Transformation is risky, but doing nothing is riskier

Written by Jimena Guijarro, Strategy Lead at propelland San Francisco

The shift of focus by companies pursuing a digital-first, customer-centric approach is reshaping entire value chains and accelerating the transformation of business models. Legacy companies looking to stay at the forefront or lead the market should address the following questions:

1. What is the pathway to becoming a top performer in a digital economy?
2. How do we prioritize the innovation pipeline?
3. How quickly can we go to market, and when will we see an impact on the bottom line?

The pathway to becoming a top performer in a digital economy

To become a top performer, a company must set up a system to capture and gather data and then leverage that information for timely decision making in response to changing consumer needs. The system must establish a natural feedback loop to enable a continuous innovation cycle, the core definition of a digital platform business model.

Newer companies usually benefit from having digital platform business models, which facilitate the exchange of value, whereas legacy companies with linear business models take raw materials and deliver products and services to the end consumer using a complex value chain. The longer the value chain, the further removed a company becomes from tapping into consumer needs and desires. This condition makes it more difficult to counter commoditization in a digital economy.

The digital platform model presents existential questions to the linear creation of value:

• How do we engage with the end consumer to understand their needs in real-time?
• How do we avoid channel conflict with our direct clients?
• How do we handle the risk of cannibalization?

What companies often fail to understand is that they can keep the core running while building a fundamentally new business model. This strategy requires a new mindset and a separate workstream focused on adjacent and transformative growth.

An example is the 2018 acquisition of Paintzen by the industrial manufacturer of specialty materials PPG industries.

Paintzen uses data and technology to connect homeowners and business managers with professional painters, making a paint project hassle-free, quick, and guaranteed. The acquisition moved PPG from a linear value chain into a multi-dimensional value network with two main benefits:

1. Channel control: Paintzen made it mandatory for all jobs to use PPG paint, pushing the sale of its products in the existing channels which favored their relationship with customers (hardware stores) and strengthened the company’s core.
2. Innovation insights: For the first time, PPG established direct relationships with the end-users of their products by facilitating interactions between painters and home/business owners. This first-hand data about preferences, pain points, and motivations is most valuable in the prioritization of the company’s innovation pipeline for products, services, experiences, and business model transformation.

These benefits are not unique to merger and acquisition strategies. Similarly, in collaboration with propelland, a large industrial manufacturing group is building a platform to connect its customers with homeowners to remove friction from the existing sales process. Beyond the business value mentioned in the first example, the model at hand is grounded on two key insights from the target users. On one side, replacing unqualified leads with real sales to save time and increase sale volume, and on the other hand, for the homeowners, reducing the discovery and consideration timeline from an average of 1 month to a question of minutes.

In the consumer goods category, one of the top producers of wine and spirits, Pernod Ricard, has created an internal innovation pipeline to develop new digital platform business models facilitating the relationship between its customers and end consumers. In less than a year the company and propelland took these two models from idea to market.

The first, a tool for bars and restaurants to take digital orders from customers; and the second, an online marketplace connecting people who want to book venues for special occasions with restaurants and bars looking to capitalize idle hours. These created business value in three ways:

1. Consumer experience: By reducing the wait time for servers to take orders the experience for customers improved. In turn, sales per ticket tripled and operations ran more efficiently.
2. Innovation insights: Pernod Ricard can gather valuable data about consumer preferences and generate business intelligence to inform the live innovation strategy as well as provide insights to their customers on how to improve their service and operations.
3. Loyalty: Restaurants and bars can leverage the technology to make decisions in real-time about operations resources and the quality of their service.

While integrating the core with adjacent and transformational initiatives is a complex challenge, the risk of not doing anything is much greater. A 2019 report by the International Data Corporation shows that between 2013 and 2017 revenue and profit growth of digital industrial organizations outpaced their non-digital counterparts by 16% and 22%, respectively.

Prioritizing the innovation pipeline in a digital economy

A digital economy challenges the traditional strategy principle of a sustainable competitive advantage. It instead permits a temporary advantage and demands continuous innovation. The end goal of operating a digital platform is to sense customer needs and demands in real-time to beat competitors to market with the most relevant temporary value proposition, shifting as often and as many times as the customer needs to. In this game, data is king and the key attributes for success are flexibility, responsiveness, and relevance.

Using the 70–20–10 framework we prioritize each innovation initiative by the impact it has on the core digital attributes organized in three horizons:

The core is 70% and refers to initiatives optimizing existing products and assets to serve existing markets and customers. To decide if a core initiative contributes to a digital advantage we ask, “How does this initiative keep the core relevant and flexible to adapt in real-time?”

Adjacent is 20% and refers to initiatives expanding from existing business into adjacent markets with products and assets new to the company and serving a new group of customers. To decide if an adjacent initiative contributes to a digital advantage we ask, “How does this initiative increase our responsiveness by opening a new door to adjacent growth?”

Transformation is 10% and refers to developing breakthroughs and inventing new offerings based on new customer needs in new markets that do not yet exist. To decide if a transformation initiative contributes to a digital advantage we ask, “How does this initiative disrupt the way customers behave and does it offer a new multi-dimensional value network?”

Speed to market and bottom-line impact

Following the 70–20–10 framework, to grow and scale, companies need to invest time and resources into the 20 and 10 in parallel to growing the core. In most companies ideas are plentiful and resources can be found. Oftentimes, what’s missing is the right team to execute and a robust methodology to take an idea to a scalable business. That’s how propelland adds value and helps our corporate partners grow and transform.

Propelland’s methodology defines new business ventures and systematically tests the concepts to bring a viable business to market.

While integrating vertically or building strategic partnerships can help increase speed to market to compete in a digital economy and create a real impact on the bottom line, legacy companies must be willing to transform their business model.

To do so, the involvement of the C-suite is critical. While having stakeholders contribute their perspective bottom-up is important for due diligence purposes, these teams are inherently inclined to preserve the status quo and represent a threat to innovation. Core teams are often incentivized to meet the core business objectives and KPIs, leaving innovation out of their priorities. Putting these stakeholders in charge of adjacent or transformational initiatives is like asking a tennis player to win a match while staring at the scoreboard during the entire game.

To contribute to the bottom line, leadership must set up initiatives for success. For this, the team leading initiatives must operate separately from the core team and have unique KPIs and objectives, recognizing the need to get to market fast and embracing the challenge to fail or scale fast.

Ready to accelerate growth and transformation? Get in touch to learn more about how we can help. From innovation and change management service to production and manufacturing offerings, we’d love to partner with you to keep bringing new ideas to life.