Digital Transformation – or stalled execution?
The Retail industry has been undergoing a rapid transformation over the last decade. The competitive landscape has shifted dramatically in terms of where value is being created and destroyed – a result of new technology capabilities, shifting customer expectations and emerging new business models. However, we can gain insight into key implications of this ever-changing competitive landscape to suggest pragmatic approaches towards ways retailors can get ahead of the game.
So, what do we know?
We know that many retailers are closing their doors, and that nearly 20% of malls in the US are considered “troubled” or “unhealthy” in terms of sustainable growth and profitability. We also know that significant investments are being made by the large retail players to counter these challenges. Additionally, many are investing to merge online with offline supply chains as well as expanding their e-commerce capabilities or using new features to lure folks in the door.
Part of this search for “what else might we do” includes investments in technology and start-ups as a way to speed up new capabilities into their existing business operations and thereby slow down the pace of the (inevitable) nibbling away of key elements of their business.
A New Playing Field
As we all know, change always creates new winners and losers.
Consider these numbers:
• 82%: the topple rate of industries from the Fortune 500 over the past 20 years
The topple rate reflects the number of companies that “fall” from their industry position. Nearly 4% of companies fall annually, or topple, from their industry position; that’s 80% over the past 20 years – and it is a rate that has only accelerated over the past few years.
• 8.2: the market multiple of new business models
Deloitte Assurance (2016) published a report classifying 4 different types of business models and their corresponding market multiples of revenue. Each differing business model reflected a different market multiple. Briefly, they are:
o 8.2: Platform-enabled, business-ecosystem models – such as Amazon, TripAdvisor, Etsy, etc.
o 4.8: Technology Creator – such as Microsoft, Amgen, etc.
o 2.6: Service Providers – such as United Healthcare, Deloitte, etc.
o 2.1: Asset Builders – such as Ford, Nike, General Electric, etc.
What is striking is that we now have enough data points such that we can model the dramatic differences of a) differing business models and b) the striking financial differences among them.
8.2 is a striking market multiple, and it is 4x the market multiple of a business model that formed the basis for much of yesterday’s (and today’s) competitive landscape.
• 3.3x: the multiple of revenue growth of companies with an effective innovation program compared with those who don’t have such a program
There are three common questions we hear over and over again regarding innovation from companies, irrespective of size, industry and geography:
o How do we get started regarding setting up an innovation program?
o How do get more out of the programs we have?
o What’s next and what do we do about it?
Each question reflects a different starting point of what to do and how to do it. All of them reflect the criticality of figuring out how to, at a minimum, capture the 3x revenue growth compared with companies without an effective program.
So what? Three Observations
What might we make of the data described above? And, more importantly, what might we do about it? Below, we make three observations pulled from the data. Regarding what you do about it depends on your response to the observations.
Observation #1: Businesses are often optimized for a world that no longer exists.
The Red Queen is a character from Lewis Carroll’s Alice in Wonderland and Through the Looking Glass. She is the character who runs faster and faster, but stays in the same place. She is an apt metaphor for much of what we see in how businesses invest in their innovation programs. Merely replace the phrase “the same place” with “the same competitive place” and the reason we use her becomes clear.
Businesses frequently fight yesterday’s competitive war. Hence, the accelerating topple rate we already discussed, the rise of new competitors and the emergence of new market multiples based on new types of business models.
In the retail industry, the ‘Big Tech’ vs ‘Big Retail’ race has only been heating up, and much discussion, and dollars, are being spent on Digital and eCommerce. However the question that most companies fail to ask is, what is the purpose of investing in Digital and eCommerce? What is it in service of? What’s the business problem we’re trying to solve?
Observation #2: The landscape is shifting… quickly
The most successful and high growth business leaders all reflect our new competitive reality – namely, the new competitive landscape will be framed less by competition between industry giants than by land grabs by ecosystem-centric business models.
This is the basis of the 8.2 market multiple discussed earlier. According to the market research firm, IDC, by 2018, more than 50% of large companies – and more than 80% of those with advanced digital capabilities – will create and/or partner with ecosystem-centric, platform businesses.
Different flavors of these models are emerging, and distinct patterns are emerging in terms of which of these work given one’s strategic intent and capabilities. We have identified seven different patterns to date, each effective in their own way, and all sharing common elements that underlie these models.
Observation #3: Common elements underlie the new models
Business models are simply different ways of orchestrating capabilities to serve customer needs. Business ecosystems, then, simply reflect the orchestration of different capabilities from a broad set of actors to capture new sources of value in new ways.
Pragmatically, there are four common elements underlying the seven different types of business ecosystems.
1. New types of consumer engagement models.
Customer experience is shaped by a blend of products and services. Figuring out what the appropriate blend is, and clarification of what services are or the new products to create need to be becomes key.
2. Ecosystem engagement & business model innovation.
Figuring out how to orchestrate capabilities to meet the new expectations that market shifts create is the key to effective ecosystem engagement. Clarity of what type of ecosystem to engage will determine what role to play and what type of value to capture.
3. The New 20%.
Shifting the competitive landscape to capture new sources of value in new ways depends on new capabilities. We call this “the new 20%” – whereby 20% of new capabilities are critical to capture 70% of the new sources of value.
4. The new strategic question.
The new models are based on what we call “the new strategic question,” namely:
where is value being created and destroyed in the ecosystems in which you and your customers engage? and what do you do about it?
In the new world of competing ecosystems, the traditional ways of assessing competitive advantage are becoming increasingly irrelevant. While many firms will continue to pursue traditional sources of advantage, they will be increasingly vulnerable to disruption from competitors taking an “ecosystem” approach. This is no minor change. It catalyzes fundamentally new ways to deliver value to your customers, stakeholders and markets within the new competitive environment in which we all engage.
For retail, specifically, we would suggest looking at Microsoft, Amazon’s Alexa and Etihad airlines for insight into how they are seeking to shift their competitive playing field. Look to Boeing and General Electric for how they are re-orchestrating their global supply chains and shifting the role they play within their existing, and emerging, ecosystems. Take note of how Cisco and Tesla have been exploiting the new strategic question and what it means for their “new 20%” of capabilities. And look at Tencent and Converse for emerging new models of engaging their customers with provocative new ways of blending products and services to engage their consumers differently.
Each of these companies lend insight and potential lessons for anyone in Retail, all of which are based on the new strategic question and the implications that answers to it raises. The critical point is to ask it, and begin the journey that its answers will highlight.
Are you interested in discovering where to capture new sources of value in new ways? We help you identify where new value will be created and destroyed in your ecosystem — and then how to mobilize your innovation efforts to lead the charge. Learn more about Imaginatik’s innovation strategy consulting services today.