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Business leaders are starting to rethink their strategies to take advantage of digital technologies. They envision omnichannel customer interfaces, ecosystems of tightly connected partners, and novel customer solutions leveraging newly accessible data.
This is smart. Digital technologies are already shifting industry boundaries and competitive landscapes (think of relatively new industry types: information dissemination, entertainment streaming, personal mobility). Ongoing industry disruption means that business leaders absolutely must articulate strategies that are inspired by the capabilities of digital technologies.
An inspired digital strategy, however, is barely enough to get started.
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For most established companies, it is more likely that operational deficiencies, rather than lack of strategic thinking, will stymie their ability to compete digitally. Those operational deficiencies will not be easily resolved. They result from layers of variability — years of new operational and commercial processes built next to (and on top of) legacy systems and ways of working. This kind of non-value-adding variability has made many companies too complex to deliver digital solutions. To compete digitally, business leaders must attack that complexity.
Digital Success Begets Complexity
Most digital businesses start with a simple concept: an information-enriched hired ride; an online book-buying experience; streaming of music or videos to personal devices; connecting people owning available living space with those who need a place to stay. But successful solutions quickly give rise to demands for expanded services, greater personalization, and, ultimately, more variability. What was once a simple, powerful vision becomes complicated by a slew of options.
It’s worth noting that demand for variability (that is, complexity) afflicts only the successful. In other words, it’s a good problem to have. Managing complexity well, as has long been the case, is a potential source of competitive advantage. But embracing value-adding complexity while avoiding non-value-adding complexity requires vigilance.
Take Spotify, the digital music service. It started with the simple value proposition of providing free radio, but leaders learned that many customers would pay for music if they could avoid advertising. Spotify could introduce pay radio by reusing some of the same services that provided free radio while building some new capabilities.
The trick at Spotify, as at any company, was to clearly articulate and assign accountability for both the reusable and the unique capabilities. This is not easy in digitally born businesses like Spotify. It is particularly challenging in big, old companies that have been accumulating non-value-adding variability (through organic growth and acquisitions) for many years.
Sustained Success Requires Simplifying Non-Value-Adding Complexity
The legacy of non-value-adding variability in big, old companies can paralyze efforts to become digital. Business and technology leaders have recognized the problem for at least 20 years, but they have struggled in their efforts to address it. Often, they have attempted to implement major enterprise systems that were doomed by scope and scale.
It’s important to recognize that the problem is first and foremost undisciplined processes and resulting bad data. Existing systems usually exacerbate the problem, but new systems won’t fix it. What’s more, even though many companies’ bloated legacy systems, dueling processes, and siloed data are awful, the businesses rely on them. The problem is massive.
Few leaders would argue with my assessment of the problem. The question is how to tackle such a messy tangle of critical systems, processes, and data.
I recommend focusing on a task that can provide significant outcomes in a year. That will involve focusing on the one process that matters most. In other words, simplifying your business requires that you define the business process that is most essential to delivery of your customer value proposition. I am referring not to your most important product or service but to your most important operational capability.
As we’ve studied old companies that are successfully transforming into digital businesses, we find that they have built upon one very powerful, central business process — ensuring the accuracy and availability of the company’s most important data. Here are some examples:
- Lego grew into the largest toy company in the world not by manufacturing more toys but by cleaning up its supply chain. That helped ensure delivery of toys at the desired time to each of its customers. Innovative toys and great customer engagement are very important to Lego, but the company cannot succeed as a business with an unreliable supply chain.
- UPS, as it competed with FedEx, doubled down on package data. It developed disciplined, standardized processes that captured and used that data. The company cared about customer data too, but its business is built around package data.
- USAA, in contrast, has long focused on customer data. The financial services company for members of the U.S. military is willing to forgo potential new products that competitors might introduce if those products run the risk of making the life of a USAA member (that is, a customer) more complex or undermine the member’s financial security.
While many old companies have had dreadful results with large-scale business transformations, large companies that are successfully becoming digital have resisted the temptation to fix multiple key processes simultaneously. Instead, they focus on one process. Seriously, one. They focus on the essence of the business.
How Nordstrom Did It
To identify and optimize the essence of the business, leaders need to understand their customers’ journey so that they can deliver the best customer value proposition. The fashion retailer Nordstrom provides an example.
In 2013, Nordstrom started to explain to investors a business strategy targeting the threats and opportunities presented by digital technologies. The company had long relied on high-end department stores to meet the needs of customers, but Nordstrom had also been operating Nordstrom Rack stores since 1973 and acquiring other discount businesses to appeal to customers who wanted high-end apparel at discount prices. Meanwhile, the company was developing Nordstrom.com into an online shopping site for customers who wanted alternatives to in-store shopping. In other words, to address digital disruption, Nordstrom was adopting a more complex business model.
While accepting that complexity, however, Nordstrom leaders were doing something that many other companies fail to do: They were simplifying the company by building a powerful, transparent supply chain. The particular emphasis on supply chain may seem counterintuitive for a company intent on great customer service, but it’s consistent with Nordstrom’s established practice of using technology to help salespeople serve customers.
For instance, Nordstrom was an early adopter of the technology that allows salespeople to attach a bar code indicating purchase price to the price tags of individual items during checkout. This technology eliminated the need to haggle over returns with customers who did not have receipts, simultaneously improving the lives of salespeople and customers. Nordstrom has also provided salespeople with detailed customer data so that they can learn what their specific customers tend to buy. This capability has enabled ambitious salespeople to anticipate the needs of regular customers.
As leaders recognized the power of digital technologies, they understood that they could vastly enhance the capabilities of their salespeople to meet customer needs through a transparent supply chain. Accessible, accurate supply chain data allows employees to see what inventory the company has throughout the company. More important, salespeople can then control the movement of any item in inventory to the benefit of their customers. The transparent supply chain empowers salespeople to deliver great customer service. And over time, that same supply chain transparency has given online customers access to Nordstrom’s entire inventory, whether an item is on a rack at a store or in a warehouse waiting for shipment. Basically, the transparency empowers customers to give supply chain commands.
Building a transparent supply chain necessarily involved standardizing processes that input and use supply chain data, while implementing technology that captured, processed, and displayed data to support responsible employees. This was no easy feat, but it was highly targeted — and thus doable. Nordstrom has not established itself as a digital winner, like, say, Amazon — at least, not yet. But its supply chain transparency, its essence, facilitates a great customer experience. This allows the company to focus on responding to competitor initiatives and conducting new digital business experiments. Nordstrom has created a capability that the company can reuse even as the business itself becomes more complex.
Simplifying a Business Is Difficult but Essential
Eliminating non-value-adding complexity demands tough decisions. Royal Philips, a Dutch technology company, has sold off multiple, profitable businesses so that business and technology leaders can focus on processes that will help deliver better health care. USAA has given customer service staff the power to reject proposed new products from the company’s product lines. Lego demands reuse of its existing bricks and minifigures rather than allowing product innovation if the cost of creating, say, a new policeman minifigure is greater than the benefit of having more variety in policemen (which is almost always the case).
An established business has no hope of providing seamless customer experience across multiple channels or creating an extraordinary app or online customer experience if its core business processes are messy and complex. To become digital, companies will need to identify the essence of their operations and streamline their processes. Doing so will empower their people to serve customers and empower customers to help themselves. Addressing operational complexity will allow business model complexity, which, in turn, can build on success rather than inhibit it.