Digitization

Introduction

Digitization is a step change even greater than the internet. Exponential technology advances, greater consumer power, and increased competition mean all industries face the threat of commoditization. The winners will act now and build a strategic advantage that leaves their counterparts wondering what happened.

Definition of digital

Digitalization at its simplest means the conversion of analog information into digital information. As digitization capabilities extend, virtually every aspect of life is captured and stored in some digital form, and we move closer towards the networked interconnection of everyday objects. The impact of this is a real-time global exchange of information on multiple connected devices (fixed and mobile).

The Issue

The imperative for digital engagement

Businesses must use digital channels to create seamless and consistent engagement

Now, however, new technologies exist (see image on the left) that make it easier than ever before for companies to bring channels together, and to deliver a consistent engagement model whether customers choose to ‘tweet’ or to take their feet to the street.

Innovative companies are taking the elements of each channel that their customers value most, and combining them to deliver a more valuable experience overall. Companies should adopt a continuous improvement strategy, launching new digital channels early and iterating based on customer feedback.

The image on the left illustrates “How engagement is changing over time”

The pace of technology change is increasing exponentially

Most companies understand the need to respond and adapt to the evolving use of technology by their customers and other key stakeholders. What they do not realize is how little time they have to address these changes.

Technology adoption typically occurs in an S-curve, with an exponential growth of technology adoption from ‘early adopters’. Not only is the diffusion of individual technologies exponential, but the rate of diffusion is accelerating, and with each new technology release, the ‘early adopters’ and ‘early majority’ move further to the left. It took more than 70 years for telephones to reach 50% household penetration, compared with 28 years for radio, and 10 for internet access. Following this trend, the rate of technology adoption should continue to accelerate so that each new technology outpaces the adoption of its predecessor, and the future will see adoption rates measured in weeks and days rather than years. Google+, the new social media tool from Google took only 16 days to reach 10 million users, compared with 780 days for Twitter and 852 days for Facebook. It took 10 years for the internet to become a basic and essential part of daily life. The future will happen much faster than that.

The Challenge

Facing the implications of digital change

Loss of control over the customer relationship

The proliferation of digital channels and devices gives consumers greater access to information, and the means for communication and collaboration. The physical world is being replicated in the digital world through digital communities, businesses and assets, fundamentally changing the way consumers engage with businesses and each other.

Today’s consumer has real-time access to competitive pricing information simply by scanning a product barcode into their mobile phone and reading this information through an application such as Red Laser. In this way price transparency is increasing as consumers can compare the prices of products on the move, placing power firmly in their hand.As well as relying on brands for pricing information, consumers also used to rely on brand communication and brand values to make informed choices, but this is increasingly not the case. Today’s consumers trust each other more than they trust corporations and/or brands (78% of consumers trust peer recommendations versus 14% who trust advertisements)

The need to engage digitally with suppliers and employees

While companies tend to be aware of the need to achieve collaborative and cross-channel engagement with their customers, they are less conscious that this need applies equally to suppliers and to employees.

The rise of social media is breaking down barriers between these groups. Instead of talking one-on-one to customers, suppliers and employees, organizations are now talking to a crowd of people who are often talking to each other.

As well as generating a great deal of noise, this interaction means that information can flow in directions that the company did not anticipate.

Increased competition and the risk of commoditization

We have already identified the future trend of consumers choosing to invest their total acquisition with a smaller set of brands. This trend is emerging as a result of two forces coming together: Consumers want choice, without the cost of developing and maintaining multiple relationships; and companies are continually seeking ways to retain and develop increased share of wallet through deeper customer relationships. These two forces are made possible by digital advance and globalization. Digital channels lower barriers to entry and increase globalization, leading to a spiral of intensifying competition and commoditization. Innovative organizations are taking the opportunity to diversify, bringing cross-industry convergence and blurring of the boundaries between industries. Previously physically distinct products and sectors now compete with one another, over less clearly defined customer bases.

What needs to happen?

The need for an end-to-end response

Many companies are already developing responses to the challenge of digital by moving from a transactional to an ‘interactional’ relationship with their customers. They are inviting their customers to become part of the R&D process, the design process and the go-to-market. They are also encouraging them to participate in the post-sale support process, and taking advantage of ‘prosumerism’ as a low-cost way to provide service.

However, forward-looking companies need to do more than this. To succeed in the digital world requires embracing innovation and identifying new engagement models and new business models. It requires grasping new opportunities that exist outside traditional markets and looking for the tools that will differentiate between the mere suppliers and the ‘lifestyle partners’ of the digital age.

The need for new business and operating models

There are important lessons to be learned from the internet revolution. Firms that have capitalized on its possibilities have rewritten the rules of entire industries such as music and advertising, and internet-enabled business models such as cloud computing have experienced tremendous growth. It is this transformation of business and operating models that are needed to stand the test of time in the digital era.

This lesson is starkly illustrated in the high-street by the failure of many bricks and mortar business models to adapt to the threat of Amazon. To be successful now, we believe, requires no less than the creation of enhanced or new business models, new operating models, new ways of interacting with consumers, and new ways of selling. Even the giants of technology are recognizing the need to shift and adapt business models.

In recent months, Google has launched social networking site Google+ to rival Facebook, and Microsoft has launched the cloud version of Microsoft Office in Office365 to stave off completion from GoogleDocs and similar applications.

A structured approach to planning transformation

Organizations need a structured approach to the challenge of connecting with key audiences in the way that they increasingly expect. They must understand the threats and opportunities that the digital world presents to their business.

One possible approach is through a digital maturity assessment, to help leadership teams to both understand the challenges posed to their particular business and industry and to identify new, digital ways to engage with multiple audiences.

Ernst & Young (figure 7) assess digital maturity using five major dimensions: customers, suppliers, and partners, investors, employees, and leadership. A model like this is not a solution, it is the starting point on a transformation journey.

It is important to avoid over-complicating the topic: the primary objective should be a clear understanding of what digital means for the business. With that understanding, it becomes possible to create a prioritized action plan to ensure success and longevity in the digital world.

Ernst & Young Digital Diagnostic Model and Approach

Customers

  • Improve customer experience
  • Increase marketing, sales and service effectiveness
  • Develop a multi-channel strategy

Suppliers and partners

  • Improve transaction speeds, lower costs
  • Optimise the end-to-end digital supply chain process
  • Improve supplier relationship management
  • Optimise sales and operations planning

Employees

  • Manage organizational change
  • Develop social policies and governance
  • Develop digital skills and capabilities
  • Manage recruitment, retention, and talent

Leaders

  • Develop a digital strategy
  • Assess market and competition
  • Design operating model and organisational structure

Conclusion

A new kind of consumer means new ways of doing business

Today, most companies are either thinking about or pressing ahead with digital transformation initiatives. Every company has a website, and few marketing strategies are signed off without incorporating social media. Certainly, social media is a critical component of any digital strategy, but a holistic response to the digital shift must go much further.

The digitization of everything is a step change even greater than the invention and adoption of the internet, primarily because of its scale and pace of change. What we describe today as ‘digital’ in a few years’ time will have no need for the descriptive word. A ‘digital camera’ is already a mere ‘camera’ to those who know no different. In the same way, a ‘digital’ strategy will become business as usual strategy. This is why it is so important to get a head start and learn while there is still time.

Digital is changing the world, and progress is not linear. In a world where a smartphone is no longer just a smartphone, but a potential revolution8, we invite organizations to explore what digital advances mean for them and their stakeholders. We support the opinion of executives who view digital much more as an opportunity to be tapped than as a risk to guard against. Not every digital initiative will work for every organization, and it is important to assess capability and capacity for change before deploying a digital strategy. In general, though, the more holistic the initiative, the greater the chance of success. We believe that those who act holistically, and act now, stand to gain the greatest competitive advantage.