The Perennial Challenge—Maintaining Value Differentiation for Value Capture
In an increasingly interconnected and globalized world, it is becoming more difficult than ever for businesses, to achieve differentiation from one another—to provide customers a good reason to buy from you, rather than your many rivals. Nowadays, companies large or small, located anywhere in the world have access to the techniques for producing goods and services at competitive prices and world-class quality standards. These techniques enable them to play at an even footing, even with the most established players. Thus, the scope for strategic options to differentiate keeps diminishing and businesses tend to erode its profit capabilities and drift towards commoditization, fighting on price as the only differentiator and eventually become unsustainable.
Yet, we have seen that a majority of the world’s leading organizations are either well-established incumbent companies (Dell, IBM, Google, Microsoft, Amazon, etc.) or are new entrants (Airbnb, Uber, Facebook, etc.). In fact, many of them would not have existed without the internet. They have built on digital platforms and have been able to maintain the meaningful differentiation and strategic control of their competitive positioning through all the changes happening around them. What is the secret of their success? Let us analyze by tracing the pattern of change from traditional business design to digital business design.
Changing Landscape of Value Chain—More Strategic Options for Value Creation
However, new opportunities for business differentiation have also emerged. Starting in the early part of the 20th century from a unidimensional differentiation (1X1 grid) in the era of specialization invented by Taylor and perfected by Henry Ford of Ford Motor Co. (Model T cars were all black)—maximizing efficiency and economies of scale to minimize costs, to the era of competitive strategies propagated by Porter and others, with a three-dimensional model—lowest cost producer or niche player or differentiated product (3X3 grid) increasing the options. Upon this categorization, competitors tried to create competitive advantages through quality, service, or speed and played out the market battles in the 1970s and 1980s. Execution of strategic choices was based on process-based management for operational excellence (OE), using methods like Lean Management founded on value thinking invented by Toyota and Six Sigma founded on statistical thinking invented by Motorola and refined by GE and others.
The 1990s saw the proliferation of more new strategic options, as companies found ways to redefine their scope of activity to reposition themselves as service and solutions providers, rather than product producers, to seize the opportunities arising out of the dramatic changes in the value chain and so on. Thus, in what we may call the Era of Business Design, the 3X3 grid expanded to a 5X5 grid; the strategic options available on the playing field more than doubled. The methods of OE continued to be applied for optimization of performance, effectiveness depended on their grid positioning as well as the execution abilities of the available talent. The companies that had higher levels of flexibility in their business design could adapt better to external change forces and had a competitive advantage over other players.
Advantages of Digital over Traditional—FAME
The 21st Century has brought in a new phase in the evolution of business designs, driven by accelerated change. The new era may be termed to be that of Digital Business Design (DBD). The disruptive changes are also making available a new array of strategic options that are amplified in its potential impact through technologies that impart unprecedented levels of intelligence to the internet coupled devices (Industry 4.0). These options include:
- Connecting with a new set of customers to enhance revenue,
- New ways of focusing on specific links in the value chain to explore value positioning,
- Value creation and flows that cut through traditional boundaries,
- New ways of managing the network of suppliers and customers to reduce the cost of operations,
- New routes for realizing the value inherent in the information that flows through the business value chain—from information to intelligence (AI/DL). This would enhance the effectiveness of decision making,
- Creatively understanding the needs of the customer in real-time and many more, to enhance customer centricity, drive innovation, value capture and therefore maximize profitability.
Most of these options did not exist two to three years back. They have surfaced recently due to advances in technologies such as Deep Neural Network, IoT, Cybersecurity, etc. The Digital Design offers additional choices with an 8X12 grid structure, therefore amplifying the opportunities to differentiate and capture value. Let us see how this happens.
- Digital business designs have the potential to make business operations efficient and fast (F),
- Enhance accuracy (A) by understanding the customer needs,
- Increase the ability to be flexible, adapt and morph/change (M) based on the changing situation,
- Increase the proactive abilities by keeping the business in close touch with the realities of a changing environment (E) and better understand the risks and opportunities that develop in real-time. The acronym FAME may be used, to sum up, the reasons for seriously considering changeover from Traditional Business Design to a Digital Business Design.
If we place the above reasoning in the context of India, there are key drivers that are responsible for accelerating the traditional to the digital transformation process.
- At the macro-environmental / ecosystem level, the Digital India program is converting all key processes related to the public services delivery to digital mode. This shall enhance the efficiency of the system and reduce corruption to a great extent.
- The current COVID 19 pandemic has further accelerated the digitization process. Health safety measures are dictating remote work, minimal contact operations, and contactless customer engagements. These are emerging as the new norms for doing business, which is resulting in completely different work cultures. The customer preferences have shifted with the safety and quality of the value chain becoming paramount as an additional differentiator to price. The regulatory environment shall enforce these safety and quality measures and become only more stringent.
- The economic ramifications of the Pandemic have resulted in a demand shock to the supply chain of many sectors of our economy. Many leading OEMs and their suppliers who are primarily SMEs are severely affected, many operating at less than 50% of their capacities as they don’t have sufficient orders. Demand generation process by direct access to customers, going beyond geographical boundaries are some of the new approaches required through innovative business designs by leveraging digital platforms. This is required to tide over not only this crisis but sustain it in the post-pandemic era.
The analysis above sets a direction for serious consideration by our business leaders, of companies both small and large. They must prepare to make some investments in technology up-gradation. But the more important aspect in the transformation process is not technology, but an in-depth understanding of the customer needs, their buying behavior, and the business imperatives, incorporating all these into a transformative business design. Thereafter only the digitization and technology aspects would become necessary. Delaying taking the steps now, would place traditionally managed organizations at very high risks, that could prove to be very costly, as survival may be at stake with an environment that is fast changing to one that drives almost everything digitally—the Digital Era is already upon us!