asked most frequently is ‘digital strategy.’ How can my strategy benefit from digital transformation? How does Playing to Win apply to digital strategy? Because of the sheer volume of these related questions, I am dedicating my 32nd Playing to Win/Practitioner Insights (PTW/PI) piece to What is Digital Strategy, Anyway? (Links for the rest of the PTW/PI series can be found here.)
Why the Fascination?
There is endless fascination about digital strategy in the business world today, which if you are not engaging in, your company is written off as a dinosaur lumbering around in the 21st century just waiting to fall into a tar pit. The fascination stems from the speed to massive domination of digital natives like Google, Facebook, Netflix, and hordes of smaller unicorns. Every traditional company wants to digitally transform itself to be just like these digital winners.
Before declaring digital strategy/transformation to be the path to follow, it is important to understand the Where-to-Play/How-to-Win (WTP/HTW) choices of these outsized winners. A key feature of the WTP choice is an entirely digital product (though it wasn’t at first for Netflix). That matters because the marginal cost of production is zero (or darn close). A key feature of the HTW is customer self-serve. For the bulk of sales these companies make, the customer does the majority of the work, making the marginal cost of consummating the sale zero (or darn close). Zero-zero marginal costs is a dream come true in which incremental revenue falls right to the bottom line.
That fundamental WTP/HTW choice — a 100% digital product purchased largely through customer self-serve is at the core of their spectacular success and crazy-high revenue per employee numbers: Netflix — $2.34M, Facebook $1.57M, and Google $1.36M. Even fantastic traditional industry leaders like J&J ($635K) or JPMC ($465K) have a fraction of the people productively of these leaders. And if you throw in network effects, by which the addition of another customer makes the existing customers better off, as at Facebook, this WTP/HTW choice of digital/self-serve becomes even more powerful.
While these companies may fuel consultant pitches for the digital transformation of traditional companies, that is a pipe dream. Converting J&J and JPMC entirely to digital/self-serve isn’t going to happen. What is going to happen is that innumerable digital/self-serve space start-ups are going to keep coming at existing competitors like the Mongol hordes. The fact that 90% or more of them have been and will continue to be abysmal failures is irrelevant. That is why the Mongol hordes were, well, horde-sized: all that was required was for a small fraction of the horde to survive long enough to breach the walls and the adversary was doomed. That is what keeps the traditional players up at night — and buying digital transformation services.
For an existing player that didn’t begin life digital/self-serve, there are three useful ways to pursue digital initiatives.
Migrate Your Product Mix toward Digital Products
For many traditional companies, the product in question can’t be converted to digital. P&G needs to sell detergent, J&J Band-Aids, Apple iPhones, etc. But you can build an adjacent related business that is digital/self-serve with (near) zero marginal production and distribution costs.
Because Apple’s core business is PCs, tablets and smartphones, Apple has to manufacture a physical artifact and get it to you, making Apple fundamentally dissimilar to Google, Facebook, and Netflix. However, Apple has built the App Store, a clever digital/self-serve business that supports its core business. And it has gotten huge — $64 billion at last estimate, just under a quarter of Apple’s revenues. In a year or two at most, the App Store will be bigger than P&G and Walt Disney, leaders in their fields that took a century or more to get that size. And it is scary to think just how profitable the App Store is based on its beautiful WTP/HTW model.
Similarly, Amazon’s traditional online retailing business entails getting a physical product to the customer and hence its revenue/employee is an old-fashioned $352K (diminished as well by buying retailer Whole Foods). But Amazon is not, of course, oblivious to the beauty of digital/self-serve. Its biggest, fastest growing, and likely most profitable business is Amazon Marketplace, which is a lovely digital/self-serve business that sticks the 3rd party vendor with the physical part of the process. (Plus, Amazon Web Services (AWS) is digital and at least partially self-serve.)
But it is not just the tech giants. In 2002, traditional and venerable newspaper Financial Times, under the direction of Chrystia Freeland (now Finance Minister and Deputy Prime Minister of Canada), relaunched FT.com, a digital/self-serve extension of its newspaper business, which has generated a digital subscriber base that is 80% of FT’s total. Soon FT.com will have as many paying customers as FT had total subscribers at the time of the relaunch. Freeland’s brilliant digital strategy may enable FT to be the last newspaper standing on the planet.
Migrate your Distribution to Digital Self-Serve
There is a glorious history of using self-serve to enhance the consumer experience while improving the cost structure of the provider. Until Piggly Wiggly opened the first self-serve grocery store in 1916, shoppers had to line up to have a clerk assemble their basket of purchases from shelves inaccessible to shoppers. With that innovation, the customer experience was transformed and costs to serve plummeted. Until Chemical Bank pioneered the Automated Teller Machine (ATM) in 1969, customers needed to line-up in a bank branch to have a teller give them the cash that they needed. Thereafter you could get it anytime, anywhere and the bank didn’t need a human being involved.
In the digital age, the possibilities for digital self-serve are, of course, endless. Even if your product is physical, you can transform fulfilment to digital — as with McDonald’s ordering kiosks or the self-serve websites of banks.
Digitize an Internal Operation
The third form of digital strategy/digital transformation is to deploy digital technologies to do more efficiently an internal activity. It is certainly important but not particularly new. I wrote about this years ago in The Design of Business. All knowledge proceeds through a funnel starting as a broad mystery (why do objects fall to the ground), getting refined into a narrower heuristic (there is a universal force, gravity, that pushes everything toward the ground), and finally to a specific, declarative algorithm (objects accelerate downward at 32 ft/second-squared). Over the past 60 years or so, everything that we have driven to an algorithm becomes feasible to code and perform via digital computer. As a result, business has been digitizing things for half a century, whether robotics on an assembly line or Computer-aided Design/Computer-aided Manufacturing (CAD/CAM) or Enterprise Resource Management (ERM) systems. It used to be that you needed an experienced and wise finance person to pull together the quarter-end financials from across the business. Then SAP and Oracle (and later Salesforce) came along and turned that heuristic into an algorithm, then coded it, and now it happens largely without human intervention.
Categorizing/Ranking Digital Strategy/Digital Transformations
From a strategy perspective, I see these three approaches very differently. All the buzz comes from the digital/self-serve WTP/HTW — whether the whole company (Google, Facebook, Netflix) or a big add-on business (Apple, Amazon). If it weren’t for FAANG, the digital transformation hype would be a fraction of what it is. A digital/self-service WTP/HTW choice is real strategy. It takes clever choices on where exactly to play and how to create distinctive customer value. It doesn’t just optimize what is. It creates new value. In geeky economist terms, it moves out the Production Possibility Frontier (PPF) to the benefit of both the innovating firm and society.
Lagging the pure play in value but still with the opportunity for strategic uniqueness is the migration of distribution to self-serve. In the spirit of Piggly Wiggly and Chemical Bank, there are clever ways available across most industries. More recently, Dell Computers rocketed to fame and fortune in part of the basis of self-serve computer configuration and ordering by customers. I would argue that these innovations also move out the PPF.
As for the third form, digitizing an internal operation, in 2021 I only see it rarely as real strategy. The dominant mode is benchmarking and replicating, figuring out the best digital practice and doing it in order to move from a position inside the PPF out to the margin of the PPF that others have already established. Most such efforts don’t pass my strategy test: the opposite is stupid on its face. It isn’t a real choice for a Fortune 500 company to not have an ERM system because not having one is stupid. Having one won’t give you any kind of leg up, but it will help you stay in business.
If you are entrepreneurially minded, there is nothing better than trying to create a digital/self-serve business. There is more financing available to fund such start-ups than ever before. Think hard about a WTP that solves a real customer need and a paired HTW that solves it uniquely. If you are like Dropbox founder Drew Houston and you come up with a brilliant customer insight and a product that meets their need, you get to have half a billion users and become a multi-billionaire. It is worth trying if you have an idea that excites you.
If you already in a business that isn’t digital/self-serve, ask how you can create a linked digital/self-serve business like FT.com, the App Store or Amazon Marketplace. Think about customers of your core service as the natural WTP and ask what digital/self-serve business could make their use of your core product more valuable. Your proprietary insights should come from your superior knowledge of your own customers. That is the best place to start.
If you can’t create a digital version of your product line, think about a clever way of creating a self-serve option for customers that would make their acquisition of your product a better experience. Don’t think first about saving costs — customers will hate you for that. Think about a better experience and if it saves costs: great.
And don’t fall behind on digitizing everything that you can in your internal operations. It’s OK to be a fast follower — and hire consultants or recruit employees who have done it elsewhere. But don’t listen too much to the hype. It isn’t going to turn you into the next Facebook. It is predominantly a benchmark-and-replicate optimizing exercise. It is well worth the effort but calling it transformational or strategic is generally unhelpful hype.