Recently I had the opportunity to interview Sunil Gupta, the Edward W. Carter Professor of Business Administration at Harvard Business School, where he is the chair of the General Management Program and co-chair of the executive program on Driving Digital Strategy. His research examines the impact of digital technology on consumer behavior, business, and society. Dr. Gupta is the author of the new book Driving Digital Strategy: A Guide to Reimagining Your Business to investigate a series of important questions to help dig into what it takes to reinvent your business. Without further ado, here is the transcript of that interview:
1. Reinventing a company’s business is a big job. How should people go about it?
Reinvention has to start with customers. Understanding customer trends, their pain points as well as identifying new opportunities to enhance their experience are the best ways to start this process. Technology tends to shift consumer behavior and their expectations and it also offers new and unique ways to serve them. Recognizing these shifts is perhaps the best way to start the discussion about various options to reinvent.
2. When it comes to reinventing their business, where do companies go wrong?
Companies typically follow three approaches for digital transformation – leverage technology to cut costs and improve efficiency; run a series of digital experiments; or set up an independent unit or startup within the large organization. However, in most cases these initiatives have led to limited success. If a company focuses solely on cutting costs and improving efficiency, it might become the most efficient but most irrelevant company as new players disrupt the fundamental business model. Running experiments may seem necessary in the face of uncertainty, but this approach leads to hundreds of tactical experiments in a large organization that often do not lead to a strategic shift. Finally, setting up an independent unit or startup is like launching a speedboat to turn around a large ship – often the speedboat takes off but the ship barely changes direction. Digital transformation requires a careful examination of all aspects of business – its strategy, its operations, its customer engagement model and its organization structure.
3. In this new era of business, where does competitive advantage come from?
The classic strategy framework suggests that competitive advantage comes from low cost or differentiation. In other words, make your product cheaper or better – a very product focused view. However, in the digital era complements and network effects can create huge advantages. Amazon sells Kindle at low price in order to make money on ebooks. Amazon can even give loans to small businesses at a much lower rate than banks because it can make money when these merchants do more transactions on its platform. If banks’ core business of lending becomes a complement for Amazon, they will find it very hard to compete with Amazon. Similarly, network effects create a powerful competitive advantage. Even if a new player can design a better social networking site, it will be hard for it to displace Facebook because all my friends are on Facebook. And of course, the ideal thing for a company is to combine complements and network effects as WeChat has done in China. It started with a free messaging service to create network effects and later added complementary services for payments.
4. What are the roles of platforms and ecosystems in the success of today’s businesses?
In the digital era, competition is no longer between products but instead it is between platforms. Echo and Google Home are not products but they are trying to develop a platform for the connected home. To develop this platform, they have to encourage developers to build apps or skills and device manufacturers to link their products to Echo or Google Home. GE and Siemens are also trying to develop a platform for industrial products. Building a platform requires creating an ecosystem of partners rather than internally focusing on developing the best product. A platform-based strategy is fundamentally different from a product-based strategy.
5. How should companies think about channels (physical vs. digital)?
When large companies think about developing their ecommerce operation or building their digital channels, they often view them as substitutes of their physical operation and as a result worry about channel conflict. However, they should realize that each channel serves a distinct role and could be a complement. For example, an insurance company or a financial services firm that has historically relied on independent brokers may worry about the wrath of its brokers if the company were to start a direct online channel to reach customers. But the online channel is suitable for simple products and may be ideal to acquire new customers who, over time, can then be handed over to brokers for selling more complex products.
6. What do you see as the difference between storytelling and story making?
When a brand engages in storytelling, it is inherently assuming that someone is willing to listen to its story. Recent data shows that most consumers skip ads and increasingly they are installing ad blocking software on their smartphones. So even if you have a wonderful story to tell, no one is listening. Instead of this one-way communication, a better way is to make stories with consumers. Mastercard has done this very effectively by finding consumers’ passion points about sports, dining, travel etc. And they have developed this in a way that drives their business as well.
7. What are micro-moments and moment-based marketing?
Marketing messages are more powerful when they are delivered at the right moment in the right context. Unlike a TV ad that airs at a certain time whether or not it is the right time for a consumer, brands can wait for the right moment to deliver the message on a smartphone. For example, an Uber ad may be relevant when you land at the airport. These are micro-moments, a terminology coined by Google. The challenge is to find the right micro-moments for each individual consumer to send the appropriate message.
8. What does it take to design an organization for innovation?
Many large companies have created an independent unit or startup with the hope that they would spark innovation within the large organization without being encumbered by the bureaucracy of the parent company. However, as I mentioned earlier, this is like launching a speedboat to turn around a ship – often the speedboat takes off but the ship does not move. Instead of launching a speedboat, companies should create a landing dock so that startups, both internal and external, can get the power from the parent company’s ship by leveraging its assets and then steer the company in a different direction. In other words, the new units have to be tied to the core of the business to transform the organization. This connection can’t be so tight that the new unit does not get breathing space to innovate, yet it can’t be so loose that it has no connection with the core of the parent company.
9. Should all companies engage in open innovation?
Open innovation can work in many but not all situations. Open innovation is best suited for well-defined problems that can usually be broken into smaller tasks with a clear goal. An ambiguous problem such as “what is the future of banking” is not well-suited for open innovation. In contrast, NASA successfully leveraged the power of the crowd by posing a challenge to develop an algorithm for positioning the space station to harness solar power. Even if the problem is well defined open innovation is not likely to work if the potential investment in hardware or infrastructure needed to solve the problem is too large for any individual. Finally, when the potential commercial value of a solution is huge, small prize money is not enough of an incentive for external parties to participate in open innovation.
10. Other than Not Invented Here (NIH) Syndrome, what are the major obstacles for companies looking to adopt a more open approach to innovation?
Open innovation requires a different process and a different way of thinking than tradition R&D. Instead of finding a solution, firms need to define a problem clearly and break it down into smaller components. It is often unclear who own this process and how it fits within the overall R&D operation of the company. Scientists within the company typically perceive open innovation as a threat to their jobs and create obstacles for its adoption.
Thanks Dr. Gupta for sharing some insights from your new book Driving Digital Strategy: A Guide to Reimagining Your Business !
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Braden Kelley is a popular innovation speaker, builds sustainable innovation cultures, and tools for creating successful change. He is the author of the five-star book Stoking Your Innovation Bonfire and the creator of a revolutionary new Change Planning Toolkit™. Follow him on Twitter (@innovate) and Linkedin.