How does your organization approach digital strategy? Is it seen as a way of cutting costs, or is it seen as a barrage of experiments? Well, both approaches are likely to be wrong. Sunil Gupta, professor of Business Administration, and co-chair of the executive program on Driving Digital Strategy at Harvard Business School explains how companies can do digital transformation right. He explains how the age-old razor and blade strategy has changed in our digital world and how companies like Amazon are using this strategy to gain market share across industries.
We are giving away fifty copies of the book Driving Digital Strategy: A Guide to Reimagining Your Business by Sunil Gupta. To take part in the book giveaway tell us what you liked about this episode on Twitter or LinkedIn using #theobitshiftpodcast and tag us on @therealjpk and @guptsunil.
Q. Your book Driving Digital Strategy: A Guide to Reimagining Your Business talks about the speed at which technology is changing. How fast is this change happening and can you give us some examples as to how this change is unfolding?
A. The shift is happening extremely rapidly. It took the telephone 89 years to reach 150 million people globally. It took WhatsApp only a few months and TikTok probably even less. We are hungry for technology and we are hungry for new stuff, and that hunger will only increase over time.
We are familiar with some examples of this change as consumers. Like smartphones and social media. But you also have robots, drones, artificial intelligence (AI) and data science. There is an amazing amount of advancement going on in the field of medicine. A couple of years ago, scientists at MIT and Harvard were able to use 3D technology and stem cells to do a 3D printing of a human artery. The forecast is in the next 10 years or so, certainly, in our lifetime, we’ll be able to 3D print human organs.
There’s an amazing amount of advancement going on in labs and at the same time, there’s a rapid adoption by consumers of new technologies that has certainly been accelerated by the pandemic.
Q. The running joke is that it was COVID that drove digital adoption and not the CIO.
A. It’s true. If you look at large companies, there are two major bottlenecks for any digital transformation. One is shifting consumers and the other is a shift within the organization.
Consumer shift was already happening and it just got accelerated. The biggest challenge for organizations is a shift within the organization. For example, hospitals have been trying telemedicine for a long time. More than the patient, the physicians themselves were worried because they were not sure that the care of patients would be as good in a Zoom environment. But what they realized during the pandemic — when they were forced to make the shift — was that they were able to do things much more efficiently. The paperwork gets reduced, because things can be automated online, and they can actually take better care of the patients.
Some of these internal barriers were definitely broken even when we were forced to teach online. If our Dean told us before “hey, you have to teach online,” we would have all revolted. But now we find there are actually some advantages to this medium.
Q. You have studied about 150 companies for this book and you have found that companies often respond to this change in three ways. They cut costs, they start experimentation, and then they set up outposts in Silicon Valley. You suggest that none of these seems to work. Tell us why that is?
A. My journey has been going on for the last 12 years, where I’ve talked to broadly three groups of companies— the startups and the VCs who fund them; what I call digital giants, which are companies like Amazon, Apple and Google who grew up digitally, but now are large companies themselves; and the third group is the large established incumbent companies who are also going digital.
The first approach everybody takes is using technology to cut costs and become more efficient and improve productivity. There is nothing wrong with that. That’s a good idea, you should always cut costs and improve efficiency if you can. But if that’s all you’re doing, that’s a shortsighted view. For example, if I’m a bank, I might move to mobile banking, because that’s where consumers are going. That also saves me the cost of the brick and mortar branches, and that’s a fantastic idea. But if that’s my only strategy I’m assuming that the future of banking will still be the same. But it won’t be. Google will start Google Pay, WhatsApp will start WhatsApp Pay, Amazon will get into payments and you will be left wondering what you’re doing. If you focus on technology only as a means of cutting costs you are making existing processes more efficient, without knowing whether these processes will be there in the future or not.
The second approach that I’ve seen people take is experimentation. And that happens because digital means different things to different people. The CIO thinks it’s all about shiny new technology, the CFO thinks about cost-cutting, the CEO thinks about improving operations, everybody thinks differently about what digital means. When I go and talk to companies, the first thing I do is to ask the senior executives to take a few moments and write down what digital transformation means to them and you get 20 different answers from them. As a result, what happens in a company is when the top management says we need to be digital, every brand, every department, every executive starts doing these small experiments, but they don’t add up to anything because experimentation without direction is not worthwhile.
The third approach that a lot of companies take is to hire a bunch of smart people, give them a few million dollars and send them to Silicon Valley hoping good things will happen. From General Electric to General Motors to Walmart, everybody has an outpost in Silicon Valley and the result is not pretty. The analogy I use is, a large company is a large ship, and you’re trying to shift the direction of this ship. By launching this small team and sending them to California, you have launched a speedboat. And usually, what happens is the speedboat takes off, but the ship still is standing there. In other words, if I’m a $50 billion company and I launch a small outpost in California that does some new innovative things that get me $10-15 million, that’s not going to change my core business. The goal of launching new things should be to say how do we actually change the core of our business, and not just tinker around.
Digital strategy is not separate from the overall business strategy of the organization. That’s why it touches every element. Think about how your strategy, competitive advantage and business model will change or should change. How your operations and value chain should change. Right from how you do innovation to supply chain to logistics and your channels. And then how you interact with customers. Because customers are behaving in a very different fashion and attracting, engaging and transacting with them is very different now.
Q. You talk about how Amazon has changed the rules of the game. Businesses have been taught that they should focus on one thing and one thing only. You point out that that need not be the case. Amazon is a case where it has done many things at a time and become massively successful. What can other companies learn from this approach?
A. The way you get a competitive advantage in the marketplace is by being either better or cheaper. That’s been the fundamental core of the strategy for decades. If you’re a bank, you focus on banking, if you’re a retailer, you focus on retailing, if you’re a healthcare company, you focus on healthcare. At some level that made sense but then you look at Amazon, Google and Apple they’re not following the rules. How does this make sense for them?
The notion of winning in the market by making your product better or cheaper is fundamentally focused on products. Today no matter how fast you innovate, the competition catches up quickly. Even if you’re Apple and you have the best smartphone, Samsung will catch up and soon, the product differentiation goes away and it becomes a price war, which means margins reduce. That notion of focusing only on the product advantage of being better or cheaper, effectively assumes I’m selling one product to one company. But what if I am selling multiple products to the same customer? Then you have the components of the razor and blade. When Amazon launched Kindle, the purpose of Kindle was not to make money on the Kindle. The purpose of the Kindle was to sell more ebooks. Now, you might say, well, razor and blade have been around forever, what’s so different today?
What is different today is the razor could be in one industry, and the blade could be in a completely different industry. Think about Amazon Prime and Amazon Studio. Why is Amazon making movies when they give them away for free with prime? How does Amazon compete with Netflix?
Netflix is only in the business of streaming and they need to charge you for streaming. Whereas Amazon gives away that content for free because Amazon doesn’t have to make money on those movies. Amazon hooks you in with Prime. And once you’re hooked into Prime because of movies and serials you end up buying more on the Amazon platform. As a result, Amazon is competing in a very different game from Netflix. It’s very hard to compete with zero prices. If Amazon’s content becomes as good, Netflix will have a very hard time charging more because consumers will compare the content of Netflix and Amazon and say “I have to buy some product anyway so I’ll go with Amazon”. That’s one part which is you’re connecting products rather than selling only one product.
The other dimension is when you’re connecting customers. Take WhatsApp for example. If you’re the only person using WhatsApp, there’s not much value in the product. But as more and more people use WhatsApp, the value of the product increases without changing the product. And that’s what we call network effects. The big player keeps getting bigger. Amazon did the same thing, once it opened the marketplace. As it gets more sellers, more buyers come in and as more buyers come in, more sellers come in. The digital economy is about connection, connecting products and connecting customers. And this lesson of Amazon and many other companies in the tech world is actually true for the non-tech world as well.
The focus should not be defined by traditional industry labels. The focus should be defined by your capability.
Q. How do non-tech companies embrace digital strategy? Let’s take for example US Foods, a company where you are a board member.
A. US Foods is a large distributor of food with $26 billion in revenue. What they do is they have large warehouses, they buy food from large suppliers, put it in their warehouses, and then they ship it to small restaurants. Historically the way they have been selling to these restaurants is by saying my fish is better or my fish is cheaper. Now the competition does the same thing saying my fish is better or cheaper and over time, the product differences go away and then you start competing on the basis of price alone.
The company basically stepped back and said how do we create a razor for fish just like Amazon created a razor for its blade?
The key to this is to put yourself in the shoes of the customer and forget about your product for a moment. For US Foods, the customers are small mom and pop restaurants. So ask yourself, what keeps them up at night? It doesn’t take a lot of time and research to know that many small restaurants go out of business every year because the people who run these restaurants are passionate about cooking, but they don’t know much about how to run a business. They don’t know how to do menu pricing, how to do waste management, how to manage labour, how to generate demand, they don’t know much about digital marketing or SEO and SEM. Once we recognized this at US Foods the company decided to invest in creating software to solve the customers’ problem. Some of the software was built in-house, some were outsourced to third-party software companies and we helped those companies sell this software at a reduced rate to the customers. The moment you sell this razor to them, which helps them survive and do well in their own business, the conversation shifts from the price of fish. And what we find in our research is customers who adopt this software actually buy more from US Food and are much stickier.
Q. What are some of the lessons that startups can take away from the book?
A. Startups don’t have many organizational problems because they’re starting from a clean slate. They don’t have the bureaucracy, and they are generally very agile, and they can pivot very quickly.
But the key advice for startups is that you still need to be very clear on what is the consumer problem you’re trying to solve. You need to have clarity on whether there is a compelling value proposition for what you have in the market. Then you can have a different business model than the competition or the existing businesses.
You always start with what is the consumer problem you’re trying to solve, look for a compelling pain point that will fundamentally encourage consumers to shift. The other thing that we see nowadays is that user experience has become extremely important. You and I will not stay on a website if it takes more than two seconds to load on your mobile phone or on your laptop. If you look at all the direct-to-consumer (DTC) brands they have become popular simply because the user experience in terms of getting information, shopping, transacting, and interacting with the company is so powerful
When I talk to incumbents like banks they say, ‘Oh, our banking app is one of the best among all the other banks.’ That’s the wrong benchmark. You should compare it to Amazon or Google. Because as a user, I don’t compare your app to other banks. I compare it to what other services I subscribe to, and how they operate. How does Netflix do recommendation of products versus what you do? That’s the right benchmark. As a user, I just don’t live in a banking world. I live in an overall world where I’m connected with lots of other products.
You also need to harness the consumer community extremely well. A good example of that is Glossier, which is a DTC company of beauty products in the U.S. Their customers are fanatics. They become their ambassadors, and they feed that community in a very powerful way and the whole experience becomes far more authentic, rather than one-way communication.
The way to build the community is you’re not doing a hard sell of the product. People want to connect with you, they want to see transparency and authenticity. It is different from Michael Jordan selling Hanes underwear because I know Michael Jordan doesn’t care about Hanes underwear. He’s being paid to do that. Even though we know social influencers are paid, over time, they have said enough things to build credibility. Big brands are also learning that. You’re providing a broader experience rather than a hard sell to the consumers, and you’re listening to them. So it’s not one-way communication.
Q. Help us understand what companies of the future will look like. You talk about Philips and Michelin and the way they’ve transformed their business models around subscriptions.
A. One big area is in subscription services because you have recurring revenue and that brings a lot of advantages. Michelin now sells tires as a service in Europe. Rather than buying tires, you pay as you go, so how many miles or how many kilometers you drive, you pay for that.
Many companies are going in that direction. Now that fundamentally changes what the company does at its own end because now you have to retain customers every month. A recurring stream of revenue is powerful. It opens up the market broadly because rather than investing a huge amount of money if I’m a trucking fleet, rather than investing thousands of millions of dollars in Michelin tires, if I can get a pay as you go mechanism, then my upfront cost goes down, the capital expense becomes an operating expense, and it opens the market to even smaller companies as a result. The platform is another trend, which is you saying I will build a platform and then I will plug in the different API’s of different startups on top of that. The marketplace of Amazon is an example of a platform where third-party sellers come in. Shopify is the newer version of the platform and they are supporting a lot of small businesses doing that. These two will certainly keep going forward, technology opens up new ways. To me, it’s always about looking at how technology is affecting consumer behaviour and how they operate and what will drive the decision as to where the future of the companies will go.
Q. When you look at startups charting out a strategy and a product roadmap in the early days, what are some of the pointers that you have for them?
A. If you ask the VCs, why they fund some startups, and why they don’t fund some other startups, there are a handful of things that VCs always look for. The first is: is this a big problem that you’re trying to solve? Is that a solution that has a huge market? And do you have a compelling value proposition to solve that problem? If I’m Uber, I’m solving a big problem in transportation. People can’t find taxis when they want and it’s a bad experience and it’s a huge market. That’s the first thing they look for.
The second thing they look at is the passion of the founder because lots of things change in a startup. You start with some ideas or the business model shifts and so on. The VCs don’t put much emphasis on your cash flow analysis and the future revenue potential. They look for grit and perseverance to follow your dream with a passion.
The third thing that VCs are looking for is what they call founder market fit. In other words, let’s say you are a journalist and if you’ve worked in journalism for a long time, you know, newspapers and the journalism industry much better than I would ever know. If you start a blog or an online media company, you’re in a better position to do that than I am, even if I believe I have a better idea, from a VC’s perspective. Because you know, the ins and outs of journalism and the media, you have a better fit with the market than somebody else who doesn’t have that experience.
There’s a general saying in the startup world that ideas are a dime a dozen. It ultimately boils down to execution. It’s just about realizing that rather than worrying so much about spreadsheets and projecting the future. Think about what is the compelling problem that you’re trying to solve and what is your key solution that will be a wow solution that will solve that problem, and if the market is big enough.
Q. Thanks for joining us. How can our listeners follow your work?
A. LinkedIn is the best way to follow me. I publish a few things every once in a while on LinkedIn. I also have articles on the Harvard Business Review.