This phrase “digital transformation” is trending hot on Google right now and it’s popular to use it to describe just about any digital or technology initiative. But lots of companies are engaging in activities they call “Digital Transformation” that aren’t really getting them to the level of digital excellence that is necessary for survival. Let’s separate these “faux” digital transformations from the real stuff.
To do so, we’ll first take a quick survey through the history of digital evolution to put it in context.
In the past 20 years or so, the business application of “digital” has gone through three main stages, as shown in this diagram:
Stage 1: COMMUNICATIONS
It was the late nineties. The TV show Friends was in its heyday. Bill Clinton was hangin’ with Monica in the White House, and AOL was littering the world with CD-ROMs.
Businesses then were leveraging “digital” to create “brochure-ware” by publishing content online to provide information to customers and prospects (or to employees via “intranet” sites). While this use of digital as an electronic publishing platform remains one valuable application, today, most companies are doing more.
Stage 2: E-COMMERCE
The second stage of digital was e-commerce. This involved enabling digital transactions such as through an online store or a self-service employee benefits portal.
In the year 2000, total U.S. e-commerce revenue was a few billion dollars. By 2010 it was nearing $50 billion and ten years later it’s over $600 billion.
To go through the change from communications to an e-commerce model, companies had to undergo an integration effort. This entailed connecting their transactional systems and processes to digital interfaces such as websites and later, apps.
E-commerce enables you to “do business” in the digital realm, not just talk about it. But for many companies, it really just means a bridge between a business built for a pre-digital world and the customers who want to interact digitally. As the word says, it’s basically tacking an “e” onto the commerce they had been doing for decades.
While this is a step forward, few companies fundamentally change their brand, products or core value proposition simply by adding an “e” to their pre-existing operations.
Stage 3: DIGITALLY DRIVEN
There is a third stage that successful digital companies are playing at, but which many legacy brands have yet to embrace. This third stage entails what I call becoming a “digitally driven enterprise,” and it requires another, much deeper level of change.
The transformation to a digitally driven enterprise is what “digital transformation” is all about.
Being digitally driven means far more than providing your customers with a good app. Instead, it implies that you are aggressively creating products and customer experiences that take full advantage of the potential of digital—becoming a business that would probably be impossible outside of the digital world.
Let’s look at a few examples. AT&T enables you to do many digital things, but it is not primarily a digitally driven business. And it largely is not loved, I’m sorry to say. Skype (now owned by Microsoft) is a digitally driven business and earns an enormous amount of love, especially from customers who otherwise could not afford to speak regularly and at length to their distant families and friends.
Skype’s fundamental business model would be impossible without the internet and digital devices that can connect “peer to peer,” since they have offloaded the vast majority of the cost of telecommunications onto their customers’ internet service providers. As a result, they are able to offer their services for free or very nearly free while generating billions of dollars of revenue per year.
When a company is truly digitally driven, they become tough for traditional companies to compete with. The telco industry estimates that the impact of Skype and similar services has cost over $50 billion a year in lost revenue.
Another example—Hertz will rent you a car to get from place to place. They have a nice app, an intuitive website, and helpful kiosks at their locations, but these are all e-commerce. Hertz’s fundamental value proposition hasn’t changed for the past 30 years. You go to the car rental facility, get the car, drive it around, and return it later to the same place, all the while getting charged by the day. Having an e-commerce-based digital reservation is certainly beneficial because it saves the customer the effort of a phone call and saves the company money as well.
But Zipcar (now part of the Avis Budget Group) does it differently. They park their cars all over the city and use GPS to know where the cars are. They let you reserve a car “near you” on the street, unlock the car with your phone, drive where you need to go, and leave it possibly someplace else, where it can then be grabbed by another customer when they need it. This enables Zipcar to charge by the hour, with many customers potentially using the same car in the course of a single day. At its core, the business is digital. If the cars could not be connected to a wireless network and the customers did not have full touchscreen computers right in their pockets, the model would never work. While they still need cars, Zipcar does not need traditional rental centers, and they make car rental practical for a segment of customers for whom the traditional model does not make sense.
Uber takes this even further. Similar to Zipcar, you use an app to reserve an Uber. But Uber has used a totally different model to digitally mobilize individuals with a car, spare time, and a desire to earn a few bucks. They don’t actually need to own any vehicles or employ any drivers. Instead, they act as a kind of “dating service” for people who want rides and people who want to provide them. Airbnb does something similar for hospitality.
These businesses are centrally reliant on digital infrastructure for their consumer value proposition and business models. Hence, they are “digitally driven” companies. In fact, Uber takes it so far that the digital infrastructure is nearly the entire capability of the company. The rest is effectively outsourced.
Other companies with inherently digital business models include Netflix, Google, Facebook, and eBay. Now, a contrarian might say, “Wait a minute, those are all ‘internet tech’ businesses, so, of course, they are ‘digital.’”
But Google’s fundamental value proposition is really that of a research library. eBay’s is that of a giant store or swap meet. And Netflix’s is that of a video rental store or a multiplex.
So, while it’s true that digitally driven companies at times feel as though they are “tech companies,” a close look at their core value proposition often reveals that they are fundamentally fulfilling a long-standing product or service category, just in a new way. These example businesses aren’t selling technology, like Cisco or Oracle. They are digitally driven manifestations of some other kind of company, such as entertainment, transportation, or telecommunications. That’s what it looks like when businesses in those industries are digitally driven.
Digital transformation is about making your company “digitally driven.” This means that your approach to selling and delivering your products and services becomes intrinsically tied to a digital world. Companies that are thriving today have benefited from this approach, and so will you if you understand what “digital transformation” really means and are able to develop strong digitally driven capabilities.
You can read more about digital evolution in my new book, WINNING DIGITAL CUSTOMERS, where I discuss in detail how the rapid change that’s happening in the world right now is transforming the way companies create and deliver products to a new generation of digital customers, and provide a clear roadmap for how to navigate or lead the change at YOUR company.
WINNING DIGITAL CUSTOMERS is coming out in October. You can download the first chapter for FREE by clicking this link https://wdc.ht/freechapter.