What is digital transformation?
Digital transformation is a buzzword. Every large corporation has a dedicated internal initiative to embrace digital transformation. The initiative can take many forms ranging from IT modernization, embracing digital in marketing, HR, sales, etc.
A Google search yields the following definition, “the profound and accelerating transformation of business activities, processes, competencies and models to fully leverage the changes and opportunities of digital technologies and their impact across society in a strategic and prioritized way.”
Companies embrace digital transformation in many different ways. For some industries that are heavily consumer-centric, digital is life or death. For other industries, digital is treated as more of an afterthought because the companies can continue “business as usual”. However, the proliferation of digital and the rise of the platform business model creates the need for companies to explore what digital means to their business and plan accordingly.
What are some of the ways in which large companies are embracing digital transformation?
For starters, an organization may hire a Chief Digital Officer that works closely with the CEO to define and execute a digital roadmap. This individual will be in charge of the company’s digital agenda and all of its operations. For instance, what does digital mean for the company’s clients and how does that impact the decisions the department must make. A roadmap may also include initiatives such as boosting e-commerce revenue by x% or creating a new vision focused on taking the existing value the organization delivers to clients and infusing it with digital to keep the company’s market position competitive.
In working with and advising large companies, Applico has created the following framework for how big companies should play offense against platform threats. This model could have been used by the hotel industry to combat Airbnb or taxi companies to combat Uber.
Build, Invest, and Acquire Model
We also often see big companies building incubators and accelerators within the organization. The purpose of these initiatives is to bring the energy and disruptive power of startups into the organization. For instance, Tide (detergent company) created an on-demand laundry service to experiment with business model innovation. Tide could have continued “business as usual”, but with more and more of their customers using on-demand services, the brand was wise to experiment with new modes of value delivery. The successful expansion of this service would presumably create more demand for the company’s core product.
We’ve also seen companies create venture arms that make strategic investments in startups. These investments happen because the organization sees a future in which companies co-exist. General Motors knew the future of the automotive industry included ridesharing. The investment in Lyft positioned the car manufacturer to maintain a strategic position as car ownership rates decline and autonomous vehicles rise in popularity.
The other model that we often see is companies making acquisitions. Under Armour’s acquisition of MyFitnessPal is such an example. The sports apparel brand understood that it could expand its core business by investing in a platform. The ability for its customers to track their workouts would improve the brand affinity that Under Armour shared with its clients. General Motor’s acquisition of Cruise Automated or Walmart’s acqusition of Jet.com are other notable examples. We anticipate the rate of startups getting acquired by larger companies to accelerate as the big companies start to invest more heavily in their future in the platform economy and startups look for successful exits.
The last part of our framework is big companies building platforms themselves. GE’s Predix is the company’s effort to home grow the software platform that powers the Industrial Internet. GE has the resources required to build a development platform that garners enough interest from software engineers. With GE’s massive database of large companies using its services, developers are certainly interested in the potential of building applications for GE’s clients.
Ultimately the decision to buy, invest or build will require careful analysis of the platform threat. If the threat directly puts the company’s future in jeopardy, acquisition may be best. If the threat isn’t as immediate, build or invest may better suit the company, especially with shareholders demanding short-term returns.
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