Business Standard

Book Extract: Adapting to digitisation

Legacy companies must think about how to harness digitisation - in any or all of its forms - to create better experiences for the customer, says a new book

Ram Charan 

Author: Ram Charan
Publisher: Penguin Books India

Price: Rs 799
ISBN: 9781610395687

Companies such as Amazon that were born digital don't have to peel through layers of bureaucracy to become consumer centric. Nor do they have to integrate technology into their operations. They came into existence by combining a new technological capability with the leaders' sharp eye toward something the consumer needed but was missing. WhatsApp, bought by Facebook for $19 billion in February 2014, for example, met the need for instant messaging while protecting the user's privacy. The most successful of this born-digital breed can scale up incredibly fast. Capital is readily available to them, and their business models are inherently light on capital intensity and cost. WhatsApp had fewer than fifty employees when it was acquired.

Adapting to digitization, let alone capitalizing on it, is a different story for legacy companies. Big corporations have tens or hundreds of thousands of employees and huge investments in physical plants and equipment. Their technology investments enhance or replace physical activities, but rarely is digitization at the core of their business. This is a huge inhibitor of going on the offense and leaves the door open for a born-digital company to swoop in and use new capabilities such as the Cloud, advanced software, algorithms, and big data to improve the customer experience, putting high-margin segments under attack.

Legacy companies must think about how to harness digitization in any or all of its forms to provide better information about the consumer and to create new and better experiences. As GE's Steve Bolze puts it, "All of us as leaders need to get up to speed on big data and analytics and how to use them. Everybody has to kind of go back to school." (He did so by spending time with GE's Industrial Internet unit in San Ramon, California.) As you imagine the possibilities, don't immediately try to nail down the particulars of how your company will transition to a new trajectory or make the necessary investments. Think first about how digitization allows you to create something new and compelling and stay focused on the customer or consumer.

Companies can be reborn digital if their leaders have a mind-set for offense and the courage to venture into uncharted waters. Consider the direction Macy's is taking toward becoming an "omni-channel" retailer, blending store, online, and mobile by investing in technology over the past five years to improve the shopping experience and learn about its customers. Its path is based partly on existing technological capabilities and partly on the insight that consumers use a mix of media to shop for, compare, buy, and return merchandise. A woman might compare dresses online, try one on at the store, order it online, and return it in person, for instance. For some items, she might prefer home delivery. Algorithms help determine whether to pull inventory from a fulfillment center or a nearby store. Chief Financial Officer Karen Hoguet says: "It's not just that consumers need the goods right away. It is more about being on the cutting edge of technology." Some products have radio frequency tracking devices to provide information that helps improve displays and sales. Macy's is also testing location-based technologies to push targeted offers to consumers while they are shopping in stores. Can retailers remain purely bricks and mortar? Some will, although they may be repurposed, but that must be a deliberate choice and not a default position for lack of knowledge or courage to act.

Be decisive if you choose to make the shift; if you vacillate, a born-digital player will move swiftly to capture your juiciest, most profitable segments. If that player gets hold of them, your decline will be swift, because it will constrict your blood supply - namely cash - and the loss of customers will accelerate.

Using math for offense in healthcare
Leaders who are on the attack find ways for their companies to be reborn digital when the opportunity presents itself. In health care, the Affordable Care Act is sharply accelerating trends already under way, causing uncertainty throughout the chain of the dysfunctional $2 trillion plus US healthcare industry - and opening huge growth opportunities for those who adapt. Every player - from primary care physicians, to health-care providers such as hospitals and clinics, to the health insurance intermediaries and suppliers of IT systems-will be affected. For example, health-care providers that are paid a fixed fee to manage a patient's health will end up managing the risk, not the insurance company - a major structural change that will redefine the reason for the insurers' very existence. Similarly, providers have been paid on the basis of the services they rendered to a patient. The fee-for-service model will shift to some form of fixed price or contract per patient or community. The likely outcome is a far more effective and efficient health-care system, in which consumers will become increasingly empowered to take responsibility for their own health-care choices.

Re-printed with permission of the publisher. Copyright 2015 by Ram Charan. All rights reserved.

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First Published: Mon, March 02 2015. 00:14 IST