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The next wave of digital

LiveMint logoLiveMint 29-03-2017 Ralf Dreischmeier

Digital-native innovators, armed with radical business models, have relentlessly raised consumers’ expectations. Such companies—including the quintessential Apple, Uber, Netflix, Amazon and Google—deliver a simple, yet intuitive experience, real-time information, and personalized advice for customers.

Traditional incumbents know that to stay competitive, they must “get on the digital train”—speedily developing new tech-based offerings and adopting digital business approaches. Many understand the need to execute competitive strategies faster through rapid experimentation and prototyping, invest in innovation including reworking business models, and remove complex processes and structures so employees can collaborate to put customers first.

Yet, only a few incumbents have met the speed imperative. Instead, they have made digital a storefront add-on to their business, or have done only the bare minimum to connect with customers digitally.

What explains their hesitations?

Many have overly complex IT systems, misaligned talent, siloed functions that discourage collaboration, and management that squelches innovation.

Incumbents’ failure to act has cost them—and the toll will only get heavier, if companies do not address the situation soon. The reason: Tailwinds shaping previous decades are losing momentum. For instance, growth in the number of internet users and the number of smartphones shipped has slowed since 2015, along with GDP and population growth in many countries. Consequently, companies can no longer count on an ever-expanding customer base. Perhaps reflecting these developments, 2016 was the first year that non-technology incumbents dominated the $1 billion-plus acquisition market, as CB Insights noted.

These trends are not universal. In India, for example, the number of internet users is expanding, while most markets face an overall slowdown or contraction (see chart).

Speed+scale+value: Getting the what right

BCG analysis of 1,000-plus businesses undergoing digital transformation shows that to succeed today, companies must master two imperatives in addition to speed:

• Scale: Companies must replicate success from new digital introductions across their business. For instance, an apparel retailer draws on digital capabilities to initiate “ship from store” and “collect from store” service for customers in several stores. Dedicated processes support the service. To get the most from the service, the company must implement it across all its stores.

•Value: Businesses must use digital to create new forms of value for customers and themselves. For customers, value comes from combining information sources. To illustrate, at a train station, an app notifies you that your train will be late—and that a nearby coffee shop has a special offer. Businesses that provide the best value to customers will capture their time, attention and money. Companies can also use data gathered from customers to develop new products and craft effective advertising campaigns.

To meet the scale and value-focus imperatives, companies need to look beyond now-mature technologies such as the almost clichéd SMAC (social, mobile, analytics and cloud computing) and embrace a new wave of technologies.

Consider AI. Thanks to new kinds of data now accessible, AI applications today include natural language processing and speech recognition, pattern recognition and real-world mobility, predictive maintenance, and advanced analytics. Companies are leveraging such applications to transform processes like hiring talent, enhancing customers’ experiences and empowering their sales force.

For instance, a financial services firm uses machine learning software and a private cloud network to review commercial-loan agreements—which used to consume hundreds of thousands of hours of work annually by lawyers and loan officers. Results have included fewer loan-servicing mistakes, most of which had previously stemmed from human error.

AI has been around for a while, but multiple uses of the technology are now surfacing. Today, there is a sharp distinction between robotics and various AI types, including deep learning. The same pattern of exponential advancement characterizing other technologies is now happening with AI.

Augmented reality (AR) also offers potential, as a home furnishings brand discovered. The company had launched a B2C (business-to-consumer) solution featuring high-quality digital photography, to help shoppers choose products online and minimize the need for “tactile”. But B2B (business-to-business) is the core of its business, so the company then introduced a “store salesman” app. It shipped iPads to its retailers to help sales reps select from among 20,000 SKUs (stock keeping units) for their end customers. To further enhance the experience, the company also introduced AR in select exclusive brand outlets, so potential buyers can easily visualize their chosen fabrics in room layouts or furniture coverings. These efforts have already begun improving the company’s growth in India and its export market.

Only by augmenting speed with scalability and value can digital solutions like those described above deliver sustainable competitive advantages—including the ability to respond to ever-changing customer requirements, achieve cost-saving efficiencies, and attract and retain top talent.

But excelling simultaneously at speed, scale and value is tricky. To do so, companies must get the “how” right: creating a digital workforce to support the digital technologies they adopt.

Digital technology+digital work workforce: Getting the ‘how’ right?

Given the enhanced pace of technology change, companies need to back the technologies they adopt with an agile, test-and-learn digital workforce. A digital workforce comprises people who can systematically craft solutions to dynamic business challenges, show early minimum viable products to internal and external customers, and use feedback to refine them.

This requires employees with relevant technical expertise who also operate comfortably amid uncertainty and change. And they need leaders who can elicit promising ideas from anywhere in the organization while uniting them behind solutions in development.

In short, companies must put technical know-how front and centre. In previous decades, technical prowess was the coin of the realm. Then technology costs declined with commercialization, and companies began outsourcing and offshoring technical work. Commoditization resulted. The mantra became, “Technology is easy; success is all about change management.”

We disagree. While effective change management matters, success still hinges tightly on technology. Those who understand technology create more valuable digital solutions that deliver a sharper competitive edge. Companies must therefore make technology a key element in their business transformation. That means hiring the best talent, designing the right incentives for them, and giving them the autonomy and challenging work they demand.

To further equip technical talent for success, companies can merge their traditional “business requirements” and “IT development” silos into a unified set of activities focused on product development and engineering—and organizing these workers in a new way. The traditional pyramid shape, containing numerous management layers, should give way to a diamond shape, characterized by many senior engineers, fewer juniors and even fewer managers.

A product development/engineering group structured in this agile way will churn out releases much faster than one built on the pyramid model. Other business functions (sales, marketing, supply chain, back office) will also show improved speed and adaptability. Result: Traditional incumbents will score as much success as their “new- age” rivals.

Mastering the “what” and “how” of succeeding in today’s digital age takes courage and commitment. But companies cannot afford to shy away from this work. Those that embrace it will stand the best chance of pulling ahead of rivals in the future—and staying ahead.

Ralf Dreischmeier is a senior partner and global leader of the technology advantage practice at the Boston Consulting Group (BCG) London, Marc Schuuring is a partner and managing director at BCG Amsterdam, Rajiv Gupta is a partner and leads the technology advantage practice at BCG New Delhi, and Shrikant Patil is a project leader at BCG Mumbai.

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