2. The Difference between Reactive and Transformative Digital

Digital transformation involves reimagining the business model, customer or user experience, and operational processes in a way that connects people with your brand, business, products, and services. It’s also about connecting and engaging people through emerging technologies in ways that create deeper relationships with your customers for the long term. Therefore, creating lasting transformative digital capabilities requires you to build a customer-centric culture within your own organization. It’s not a simple or easy process—but it’s necessary to not only survive but to thrive in today’s economy.

Some major differences between reactive digital and transformational digital can be demonstrated by the following examples:

As an example, the traditional banking industry has mostly been digitally reactive. This is surprising because the banking industry has driven technology innovation such as electronic fund transfers, ATMs, etc. The explanation may be that these particular innovations were serving product silos where each has their own technology, infrastructure, and even marketing models—all typical of the digitally reactive company. The digital transformation needed for banks to lead is better integration between product silos and presenting “one face” to the consumer. Instead, the best customers of big banks (those customers using multiple products) actually get treated the worst as in most cases they are forced to deal with different digital experiences for each product and typically have a disconnected experience between the physical branches and the digital channels.

The customer demand for banks to create an omni-channel experience is already here, particularly around products like mortgages, a traditionally bank branch driven model that’s ripe for digital transformation. However, few traditional banks are showing real movement in that direction. Customers routinely use the Internet to search for interest rates and to apply for loans and credit cards. Customers are demanding that banks come to them, but many traditional banks are reluctant to do so, which is leaving them vulnerable to competition by other business models such as Quicken Loans, who are more proactive, digital, and customer centric.¹

¹ http://www.pwc.com/us/en/financial-services/publications/viewpoints/assets/viewpoint-retail-bank-customer-centric-business-model.pdf

Social media provides the forum to drive customers to explore to alternative and more digital, customer-centric financial services. As a result of this evolution, bank customers can now share their great experience with non-bank financial solutions or bad experience with their traditional bank to an average number of “150–200 friends” in a matter of minutes. Banks with outdated digital capabilities and poor service have nowhere to hide. In a study by PwC bank, 42 percent of their customers stated the number one thing they would like to see change was “Better and more personal service.” An Accenture survey results suggest that banks are at a digital tipping point where they will lose customers, if they can’t deliver the services customers are demanding.

Consumers are already going to alternative financial providers, sometimes referred to as “non-banks,” for better products and services. In fact, the majority of consumers Accenture’s survey said they went to other sources to purchase auto loans (70 percent), brokerage accounts (61 percent), registered retirement accounts (53 percent), financial advice (52 percent), and home mortgage loans (52 percent).²

² http://www.forbes.com/sites/tomgroenfeldt/2015/05/11/financial-services-customers-are-fed-up/

It’s not that banks aren’t aware of their customers needs, touchpoints, or demands. They are awash in relevant data, but either they don’t know what to do with it, are reacting too slowly, or they’re ignoring it.³

³ http://www.forbes.com/sites/tomgroenfeldt/2015/05/11/financial-services-customers-are-fed-up/

⁴ http://blogs.wsj.com/bankruptcy/2012/10/25/lessons-from-the-death-of-circuit-city/

Wurtzel said, once management finally came up with a plan, (reactive digital) they failed to execute it for one of the same reasons we see in other companies—the investments in a digital transformation that would have moved Circuit City’s business forward also would have threatened its stock price.⁵

⁵ http://blogs.wsj.com/bankruptcy/2012/10/25/lessons-from-the-death-of-circuit-city/

Another classic example of reactive digital was the battle for the rental DVDs and streaming media that played out between Blockbuster Video and Netflix. Blockbuster dominated the market until a new CEO cut their digital strategy and business model to adopt a brick and mortar approach. That was the point where Netflix took over and ultimately destroyed Blockbuster. Blockbuster tried to rally—reactive digital—but it was too late. Last year the last Blockbuster store closed, and Netflix is now the industry leader, fending off other digital attacks from Redbox and other disrupters.

Companies that are not digital on the inside will have difficulty being digital on the outside, resulting more in a reactive culture than a transformative one. Additionally, companies that have employees who are digitally savvy often don’t take advantage of those skill sets. Therefore, their employees are unable to bring their digital intelligence inside. As a result, these companies become reactive rather than proactive. They respond digitally only when they see competitors advancing in the marketplace with digital strategies. They haven’t created the organizational structures, strategies, or processes to run successful digital campaigns.

Companies worried about the bottom line cost of being transformative don’t typically understand that it costs more to react and fix a problem after the fact than to prevent it from happening in the first place.

Digital transformation is how a company changes their business model, customer experiences and operational processes to adapt to the way customers into today’s digital age want to find, explore, buy, and interact with their goods and services.

Research shows that the majority of companies think they’re engaged in a digital transformation, when only one in four actually are. A recent study reveals that 25 percent or less of companies surveyed understand what a digital touchpoint or digital transformation is, yet 88 percent of those companies confidently claim they are in the midst of a digital transformation.⁶

⁶ http://www.forbes.com/fdc/welcome_mjx.shtml

In other words, most of the people who claimed their companies were undergoing a digital transformation didn’t even know what a digital transformation was. Many companies mistake a “redesign” of their website as a digital transformation.

A great metaphor for the difference between a redesign and a transformation is like updating an old house. Will you refurbish, redesign it, renovate, or recreate it? Redesigning a home versus renovating it is the difference between hiring a designer versus hiring an architect and an engineer.

Netflix pulled together cloud architecture, mobile apps, streaming media, and other digital capabilities to drive rapid product development across multiple teams very successfully. Jf they relied on traditional processes, procedures, and architectures, it would have only slowed them down.⁷

⁷ http://www.forbes.com/sites/jasonbloomberg/2014/07/23/agile-enterprise-architecture-finally-crosses-the-chasm/2/

At the heart of digital transformation is this one immutable fact: if what you’re doing isn’t solving a true consumer problem or pain point, it doesn’t matter what you create, or what technology you use to create it. There are no amount of bells, whistles, flash, brilliant copywriting, or technology that will entice the consumer to stay with you over the long run if you aren’t solving their problems. It takes transformative digital, not reactive digital, to do that.

Ultimately, digital transformation is connecting with your customers, clients or constituents, and how they engage with your company. It’s not just about apps, nor about new websites, smartphones, or computers. Technology is what enables you to create those connections and automate operations and processes, but technology in and of itself is not the goal or the heart of digital transformation. Technology is simply the vehicle that drives your company brand and model into the hearts, souls, and minds of your customers.

A truly transformative digital model also transforms how a company achieves authentic customer connections. Additionally, your business model(s) depends on what product or services you’re offering. Chances are once these models are pointed out to you, you’ll recognize them and how they work. Take for instance an “on-demand” business model such as Amazon’s Prime Now or InstaCart. These on-demand models generate revenue from people who want or need to have something right away. People are also willing to pay more for a product or service they can have right away. Their time is more valuable than money.

Customers want a cheaper, faster, better, and more engaging experience with the companies they do business with. They want an immediate customer experience that can be facilitated from a smartphone, a computer, tablet, or handheld device. Whether they’re ordering food, buying music, books, mattresses, eyeglasses, or apparel, they want a simple, seamless, easy way to do it. Digital transformation is about reimagining and then recreating the customer experience.

A transformative digital business model will incorporate cloud technology architecture to platform the business, leverage big data to make decisions, be mobile centric, and incorporate social media to engage customers. It’s that realignment of business models that presents the greatest challenge to most companies.

Study after study shows digitally mature companies far outperform their non-digital competitors. Forbes and the MIT Center for Digital Business examined more than 400 large mainstream companies around the globe. They found that digital leaders enjoy a significant advantage over their non-digital competitors. Their analysis also found that digital companies are 26 percent more profitable than their average industry competitors and enjoy a 12 percent higher market valuation. Additionally, digital companies generate 9 percent more revenue with their existing physical capacity and drive more efficiency in their existing products and processes.⁸ Implementing a digital transformation isn’t about whether or not to get on the latest, greatest bandwagon—it’s about becoming a more profitable, more valuable business.

⁸ http://www.forbes.com/sites/ciocentral/2013/03/10/the-dna-of-digital-leaders/

While digital transformation is an iterative journey where the end of one leg of the journey is really the beginning of another.

To start with, companies that are able to evolve are always in a mode of planning for both the long and short term. Integrated into their ongoing planning is the consideration of big and small data, which they factor into their decisions. They never consider this data in a vacuum, instead accumulating context along with the data they’re collecting. They literally look at the things around something to better understand the thing itself. Data rarely makes sense and is of little use to strategic thinkers if it is not presented with context. In an obvious case, the data may tell you that the majority of your customers buying rain gear are in Washington state, but the context tells you that not only does it rain more in Washington State, there are more communities of people engaging in the outdoors via running, biking, hiking, fishing, and kayaking. The more you accumulate context, the more you understand your customers.

Most companies think they put people first, but in reality they’re more focused on products, services, and profits. Transformative companies focus on people and are concerned with how to better engage them. When an organization stays focused on people, they naturally care to listen to their customers. They understand that servicing their customer well leads to long-term engagement. In addition, they learn that the way their customers act in specific circumstances translates into very powerful data. Understanding why they act in those ways is the context and the key to more effective and profound digital transformation.

Transformative companies are lead by people that look for and study trends and practice trend analysis—a way of looking at information in an attempt to predict future events. By accurately predicting future trends, such as people moving from a desktop environment to a mobile one (smartphones and tablets), companies can move to meet an anticipated demand before it happens.

Culturally speaking, these types of companies almost always invest in and encourage innovation, even during hard times. They recognize that failure is part of the innovation process and they encourage both, acknowledging that success is founded upon failure. To be effective at innovation, they work closely with technical and marketing staff to determine marketing opportunities that may be opening up as a result of studying trends and context and data.

Perhaps transactional but no less important, transformative companies we work with know how to create prototypes. They recognize that prototypes don’t have to be perfect and are part of a process, not the end result. They know prototypes are designed to give the company and the beta testers and designers something to gauge an idea or a concept. This also connects them back to their people (customer and employees) who become part of the process of determining what direction new products and services will take over time.

Last, companies that are successful at change hire and reward great leadership, and denounce politicking and bureaucracy. This means taking risks, making certain decisions quickly, and not requiring every move to be approved by a committee or onerous governance process. This type of leadership almost always comes from the top down, and requires leadership by example.

Uber changed all that. Their unique business model transformed the system. Yes, they build a great mobile app, but it was the business model that leveraged existing technology that turned the industry on its head. Uber bypassed the dispatcher, the costs, and the ugly yellow cars. Instead they put riders in cars without all the hassles, costs, and barriers a taxi would. So if you live in a rural area where there’s not likely to be a taxi company (too expensive), chances are very high there’s an Uber driver.

Did Uber drive that digital transformation? No. Customers looking for a better ride did. And that brings us to the most important message of this book. Digital transformation doesn’t follow a change in your business strategy. It is the total business strategy that transforms your business model.

When a “cease and desist” protest against UberPop—the French local ride-sharing equivalent of UberX in the United States—didn’t work, French police arrested two of the company’s executives. The men will face charges based on carrying out “deceptive commercial practices,” permitting “illegal taxi services” and “illicit storage of personal data.” The charges come amid mounting pressure on French authorities to curb what critics have called unfair, anticompetitive practices by Uber. Mass protests have hit major cities across France, and in the United States, with local taxi drivers accusing authorities of creating one rule for them and another for Uber. Authorities around the world aren’t sure how to react yet.

History has also shown that while you might be able to legislate and regulate business, regulation can’t ultimately prevent inevitable innovation. We see that from when Great Britain tried to legislate distribution of technology during the Industrial Revolution and failed miserably. While taxi drivers are demanding regulation to stop Uber they’ll find out, as many companies do, regulation can’t stop undeniable customer demand. In fact, Larry Downes and Paul Nunes, authors of the book, Big Bang Disruption, said “regulators will be left unable to justify limits that no longer have economic, social or political rationales. The devastation when it comes will be that much more dramatic.”

The founders said they had two goals: (1) offer an alternative to the overpriced and underwhelming eyewear that was available to us, and (2) build a business that could solve problems instead of creating them.

What Warby Parker did was look at a problem that everyone has. If you wear eyeglasses, which many people do, why does it cost $400 or more for a pair of prescription eyeglasses? How is that reasonable? Why should that be?

Warby Parker quickly figured out that prescription eyeglass prices were exorbitant because the supply chain is old and complex and too many people have their hands in the pie. So they created a disruptive digital business that sells glasses.

They design, buy, and manufacture them very inexpensively overseas. Yet, they’re still very high quality. The reality is, it’s very cheap to make quality eyeglass frames. For example, if you spend $300 on a pair of designer sunglasses, you might be freaked out to know that they’re actually made in China for $1.50. It’s the supply chain, though, that eats away at all the profit. So, they designed their own frames, then they created their own manufacturing process and started to sell directly to consumers.

What is the disruptive business model and where does digital transformation come in? They used digital to transact all of their business. They created a web-based version of software that lets consumers try on glasses virtually in an effective manner. So, Warby Parker will sell you prescription eyeglasses that are very beautiful, very well made, very design conscious, and very (compared to the average shop) inexpensive. Instead of going where you used to buy eyeglasses and paying $450, you can get four pairs for the price of one at Warby Parker. Do you see how that site is very disruptive to all kinds of traditional eyeglass companies? That is digital transformation at its core.

Like Warby Parker, Casper Sleep went in search of a solution to a specific problem. They eliminated the need for showrooms and are selling mattresses direct online. They now offer a zero-risk, 100-night trial of any of their mattresses. If your mattress isn’t perfect for any reason, they’ll send a courier to pick up the mattress and refund you 100 percent of the price. They are able to do away with the need for a showroom because they figured out a way to compress a mattress into a package size that could be shipped through normal delivery channels. This enabled them to lower the cost of delivery and simplify the trial experience.

The examples above are designed to get you thinking, “Where do I go from here?” or even better, “I have to be even more prepared to preemptively strike against this disruption than I realized. Because if I thought I was safe in my industry, I’m wrong.” The truth is that no industry is safe; change is coming.

What if you could apply similar transformative business principles that companies like Google, Amazon, Apple, and other companies riding the digital transformation wave have? Imagine if MetLife, for instance, could change the way insurance is bought in the way that Apple changed the way computers and gadgets were sold?

—Angela Ahrendts, CEO of Burberry

Somewhere along the line Burberry, the most famous Trench coat manufacturer of all, forgot the iconic coat their company was founded on.

When Angela Ahrendts became CEO of Burberry in 2006, the first thing she asked was, “Where are the trench coats?” More than 60 managers had braved the cold, damp weather to be at their first strategic meeting, yet not one of them was wearing the iconic coat the company was known for. Additionally, offshore manufacturing and other business practices had compromised the brand to the point Burberry had lost its former luxury reputation.

Ahrendts promptly spent the next 6 months traveling the globe to gauge the extent of the damage to the brand before changing the company’s business model and committing to a digital transformation. Using technology, she created videos for salespeople to use to explain why the Burberry Trenchcoats were so expensive ($1,500 and up), and gave salespeople iPads and stores audiovisual equipment so they could “tell the Burberry story.”

Her use of technology didn’t stop with iPads. Ahrendts also created new websites, and had the company rethink their entire marketing approach, making it digital. She consolidated all the regional websites and redesigned everything on one platform to showcase every facet of the brand. The new website became the hub of the company’s marketing and branding. Now the iconic Burberry Trenchcoat is the first thing customers see when they go online. Burberry launched theartofthetrench.com in 2009, showing off photos of celebrities and historical figures wearing their Trenchcoat and encouraging customers to submit photos of themselves in their own coats.

They recently began to offer customization of the Trenchcoat online, offering some 12 million possible styles. While it’s taken years to transform the company, it’s happened, and all around a vision of returning to the company’s iconic roots. The transformation paid off. Today 60 percent of Burberry’s business is apparel, and outerwear makes up more than half of that. At the end of fiscal 2012, Burberry’s revenues and operating income had doubled over the previous 5 years, to $3 billion and $600 million, respectively.⁹

⁹ https://hbr.org/2013/01/burberrys-ceo-on-turning-an-aging-british-icon-into-a-global-luxury-brand

The website, the stores, the brand are all designed to speak to that millennial consumer through emotive Burberry brand content: music, movies, heritage, storytelling. “More people visit our platform every week than walk into all our stores combined,” Ahrendt says.¹⁰

¹⁰ https://hbr.org/2013/01/burberrys-ceo-on-turning-an-aging-british-icon-into-a-global-luxury-brand

Takeaways from Burberry:

• Stick with your core product and stand by your vision. There will always be critics. Once you understand your core product, have your vision and set your goals, trust yourself to reach them.

• Share, engage, and involve your customers, your employees, and even your critics. Make sure people understand your vision as much as is possible, but don’t let their lack of understanding derail you.

• If you lose your focus, you can regain it. It doesn’t matter whether you, or the person in charge before you, lost the company’s focus; it can be regained. Organizations that focus on the competition rather than their own strengths tend to lose focus.

—Bob Iger, CEO and CDO of Disney

At Disney the CEO is the Chief Transformation Officer (CTO), that’s how important digital, and the customer experience is to Disney. Disney was an innovator from the beginning. They have always focused on the customer experience—perhaps more than any other company in the world. What many people don’t know about Disney is that they drive their phenomenal success with their strong commitment to new technology, gathering, analyzing, and using data to enhance the consumer experience.

Disney recently invested $1 billion investment in the “MyMagic+” band. The new band, Disney says, serves as “a multi-channel, multi-platform digital experience initiative.” The band, the website, and a mobile application all allow visitors to customize their visit in different ways. The wristbands also serve as a guest’s park ticket, room key, FastPass ride ticket, PhotoPass, and means of purchasing food and other products on property. Guests can preplan the day’s Fast Passes and making dinner reservations in one place. Not only does the band make visitor’s time in the magic kingdom easier, it provides even more data Disney can use to continue to enhance the user experience the next time they visit.

Data Disney collects also helps them manage their staff. Labor costs account for almost half of the expenses at the park. Being able to track demand and schedule employees gives Disney control over every aspect of both the customer and the visitor experience.

Physical age doesn’t matter at Disney, but mental age does. You might be surprised to know that the biggest thought leaders, CEOs, and experts on digital transformation were also board members for Disney. Jack Dorsey, co-founder of Twitter and CEO and co-founder of Square; Sheryl Sandberg, COO of Facebook; the late Steve Jobs, former CEO of Apple; Orin Smith, former CEO of Starbucks.

Takeaways from Disney:

• The future is digital so your employees, officers, board, and management should not only understand it, but embrace it. If they don’t, you need to hire people who do.

• Trendwatching is critical. Not only does it enable you to spot patterns and trends before they become mainstream, but it’s a rich source of inspiration, creativity, and innovation.

• When your business model is the experience, invest in, and focus heavily on data analytics to ensure that your customers are having the best experience possible.

—Stefan Olander, Vice-President of Nike’s Digital Sport

Nike, the world’s leading innovator of athletic footwear, apparel, and accessories, built its company around innovations. When digital technologies began to emerge in the 1990s, Nike was quick to explore the possibilities. From letting customers order customized colored sneakers online, to creating a community of like-minded weekend warriors or extreme athletes, Nike reaped significant business benefits from digital.

When social media, the Internet, and the technology came along, Nike was waiting. They embraced digital like it was a long lost family member. Because they’ve always focused on people who purchased their products, their only goal has always been to “connect with athletes to inspire and enable them to be better.” That consumer engagement mindset is probably best understood by their recent (2014) decision to discontinue one of their most popular technologies—the Fuelband and the Nike+ Training App.

A testament to their focus on the consumer to the exclusion of product and revenue is the Nike Fuelband, an activity tracker worn on the wrist. The band allows users to track their physical activity, including how many steps they’ve taken daily, and how much energy or calories they’ve burned throughout the day.

Data from the Fuelband is integrated into the Nike+ online community. Wearers cannot only monitor their progress and achievements, they can share that data with friends on social media, or compete with others for points and awards. When it was released in 2012, the Fuelband was wildly successful, even though a University of Pennsylvania study showed of all the fitness wearables, it was the least accurate. The Nike fan base drove the popularity of the device and would still be driving it, if Nike hadn’t opted to discontinue the band in 2014. The reason? In a market rapidly becoming saturated with fitness wearables, almost all of whom were more accurate than the Fuelband, Nike concluded it no longer needed to manufacture its own gadget.

Measuring, sharing, and incorporating performance into the customer lifestyle was, and still is a big part of Nike digital, but not at the expense of the customer experience. By focusing on deepening their connection with their customers, and not on making a better wearable, they both personalized and amplified their “Just Do It,” slogan. That’s how Nike captures their customers’ hearts, not just their wallets.

Takeaways from Nike:

• It’s okay to let go of a disruptive product even if others are pursuing it. When Nike stepped away from its Fuelband, they did so because they recognized it was the software and applications, not the physical product, that created the customer interaction and engagement they sought.

• Understand what business you’re truly in and stick to it. There was no fitness wearable when the Fuelband was released in 2012. In less than 3 years, however, the market was all but saturated. Nike watched the market, realized there was competition from better performing wearable products and stuck to its original goal—to “connect with athletes to inspire and enable them to be better.” Nike understood when it came to producing wearables it was in the software business and Apple was in the hardware business. They made appropriate digital decisions to partner with companies who were in the hardware business.

• Great digital companies remain focused on engaging with their consumers. They aren’t swayed with emerging technologies unless those technologies can help them improve or maintain that engagement.

• Capture the consumers’ hearts, not just their wallets. Never forget that people, not technology, drive true digital transformation.

UPS got a government grant and went to Virginia Tech’s Department of Industrial and Systems Engineering department and professor Thurmon Lockhart. Working with Professor Lockhart, they came up with a radical solution—retrain the brain kinesthetically. They developed a slip-and-fall simulator that allowed UPS drivers to actually experience slips, trips, and falls in real time, on real surfaces. Drivers were suspended by a harness system that kept them from getting hurt, but their brains and bodies experienced the sensation of an actual fall and learned to compensate for it, making drivers safer on various types of surfaces.

The simulator was very effective. After a series of successful training outcomes and requests for simulators, a new company was born. Several Virginia tech alumni engineers started Industrial Biodynamics around manufacturing the simulator. Now UPS sends all their drivers for the 30-minute hands-on training on one of the two simulators they now own.

Several companies in a variety of industries, including manufacturing, healthcare, and even law enforcement and crews at Los Alamos National Security Center use or have trained on the simulators. UPS may have transformed their training, but Industrial Biodynamics is transforming the slip and fall industry.¹¹

¹¹ https://www.vt.edu/spotlight/impact/2010-01-04-falls/fall-prevention.html

If transformation is so profitable, then why aren’t more companies doing it? Chapter 3 focuses on exactly the reasons why.