Ride the Wave: A Primer for Digital Transformation

Jared Johnson

12.07.2016

At Solstice, we have helped a wide array of businesses with their digital transformation. From digital dinosaurs, all the way to innovators and disruptors, we've dug deep into digital transformation successes and failures of some of the most well known global companies and assembled action plans to help you leverage digital transformation lessons they've learned the hard way. This is your primer for digital transformation in 2017.

1. Amazon doesn’t try to compete based on having the lowest price; they target the most ubiquitous customer experience

Amazon Prime delivers a simple, fast and omni-channel experience to the degree that Prime customers do not even check to see if they are getting the lowest price when shopping on Amazon. In fact, only 1% of Prime customers do online price comparisons and 63% of Prime users who look at an item end up buying it! That means Amazon Prime has roughly 18x the industry average conversion rate of 3% to 4%.

Why is Prime’s conversion rate so high? Why do Prime customers not check to see if they’re getting the lowest price? The answer is customer experience. Concerning price, Amazon has given their customers the expectation that the prices they find there are competitive, even if they are not the absolute lowest. Amazon has also put a lot of effort into having a truly omni-channel experience: You can use your computer, smartphone, smartwatch, tablet, Kindle, FireTV and Amazon Echo to shop. They even supported the Windows Phone until July 2016, so you know Amazon wants to be in as many channels as possible. Prime has amazing penetration, with about 21% of adults in the USA having an Amazon Prime membership. These numbers all point to the fact that Prime customers care more about convenience and experience than they do about price. This convenience > lowest price mindset is not unique to Amazon shoppers (though even if it was, we’re still talking about over 50 million Americans who think this way). Amazon is leveraging their best-in-class customer experience to achieve these goals, and it is working quite well for them, as AMZN is up 264% over the last 5 years.

Does your business acknowledge that your customer is in control? Have you enabled your customers to interact with your brand in as many channels as they wish? Have you stopped trying to compete on price and started to compete on experience? Have you made it easier for your customers to do business with you than your competitors? This is how digitally transformed businesses are thinking. They are charging more and delivering more value and innovative experiences to their customers.

According to Ketchum’s Innovation Kernal Study, digitally transformed businesses are tapping into the fact that 68% of consumers are willing to pay on average 21% more for innovative brands.

Your Action Plan: Write out all the emerging channels that you are not present in today. Think about the conversational user experience possibilities through Amazon Echo, Siri, and Google Home. Think about chat bots, virtual and augmented reality, and robotics. Look outside of your industry for examples of brands that are using digital to create innovative customer experiences in emerging channels. One good example is Lowe’s, who is re-imagining their customer experience through robotics with their LoweBot, virtual reality with Oculus Rift, and now augmented reality with the Microsoft Hololens. Now use an innovation-by-constraint exercise to think about how your customers would interact with your brand if they wanted to complete their entire customer journey within that emerging channel. This will illuminate how you can use these emerging channels to create new revenue streams and turn pain points into surprise and delight. Being present in these emerging channels will position your brand as being more innovative, and ready to serve customers in whichever channel they prefer.

2. Kodak didn’t realize they were actually in the storytelling business

Let’s step back and take a look at Kodak. Kodak had a compelling rise to dominance in the film industry as the fifth largest brand in the world by 1996, with a peak revenue of $16BB/year. In its heyday, two-thirds of all film on the planet was sold by Kodak. However, even more compelling, as any MBA can tell you, was the dramatic fall from glory that Kodak had as digital transformed photography in the 2000’s. A Kodak employee named Steve invented digital photography in 1975. Over the next 10 years, Kodak made great advances with digital photography in their famed Kodak labs, but the business did not want to commercialize any technology that would cannibalize its high margin film business. It did eventually get into digital photography, but it was too little, too late.

Rahul Kapoor, a Wharton School professor, summed up Kodak's missteps: "If you look at R&D, they were superfast. In terms of the business model, they were quite the opposite.”

Businesses that are successfully transforming to digital are NOT just propping up their existing business model with digital. Instead, they are reinventing themselves around digital. When Cortes landed in Mexico in the 1500s, he ordered his men to burn the ships that brought them there to remove the possibility of doing anything other than going forward into the unknown. Venture Capitalist Marc Andreessen has the same advice for analog companies: “Burn the boats.” Now you do not necessarily NEED to “burn the boats” of your existing, traditional business models and infrastructure, but if Steve or Susie in your R&D department achieves some digital innovation, you must be willing to cannibalize some of your existing business to capitalize on it, or you could suffer the fate of the digital laggard: obsolescence.

Digitally transformed companies are rethinking the way that they do business with their customers. Discover Financial Services has put in painstaking efforts to ensure that their business is primed for digital business models by investing in mobile wallets, like Apple Pay and Android Pay, and omni-channel digital experiences for mobile, web, and beyond -- not in plastic credit cards and mailers, which is how traditional credit card companies act. Discover envisages itself at the higher level: as an experience company, NOT a payments company.

Digital is not going away or slowing down. Digital will only continue to accelerate its transformation of industries. Companies that are not riding the wave of digital are shortsighted. In the same way that Kodak thought it was in the film business, but was really in the storytelling business, you must take the longview in your business perspective. Use new technology to innovate -- not just at the product or service level, but at the business model level.

Your Action Plan: Formalize an ideation process in your organization that doesn’t rely on deductive logic or past experiences. As a thought-starter, use a powerful statement for inspiration, such as “What if a digital leader like Google, Amazon or Apple were to move into our business tomorrow? How do we defend against that?” To answer a question like that, you would need to re-think your customer journey around the latest emerging technologies, because those digital leaders certainly are. Start with your current customer journey map, identify the pain points, then re-think how those pain points could be turned into opportunities for surprise and delight through emerging technologies.

3. Starbucks empowers its customers and employees through digital

30% of VPs and directors who say their companies are not giving them or their peers opportunities to develop in a culture encouraging digital are at risk of leaving their company in one year.

Let’s take a look at Dunkin Donuts and one of its biggest competitors, Starbucks. Dunkin Donuts has 2.8 stars for Culture on Glassdoor, while Starbucks has 4.0 stars. As far as employee experience, in their 2015 annual report, Dunkin Donuts meekly states that “we believe our relationship with our employees is healthy.” While Starbucks 2015 annual report boasts that “we’re empowering our people and enhancing their experience with new digital tools, upgraded technology, customized scheduling, and direct access to support.”

So, with these two very different employee experiences, how are their stocks performing comparatively over the last five years? The answer is that Starbucks is killin’ it compared to their main competitors, Dunkin Donuts and McDonald’s.

Your Action Plan: Compare your Glassdoor rating to your competitors. Focus on the Culture rating. Compare your annual report to your competitors. Focus on terms like “digital”, “customer experience”, and “employee enablement” -- these terms signal that a company is thinking about the power of using digital to empower their customers and employees. Now, compare your stock price to your competitors. Is there a correlation between your Glassdoor rating, those key digital terms in your annual report, and the stock price of your organization? Illuminating correlations like these will help you build a business case for investing in company culture, and digitally enabling your employees and customers.

4. Digitally transformed companies have accelerated the time it takes to go from “that’s a good idea” to “we are realizing value from that idea”

How quickly can you validate or invalidate an idea before you’ve invested too much in it? You cannot wait six months to build a digital experience and get it out to users. In that time, your competitors and disruptors are eating your lunch. Merely getting new products and services delivered to customers at a competitive price is the undifferentiated low-level vision of yesteryear. Digital businesses ask themselves “how fast can we deliver the right value to the right people?” Digital businesses use rapid experimentation to quickly experiment and test ideas. They do not try to deliver an entire experience all at once, but rather, use a piecemeal approach to get feedback from real users on smaller parts of the larger experience that they target. They create wireframes and prototypes to do this validation, not full-fledged experiences with lots of engineering. They use Google’s HEART framework for a quantitative analysis, and use qualitative user interviews to gain an empathetic understanding of their users. This agile approach, with all of its pivots, forces you to stay close to what real users want, instead of waterfalling towards a final goal that may not be the right experience.

Rapid experimentation is about failing fast, but if you think that it will be hard to get funding from your C-levels to ‘fail’, you should make a business case for rapid experimentation that shows how it minimizes risk. You may hear questions like, how does rapid experimentation reduce risk? The answer is that getting a robust digital experience ready to ship can cost into the 7 figure range and take months, but if you can spend a tiny fraction of that cost to do a rapid experiment for a digital experience in a matter of days or weeks, and invalidate the user value or business value of the project at a very early stage, then you just saved 7 figures that would have been wasted building out the robust version of that experience. Creating a cost-benefit analysis like this, using an example of a digital experience that failed within your organization, you can shift the conversation to, “Can we afford to not do rapid experimentation?”

Your Action Plan: Try to assemble a list of any digital experiences your organization has built, that were considered to have failed. Total the cost of those projects. Compare that number to the cost of rapid experimentation. It should become obvious that failing fast with rapid experimentation is cheaper than failing big with robust digital experiences that are put into production.

By acknowledging that your customer is in the driver’s seat, you can begin to focus on your most durable differentiator: customer experience. When new tech emerges, don’t just prop up your existing business with it, but rather reinvent yourself around the new technology. Enable your employees to innovate, and empower them to do so with the right digital tools. And, finally, when a new idea emerges from your organization, get value from that idea as quickly as possible, with rapid experimentation that focuses on the customer experience possibilities that this idea can deliver. Don’t learn these lessons the hard way, that is expensive, frustrating, and risky. Digitally transformed companies are positioned to ride the digital wave. Surf’s up!