In 2013, McKinsey & Company presented four lessons from the software industry, in which it described how every type of business could learn something from the software industry.
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The age of digitisation means this is truer today than ever before. In the past, manufacturers made products and developed brands, and consumers bought these products and continued to buy more – either because they liked the products, or because they fitted in functionally or aesthetically with other items from the same brand.
It used to be like that in IT. It’s a well-known phrase that no one ever got fired for buying IBM, and these highly integrated systems proved very compelling.
Over time, the big names changed – from IBM, Oracle and HP, to Microsoft, Apple, Google and Amazon. Now the IT world is heterogeneous and suppliers find they need to collaborate and co-operate to ensure products are interoperable. Competitors collaborate in certain areas, while still competing in other areas.
This dynamic of the software industry is set to change other industries as CEOs begin to digitise their organisations. Experts believe the power of digitisation comes from using IT to add unique value to an existing business ecosystem.
Take digitisation seriously
In the book, Venkatraman says: “Even if you take any company on a digitisation journey, it is only happening in pockets of the organisation.”
While it is entirely plausible for a company to understand its competition, Venkatraman says: “The real threat is coming from the startups that can do things at scale and at speed, and the digital giants that influence the way your business runs.”
Rather than try to benchmark where businesses are relative to one another, in terms of digitisation maturity, Venkatraman recommends companies look inwards to understand where digitisation is succeeding internally.
He suggests companies need to assess how digitisation will affect the top line and the bottom line. At the top line, digitisation offers the chance to go after new business opportunities. Looking at the bottom line, he says it can also change the cost structure from an operational perspective.
Decide on a digital direction
One of the early success stories with digitisation was sportswear company, Nike. The company began its digitisation journey in the 1980s with a device called the Monitor, and then tried smartwatches.
In The Digital Matrix, Venkatraman describes these early initiatives as experiments, helping Nike gain a better understanding of sensors and digital technology. In collaboration with Apple, the company introduced the Nike+ running shoe sensor in 2004, which worked with iTunes.
The collaboration was way ahead of its time. In effect, Nike was experimenting with the internet of things (IoT) before the term had been coined.
But even so-called first-mover advantage is no guarantee of prolonged success, especially now that Apple and Samsung have smartwatches, and Fitbits have captured mainstream interest in well-being.
“Nike is still a logo-driven company. It has to decide whether it is selling sportswear products or if it is an agent for consumer lifecycle,” says Venkatraman.
“If Nike is selling a product and uses technology to monitor use of the product, then it needs to take a different approach to how it has operated in the past,” he adds, referring to Nike’s approach of using its smartwatch as a point of entry to target consumers with product offers.
On the other hand, if it wants to be a lifestyle coach, Venkatraman says Nike has to become a multi-platform company and focus instead on helping to improve users’ fitness and well-being. It has to become part of a wider well-being ecosystem.
Learn from data
This is exactly what Nike rival Under Armour did. In The Digital Matrix, Venkatraman describes how the company that pioneered moisture-wicking sportswear fabrics acquired MapMyFitness, Endomondo and MyFitnessPal, giving the company 300 developers and 150 million active members.
Customer data is now driving the company’s strategy. Beyond selling products, Venkatraman says Under Armour has branched out to create vibrant communities, such as those in LinkedIn and PatientsLikeMe.
Under Armour has been collecting the data community members have been actively uploading about their lifestyles, such as the food they eat and the gear they use for fitness, Venkatraman says.
“Under Armour is taking a [lifestyle] solutions view: I want to know what you eat, how you sleep, how many steps you’ve taken, then I will benchmark you against other people and give you incentives to improve your lifestyle,” he says.
A products company that tells people what they need to do to get fit is a very different type of company to one that sells on its brand image, he adds.
Move away from industrial age lock-in
In the past, companies tried to offer everything. “A lot of the business strategies of the industrial age were focused on locking in the customer. But in the digital world, people do not want to be locked in,” says Venkatraman.
As an example, he says consumers may prefer Spotify to iTunes, but they still want to use it on their Apple devices. The balance of power has shifted from a producer-centric ecosystem to one that is consumer-centric.
“Digitisation will have a tension between ecosystems that are pushed by a group of companies and where the ecosystem is defined by consumers, who will knit together different pieces in ways that make sense to them,” he adds.
Traditional business can learn a lot from the computer industry, according to Venkatraman. “Three years ago, IBM would not have considered working with AWS [Amazon Web Services], Apple or [Microsoft] Azure. It wanted to provide the hardware, software and services. The computer industry has become horizontal layers interconnected through APIs [application programming interfaces],” he says.
Venkatraman says almost every computer company allows their software and hardware to interoperate, but it will upsell the benefits of using its own technology. “They let the customers define their own architecture.”
He believes industrial companies are in the early stages of a revolution, which will see them become more interoperable, with customers often buying machines from several manufacturers.
Look at the work of digital pioneers
GE is among the companies that has been pioneering digitisation. It has the concept of a digital twin, effectively an emulation of a physical product in cyber space.
Venkatraman says: “GE’s digital twin is a masterful stroke of thinking through the logic that if every single physical product has a digital twin, it can gain preferential access to the data [produced by the twin].”
Access to this data gives companies such as GE a competitive edge. According to Venkatraman, GE has done this before, when it began monitoring its aircraft engines and some airline customers wanted GE to monitor their Rolls-Royce or Pratt and Whitney aero engines too.
“So long as the service level agreement stipulated the customer was the custodian of the [engine telemetry] data, it was possible to give it to anybody else,” he says.
Venkatraman believes companies have yet to fully appreciate the implications of access to this data. Clearly, many will feel the need to own the data exclusively, but the customer will inevitably want choice, and, as in the consumer space, it is the customer who will be the centre of the ecosystem.
As such, companies need to reassess where they can add the most value, and this may mean offering products and services that may not directly benefit their core offerings, which is what GE’s aero engine division was able to do.
Kone Elevator is another company that understands it can create value on top of a competitor’s products. Kone has used IBM Watson’s IoT platform to monitor the elevators in multiple buildings across a city, optimising maintenance. What is interesting, according to Venkatraman, is that the IoT-powered maintenance contracts it offers support multiple lift providers.
The Kone platform gathers data from sensors and systems connected to elevators, escalators, doors and turnstiles from its maintenance customers. Using IBM’s advanced analytics engine, this information is being used to develop services.
Henrik Ehrnrooth, president and CEO of Kone, says: “We are well on our way towards creating a truly intelligent elevator and escalator service platform, which will use Watson’s cognitive capabilities and take elevator and escalator services to a new level.”
IT plays a key role in digitisation
The IT function has an opportunity to become core to an organisation’s digital transformation.
Findings from the Hackett Group’s Closing the digital transformation confidence gap in 2017 study show there will be a gradual shift in the coming year away from defensive strategies oriented towards margin protection – such as enterprise cost reduction, portfolio rebalancing and, to a lesser extent, mergers and acquisition-derived growth – in favour of expansion, innovation and growth-driven strategies.
It is highly unlikely more money will be found to fund new IT-powered initiatives, so the CIO will need to assess where the IT is best placed to take the lead and where it should be subordinate to business objectives, says Rick Pastore, senior director of the global IT executive advisory programme at Hackett Group.
IT is the core customer of the major enterprise software providers and, in many ways, it has benefited from their moves to become more customer-centric.
Given the importance of software and the way software ecosystems works, IT is well-placed to advise the business as it embarks on creating software-driven initiatives.
“IT has been the customer and instigator of new products by working with suppliers,” says Scott Holland, practice leader of the global IT executive advisory programme at Hackett Group. “IT can play a huge role to tap into the value of the ecosystem, as long as it is not seriously inwardly focused.”
Beware the risk of core competencies
Every company develops its core competencies, first by acquiring a set of physical assets and then by investing in people with the knowledge and skills to create its products and structure the organisation with appropriate governance.
Over time, these competencies become difficult for competitors to imitate, and are then considered core to the company’s future performance. But there’s little opportunity to question when or whether these competencies might run their course.
Take BlackBerry and Nokia as examples. In 2007, BlackBerry thought it had the perfect smartphone for corporate business executives. It had an important Messenger app for email, software optimised for limited bandwidth and a battery optimised for long usage.
Around the same time, Nokia thought that feature phones with short message service (SMS, or text messaging) and global reach could guarantee its future success. They were both leaders in their respective domains. Then Apple introduced the iPhone, and BlackBerry and Nokia’s phones were rendered obsolete.
Read more about digitisation
- The RAC, an organisation steeped in tradition, is on a modernisation drive. We look at how Microsoft Azure is helping it digitise older cars.
- Imagine if your boss was a CEO pioneering a digital revolution in a company over 120 years old, connecting industrial machines to the internet. We Speak to GE’s CIO, Jim Fowler.