Comparison of average rates of change in company-level returns on assets, 2007—2015
Find the New Business Models Within
Digital technologies are now fundamental to creating new business opportunities, observes Pontus Siren, a partner at innovation consulting firm Innosight. Companies are finding profitable ideas close to home by using new technologies to transform processes or capitalizing on data they capture from their existing businesses. For example, Disney’s MagicBand, the chip-enabled bracelet that patrons use to buy passes, food, and souvenirs, “is a great example [of] where they are not fundamentally changing the business, but they are transforming the experience,” Siren says.
Using digital technologies to become more efficient or to create a better customer experience should ultimately lead to higher revenue and profits. But companies pursuing digital transformation need to constantly reevaluate their strategies, how they use data and innovate, how they win customers and compete, and how they define their value proposition, says David Rogers, a professor at Columbia Business School and author of The Digital Transformation Playbook.
“The traditional idea of putting up barriers to entry and creating a unique, sustainable competitive advantage is not a winning approach anymore,” says Rogers. He argues that tying value generation to meeting evolving customer needs means that executives must be open to making investments that serve this value.
The porous boundaries of the traditional auto industry illustrate this dynamic. Personal transportation is an evolving concept with a bevy of new players: smartphone-hailed ride services from the likes of Uber and Lyft; driverless cars backed by Google; and high-performance electric vehicles with software-based support services from Tesla. These disruptions have prompted a tide of investments from incumbents. As Reuters recently reported, Toyota will invest $1 billion over the next five years in artificial intelligence to enhance driver safety. GM has taken a $500 million stake in Lyft, according to Bloomberg. And Ford, like firms in banking, retail, and industrial manufacturing, has opened an R&D center in Silicon Valley.
Keep an Eye on the Exits
Rogers notes that transformation may also lead to divestments as companies pour their efforts into digital initiatives. He points to GE, which has been working to shrink its GE Capital unit as it beefs up investment in a new business devoted to services for industrial customers using analytics and the Internet of Things. Verizon, Rogers, adds, spun off the famous Yellow Pages business telephone directory business 10 years ago when it decided to invest heavily in its high-speed fiber optic cable network for television and internet services.
“The stock market was really annoyed,” Rogers says. But it was a good call because while the unit still had market value, it was not core to Verizon’s strategy. “That takes leadership,” he says. “‘This is a cash cow, but we can see this is declining in relevance to our market. We’re not going to turn it around, so let’s take money out of it while we can.’ And then they put it in a new opportunity to create value for customers and be a growing area for them.”
Today’s strategic choices involve the same criteria. “Looking to use digital technologies, through the lens of ‘How can I use this to create a new offering and additional value to my existing customers?’ sometimes opens doors to additional customers,” Rogers says. “And sometimes that involves building novel business models that are new to your company.” D!