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BW Businessworld

Book Extract: Collision Course

Why digitisation should be on the management agenda of every company

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What comes to mind when you hear the names AT&T, BlackBerry, Blockbuster, Borders, Deere & Company, Dell, Hewlett-Packard, IBM, Intel, Kodak, Microsoft, Nokia, Oracle, Pfizer, Philips, Sharp, Sony, Texas Instruments, Toyota, and Xerox?

Blockbuster and Borders may no longer be household names, but AT&T, IBM, and Microsoft are all still very much on business people’s radar, so it’s not a list of companies buried by technological tsunamis. What all of these companies have in common is that they have faced challenges from newer business models put forward by tech entrepreneurs and digital giants. Blockbuster, Kodak, and Borders may not have survived, but the rest have so far successfully weathered this collision at the core of their business model and adapted. What can your company learn from their experiences?

Are You Prepared to Adapt and Transform?
You may be inclined to think that some of the businesses that failed did so because they were information rich in products and services and asset light in business infrastructure, and that because your industry is asset heavy and information light, it is immune to the incursion of the digital giants and tech entrepreneurs restructuring your business model. I can tell you right now that it’s a fundamental fallacy.

Sooner or later, incumbents in every industry are going to collide with tech entrepreneurs and digital giants—and maybe their own incumbent competitors—who have a different idea about how to design and deliver products and services, and how they can earn revenue and profits. Even if you and your industry are not yet in this phase, it makes sense to look and learn from those that have preceded you.

Experiments at the edge can move very quickly—as many companies have discovered too late to ensure their own survival—and understanding how this happens can help you to be prepared.

Signs That a Collision Is Taking Place

Have you started noticing companies from outside your industry beginning to challenge your business models? Have you seen innovations in value delivered to customers that take advantage of digital technologies? Have you seen experiments from yesterday evolve and become well-thought-out business ideas that challenge the traditional ones? If you find yourself in this phase, or if you believe that it is imminent, digitization should be on your management agenda as a fundamental driver of growth and profitability for your company.

Businesses typically start to take notice of the need for digital transformation when a collision occurs because it’s hard to miss the competitive pressure that threatens your very existence. You will feel this pressure first in one of two areas, and then both.

Strategy collision. Your traditional strategic logic—and those of incumbents competing against you in the traditional industry—collides against newer logics that rely more heavily on digital functionality.

The newer models could come from other industry incumbents who have accelerated their digital transformation, from newer digital-born entrepreneurs, or from digital giants.

Organizational collision. Your organizational model—the traditional structure, processes, and systems born in the twentieth-century industrial age—collide against alternative ways of organizing born in the digital age. In doing so, they make your organizational model inefficient, and over time, this contributes to decline and extinction.

Historically, we separated strategy formation (which focused on business models and competitive strategies) from strategy implementation (which focused on organizational models and tactics for execution) under different hierarchical levels and functional departments.

The core thesis of the Digital Matrix is that these two collisions are increasingly interdependent and occur together. Moreover, those companies born digital do not see any compelling reason to separate strategy and organizational models into functionally defined boundaries or hierarchies or even within and across corporate boundaries.

To them, information technology is not a separate function under the chief information officer (CIO); it is the very essence of why they exist and how they plan to win. To them, there is no separate chief digital officer (CDO) or separate digital innovation unit. As Microsoft chief executive officer Satya Nadella realized when he took over Microsoft:  “Any organizational structure you have today is irrelevant because no competition or innovation is going to respect those boundaries. Everything now is going to have to be much more compressed in terms of both cycle times and response times.”

In other words, even companies as large and successful as Microsoft are facing this collision at the core of their business models. Microsoft’s past strategies and structure as a packaged software company will not withstand competitive threats from other digital giants and tech entrepreneurs whose business logic is defined by mobility and cloud computing. You, Microsoft, and every other company must reinvent themselves when faced with this collision. As an example, let’s look at how this collision is occurring in one particular setting.

A home thermostat, redesigned for the digital age: Learning from Honeywell
A thermostat is designed to regulate temperature in residences and commercial buildings. The one offered by Honeywell is a typical industrial-era product, designed by Henry Dreyfuss in the US around 1956, long manufactured in the US, and sold through traditional channels such as Home Depot, Walmart, and Sears. Its design has changed very little in the past five decades. It has predictable sales, tied to the demand from the construction industry and the regular replacement pattern in residences, and its global sales and market shares matter. Its relationships with distributors such as Home Depot, Target, Lowe’s, and Ace Hardware are critical, and its market position fluctuates only minimally. Honeywell leads the market in thermostats worldwide (it holds 30 percent of the market share), with Johnson Controls and Emerson Electric as other market-leading contenders.

In October 2011, a small startup company named Nest Labs introduced a new thermostat, which it self-styled as a learning thermostat—it learns as users set and reset the temperature when they are at home and away, and after a week, it programs itself for energy optimization. The settings can be overridden as necessary through a smartphone mobile app.

If you’d been an executive at Honeywell, the leader in home and commercial thermostats, would you have been worried about this new product? Perhaps not, even if Tony Fadell (the designer behind Apple’s legendary iPod) founded the company and declared, “It was unacceptable to me that the device that controls 10 percent of all energy consumed in the US hadn’t kept up with advancements in technology and design.” You might have looked at this thermostat as an experiment at the edge of the industry with potential future impact but not yet worthy of more serious attention, even if the startup company was backed by the renowned Silicon Valley venture capital firm Kleiner Perkins. After all, venture capitalists routinely invest in technologies that are way off. Like many managers in industrial companies, you might have seen this thermostat as a new, specialized type of hardware and considered it less of a threat than a new software innovation or an e-commerce model.

In October 2013, the company introduced Nest Protect, a smoke and carbon monoxide detector that uses Wi-Fi and cellular connectivity to alert your phone to a problem. If you’d been an executive at Honeywell, would this product extension at Nest Labs have raised concern?

Perhaps a little, but you might have convinced yourself that this upstart company simply didn’t have the size or scale to reach into all your complex distribution channels. You might instead have focused your attention on any competitive threats from Johnson Controls and Emerson Electric.

Three months later, in January 2014, Google acquired Nest Labs, which had fewer than 300 employees at that time, for $3.2 billion. By November 2015, this unit had grown to about 1,100 employees, and all of them had a very different skill set than their counterparts at Honeywell or Johnson Controls. Nest Labs with Google’s backing also acquired a webcam company and developed a platform for home security and automation. By early 2016, as an independent subsidiary of Alphabet, Nest had created its Works with Nest platform, which links a set of its own products in your home via an app on your smartphone, and established an ecosystem involving major players such as Whirlpool, Fitbit, Mercedes-Benz, and others. Your Mercedes-Benz car could send the data on estimated time of arrival to the thermostat at your home to optimize the desired temperature in the house. Your Whirlpool washing machine could auto-delay its run cycle to take advantage of lower-cost energy during off-peak hours.

Now, if you were an executive at Honeywell, Johnson Controls, or Emerson Electric, would you be concerned? You should be, because digitization of the thermostat (and smoke detector and other related products) is no longer a peripheral experiment. The core product’s technology has shifted from analog to digital, and the core product itself is interconnected with others as part of broader platforms and ecosystems. Honeywell’s legendary thermostat—a product designed in the industrial age, one that received several industrial design awards—is now colliding against a digital ecosystem of hardware, software, connectivity, and services with many different but plausible business models. In the industrial age, Honeywell could have developed an effective strategy for its product on its own. Now, it has to develop its strategy as part of digital platforms and ecosystems.

This is collision at the core, with Honeywell (and other incumbent competitors in its traditional industry) competing against Alphabet and its digital prowess. Honeywell could legitimately have ignored Nest in 2013, but by the beginning of 2016, the industrial world of home energy and comfort has collided with the digital world of smart homes shaped by the Internet of Things, mobile operating systems, data analytics, and cloud connectivity. In 2013, Nest was an experiment at the edge. Now it’s colliding with and directly challenging Honeywell.

Tomorrow, it could challenge a wider range of companies in different industries.