The impact of the digital revolution is now having a fundamental effect on businesses that have traditionally been non-digital in what they offer, and in how they deliver that offering.

To begin, the digital revolution was epitomised by the growth in dot.com start-ups of the late ‘90s that sought to take advantage of the internet as a retail platform. Many start-ups failed, but some, such as Amazon, EBay and Expedia, thrived. These were stand-alone businesses, ‘born digital’, that attacked the legacy, non-digital businesses from the outside. The legacy businesses responded by building onto their front-end a digital ‘shop window’, which allowed them to first market, and later sell their goods. But this didn’t really affect their core infrastructure, allowing them to continue operating and managing themselves largely as before.

But now we’re seeing a real step-change in the pace of this revolution. The impact of digital networks is starting to bite harder, as various products, channels to market, transactions and fufilment go digital. This is forcing many legacy, non-digital businesses to respond to the threat of being sidelined, whilst others are discovering new emerging opportunities to pursue, that previously did not exist. Meanwhile those that have been slow to respond, have already suffered the consequences – such as Netflix and LoveFilm’s effect on Blockbuster, and the impact of Amazon on HMV.

“The failure of HMV, the last of the superstore music chains, is both sad and inevitable. It is sad because it signifies the beginning of the end of an era… It was inevitable because the way we consume music has been utterly transformed by the internet and a high store retail space no longer fills the interactive desires of a digital generation. It may be hard to understand how a business with 38 per cent of the market can fail, and questions have to be asked about its inability to adapt to the new models of the music business… Anyone whose heart mourns the loss of a record store is suffering from the bittersweet tang of nostalgia. We are mourning the loss of our own youth while a new generation forge their own rituals in the endless racks of cyberspace”.

(Neil McCormick, The Telegraph, 15 January 2013)

 

On top of this commercial challenge, the digital revolution is also having a dramatic affect on how all businesses organise themselves. The rise in accessibility of data is reducing the power base of some roles; and the emergence of social media channels is allowing problem solving and decision-making to be delivered in different ways. All of this is challenging how we organise ourselves, how we define roles and redefining the role of leadership. Mark Goodridge’s article covers this in more depth.

 

Adapting the Old Whilst Building the New

Meanwhile, in the retail sector, digital is disrupting the core activities of marketing, sales, category management, buying, fulfillment and information technology. So retailers are starting to fundamentally reassess their business models, to take account of where they create value, keep and win customers, and be profitable. Take Debenhams over Christmas 2012 for example, which made a success of its web and mobile channels and so saw a surge in online revenues, but also saw a decline in profit margins, partly caused by higher distribution costs of direct delivery. So adapting to the digital opportunities and threats cannot be simply an adjunct to the existing business strategy; it requires a transformational change to the business.

 

The Grafting Challenge

For a number of businesses nowadays, when that reassessment has taken place, the conclusion being drawn is that there is still considerable value in the existing assets – such as the brand and their relationship with customers and suppliers, which now need to adapt to the new competitive environment. But they are also concluding that they need to build a new digital-based proposition, with a new profit model.

And for this, there are two options: either to create a new independent start-up digital business (that may well ultimately compete with its legacy business) or build the emerging digital offering onto its legacy business. This latter option is the challenge of ‘grafting’ the new onto the old.

Taking the analogy of the horticultural and medical worlds, ‘grafting’ is inserting new tissue from one plant or body to another, so that they join-up and grow. With this approach comes the risk of the host body rejecting the new tissue before it has time to establish and flourish.

The same challenge exists with organisations, which requires answers about how to organise the business to support the old whilst encouraging the new: who makes what decisions, how to bring in new capabilities, how to establish new ways of working and how to shift the employee mind-set to thinking that this disruption is necessary and a welcome, albeit uncomfortable, change.

 

The Mobile 3G Experience

One industry that experienced this digital revolution earlier than most was mobile telecommunications. After only a few years of its young existence, the sector experienced a major disruption with the advent of 3G. The legacy businesses had been built around 2G, with appropriate functions and skill sets, but the emergence of digital challenged the very business model of how to make money. With that came the challenge of how to develop a new digital platform whilst maintaining the 2G cash-cow that, from then on, would be in long-term decline.

One option was to create a completely new 3G business entirely independent of 2G. For example, “3” was set-up from scratch, and BT created and then sold-off Cellnet (which subsequently became O2). However, other mobile companies wanted to keep their 2G business whilst growing a new 3G business. We experienced this latter option when working with a mobile telecoms business. Before 3G, the new non-voice opportunities were being roundly killed-off by the 2G incumbents. This was likened to 2G ‘antibodies’ surrounding and killing off these new ideas before they had the chance to grow.

With the arrival of 3G, it was recognised that they needed to bring in new technological and commercial capability and allow it to grow without the threat of premature death. This new talent also required different organisational structures and different ways of working – permitting them the freedom to explore and develop, without being cramped by the more operationally-driven 2G business.

So a new business was initially established, ‘semi-detached’ from the legacy business, geographically distant from the parent with a different structure and ways of working. But as 3G was ultimately reliant on the existing 2G customers and suppliers, at some point it needed to be grafted onto the legacy business. So this needed the employees within the 2G world to accept and embrace the 3G business, and ultimately to work together on how to move over to 3G without prematurely jeopardising the 2G cash-cow.

 

Digital Revolution: Defining the Transformation Challenges

For some businesses this digital revolution can mean radical changes to how it markets, sells and fufills its products and services. With others, the very product itself is shifting from a physical form to a digital form, which in turn requires a fundamental change as to how it does business. So how do you deal with such challenges?

We see four key challenges that organisations need to address to survive and thrive in this digital era:

  1. Changes to the business model – identifying where and how a business can make a profit and redefining the metrics used to manage the business;
  2. Changes to the organisation – understanding the organisational implications of shifting focus, power and resources and the massive democratisation of information;
  3. A shift in culture – in the mind-sets of both the new and existing staff towards the transformation, to avoid the negative consequences of a culture clash (see Susan Carroll’s article);
  4. The need to bring in new capabilities – how to bring in new technological and commercial talent – with possibly very different ways of working. How the new digital leadership will interface and get things done with the existing non-digital core functions will be critical to the success of the transformation (see Martyn Sakol’s and Paolo Moscuzza’s article).

 

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So to change the organisation, some of the key issues to address are as follows:

Redefine How You Manage Your Value Chain

Start with a look at your core value chain and understand the value-adding activities of your business (see diagram 1).

Compare how you currently configure your existing teams and their resources, accountabilities and decision authorities, and consider options for the future that take account of the need to first lead the building of the new digital proposition, and then transition into a new steady-state.

This might mean creating a cross-functional business unit that brings together a set of disparate skills, for the purposes of developing and delivering a new digital offering, rather than keeping the skills dispersed across more traditional functions.

The trick here is in getting the balance right between what is separated out, as opposed to being shared, and for how long it remains that way.

 

Redefine your Metrics and Decisions

Working down the value chain, you can identify and evaluate the consequences of grafting on a new digital business, by assessing which areas will be affected, and what that might mean for what gets measured, what decisions need to be made, and who is accountable for those decisions. For example, the consequences of increased levels of home delivery in retailing can require a reassessment of how product profitability is measured, and therefore how product decisions are made.

It also might mean that if a new digital unit is created, its goals are initially more around share growth rather than profit maximisation.

 

Redefine Primacy

To deliver this change often requires a power-shift as to which area is driving the business. This power-shift will be different for each business, depending on what capabilities they currently have and where they need to develop and change the most. For instance it might mean the need for a Chief Digital Officer, or equivalent, to lead the technological transformation. But with this, it is important to also define how the decision-making of the transformation is woven into daily commercial decision-making.

Over time, the commercial decisions of a business will necessarily change, as the value of the digital offering is realised, and the new morphs over time into business as usual.

So it is important to re-define what and how decisions will get made. This is what we call “Primacy” – understanding which decisions drive the momentum of the business – who leads, and who follows.

 

Share Capability and Capacity

Once the core of the new and existing business propositions have been defined, the next step is to define what capabilities can be shared across both, in order to gain the benefit of being part of one organisation and to help assimilation of ideas across both businesses. This is particularly important to get right for the company’s Shared Services such as Finance, HR and IT, and how they provide the right level and type of support for the new as well as the legacy business.

 

Redefine Interfaces

Any reconfiguration of teams and decision-making will necessarily require a new set of relationships between functions and teams – leading to a need for determining who makes what decision and who is involved in the decision-making process.

For example, product decisions impacting on sales and fufillment; and marketing and selling decisions impacting on information technology.

 

Lead the Business Transformation

Answering all of these questions effectively is about leading a business transformation. This requires the top team to collectively create this new organisation, so that there is shared understanding and buy-in of the principles, end-game and shifts in power.

Ultimately, by successfully leading such a transition, ensuring the support of the legacy business whilst grafting on the new, can be the making of a revitalised business that thrives in the new digital marketplace.

gary.ashton@oecam.com