How to Drive Digital Transformation in a Changing World

Sunil Gupta is the Edward W. Carter Professor of Business Administration and Chair of the General Management Program at Harvard Business School. He’s also the author of Driving Digital Strategy: A Guide to Reimagining Your Business, Based on almost ten years of research, and using multiple case studies, Gupta’s book shows how the rules of business have changed and why it’s no longer enough for firms to be better or cheaper to gain competitive advantage. These new rules make it essential for companies to reexamine four fundamental aspects of their business in order to thrive in the digital era: their strategy, value chain, customer engagement, and organization structure. The NCMM caught up with Professor Gupta recently to discuss his new book.

Listen to the interview on Spreaker.

In terms of driving digital strategy, does the size of the company matter?
Gupta: A startup can be more agile. It has a clean slate, so can change things quickly. It’s much harder for a Fortune 500 company, for example, because they have more legacy to clear away. Middle market companies are somewhere in the sweet spot between.

Middle market companies have more of a customer base than a startup and less legacy than a Fortune 500 company. On balance, they’re actually in a better position than both to drive digital transformation.

Why is it such a bad idea to separate digital strategy from your organization’s overall business strategy?
Gupta: I've seen a lot of companies say, “It's very hard to do innovation, especially in a large company. What if we set up a separate organization to drive innovation?” So they hire a bunch of smart people, give them a couple million dollars, and send them off to Silicon Valley.

It's almost like you're trying to turn a large ship and you just launch a speedboat from the mothership. Usually the speed boat takes off but the mothership doesn't change course. The ship and the little speed boat still need to be connected to one core, which can be a changing core. But you need to integrate the two, not separate them.

What is this four-part framework you describe in the book?
Gupta: First, it’s what we just said, that digital strategy has to be an integral part of your business strategy. You may need to change or redefine what business you’re in, because industry boundaries are getting blurred. What businesses is Amazon in? Is it a retailer, a cloud computing company, a video producer? Number two is your operations need to be ready to change. All the components of your business need to be continually re-examined, re-imagined.

Third is re-thinking how you engage with customers. How do you engage with your customers in this new digital media landscape? Fourth is how digital strategy impacts how you structure your organization, including what kind of people you hire as new technology and artificial intelligence comes in and gets integrated into what you do.

How is a manufacturing company like John Deere re-imagining its strategy?
Gupta: If you go back to the traditional principles of strategy, the notion was that in order to have a competitive advantage, either you had to be a low-cost producer or offer a differentiated product. That's a very product-based strategy. But today, the competition catches up very quickly on price and differentiation.

What John Deere now says is, “when farmers buy tractors from us, they're not simply buying tractors, they want to improve their productivity. How can we help them with productivity?” John Deere now defines itself as a farm management solutions provider, which means, for example, that it offers weather expertise to farmers. It’s hiring a lot of computer scientists to develop algorithms to help farmers know when to plant seeds, in what soil, and in what weather conditions, so the farmer’s yields are optimized.

How might middle market companies consider adopting “Product as a service” as a potential business model?
Gupta: Companies are accustomed to selling a product and getting the money up front. I’ll sell you equipment, machine tools, etc., and the customer owns the asset. Product-as-a-service [PaaS] means the customer is renting the product rather than owning it. The advantage for companies is that you have a subscription-based model with recurring revenue. The whole idea came from software/SaaS.

The second advantage is having more predictable revenue. It's easy cash forecasting for the PaaS company. A third major advantage is that it opens up a large new market because if I'm selling equipment, the price points to own are quite high, while renting is cheaper. You have more potential customers. On the downside, the company is responsible for tracking, monitoring, and maintaining the products. If you don't have that capability, you’d better develop it.

How might middle market companies use “open innovation”?
Gupta: Another word for open innovation is crowdsourcing. It recognizes that your in-house people don't have all the answers, but there’s a lot of bright people outside the company working in very different fields who might have solutions. Doing open innovation well involves defining the problem/challenge clearly.

Open innovation can work because people with completely different backgrounds look at problem with a different lens from your in-house people. As a result, you often gain a different way of addressing problems.

We see a lot of emerging technologies like 3D printing and the industrial internet of things (IoT) coming into manufacturing. How might these change US manufacturing?
Gupta: A lot more customization of production will happen, which is great for customers and creates new opportunities for US manufacturers. You will see more manufacturing move back to the US from emerging markets like China, Vietnam, and Cambodia, which originally moved there for cheaper, outsourced labor. Now more manufacturing can be done here at reasonable cost and high quality. There will also be more production on demand, which means inventory costs will go down. I don't need to store product in the warehouse. I just produce and ship what was ordered.

What would you say to middle market leaders who are looking at their sales channels and thinking online sales channels will cannibalize their other channels?
Gupta: That's a big issue today. I'm working with a mid-market insurance company that has historically sold through independent brokers. Now, they're thinking of moving in the direction of e-commerce, setting up a direct channel to customers. But their concern was that the brokers would feel threatened, right?

The implicit assumption in this scenario is that both channels (brokers and e-commerce) are identical, and one is cannibalizing the other. But each channel is good at something and not good at something else. For example, the midmarket insurance company realized that its online channel was a cheap way to acquire new customers, but not very good for selling more complex insurance products. They use the website to offer simple insurance products. Once it acquires those customers, it hands them over to the brokers for upselling more complicated products. The two channels actually help each other rather than cannibalize each other.

What else would you like to say to middle market leaders about “Driving Digital Strategy”?
Gupta: Digital strategy has to be integrated into your overall strategy. Also, you have to continuously strengthen your core business, but also build for the future. Everything is shifting inside organizations because of emerging technologies, changing consumer behaviors, shifting channels, and shifting operations. So you need to develop the capacity to re-examine and re-imagine every part of your business.

Sometimes it feels like you're running two organizations at once: what you’re doing now and what you’ll be doing next. Be prepared for tough transitions between now and next.