Developing a Strategy for the Digital World

New Book: A new book by Sunil Gupta, "Driving Digital Strategy," explores how traditional businesses can make the leap into the digital age.
  • Author Interview

Who Does Digital Best?

Interview by Sean Silverthorne

Digital transformation is certainly a threat to the old guard—just ask cab drivers, newspaper reporters, and coal miners. In 20 years, all commercial truck drivers could be facing the same fate as autonomous vehicles take over the road.

Sunil Gupta’s message in a new book is more positive: Digital “presents an endless number of opportunities for companies from traditional industries,” he writes in Driving Digital Strategy, published last week. But it starts with reimaging what your business is, who your customers are, and how to engage them using digital technology. Gupta is the Edward W. Carter Professor of Business Administration at Harvard Business School.

Sean Silverthorne: Are there examples of companies that have implemented a full, end-to-end digital strategy? It seems as if most enterprises have “cherry-picked” technologies to solve individual problems or improve efficiencies, rather than embracing an overall strategy that guides everything.

Sunil Gupta: Companies, such as Amazon, which grew up with a digital DNA, have obviously integrated digital in all aspects of their business. Among the legacy companies I found Adobe, The New York Times (NYT), Goldman Sachs, and Mastercard to be at the forefront of embracing an end-to-end digital strategy.

When Adobe moved from selling its software in a box to a subscription model, everything inside the company changed—its salesforce, its innovation process, its marketing, its pricing, its accounting, and its short-term profits. Shantanu Narayen, its CEO, described this shift as “burning the boats” to highlight the company’s commitment to this new strategy. In 2011, NYT took the bold move of creating a paywall when everyone was arguing that “information wants to be free.” Instead of relying largely on advertising, this changed NYT’s business model towards subscription and it had significant impact on company’s hiring and production process as well as business strategy and organization structure. Goldman Sachs also made headlines when it opened up its proprietary platform to clients and launched a platform, called SIMON, where it even invited its competitors. And Mastercard embraced digital by partnering with Apple Pay, innovating in multiple payment methods, rethinking its marketing approach and creating an organization that could strengthen the core and build for the future at the same time.

Based on these and many other companies I studied as part of my research, my book shows that digital strategy requires rethinking all aspects of business–business strategy, operations, customer engagement, and organization structure. For each of these four pillars, the book offers some general principles and guidelines to help companies reimagine their business.

Silverthorne: Firms today use the “experience” word a lot, as in creating a customer experience, an employee experience, a partner experience. What does experience in this context mean, and why is it important?

Gupta: In today’s environment, experience is important for three reasons. First, we live in a connected and transparent world where consumers, employees, and partners can easily voice their opinion that can have a significant impact on the image and performance of a business. Second, firms are increasingly realizing that they need to build an ecosystem of partners and collaborators, and for this ecosystem to function well they need to manage the expectations and experience of multiple parties who often have different objectives. For example, Amazon wants to ensure that both the sellers and customers have good experience on its platform. Third, focusing on experience rather than products ensures that you are solving a problem. For example, many department stores are putting beacons or sensors in their stores to track traffic. But it isn’t clear if this solves any consumer problem. Instead, if they focused on consumer pain points, they would realize that often consumers can’t find a product in the store (easy solution: install iPads in stores), or wait in long lines to pay (easy solution: build self-payment kiosks).

I strongly believe that a digital transformation journey has to begin by understanding consumer pain points and then using technology to find a solution. This focus on addressing consumer pain points has led (Amazon CEO) Jeff Bezos to obsess about reducing friction in commerce.

Silverthorne: Digital strategy turns traditional business strategy on its head in that the company’s primary focus is on the customer, not on products or competitors. What does putting the customer at the center of everything you do accomplish for a company in terms of competitive advantage?

Gupta: Strategy experts and strategy books tell us that competitive advantage comes from making your product better or cheaper. This is a very product-focused view where a company is selling one product, say a car, to one customer at a time. In a customer-focused view, there are two additional forces—complements and network effects—which are very critical for competitive advantage. Take Amazon for example. Amazon can offer loans to small businesses at a much lower rate than banks because instead of making money on loans, Amazon can benefit when these small merchants grow their business and do more transactions on Amazon’s platform. If the core lending business of banks became the complement for Amazon, banks would find it very hard to compete. The second force, network effects, is even more critical in the digital era. As Amazon attracts more buyers, more sellers join its platform, which brings in even more buyers. This virtuous cycle makes it very hard for a new player to compete with a player with strong network effects. Complements and network effects are not limited to only technology firms. US Foods, a food distribution company that offers meat and produce to independent restaurants could compete on the basis of price, but instead it also offers complementary services to help restaurants increase their traffic, reduce waste, and improve overall profitability.

Silverthorne: How important is developing an omnichannel strategy? It feels like many companies adopt a separate strategy for each channel, rather than working to unify experiences across all channels. Is that a mistake?

Gupta: A typical consumer journey for buying a product spans across several channels. A consumer may become aware of a product on Instagram, do a search online, look at the reviews on social media, and ultimately buy in the store. Therefore, it would be a mistake to run your brick and mortar store independent of your e-commerce operation with separate P&L statements. But that is exactly what many companies have done in the past and [they are] now learning from their mistakes. Recognizing that consumers look for reviews on their mobile phones in its stores, Sephora’s mobile app now allows consumers to scan products in its store to view consumer reviews and tutorials on YouTube videos.

Silverthorne: Looking ahead five years, what do you think will be the primary trends we’ll see around digital?

Gupta: I think it is fairly certain that data will become more important than ever before and companies that develop the skills to leverage data would gain a competitive advantage. As firms collect more and more data, machine learning and artificial intelligence would replace repetitive tasks and firms would need to adjust their processes and talent management. For example, one Oxford study suggested that there is a 94 percent chance that the job of accountants and auditors will be automated in the near future. Accounting firms would need to rethink their entire business model if this indeed becomes true.

  • Book Excerpt

Personalization and Retargeting

from: Driving Digital Strategy
by Sunil Gupta

Digital technology and rich data allow firms to personalize ads to consumers based upon consumers’ interests, web-browsing behavior, past purchases, and/or the context of the site they are visiting. A novel study by MIT went one step further by morphing banner ads to match consumers’ cognitive styles. For example, some consumers like to read text while others are more visual. If an advertiser can divine which style any particular internet user possesses, it could enhance the particular effectiveness of an ad by matching the ad to a given consumer’s cognitive style.

The MIT team surveyed a sample of consumers to learn their cognitive style and then tracked their web-browsing behavior to link the two. In practice, one can observe only consumers’ web-browsing behavior, not their cognitive styles. But by using Bayesian models and estimates from the sample consumers, the MIT team could infer consumers’ respective cognitive styles and serve personalized ads in real-time. The MIT researchers tested this approach in a large-scale field experiment in which more than 100,000 consumers viewed over 450,000 banner ads on Morphing doubled the click-through rates of the ads. In a follow-up experiment for automobiles, the researchers demonstrated that not only ad click-through rates improved with morphing, but that brand consideration and purchase intentions also jumped significantly. In another follow-up study they developed an algorithm to morph the entire website in real-time.

Another commonly used approach to improve ad effectiveness is called retargeting, by which ads are shown to consumers who previously visited a firm’s site but did not buy. Several studies have shown the effectiveness of retargeting, including a recent large-scale field experiment for an online sports company. Using Google’s Display Network of two million websites, the experiment showed that retargeting increased website visits by 17 percent, transactions by 12 percent, and sales by 11 percent.

But how specific should retargeting be? A specific or dynamic retargeting shows an ad for the exact product that they searched previously (e.g., Nike Men’s Roshe One running shoes), whereas a generic retargeting may simply show an ad for running shoes. A field experiment for an online travel company, in which almost 80,000 consumers participated, revealed that specific or dynamic targeting surprisingly does worse than generic retargeting. The authors of the study suggest that many customers do not have well-formed preferences , especially early in their purchase process, which makes specific targeting less effective.

Reprinted by permission of Harvard Business Review Press. Excerpted from Driving Digital Strategy: A Guide to Reimagining Your Business, Copyright 2018 Sunil Gupta. All rights reserved.

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