Why business models must change due to digital

Hack Reactor

By Wendy Gittleson for Hack Reactor

The digital revolution is now 40 years old. Nearly every corporate decision-maker agrees that digital transformation is critical to a company’s success.

According to a Gartner survey:

  • 87% of senior business leaders say digitalization is a company priority

  • 67% of business leaders say their company will no longer be competitive if it can’t be significantly more digital by 2020

  • 66% of CEOs expect their company to change its business model in the next three years

According to IT Pro, recent studies report that worldwide spending on the technologies and services that enable digital transformation is forecasted to reach $2.3 trillion (£1.8 trillion) in 2023, with the period from 2019 to 2023 seeing a steady expansion of digital spending to reach this figure. This shows that the digital transformation process is increasingly being viewed as a long-term investment, with initiatives set to take over a 50% share of worldwide technology investment by 2023, reflecting the global commitment to enterprise-wide digital transformation.

Still, digital transformation is slowing, and likely will be for at least another year. So, where is the disconnect? What are the impediments to digital transformation, and how do business models change due to digital technology?

Why are digital transformations slowing?

While some companies are moving ahead with their digital transformations, some are slowing down. It seems that digital transformations are one of the areas where size matters, but not in the way you might think. Smaller companies fare much better than larger companies. 

According to Gartner, “large organizations will struggle with digital innovation as they recognize the challenges of technology modernization and the costs of simplifying operational interdependence. Smaller, more agile organizations, by contrast, will have an opportunity to be first to market as larger organizations exhibit lackluster immediate benefits.”

Why should companies adopt digital technology?

For a company that’s thriving in today’s economy, it might be tough to see the necessity of a digital transformation. A digital business model isn’t cheap, but forward-thinking companies see it as a critical investment in long-term growth.

Consumers expect a fully digitized customer platform

A 2020 Pew poll revealed that while 82 percent of Americans own cell phones, the average American makes or receives only around five voice calls in a day. Outside of work, the number one use for cell phones is shopping, usually via app. Today’s consumers demand a fully comprehensive digital customer interface as part of the overall customer experience. Not only that, but digital is profitable. A Deloitte survey showed that digitally mature organizations report significantly higher margins and annual revenue growth.

Digital boosts employee productivity and effectiveness

Digital unburdens employees from many labor-intensive processes like payroll and inventory, while allowing them to focus on the customer experience and executives to expand business opportunities. It also gives companies the opportunity to track employee productivity.

Digital offers security

While it is true that hypothetical fully analog companies shoulder less security risk or at least different types of risks, the fact is that all companies, even your local coffee shop, are digital. Nearly all companies collect information from customers, even if it’s just credit card information. Digital maturity ensures that customer data, supplier data, and the company’s proprietary information is protected. 

Digital strengthens business partnerships

Digital maturity helps companies maintain partnerships with vendors, consultants, sub-contractors, suppliers, distributors, among others. eSignatures, for example, can streamline workflow. Video conferencing allows participation from around the world. 

Digital allows companies to gather data

Most business leaders know the importance of knowing their clientele, but how much do they know about the customers they’ve lost? A company doesn’t have to have the resources of Google or Facebook to gather critical demographic data. Digital is about far more than just gathering data, though. A digitally mature company is able to analyze the data and remain proactive. 

Digital transformation success stories

Best Buy

Despite the fact that they were all but written off just a few years ago, there are currently about 1,200 brick and mortar Best Buy stores, and the company is thriving. In 2012, Best Buy hired a new CEO, Hubert Joly. Even he thought he was jumping on a sinking ship. “Ten years ago at Best Buy,” Joly said at last year’s Adobe Summit, “we thought Amazon would kill us.”

Amazon didn’t kill them. When Joly joined Best Buy, their stock price was around $24 a share. Today, it sits at almost $70 a share. Once best known for selling CDs and electronics, Joly completely reinvented their business model. Instead of chasing single transactions, Best Buy is now about the customer experience. 

Best Buy:

  • Overhauled marketing efforts - in 2012, 80 percent of their media spend was mail, and now, it’s 90 percent digital

  • Offers free in-home consultations for suggestions on what works best in a customer’s home

  • Offers an annual subscription for Geek Squad advisors to do free in-home repairs on all electronics, even those purchased elsewhere

  • Can install monitoring devices to help keep seniors in their homes, thereby lowering assisted living and healthcare costs

The transformation has been so successful that, despite the fact that the company has thousands of stores and hundreds of thousands of employees, Joly doesn’t see the company as brick and mortar.

We don’t see ourselves as brick and mortar retail. We see ourselves as obsessed with customers in a way that truly solves their unique problems.

As with all digital transformation business models, Best Buy made room for evolution.

Target

In 2004, Target chose to outsource its web presence to Amazon. In 2011, they took it back. While competitors such as K-Mart have all but shuttered their brick and mortar stores, Target chose to go big with its hybrid business model

Everyone has a digital strategy," said Tom Kadlec, SVP of infrastructure and operations at Target. “And right now, Target's digital strategy is focused on bringing retail to mobile to serve as a ‘companion’ for customers to go from e-commerce to stores.

Target also invested $7 billion in remodeling stores. They are adding services such as drive-up delivery and even telephone ordering. 

Some of the big box store’s goals were to invest in digital talent, adopt an “always-on” model of operation, use technology to create an end-to-end connection between customers and employees, and of course, to increase its bottom line.

Target also invested in its tech employees. Five years ago, according to Kadlec, 70% of Target’s team members were contractors. Now it’s the opposite. “We chose to define the DNA of our team,” said Kadlec.

It worked. In 2011, Target’s stock sold for about $50 per share. Since, it’s more than doubled. 

Microsoft

It might seem counterintuitive to include a tech company in a list of companies who’ve experienced digital transformations, but in 2014, Microsoft found itself struggling. Its stock was selling at around $38 a share. At the time, Microsoft primarily sold computers and its Windows and Office software suites. When Microsoft’s new CEO, Satya Nadella, arrived that same year, he shifted the company’s focus to cloud-based technology.

In a GDS Summit talk from Helen Fanucci, Microsoft’s Strategic Accounts Global Sales Leader, discussed digital transformation in general, and in specific, Microsoft’s digital transformation. Fanucci stressed the value of a bottom-up approach. 

Fanucci spoke about making employees feel valued and embracing cultural changes, stressing a move from a “know it all” culture to a learn it all culture. The company learned to champion diversity of ideas, people, and products. 

Fanucci spoke about her previous role as the Global Sales Leader at Windows where she helped launch a new product too soon. “I started getting calls from sellers – saying we just can’t move fast enough to update our operating system on our devices.” Fanucci says through the insights and feedback they were able to change the product. She believes it’s important to listen to your sales teams and make sure they have a voice to go back to corporate. Communication means to trust, and trust leads to collaboration and collaboration leads to innovation.


How to structure a digital business model

Before developing a business model, it’s important to determine your goals. Some companies, such as Target and Best Buy, might choose to entirely overhaul their existing operations. Others might choose a more risk-averse approach. Regardless, Gartner lays out three key pillars to a successful digital transformation, for companies of all sizes.

Take inventory of existing culture and abilities

Whether it’s about designing new technology or mastering existing digital technologies, skill needs are always in flux. Rather than start from scratch, a model centered around continual upskilling will be far more cost-effective and provide the digital dexterity to address future needs and challenges.

Adopt “customer-centricity”

The primary reasons for digital transformation are to increase customer satisfaction and to attract new customers. Modern supply chain operations demand agility and responsiveness to maintain delivery schedules. To remain competitive, companies need to streamline the buying process, and to empower their sales reps to solve problems on the spot.

Drive digitalization

CEOs and corporate boards need to listen to their tech departments. It’s not an entirely bottom-up approach, but a company’s CIO should be a major contributor to their digital transformation business model. 

The digital era also demands that consumers and organizations be secure. In most organizations, the CIO remains accountable for cybersecurity, but information and technology (I&T) top performers are more likely to report that their boards are ultimately accountable for cybersecurity. All CIOs need to educate their boards and the C-suite on how to think about and take more responsibility for cybersecurity risk.

In conclusion

A report by SAP acknowledged the slow pace of digital transformation. While nearly every company recognizes the importance of digital transformation, they seem to be stuck. Only a fraction have done a company-wide transformation.

Digital transformation is no longer a choice, it’s an essential driver of revenue, profit and growth,” SAP said.  “Executives need to move from simply understanding the high stakes, to activating complete end-to-end execution across their business.  This requires innovative breakthrough technologies, investing in digital skills, and retraining the existing workforce. The next two years will be a key inflection point, which will separate the digital winners from those left behind.

The primary roadblock isn’t a lack of resources as much digital illiteracy. Many companies fear that a digital transformation requires an entirely new tech department when establishing continual revolving upskilling is far less of a shock to the system. 

The good news is that since most corporations are still in their digital transformation infancy, opportunities far outweigh the risks.