How to Call the Right Digital Play

When global executives want to understand the nuances of the digital economy, one person they ask is David L. Rogers.

A sought-after speaker and consultant to companies such as Google and Toyota, he’s also Columbia Business School’s faculty director of programs on digital marketing and digital business strategy, as well as founder of the school’s BRITE Conference on brands, innovation, and technology. His latest book, The Digital Transformation Playbook (Columbia Business School Publishing, 2016), explores how incumbents—companies with business models and cultures that predate the digital era—can hold their own against the onslaught of digital-first upstarts.

We asked Rogers to talk about the difference between innovation and disruption and how to resist the dangerous temptation to use new technologies to pursue the same old strategies.

Q: You contend that digital transformation depends less on new technologies and more on a new approach to business strategy. But does strategy drive transformation, or vice versa?

A: Strategy definitely comes first. The core challenges for incumbent organizations are their organizational habits and assumptions that are rooted in the pre-digital era. These need to change in order for the firm to thrive, grow, and evolve in an economy defined by successive, interconnecting waves of technology.
But the crux of this transformation isn’t what technology tools they choose. Rather, executives have to think differently about five fundamental domains of strategy—customers, networks, data, innovation, and value—before they can choose the tools and systems best suited to bringing their strategy to life.

For example, Marvel Comics was a legacy print media business until it realized that its value wasn’t in traditional comic books or even digital versions of comics, but in its characters and storylines. It stopped licensing its superheroes to movie studios for a fraction of the profits and launched its own movie studio instead. Now when you think of Marvel, you don’t think of comic books; you think of blockbuster movies with a global fan base. That’s why Disney bought them for US$4 billion.

Q: When we talk about digital transformation, it’s often in the context of disruption by business models based on new technology. Do incumbent businesses always need to aim to be disruptors themselves, or can incremental innovations alone be enough for them to survive?

A: This is a common source of confusion; innovation is not the same thing as disruption. My favorite definition of innovation is “anything new that has an impact.” The goal for any business is innovation that creates new value. That only leads to disruption of an existing industry in some cases. Disruption occurs when a competitor introduces a product or service that is vastly more valuable to at least some customers, and to which the incumbent industry is unable to respond with a matching offering because of differences in its business model.

Digital audio disrupted the market for music on CDs by creating a vastly preferable new way to consume music, which the incumbents were (initially) unwilling to match; so Napster stole market share. Ride-sharing services are disrupting the taxi industry today by giving passengers a better way to summon and pay for a ride, built on a data-driven business model that traditional taxi companies cannot match.

If you’re facing a disruptive competitor, you have six possible responses. You can become the disruptor yourself: by acquiring your competitor, or by launching a new business that imitates its business model, or by splitting up that business model by partnering with other companies that complement yours. Three other responses involve mitigating your losses from the disruptor. You can do this by refocusing on your defensible customers, by diversifying your portfolio to leverage your skills and assets in other areas, or—if the disruptor threatens your entire market and there’s no way to launch a disruption on your own—by exiting the market entirely.

Q: Can a business start its transformation within one of the five domains of strategy, or are the domains so interconnected that they all have to be tackled at once?

A: They’re definitely interconnected, but you don’t have to tackle them at once or equally. In fact, you need to pick a starting point based on your company’s goals, its gaps, and its specific opportunities and threats. If your company’s goal is to grow at twice the rate of its industry over the next five years, then using digital to shave costs in your supply chain will be less important to you than spotting customer needs that aren’t being met and introducing digital products or services that can ignite top-line growth.

Q: When you talk to business leaders at incumbent companies, what’s their most common concern, and is it the thing they should actually be most worried about?

A: Many of them tend to be overly focused on hypothetical disruptive threats, which leads them to the mistake of trying to stake out the leading edge, throwing a lot of money at technology, and expecting a clear ROI in one quarter. I always urge them to focus instead on the customer value imperative: creating new products or business models that deliver value for the market before their current or potential competitors do.

Q: In your book, you compare digital transformation to the electrification of factories in the early 20th century, but digital transformation isn’t binary. A factory either did or did not have electricity, but a company can’t transform by flipping a switch. How can top executives know that they’re on the right track?

A: The lesson of electrification was that it was easy to plug in a new energy source to a steam-driven factory. The harder part was learning to completely redesign the flow of work inside that factory, once manufacturing was freed from the constraints of the line shaft.

Similarly, unlocking the value of digital technologies hinges on your ability to adopt new ways of thinking. Is your business using digital to become more customer-centric? Digital transformation requires a lot of organizational change: how you make decisions, how you allocate resources to new projects, how you reward and recognize people. Are you diversifying the talent pool within your organization to match the new business you’re creating? At GE, one of the metrics for its strategy of becoming a “digital industrial company” is how well it’s attracting employees who it might not have considered in the past.

Digital transformation is not a “do it once and you’re done” thing. It’s about changing the way the organization thinks and responds to opportunities, and it’s continuous. It has to become part of your corporate DNA.

This story originally appeared on Digitalist Magazine.