Saturday, 3 March 2018

How does the shift towards a digital economy impact today's business?

This question appeared in Quora.  I've turned it into a post here.  For a quick answer, go to 'Conclusions'.

Businesses will be made redundant if they are reluctant to change.  A popular narrative, though true, does not apply to most companies.  But it will affect their business.

Consumers and companies are using the internet, increasingly carrying out their daily activities digitally.  It is only natural that business follows, to reach them, to sell, to brand and now also to engage, to catalyse word-of-mouth, for input, for data, for ideas.

Impact of the digital economy - improve business operation

“Digitisation is simply how business is carried out over the internet.”

For most, digitisation will benefit their business.  It can expand sales, reduce cost, increase productivity, improve effectiveness.  A digital plan ranges from email marketing, social media branding, product design, online sales to sales support, gauging customer needs, client-assisted selling, data harvesting and even recruitment.  That is, it covers business operations broadly.  A common misconception is that it is only for marketing and sales.  This flawed understanding will limit the potential gain from digitisation.  Product design for example, using a digital method - the community model - involves customer directly in a natural setting to define wants, something traditional study groups carried out in controlled environment cannot match.  Further, if applied correctly a business can track trends…..continuously.

Conversely revenue will be impacted due to increased competition since it can come from anywhere. 

Impact of the digital economy – increased competition….or opportunity

The wide reach of the internet makes it is easier for a buyer to find a product.  That means your existing customers will likely take a look since it only takes a click.  Competition is no more just down the road but also in another town, another country, magnifying it.  Many businesses are threatened by the borderless economy.  Or look at it this way - you can increase sales by going outside your current physical constrain.  It works both ways. 

Impact of the digital economy – business environment changes

Whether a company digitises or not, others will.  Businesses exist within ecosystems.  If your partners use tools like blockchain for transactions and you don’t, the relationship with them is affected.  If your customers have a choice to buy after hours and you don’t, you will lose some sales.  If you can sell directly instead of through a middleman, your margins increase.  If a competitor engages its ecosystem to improve its operations and you don’t, you become less competitive.


Impact of the digital economy – businesses will treat their customers better….

Or another business will, taking them along.  The borderless nature of commerce today increases competition vastly.  Internet startups understand this.  They prioritise customer experience.  It is usually the top item in their list, unlike conventionally when it is partly a PR statement.  Customer service has to be built into the consciousness of the organisation culture and put right into the centre of things.

An example - banks.  When they turn paper bank or credit card statements into electronic statements, they merely replicate the paper version and email them.  That actually makes it less friendly to customers.  Can you flip through six months of statements easily like the paper version can?  The right way is to turn it into a form customers would find more useful than paper statements.  Turn it into a booklet so they can flip through the monthly statements easily like ebooks, add search, simple presentation tools, simple analytics so he can ask ‘how much did I spent in the supermarket last year’.  That’s user experience.  It is now better than paper statements.

Impact of the digital economy – operational culture will change

The quote below exemplifies a key difference between the norm now and the emerging.

"Digital culture is about cooperation, partnerships. Existing culture is about internalisation (tasks mostly done in-house) while new culture adds a huge dose of externalisation (tasks carried out through partners, customers, would-be customers, public)."

It changes an internally-centric culture into one that is more externalised.  It requires the organisation to become more open (working more closely with and through outside partners and even the public rather than depending solely on internal staff), to lessen the tendency of a strong command-control culture (newspaper editors decide what’s best for the readers), become more nimble (over-planning a project to be as complete as possible in the age of agile is not the way to do things) and to lean towards customer-centricity (today, most organisations sympathize with internal staff when designing processes to make it easier for them, like, by making the customers fill forms in replicate).

An externalised culture is the reason staffing at the new economy firms like Amazon (566,000, 2017) are a fraction of the traditional equivalent Walmart (2.3 million, 2017).  And the cracks we are witnessing in traditional sectors; taxi, advertising, media, tv………

It is also the reason operational culture must change and will, to compete in a digitising economy.  For the early adopters, the challenge though is acceptance since operating in the digital space requires adjustment. 

Impact of the digital economy – how to partake

This is the one that counts if your firm wants to adjust to the digital economy.  But like anything, achieving it requires deeper understanding.

A good starting point is to understand the key drivers of digitisation, derived from the way the internet causes change.

Drivers of digitisation – the internet

The internet can be described as a communications utility with wide global reach, borderless, characterised by being cheap, fast and easy-to-use, allowing services built on it to be provided 24x7 and with immediacy.  These change behaviour.

It provides consumers a choice.  If they are busy, they can order, say, a replacement phone charger online instead of having to saunter down to the high street.  But if your storefront is not online, they now also have a choice to try another.  It is this simplicity of choices that changes a buyers’ buying behaviour.  This extends to suppliers in a business ecosystem.

The internet connects buyers directly to sellers, and to information.  Customers now have access to information when once it was restricted.  Such democratisation of information moves the power closer to the buyer.  Consumers are now more comfortable buying directly.  They can make better decisions.  They may now buy from sources or places they once were hesitant to.  This direct model is anathema to the middleman model that until now rules commerce.  If you are run a middleman business, it’s going to be tougher.  But seek inspiration from Jeff Bezos.  Amazon is really an online version of the middleman model, less layers but he uses digital brilliantly.  But in general, the middlemen model is giving way to the direct model.  The consequent reduction in prices changes buying habits.

The immediacy of the internet is another that changes consumer behaviour.  Consumers like it.  Business partners like it.  Businesses should look at how it can be fashioned into their operations.  Industries that restrict consumer habits and are reluctant to build it in are already affected.  Cable tv operators come to mind.  Customers are forced to accept specific packages at specific times.  Netflix’s explosive growth is due to enlightened management taking advantage of the internet’s immediacy and also its low delivery cost to provide a better video experience, 24x7 at reduced prices. Many businesses will be affected one way or another by the immediacy effect.

Finally, our social nature compels us to communicate, to share, to show off, etc.  Or to assists others.  Social media which can only be pervasive with the scale of the internet reinforces this.  Pre-internet, word-of-mouth is restricted to friends and family.  Social media expands it.  From the fringe, it has become an important sales-assist tool.  Before making a booking at TripAdvisor, we look at the reviews.  They help us decide.  Businesses can tap the effects.

If you accept that the digital economy will have an effect on your business and you intend to do something about it, the next topic is important.

Drivers of digitisation – culture

Culture affects behaviour, it determines how the team and thus business operation will function. 

The challenge is that digital culture, really we should be referring to internet culture, is unlike what we are used to.  Some understanding of it is necessary when executing digital strategies.

Click this to get a better understanding of the internet culture - The culture that lead to lean startup, agile, Uber and the digital economy
Drivers of digitisation – rules

The rise of internet startups exemplified by Google, Facebook, Tencent that use diametrically different business models portends changes to the way the wider business operate in the digitising economy.  This mirrors the emergence of the new industries - oil, steel, railways, finance, cars - in the 1800’s during the second wave of the industrial revolution. 

Today’s business models, management principles and culture emerged from that period.  It’s about to change again.

The impact on business in the information revolution (of which the digital economy is part of) will be similar.  Businesses are already starting to operate differently.  Agile and lean are management techniques post-internet evolving from processes of the open source model.  The sharing economy, the platform model and the marketplace model are digital business models.  As traditional businesses increase their digital footprints, as they must, they need to figure out what I term the machinery of the internet economy – the business models, business rules, methods, tools, culture to apply to their digital plans.  It is summarised in the illustration below.

This obviously is too huge and multifaceted a topic cover here.  For those interested, start with this – how to create a digital strategy.  It’ll guide a business to define a digital strategy and within the post point to a series of posts that covers this topic.


How does the shift towards a digital economy impact today's business?

·         Increase competition or opportunity.  Consumers now have many more choices
·         Changes the way organisations go about their customer-facing activities or to be more exact those with external elements.  The most significant of this is active engagement with customers and would-be customers and partners.
·         New ways to conduct business; impacting costs, productivity, effectiveness
·         Organisation culture will be transformed, gradually.
·         They say ‘software will eat the industry’, it will.  Tech will now be deployed for to-market goals unlike the past when IT was used only internally to improve operations.  All employees should know simple coding.

What does it leads to?

·         More collaboration, in ways a traditional firm will initially find odd!
·         The business will pay much better attention to customers.  This time it is not lip service
·         New ways to sell a house, for example
·         Less margins on existing products so the business will look at other revenue sources
·         Data now has a revenue role
·         Branding becomes even more significant
·         If you are fortunate to be in the ecosystem of the digital economy, like, in logistics, a new revenue opening presents
·         If you are unfortunate to be in the industry being disrupted, like, taxis or banks, you need a major makeover.  Some will thrive, other sectors will shrink, like traditional banks.
·         Instead of relying on others, executives will put together initiatives using simple digital tools to achieve corporate objectives, like a specific product branding exercise.
·         Our culture of complexity applying the 80/20 rule (as complete as possible) to project planning/execution will flip towards simplicity, 20/80 applying MVP (minimum viable product), pivot, agile.