3. Why Traditional Companies Are Failing at Digital

Companies fail at digital every day for a variety of reasons and they suddenly find their business is taking a beating and their competitors have passed them by while they’re sitting there and wondering, “What happened?” This may be because the company’s leadership or designated digital team is not monitoring what’s happening around them. Sometimes they casually observe what’s happening, but they have no process in place to contextualize and measure what they’re seeing. It may be their culture, their IT department, their inability to spot, or follow trends. Whatever the reason, they’re failing. We will cover the most common reasons in this chapter, but first let’s start with an example.

Two of the biggest, most well-documented and talked about digital transformation failures are Borders and Barnes & Noble. The winner in the bookstore battle was, of course, Amazon—who never intended to be just a bookstore at all. In a speech to the American Association of Booksellers in 1999, Amazon founder, Jeff Bezos said, “We don’t view ourselves as a bookstore or a music store. We want to be the place for someone to find and discover everything they want to buy.”

Bezos started Amazon by creating a list of 20 potential products he thought might sell well via the Internet, including software, CDs, books, office supplies, and apparel. Because of the sheer number of SKUs in the millions, and the fact that books sold in one store were the same as books sold in another store, books became his first, and most obvious choice of product. No physical bookstore could stock millions of titles, but a “virtual” bookstore could. After books came DVDs and CDs. Amazon.com opened its virtual doors in July 1995. By September 1996, the company had 100 employees and more than $15.7 million in sales.

Amazon’s success didn’t go unnoticed by Barnes & Noble, who countered with their own website, and a claim that readers could access more books than they could on Amazon. But by then Amazon was also selling CDs and DVDs. They had become much more than a bookstore, adding toys, music, movies, gifts, electronics and more to their site, but it was content that made them grow, and the Kindle that made them king.

Kindle went to market 4 years after Barnes & Noble had stopped selling ebooks entirely.¹ It wasn’t the first ereader on the market, but it was the best. Why? Because Jeff Bezos waited 7 years for reader technology to advance enough for the Kindle to bypass the issues his predecessors experienced.

¹ http://goodereader.com/blog/electronic-readers/a-brief-history-of-ebooks

The first Kindle represented the kind of technology that would launch the digital transformation that would create a new kind of relationship with the mobile consumer. The Kindle did for content what the smartphone did for apps—it opened a million markets and provided untold opportunities to change the media industry. Amazon didn’t want to sell books as much as they wanted to own the content consumption platform with a device as desirable as a smartphone.

While turning out a new, better and more improved version of the Kindle almost every 18 months, Amazon announced that “Prime” subscribers to Amazon.com would also get free access to almost 3,000 Fox TV shows and movies. Prime subscribers could also get free access to a Kindle e-book library. So, now, for about the cost of 10 paperbacks, you get free shipping, thousands of television shows and movies, and a library where you can check out up to 10 books and keep them as long as you like. As of this writing there are over 3.6 million books in the Kindle library, and more than 40 million Amazon Prime members.

By offering more incentives and reasons for consumers to download content rather than order it delivered, Amazon cut down on the number of physical orders it had to fulfill. Using that same thought process, they cut a deal with Fox TV to stream or download shows and movies. Every television series or season of shows watched online, or on a Kindle Fire, was another heavy-box set that didn’t have to be processed, packaged, and shipped. Not only was Amazon saving money on employees who had to retrieve, prep, pack, and ship the product, they saved millions on postage and shipping costs. Amazon was a huge success, but had Barnes & Noble acted quicker they may have stopped Amazon in its rush to become the superstore it is today.

Amazon only sold books when it launched. That was the point where had Barnes & Noble acted differently they could have prevented Amazon’s bookselling growth. Yet Barnes & Noble, like many traditional companies of that era, failed to focus on digital.

To take a page from Stephen Covey’s time management quadrant, too many companies are watching the urgent things, not the important ones. Urgent things demand immediate attention and are often associated with the achievement of someone else’s goals. Important matters have an outcome that leads to the achievement of your goals. The secret to effective digital transformation is a lot like effective time management—focus on the important before it becomes the urgent.

When companies fail to pay attention to emerging opportunities, their competitors not only trounce them, they gain the extra capital to move in and grow even bigger.

Barnes & Noble’s customers wanted to order items online and pick them up in the store in their neighborhood, or they wanted to be in the store and say, “Oh you don’t have this,” and then order it right in the store from barnesandnoble.com and have it shipped to their house. They have that capability now, and they’ve probably had it for 5 years or more. But they didn’t have it when it counted. They failed digitally when they didn’t make that move and they let Amazon continue to grow its customer base and build loyalty.

It’s not to say that Amazon wouldn’t have existed, but they may not have gained the dominance they did through online books had Barnes & Noble acted differently.

Transformation is not looking at who you think your competitors are, or looking at who you think your digital native competitors are; so you can copycat them. You have to figure out what is unique to your business and find leverage that others can’t.

Barnes & Noble’s strategic advantage was their superior real estate assets and great brand name. Barnes & Noble had the footprint, and it had the operations and it had all the right things going for it, but they weren’t paying attention. At the time people were ordering books on Amazon, but there were a lot of people who were saying, “I still like my neighborhood Barnes & Noble store. I like the feel of a book and I like to sit down in the Starbucks in the Barnes & Noble and enjoy those big puffy chairs while I read my book.”

What occurred between Amazon and Barnes & Noble is happening across many industries today. For example, connected car technology (your automobile having a permanent connection to the Internet) is already going mainstream. Who is paying attention? Not many. Companies are saying, “It’ll never happen.” Those are famous last words of too many failed companies.

Connected cars may not be mainstream next year, or even 5 years from now, but if I’m a Ford executive, I better be building that car and spending money experimenting with it to see if I can figure out exactly where it’s going and how my customers are going to want that experience.

If you’re a company of any size, you don’t want to wait until an idea or concept is accepted before taking action. Companies fail to transform for many reasons, primarily because executives don’t take the time or don’t know how to look out for the signs as to where the trends are taking their business. But there are dozens of other reasons companies fail at digital. Here’s the list:

They need to realize that many of these trends will indeed happen or that certain distinct trends, when combined down the line, will bring about great change. For example, the smartphone required the convergence of touch screens, high speed mobile data service, and extended battery life provided by lithium technology. Any of those technologies on their own may have not gotten industry leaders to pay attention.

The logical next step to take after spotting a trend is not to ask “will it happen?” but to ask, “how long will it take for these trends to manifest in my target market and how can we prepare to get there ahead of our competitors?”

There are far too many billion dollar companies where CEOs have ignored trends, calling them fads. They made limited vision assumptions such as assuming that people will listen to music just downloads because bandwidth would never support good audio quality. Meanwhile digital leaders like Apple, were sitting back and waiting for the bandwidth to catch up, and allow better quality, the companies who had a chance at the opportunity of the century were missing the boat.

To be competitive, companies should envision where things are going in their industry as well as other industries and get real about potential new product and service creations of the future. They should lead in their space, not follow.

3D printing is an example of an emerging technology poised to significantly impact several industries including manufacturing, packaging, and transportation. Traditional businesses like Staples and Home Depot recently launched print-on-premises plans. Anyone with a thumb-drive can stop into one of their stores and have an item quickly printed for them using the store’s 3D printer. Amazon also saw the potential—launching a 3D printing store where customers can shop for and order products that can be printed and shipped on demand.²

² http://www.amazon.com/b?node=8323871011

Put your research findings into context. Often we see companies failing at their own industries because they are only focusing on their competitors and not on best practices across other industries. It’s rare that your competitors are far enough ahead to provide the kind of best practices that can stimulate your industry.

Remember how Barnes & Noble’s failure to recognize the “omnichannel experience”—how they dropped the ebook reader, embraced short sightedness . . . and didn’t run with a fully mobile ecommerce site. That’s how they helped open the doors to Amazon’s spectacular growth.

How big was Barnes & Noble’s failure? Well, Morgan Stanley estimates that Amazon sold $3.57 billion worth of Kindle ereaders and tablets in 2012, $4.5 billion in Kindle device sales in 2013 and $5 billion in Kindle device sales in 2014.³ This is not just a measure of their product sales success, it’s a measure of customer engagement as well. The kindle is a content distribution system, and the average reader of all ages was clearly buying into the concept. This allowed amazon to engage its customers consistently, and sell them content that was substitute for printed books and magazines.

³ http://allthingsd.com/20130812/amazon-to-sell-4-5-billion-worth-of-kindles-this-year-morgan-stanley-says/?mod=obinsite

Whether a company crashes and burns, or crashes and ultimately succeeds, their failures provide rich case studies for the rest of us about what not to do and what to do. By studying the failures around you, you can see where things might have gone right, and where they definitely went wrong. If you don’t study where others have failed, chances are you’ll follow in their footsteps.

Circuit City continued to resist digital until it was too late and too expensive to even react digitally, let alone transform. Best Buy, their closest competitor, heard the wakeup call Circuit City ignored. Best Buy launched a massive internal effort to educate its employees about digital transformation, even creating a “customer-centricity university” for their employees. They changed their business model and their strategy and senior leadership at Best Buy saw to it that the entire organization embraced a customer-centric approach.

Blockbuster failed to see customers moving toward streaming content. Companies like those we just mentioned fail to understand their customer base and move to meet it. For example, we both have mothers who now love their Kindles. They made the change from paperbacks to ebooks. However, they still prefer to go call the airline to book their flights because booking a flight online isn’t as easy a shift as a Kindle.

What we see is that some people acclimate toward some online changes, but not others. It’s a sign of a changing customer base and their comfort or discomfort with digital. When a change happens, as changes always do, people like our moms, who are digital immigrants who weren’t raised with technology, can’t adapt to the changes. In other words, people from an older generation, or an ethnic generation who don’t have the backgrounds in technology often have significant trouble adapting. They may be able to adapt in one area but unable to cross over into other technology areas.

Many companies see their currently non-digital customers who prefer a physical connection to a digital one, as a reason not to transform. Blockbuster made this mistake, switching from digital back to the concept of a physical store, a “7–11 convenience store” concept where families drove to their nearest Blockbuster, and wandered for hours around the store physically shifting through a limited selection of movies.

Blockbuster failed to realize or acknowledge that customers were moving away from their stores, preferring the convenience of ordering DVDs online rather than going to a store with a limited selection, and many current releases often out of stock. Customers also didn’t like the late fees, a $400 million bonus in Blockbuster’s coffers, but a strong irritant for customers who had to remember to return the DVD to the store on time or be charged late fees. Blockbuster also allowed customers to swap out some DVDs for others for no charge, but then later limited the numbers of DVDs they could do that with.

For instance, seniors are now “facetiming” their grandchildren, finding the best travel deals on Kayak, or paying bills online. They’re still digital immigrants, sometimes struggling with the Internet, or certain apps or websites, but many times they struggle because the company they want to do business with makes it difficult to interact or engage in a streamlined, effective way.

Creating the best customer experience means collecting data about how your customers find you, how they explore your company, make buying decisions, how they prefer to purchase and where and how they give you feedback, among other things. Not understanding each one of these touchpoints and creating and implementing a business model, strategy, and processes to address them is yet another reason why companies fail.

“The power behind the sharing economy,” says Rachel Botsman, author of What’s Mine Is Yours, a book on the sharing economy, “is using the power of technology to build trust among strangers.”

Just because this sometimes touchy-feely business model has a “sit-around-the-campfire-and-sing-Kumbaya,” feel to it, don’t think of the sharing economy as a warm, quaint, but passing fad. Botsman says the consumer peer-to-peer rental market alone is worth $26 billion. That’s a lot of trust and a powerful economy. Companies who fail at digital fail to see how to tap into a socioeconomic ecosystem of human and physical resources.

You need to appoint a Chief Digital Officer, and not just in name. The position must come with a realistic budget, power, and the authority to act and someone else overseeing whether that budget is being spent wisely. Blockbuster had a CEO committed to digital transformation, then fired him and hired a CEO with absolutely no interest in digital. Without anyone to champion, implement. and push digital, it took less than 18 months for Blockbuster to lose ground to Netflix.

You need strong leaders and genuinely strong leadership. You need people who can make decisions and execute them without too much fear. In other words, in order to do this well, you’re going to be invoking change. What we know about people is that many of them fear change and a lot of them resist it because they don’t understand how the changes are going to impact them. Are they going to have a job after the transformation? Do they have the job skills needed for the new incarnation of their position? Will they need more training?

You may eliminate 50 jobs in an auto plant, to create 150 different jobs somewhere else. The fact is people need to change for progress to happen. It all boils down to employees and management accepting that. Look at your own skills and those of your employees.

What kind of skills do people need to have that are running digital groups or rethinking their entire business because of digital? They need to be able to make decisions. They need to be able to lead. They need to be able to invoke change in whatever way you want to describe it.

You don’t want to be frozen in fear either and end up saying, “we’re not going to do it this way because no one’s ever done it yet.” The fact that no one has ever done it is exactly the point. No one has done it yet and you’ve got to step out in front of it.

You’ll also need to have good managerial skills to manage teams and build a culture around digital. That is, you’ll need to hire and attract people who are passionate about digital, who want to do things differently and want to take risks. In this day and age those are sound generic traits and what you need and want in any group of people that’s trying to be successful at something.

A silo mentality is a mindset where certain departments, or even all departments, compete against each other in the same company. Even if they’re not competing, they’re not sharing information within the same company. Not only does a silo mentality reduce efficiency overall, it reduces morale, creates paranoia, cynicism, and eventually contributes to the failure of a productive culture, product, or division.

⁴ http://www.economist.com/node/15016132

Current systems are notoriously fragmented and complex. As a result, many banks have huge problems with data quality and consistency.⁵ Banks and financial institutions may have inherited their restrictions, regulations, and a system that’s not easily sourced to the cloud, but too many companies can’t get out of their own way even when it’s affordable and doable.

⁵ http://www.economist.com/node/15016132