At one point or another, we’ve all heard the tale of a little girl named Goldilocks, who decides to make herself comfortable in the home of three bears. She eats their food – going from a bowl of porridge that was too hot, to another that was too cold, and finally finding one that was just right. And she continues to do the same as she tests each chair and bed until she finds the one that is optimal for her comfort.
When you think about digital transformation, the balance between innovation and competitive advantage can be just as arbitrary. Some strategies just scrape the surface to create a more engaging customer experience, while others go deep into its operational core to reimagine how the business runs and which products and services are offered.
However, unlike Goldilocks, no business has the luxury of time to sample digital transformation strategies and determine which one is just right. The key is knowing how each approach impacts the overall transformation and direction of the brand.
The reality of digital transformation strategies: No two are the same
Most CEOs are focused on understanding all the different ways their business can be disrupted over the next five to 10 years and identifying how they can win given this dynamic landscape. During the Americas’ SAP User Group (ASUG) webcast “Why Digital Transformation Should Be a Strategic Priority,” Julie Goran, leader of McKinsey’s Digital Strategy and Organization Practice, shared, “most [CEOs] feel at best uncertain and completely overwhelmed. So, in response, we studied different types of disruption that we have observed and found that there are some distinct flavors of disruption.”
In fact, recent McKinsey research has identified six different strategies for digital transformation, ranging from modest to extreme disruption and influencing demand, supply, or both:
Figure: Digital transformation strategies based on degree of disruption and impact on demand and supply (Courtesy of McKinsey & Company)
1. Undistort demand
By focusing on the demand side of modest disruption, companies can make an existing product easier to purchase through digital channels or unbundle it to address an unmet need. Amazon is a great example. It takes products purchased at existing stores and allows customers to browse the “store” and buy the product online anytime and anywhere.
2. Unconstrain supply
Shifting a modest disruption towards supply reimagination enables businesses to sell products that customers already want, but also source them in an entirely different way. Airbnb has based its entire model on this strategy, unleashing the market for hotel rooms or accommodations.
3. Make new markets
When demand and supply are both affected by a modest disruption, the transformation is more meaningful. Think about what Uber has done to the taxi industry. While the service is fundamentally the same, Uber took a different path to answering demand with a new way of sourcing. In turn, this has created a service that is faster, more transparent, and more streamlined than traditional taxi services, which are all key factors in the customer experience.
4. Create new value propositions
Extreme disruption on demand opens an opportunity to enrich current offerings with information, connectivity, or social content. By doing more of the customer’s work, businesses can offer added value to the client while finding a new source of revenue through service monetization. Take John Deere, for example. In a short time, it moved being “just a manufacturer” to becoming a partner that can help farmers grow crops more productively through the information generated from their machines’ sensors.
5. Reimagine business systems
If extreme disruption is redirected towards supply, the cost structure is changed through automation, virtualization, and disintermediation. This tactic is allowing Progressive Insurance to break down an age-old industry paradigm with user-based pricing. Rather than guessing the risk of a policyholder, the insurer is analyzing real-time data to get a more accurate view of the individual customer to reward safe driving with the best price and incent for performance improvement.
6. Hyperscale platforms
Innovating new products and services, while changing how they are supplied, brings tremendous value to the customer and the business. More important, the model causes damage to adjacent industries and competitors. Google and Apple are a testimony to this type of extreme disruption, especially when you consider what they have done to industries beyond their own.
Which strategy is “just right” for your business?
Digital transformation is challenging, undermining, and disruptive. It’s changing how customers engage with a brand. It’s empowering people to resolve problems that were long perceived as unsolvable. But more important, it’s allowing startups to emerge and rise to the same level of competitiveness as long-time, established, multinational brands. No business is immune from digital transformation.
And for these reasons, I warn: Time is not on your side. You must map out a digital transformation path now that is “just right” enough to help your company evolve for an increasingly digital economy.
To help you get started, check out the replay of the second episode, “Why Digital Transformation Should Be a Strategic Priority,” in a series of webcasts hosted by ASUG, to hear McKinsey & Company’s latest thinking on the topic.
Top image credit: © Robert Byron | Dreamstime.com – Porridge Bowls