Why Digital Is A State Of Mind, Not An Add-On

by CXOtoday News Desk    Feb 12, 2016

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It’s been a decade or two that the digital revolution is underway, and yet, businesses have trouble defining it. While there are many definitions to the term, many companies still struggle to make the most of it. A recent McKinsey Podcast, (recorded in November 2015), explains the meaning of digital, why knowing the meaning is important, and how leaders can use that understanding to help transform a business at its core rather than at the edges.

According to McKinsey principals Karel Dorner and David Edelman, companies that successfully adopt digital technology don’t view it as an extra; digitization becomes central to what they are because they transform their value propositions and evolve every level of the organization so that it becomes data driven, customer obsessed, and highly agile.

According to Edelman, businesses have trouble defining digital because, for the most part, it seemed like an extra channel that they added on to their businesses. But what’s clear today—and emphasized by companies that have really created whole new business models based on digital—is that digital is not just about more; it’s about different. And you need to take a different view of how a business is affected by digital.

The researchers explain digital in three ways – first, it can be the levers by which you think about new ways to assemble your overall business model, the way you make money, the way you deliver a value proposition overall. In parallel with that, digital also is a new way to interact with customers to take your value proposition and bring it to market. Third, digital is a different way of operating within a company, and within a broader ecosystem, to actually make those products and services happen.

The CEO’s role

Businesses should also embed digital thinking in the way the CEO communicates with and enlightens the entire organization, believe McKinsey researchers.

Dorner believes that the CEO really has to stand for that digital target picture, the objective. “It’s also embedding digital thinking in the way the CEO communicates with and enlightens the entire organization,” he said.

According to Edelman, “The CEO would be setting up journey teams where there would be a leader, maybe a store-operations leader. It could be someone from the digital organization who’s then chartered to bring together a cross-functional team to work intensely together to tackle that journey. The measure of success is being able to actually release and roll out that journey and market it in order to attract volume.”

The researchers agreed that setting up the cross-functional team—that’s something the CEO has to make happen. But if it’s a whole new business model based on the core, that is going to require separate funding, possibly a separate organization that will need to be insulated from all the traditional overhead, policies, things that hamper the legacy business.

New frontiers of value

According to Dorner, digitizing at one level is improving and digitizing the core and at another, it is identifying the new disruptions and the new frontiers, which is very much driven by technology advancement and also by the way customers and consumers are adapting to that.

Giving the example of connected homes, in which, devices, appliances, the power line, and the entire infrastructure of a home are expected to be continuously connected to each other, Dorner explains that it opens up completely new business models.

“You have to lift boundaries that have traditionally been very sector specific. Instead, you really think not only about what is possible as an opportunity but also about how others could attack you if these new frontiers become the new norm,” she said.

One of the biggest changes digital allows is that what might have been product sales become services. That’s the connected home. You may have bought a thermostat, but now you’re buying energy management. You may have bought a TV, but now you’re buying entertainment streaming.

Earlier, changes in the business model used to be around manufacturing, marketing, and sales. Now companies have to create a whole service infrastructure to manage streams of data, make sense of data, and use that to provide services. That’s a big change in the business model and in operations for companies that are used to just making and selling stuff, explained Edelman.

It’s a mindset

The researchers agreed that digital is a mind-set about being more externally focused, to connect with outside organizations, outside vendors, outside talent. This forms a core element of the definition of digital. “This can be pretty challenging,” said Dorner.

She added, “This needs constant innovation, as everybody will say they’re customer oriented, but, as digital leaders would say, they have to be customer obsessed. And that’s something that a lot of organizations still struggle with. So that’s where you should start - take the customer perspective.”

According to Edelman, “One of the things that really push organizations forward and make things like customer focus become real is getting real numbers for something like “ship from store.” Somebody’s in a store, loves a particular article of clothing, and can’t find the right size, but a salesperson can find it in another store. Now, ideally, you’d like to be able to ship that directly to somebody’s home free of charge because you messed up by not having it in the store. But a store may have charged for that service before and then waited until a whole bunch of orders were batched together to make them lower cost to send because that’s the way the store operated. Making a move to something like “ship to home by next day for free,” which is a customer-oriented objective—that’s a huge change.

Edelman assured, this is the kind of start, from a cultural perspective, that it takes for digital. You look at the journeys that will be affected digitally and bring a perspective on what it really means to serve the customer, to break the compromises in the current system. Because you can do way more for the customer, but it’s a question of changing the way you operate and then using digital technology to give you the low-cost flexibility to get that done—and then measure it.