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Framework for Reinventing Your Business

The leaders who achieve transformative results go all-in on digital. That is, they don’t treat digital strategy as separate from their overall strategy. Instead, they lead with a digital-first mentality and make sure their digital strategy touches all aspects of their organizations. Digital transformation requires strengthening the core and building for the future at the same time.

To mitigate the effects of digital disruption while also exploring new opportunities, companies have typically followed some combination of these three strategies:

  • Creating small, independent units or startups within the larger organization
  • Doing a series of digital experiments
  • Leveraging technology to cut costs and improve efficiency

Creating an independent unit is like launching a speedboat to turn around a large ship. Often the speedboat takes off but does little to move the ship.

Experiments help a company test novel ideas and explore future trends. Proliferation of ideas across business units is a sign of entrepreneurship and enthusiasm. Consolidation is a necessary and effective way to rationalize processes and allocate resources.

However, doing experiments without a road map or a sense of direction may give the illusion of success in the short run without making any impact in the long run.

Alibaba’s four-year-old Yu’e Bao fund, set up as a repository for consumers’ leftover cash from online spending, has become the world’s largest money-market fund, with $ 165.6 billion under management, overtaking JPMorgan’s $ 150 billion money-market fund.

A framework for reinventing your business. The framework consists of four key components:

  • Reimagining your business
  • Reevaluating your value chain
  • Reconnecting with customers
  • Rebuilding your organization

Let’s take a brief look at the framework, one part at a time.

You’ll need to sit back and reflect on the core essence of your business, examining three components:

  • scope,
  • business model and
  • ecosystem.

When considering scope, you’ll need to ask yourself this fundamental question: “What business are we in?”

Competition in the digital age usually comes laterally, from new players and redefining the scope of your business is essential to ensuring future success. Technological changes also require you to rethink your business model: how you create and capture value. A shift from selling products to creating a platform requires a very different mindset and strategy.

Digital technology can significantly improve the efficiency and effectiveness of various parts of your value chain, especially as new models of R&D and innovation have emerged

Digital technology has also ushered in a new era of Industry 4.0. Innovations such as digital manufacturing, virtual and augmented reality, 3-D printing and digital supply chains are improving operational excellence.

Every company now has to think about its omnichannel strategy, which creates a synergy between its online and offline channels.

Digital technology has changed the way consumers search for information and buy products, and technology is enabling firms to collect information about the entire consumer decision journey or path to purchase, which will open up new ways for you to acquire customers.

As you try to strengthen your core business and build for the future at the same time, you’ll face the challenge of running two organizations in parallel. So instead of launching a speedboat, you must create a “landing dock” where new initiatives, or speedboats, can dock, leverage the power of the mothership, and help change its course over time.

Technology is also allowing firms to move to a more data-driven and less subjective approach to talent management.

Reimagine Your Business

Business Scope

In 1960, Theodore Levitt, a Harvard Business School professor, published a provocative paper in Harvard Business Review in which he argued that companies were too focused on products and not enough on customer needs. To help managers address this problem, he asked, “What business are you really in?”

Competition is no longer defined by traditional product or industry boundaries. The rapid development of technology is making data and software integral to almost all businesses, which is blurring industry boundaries faster than ever before.

In 1979, Michael Porter, one of my colleagues at Harvard Business School, published a landmark paper in which he argued that a company could follow one of two potential strategies for competitive advantage: either by being cheaper (that is, as a low-cost producer) or by being different (with differentiated products that command higher prices).

Amazon has mastered three skills:

  • Deep knowledge of customers obtained from mining customer data.
  • Back-end logistics for warehousing and shipping that could rival the logistics systems of FedEx and UPS.
  • Knowledge of and ability to manage technology infrastructure.

A deep understanding of customers and their demand patterns allows Amazon to have a cash conversion cycle of minus fourteen days, in contrast to the cash conversion cycle of ten days for Walmart and twenty-seven days for Target.

Paytm, an Indian startup backed by Alibaba, illustrates the idea of complementary products very well. Paytm began its operations as an online mobile-recharge company that offered consumers the convenience of adding money to their prepaid mobile phones. Consumers could use money from their Paytm wallet to buy bus and train tickets. They could use it for peer-to-peer payments. They could use it to pay offline merchants. Paytm did not charge any fee to small merchants for accepting Paytm money. Paytm did charge large merchants and consumers were charged a fee if they took money out of the Paytm system.

The most ambitious strategy is to devise an approach that benefits from both complements and network effects.

The two most valuable assets of a company today are its data and its customer base, yet they don’t show up in the balance sheet.

The value of data increases as more data is collected — sort of a “data network effect”. Amazon’s Echo gets better as people use it more and as Amazon refines its functions. Tesla improves its self-driving algorithms and updates its software regularly as it gets more data from its cars.

Artificial intelligence and the internet of things are creating products with the ability to learn and improve the more the products are used.

Traditionally companies expand into adjacent businesses where they can leverage their existing core capabilities. However, a customer-centric view requires a firm to follow shifts in customer needs and to develop new capabilities to meet those needs.

The tension between focus and broad scope is reasonable and healthy. It’s best to think about your consumers’ point of view and how your core competencies can help serve those consumer needs.

If automobiles become software on wheels, Apple may have a strong role to play in this industry.

Business Model

A business model defines the way a firm creates, delivers and captures value.

While the unbundling of music was good for consumers, it wreaked havoc on the music industry, which saw a significant drop in its revenues.

The industry had arrived at a kind of paradox: while the popularity of music among consumers reached record highs, the music studios and artists suffered a dramatic drop in their income. Concerts were the razors to sell music albums — the blades. As the income from the selling of recorded music (the blades) declined, studios and artists converted the razor (i.e., the concerts) into blades, or the money-making part of their business.

Like the music industry, newspapers witnessed unbundling due to digital technology. To compensate for the losses in print, every newspaper built an online presence with the hope of reaching a much larger audience around the globe and of generating lots of money in online advertising. For decades they had sold subscriptions at a low price (the razor) to generate revenue through advertising (the blade).

Was it time to convert this razor into a blade?

In March 2011, NYT decided to create a paywall and made its website restricted. Users would get free access to twenty articles per month, after which they had to pay. The value of a newspaper is not simply in information — anyone can tweet or blog and create information, fake or real. The value is in the curation of that information. During the first half of 2017, over 70 percent of NYT revenue came from subscriptions, a large portion from digital subscribers. The razor has become the blade!

In January 2016, IBM acquired The Weather Company for about $ 2 billion and David Kenny became the head of IBM Watson with the goal of doing for IBM what he had done for The Weather Company.

When Hubert Joly joined Best Buy as its CEO in September 2012, he faced a number of challenges. To address these challenges, Joly crafted a “Renew Blue” strategy that addressed Best Buy’s two biggest problems: declining same-store sales and decreasing operating margin.

Shifts in technology and changes in consumer behavior typically disrupt companies by significantly affecting their source of income even when these companies continue to create tremendous value for their customers. The old ways of capturing value may no longer work and companies need to find new and often hidden sources of value. What is the future of retailing and brick-and-mortar establishments in the digital age? Perhaps it is time for them to rethink their business model and shift from selling products to selling experiences.

Oscar Farinetti realized from an earlier mistake that restaurants alone are not very profitable. They are a risky venture, with a failure rate of almost 80 percent in large cities. Oscar Farinetti wants to bring Italian food and its experience to the world, the way Howard Schultz, chairman of Starbucks, brought the Italian coffee experience to everyone. And by 2016, Eataly had built a global brand with half a billion dollars in revenues, healthy profitability and an aggressive plan to grow all around the world.

As consumers move away from products to experiences, creating value and sustainable advantage will not be based on product features alone.

Almost a century ago automobile manufacturers settled on a system of franchising whereby independent dealers would sell mostly a single company’s models. Over time these dealerships have become large businesses in their own right, with many boasting sales in billions of dollars.

In the last decade consumer buying behavior has changed dramatically. Studies by Google show that most consumers start their search online about two or three months before they actually buy a car.

Surveys also show that consumers hate visiting dealers. They find the experience boring, confrontational and time-consuming.

A study by McKinsey found that ten years ago Americans visited an average of five dealers, perhaps to compare and negotiate prices, but now they visit 1.6 dealers on average. There is really no need for dealers to follow a capital – and asset – intensive model anymore. As virtual reality becomes mainstream, visiting a dealer to test-drive a car may become a thing of the past.

Any business model has to start with solving customers’ pain points and then thinking about how to make that solution economically viable for the company.

In April 2015, Amsterdam’s Schiphol Airport, Europe’s fourth-busiest airport, reached an agreement with Philips, the global leader in lighting, and Cofely, an energy services company, to pay for “lighting as a service” in its terminal buildings.

Michelin has introduced a similar “pay-per-mile” program for the use of its tires. Hilti, the tool manufacturer, introduced a fleet-management system in which customers pay a monthly subscription fee to get tools on-demand instead of buying them.

As global competition for products intensifies and product differentiation diminishes, it is not surprising that companies are relying more on services for their growth and profitability.

Product-as-a-service is fundamentally a different business model for the following reasons:

  • Outcome-Based. Under the outcome-based model, Rolls-Royce is paid only for every hour the plane is flying, thus aligning the incentives for both parties.
  • Improved Reliability and Reduced Cost.
  • Customer-Focused Innovation. An outcome-based model drives a company to become customer-focused and thereby changes the company’s innovation process.
  • Organizational Shift. The product – as – a – service business model leads to significant shifts both within and beyond the organization.

“Changing to an outcome-based model means willing to be [in] an environment where you don’t know everything about everything that you’re working on. For people who are very risk averse, that’s an uncomfortable place to be.”[1]

As we move toward a demand-based economy, access, not ownership of products, will drive the success of businesses.

Platforms and Ecosystems

Gelato, a startup based in Norway, decided to reinvent the printing industry to solve the problems of buyers and suppliers by building a platform that connects the two parties. Customers can upload their print design on Gelato’s cloud and order any quantity of the print material to be delivered anywhere in the forty countries where Gelato currently operates. Gelato matches this demand with the unused capacity of a supplier who is closest to the local delivery address.

Why is there a sudden explosion of platforms? To understand this, it is useful to go back to 1776 when Adam Smith published his classic book The Wealth of Nations. If the free market is supposed to efficiently match workers with tasks, then why do firms exist? Why don’t we sell our skills in an open market instead of working for a company?

Today digital technology has dramatically reduced the transaction cost of finding and selling goods and services.

  • Greater Access to Sellers. The platform model works best in fragmented markets by aggregating dispersed supply and demand.
  • Better Value to Consumers. Platforms also provide better value to consumers by offering them convenience and a greater variety of products and services at competitive prices.
  • Market Growth. By lowering transaction costs, platforms open up whole new areas of supply and demand.
  • Asset-light. Platform businesses facilitate the transactions of third-party players without owning many assets.
  • Scalability. In addition to having a low capital requirement, platform businesses scale quickly due to network effects.

Innovation. By attracting large numbers of sellers and developers, a platform creates an implicit incentive for them to innovate and improve their product and service to remain competitive.

An inventory-based model allows for greater control over product quality, delivery and availability and over customer service. In summary, a platform offers scale with low capital investment, but it comes with limited control that may lead to poor customer experience.

In the connected world, the battle is no longer fought among products. Instead, competitive advantage comes from building a platform that has an ecosystem around it.

In 2010, two facts became clear to Jeff Immelt, GE’s CEO at the time. First, industrial productivity was expected to drop to less than 1 percent in the next decade, compared with 4 percent during the last decade. Second, future improvements in productivity would come from software and analytics instead of physical improvements in products. After much deliberation, GE management came up with the idea of “digital twin”. Jeff Immelt decided to transform GE into an industrial digital company, and in 2011 he created GE Software, located in San Ramon, California and installed Bill Ruh as its head.

Digital twin and asset-performance-management (APM) tools allowed GE to do predictive maintenance, minimize downtime, and optimize assets, all of which saved billions of dollars for its clients. Using weather forecasts and historical data from its turbines, GE Renewable can now forecast farms’ power production seven days ahead, allowing them to better manage their power-generation business. In the next phase GE decided to open up its Predix platform to non-GE customers.

In 2016, Goldman Sachs shocked the financial-services industry by opening up its structured-notes business to competitors. The evolution of Goldman Sachs’s digital journey followed a pattern remarkably similar to that of GE.

Goldman first embarked on creating internal efficiencies across business units. Next, it opened up its Marquee platform to clients so that they could use Goldman’s proprietary database and tools to analyze risk or construct their portfolio. Opening the platform to competition effectively increased the size of the pie, and Goldman Sachs took a cut from the sale of competitors’ products on its platform.

In the digital age customers are likely to compare products anyway, and by providing a central place for them to do so, the bank would benefit from getting a portion of revenue if a competing product were sold on its platform.

Platforms enable transactions between multiple parties. Here are some guidelines:

  • Develop Compelling Applications or Services Yourself.
  • Start with a Focus.
  • Subsidize One Side of the Platform.
  • Build a Freemium Model.

The primary function of a platform is to enable and facilitate transactions. Recall that a platform business works by aggregating demand from a fragmented market and by reducing transaction costs.

In general, an open system creates a larger market and a closed system creates a better customer experience.

Platforms develop an ecosystem of partners who provide complementary products and services. The word ecosystem was first coined in 1930 by British botanist Roy Clapham, and later popularized by ecologist Arthur Tansley to describe a community of organisms who, in conjunction with their environment, interact as a system.

Banks don’t want Apple to own the user interface and effectively become a utility in the background, yet they can’t ignore Apple either, because of Apple’s strong affinity among consumers.

The company that has access to the customer interface is the one who possesses the opportunity to do one-to-one marketing and personalized services for each customer through the data that is collected.

Alvin Roth, winner of the 2012 Nobel Prize in economics, said, “Traditional economics views markets as simply the confluence of supply and demand. A new field of economics, known as ‘market design’, recognizes that well – functioning markets depend on detailed rules.”[2]

Markets or platforms need to provide thickness, which brings large numbers of buyers and sellers together. They need to make it safe for participants to reveal and act on confidential information they may hold. And they need to manage congestion, or competition and complexity, that arises from thickness.

Reevaluate Your Value Chain

Rethinking R&D and Innovation

Leveraging the expertise and insights of both users and experts outside the company, often called open innovation or crowdsourcing, has been on the rise in recent years.

As product lifecycles become shorter and R&D costs continue to increase, internal innovation alone is no longer enough to support companies’ growth expectations.

Technology has also played a significant role by making design, development and collaboration tools affordable and accessible, which in turn has made innovation possible for small businesses, communities and individuals.

Why are users and contest participants able to outperform companies’ internal high-caliber scientific teams for some of the most complex problems? Internal company teams often view a problem with a single lens and attempt to find a solution using a handful of approaches.

Why does diversity of methods matter? In a seminal paper published in 1969, two economists showed that combining forecasts from different models produces better results than does a forecast from a single complex model.

Companies aim to hire the best people, so on average their scientists and engineers are smarter than the outsiders and therefore likely to produce better ideas. However, we are usually not interested in averages but — rather — in one or two winning ideas that can lead to a successful innovation. In other words, a company is interested in the extreme values of a probability distribution instead of its mean.

User innovators are by definition close to their market, as they are in essence innovating for themselves. This reduces the need for and cost of consumer research and allows for quick and inexpensive in-market product testing.

Contestants in an open innovation are self-selecting, working on the problem they are most passionate about.

Von Hippel and his colleagues conducted a study in Finland and found four factors that influenced user participation in open innovation:

  • personal need,
  • fun and learning,
  • desire to help others and
  • the monetary reward.

To successfully leverage the power of open innovation, firms should consider the following issues.

Open innovation is best suited for well-defined problems.

Jon Fredrickson, vice president and chief innovation officer of InnoCentive, a firm that helps companies with their open-innovation projects, said, “One of the most difficult challenges we face with clients is clearly defining the problem. They can tell us what they want, but we often have to go back to the first principles to find out what is preventing them for achieving what they want.”[3]

If, on the other hand, the problem is broad and vague, open innovation turns into brainstorming rather than problem-solving.

In a crowdsourcing future, it will be the questions companies ask, not the solutions they know, that will determine their success.

Operational Excellence

In 2011 the German government conceived Industry 4.0, or the fourth industrial revolution, and since then the concept and the ideas behind it have caught the attention of many companies around the world. Today, digital technology is leading the fourth industrial revolution, which allows the convergence of digital and physical products.

In Amberg, a small town in Bavaria, Siemen’s has built a factory of the future that produces programmable logic controllers (PLCs), devices used for automating industrial equipment and processes. Almost 75 percent of the operations in this factory are digitized and automated.

To understand the importance of digitization, it is helpful to distinguish it from automation. Eckard Eberle, CEO of process automation in the Siemens Process Industries and Drives Division, describes the classic automation process: In manufacturing and process industries, people are running their plants deterministically. By this I mean they have a complete understanding . . . [of] process . . . so everything operates under the assumption that the complete system is described. This is something that is very static, but also stable. It has the advantage that it is very robust.[4]

A digital factory, by comparison, provides all the advantages of automation in terms of speed and efficiency but also allows for flexibility and tracking. Digitization of operations allows a company to quickly change any component, machine or process. And this flexibility, again, has not come at the cost of speed and productivity.

This is how Siemens describes its Amberg smart factory and the future of Industry 4.0: Here, products control their own manufacturing processes. In other words, their product codes tell production machines what requirements they have and which production steps must be taken next. Products and machines will determine among themselves which items on which production lines should be completed first in order to meet delivery deadlines.

The Industry 4.0 vision also foresees factories that will be able to manufacture one-of-a-kind product without being unprofitable.

Falling costs to connect, store and process machine data are driving the growth of the industrial internet. The industrial internet differs from the consumer internet in several important ways.

  • First, mistakes are costly in the industrial world. An error in a software algorithm for the industrial world could lead to the failure of a gas turbine, resulting in millions of dollars’ worth of damage.
  • Second, security for industrial equipment, such as a power plant, is far more critical.
  • Third, getting data from machines located in remote places, such as an oil rig in the Gulf of Mexico, is not possible using the consumer internet.

McKinsey Global Institute estimates that operational efficiencies in factories through the internet of things has the potential to add $ 1.2 to $ 3.7 trillion in value annually to the global economy by 2025.

In the last few years, 3-D printing has transitioned from being a mere curiosity for techies to prototyping for machines and printing large volumes of hearing aids and dental implants. It is now finding its way into the mainstream operations of companies.

Additive manufacturing provides many benefits and has several implications that go beyond manufacturing:

  • Ability to Produce More Complex and Better Products.
  • Customization.
  • On-Demand Production.
  • Reduced Cost of Inventory and Logistics.
  • Design Platforms.
  • Intellectual Property.
  • Impact on Workforce. Decentralized manufacturing enabled by 3-D printing is likely to bring manufacturing back from emerging markets to developed economies.

Developments in additive manufacturing are already moving beyond 3-D printing. In its self-assembly lab, MIT is experimenting with 4-D printing, in which an object can transform itself in a preprogrammed way in response to a stimulus such as a change in temperature or contact with water.

Virtual reality (VR), which immerses you in a virtual world, and augmented reality (AR), which overlays virtual elements on a physical product, have improved dramatically in recent years. These technologies are now being increasingly used for design, assembly and training in industrial settings.

  • Design. The next revolution in product design is VR that allows designers to virtually interact with their creation and modify it.
  • Assembly. Augmented reality — delivered via wearable devices such as smart glasses — overlays computer-generated instructional videos, images or text, all of which enables engineers to operate efficiently and accurately without having to rely on physical manuals. These devices are being used in manufacturing, warehousing and field operations.
  • Training. Goldman Sachs estimates that the market for AR and VR will be between $ 80 billion and $ 182 billion by 2025.

Technology is transforming not just design and manufacturing. It is revolutionizing the entire supply chain, including warehousing, inventory management, logistics and delivery.

Real-time information and data analytics are key to implementing demand-driven supply chains. Amazon has filed a patent for a “flying warehouse” equipped with drones, that will move close to key locations based on their demand patterns.

According to Gartner, demand-driven supply chains are able to reduce inventory by 15 percent, increase order fill rates by 20 percent or more, increase revenues by 2 percent on average and improve gross margins by 3 percent to 5 percent.

Not surprisingly, Amazon relies heavily on technology to increase speed and reduce fulfillment cost. Its acquisition of Kiva Systems for $ 775 million in 2012 transformed the way Amazon manages its warehouses using robots.

Locus Robotics, a startup based in Andover, Massachusetts, has developed the next generation of robots for warehouses. By using its robot, called LocusBot, Quiet Logistics — a third – party logistics company that does fulfillment for Gilt, Bonobos and Zara — was able to increase its productivity by eight times.

In addition to using robots, tagging individual items with RFID chips enables better and more accurate management of inventory.

With the rise of e – commerce, delivery has become more critical than ever before. The last mile of delivery is perhaps the most complicated and expensive part of any delivery operation.

To design an optimal route to maximize efficiency and minimize fuel consumption, known as the “traveling salesman” problem in operations research, is a complex problem. Knowing the location of a driver and the real-time traffic information, route-optimization software called ORION (on-road integrated optimization and navigation) directs the driver to take the optimal route. In the four years since its roll out, ORION has eliminated 1.6 million hours of truck idling time and has produced an annual savings of 85 million miles in driving and 8.5 million gallons in fuel consumption.

Real-time data flow and automation are radically transforming service industries as well.

Goldman Sachs is in the process of automating its IPO process. The company broke down a typical deal into 127 steps and then went on to identify that about half of these steps could be handled by algorithms. According to Bloomberg, a computer interface called Deal Link has replaced informal checklists that were once tended and passed down between generations of rainmakers.

Auditing companies like Deloitte are using artificial intelligence and machine learning to identify high-risk accounting areas and to spot patterns in financial transactions.

Omnichannel Strategy

As the world moves from bricks to clicks, companies are struggling to develop an effective omnichannel strategy.

Online travel agencies (OTAs). By aggregating demand for multiple hotel properties, OTAs managed a 23 percent penetration in the European hotel market in 2014, compared with only 9 percent by hotels’ own websites.

Almost all hotels and airlines are facing similar pressure from OTAs. These channel partners are both friends and enemies at the same time — friends because they bring additional business in an industry (hotels) with high fixed costs and an average occupancy rate that doesn’t reach 70 percent, but also enemies because they divert a large portion of traffic from a hotel’s own website and because bookings made through OTAs cost hotel owners as much as 25 percent in commission.

Ask yourself what consumer problems you are trying to solve and how technology might enable you to solve those problems. In a retail environment there are at least four consumer pain points that warrant attention:

  • Finding Things. How many times have you gone to a hardware store, a bookstore or a department store and been unable to find the exact item that you were looking for?
  • Trying Things. Most consumers want to try multiple items before selecting the one they’ll buy.
  • Paying for Things. Perhaps the worst part of a shopping experience is when you’ve found the ideal product but have to wait in a long line to pay for it. Starbucks’s mobile app has been a huge success because it solved exactly this problem for consumers.
  • Returning Things. According to the National Retail Federation, over 10 percent of the holiday gifts purchased in 2015 were returned. Return rates for online purchases are even higher, estimated to range from 15 percent to 30 percent.

In recent years Amazon shocked the retail industry by opening a handful of physical stores.

There are at least four reasons for Amazon to test this omnichannel strategy.

  • New Product Categories. Retail stores continue to dominate several product categories, such as groceries, furniture and large appliances.
  • Amazon Devices. Amazon has sold these devices through retailers such as Best Buy and in recent years it has also started opening pop-up stores to increase their visibility.
  • Prime Membership. Physical stores can potentially become a customer acquisition channel for Amazon’s Prime membership and online commerce.
  • Reinventing Retail. Testing physical stores also allows Amazon to reinvent the retail industry.

Reconnect with Your Customers

Acquiring Customers

Growth is a key priority for every business and acquiring new customers is a major driver of growth.

Which customers should you acquire, and how should you go about acquiring them?

Most companies track a host of short-term metrics to assess their marketing campaigns — impressions, number of clicks, click-through rate (CTR), conversion rate (from clicks to purchase) and customer acquisition cost (CAC). Of all these, CAC often becomes the key metric for managers when evaluating the effectiveness of their marketing efforts and when allocating budgets.

CAC ignores how much customers spend with the firm and their retention rate, both of which determine the long-term profitability of customers, also called customer lifetime value (CLV).

According to the familiar 80 – 20 rule, 20 percent of the customers provide 80 percent of the revenue. However, research shows that if we focus on profitability instead of revenues, the rule would be 200 – 20, where 20 percent of the customers provide almost 200 percent of the profit!

A company with a large market share may be saddled with a significant proportion of unprofitable customers. First, most companies are organized by product or business units that mask huge variation in the profitability of customers within that product or business unit. Second, to measure customer profitability a firm needs to adopt activity-based costing to allocate costs to each customer or customer segment.

The customer-acquisition process must begin with a deep understanding of a customer’s decision journey or path to purchase.

Recent developments in technology are making it possible to track product consumption.

The battle for consumers begins long before they buy or experience a product. It starts when they open their laptops or tap on their mobile phones to search for a product. In 2011, Google coined the term “zero moment of truth” (ZMOT) to reflect the importance of this period of online searching before consumers show up in a store or make an online purchase.

The rise of social media and the increasing use of reviews by consumers have made the third moment of truth (TMOT) a critical factor. This is when loyal fans of a product become passionate advocates for it on social media and consumer-review sites.

The consumer journey from ZMOT to FMOT typically involves four stages:

  • awareness,
  • consideration,
  • evaluation and
  • purchase.

If Twitter is the one- hour network, Facebook is one day and Pinterest is one week. Slow content — a recipe, for example — will work best on Pinterest.

Although short-term discounts may provide a quick win in acquiring new customers, word-of-mouth and referral programs are more effective in the long run.

Recognizing that not all customers are equally price sensitive or equally valuable, firms may want to consider deliberately making it a little harder for consumers to find discounted items.

Going beyond ad clicks to understand consumer pain points along their decision journey can help companies make their acquisition programs more effective.

Most discussions about digital marketing center almost exclusively around digital advertising, even though all 4Ps influence customer acquisition and retention.

For digital products with almost zero marginal cost of production and distribution, a powerful strategy is “freemium”.

A critical question in designing a freemium product is how much to give away for free. Give too little and consumers won’t be excited to join. Give too much and no one will pay to upgrade.

Engaging Consumers

The advertising industry has come up with innovative metrics for ad exposure: Facebook considers it a view when a video plays for three seconds on its site. Snapchat counts it as a view if the video is rendered on the screen, even if it plays for half a second.

In 2016, after months of deliberation, the Media Rating Council, an industry organization that sets standards for ad measurement, reported its ruling that a mobile-video ad impression is delivered if 50 percent of ad pixels are in view for two consecutive seconds. No matter what study you believe in, is a 1 percent click-through rate for online ads a huge success? Put differently, when was the last time you declared a victory when 99 percent of the time you failed to achieve your goal?

As consumers, we have come to accept annoying ads as the cost of getting free content. But are there better ways to go about this, ways that help both consumers and brands?

The goal of marketing is to create value for consumers. Tesco’s introduction of virtual stores in South Korea and Unilever’s mobile radio station in India provide two excellent case studies of leveraging mobile technology to create win-win strategies for the company and for consumers.

Marketing is not just advertising. Neither Tesco nor Unilever created another ad campaign to engage consumers. Instead, they focused on solving consumers’ problems and providing consumers significant value.

It is ironic that in a world of two-way communication, most advertisers still follow the age-old one-way communication approach in which consumers are passive receivers of banner or preroll ads.

When M.V. Rajamannar (Raja) joined Mastercard in September 2013 as its chief marketing officer (CMO), he inherited a strong brand and the iconic “Priceless” ad campaign. Our brand was positioned as “the best way to pay” even though payment is the lowest emotional point for a consumer during her purchase. Consumers don’t get up in the morning thinking about payments.

In the era of Netflix and ad blocking no one is listening to our story, no matter how compelling it is. We need to shift from storytelling to story making by making consumers an integral part of the story.

The digital engine is a seven-step process based on insights gleaned from data and real-time optimization.

  • Emotional Spark. The first step is to create an emotional spark and a connection with consumers.
  • Engagement. By using data to identify the right audience, Mastercard targets that audience with a spark video through Facebook and social media.
  • Offers. With the goal of helping its partner banks and merchants in driving their business.
  • Real-Time Optimization.
  • Amplification. Real-time testing.
  • Network Effects.
  • Incremental Transactions.

Important lessons on how to engage consumers:

  • Have a Broad Message.
  • Shift from Storytelling to Story Making.
  • Be Consistent with the Brand Value.
  • Create Engagement that Drives Business.

We now have the ability to wait for the right moment before sending a message to a consumer’s mobile phone. This is the era of micromoments, when messages need to arrive at the proper time, in the proper context. Focus less on consumer demographics, interests, or even past purchases than on the moment and the context.

A 2015 study by Forrester found that only one-third of businesses prioritize a moment-based approach and only 2 percent of firms have all the necessary elements for a moments-ready organization.

Moment-based program? Here are some guidelines:

  • Map Consumers’ Journey to Understand Their Intent and Context. Elaborating on the intent-context- immediacy nature of micromoments, Lisa Gevelber, Google’s vice president for marketing and a pioneer of the micromoments concept, said, “The advertising game is no longer about reach and frequency. Now more than ever, intent is more important than identity and demographics, and immediacy is more important than brand loyalty.”[5]
  • Classify Different Moments into Coherent Groups. Google has classified micromoments across four groups: I want to know, I want to go, I want to do and I want to buy.
  • Provide Useful Information.
  • Create Snackable Content. Based on its studies Google concluded that the average time spent per mobile session is only one minute and ten seconds long.
  • Speed Matters.

Measuring and Optimizing Marketing Spend

Syncapse, a company that specializes in “social intelligence” created an even bigger splash by declaring that, on average, the value of a Facebook fan was roughly $ 174. For Coke specifically, a fan was worth a little over $ 70.

Across five experiments and two meta-analyses involving over 14,000 consumers, we found that a Facebook “like” has no impact on the attitudes and buying habits of either consumers or their online friends.

It seems that branded keywords are ineffective for well-known brands such as eBay or Amazon, but may have a positive impact for lesser-known brands and restaurants.

Highlight (orange) – 9. Measuring and Optimizing Marketing Spend > Page 159 · Location 2698

Google provides an overview of various attribution models used in the industry. The “last interaction” method gives 100 percent of the credit to the last touchpoint. The “time decay” approach gives more weight to the later touchpoints. Model-based methods use ad-exposure and consumer-response data to deduce the effect of each ad along the consumer journey. Experiments, often considered the gold standard, show ads of a target brand in the test group but not in the control group.

Proper attribution is critical for optimal budget allocation.

If you see a search or display ad, you may not click on it at that very moment but it may still influence your behavior at a later point in time.

The ability to conduct field experiments quickly and cheaply and the possibility of building rigorous models using large amounts of advertising and purchase data are enabling firms to better measure and optimize their marketing budgets. However, managers must be vigilant against the false metrics and spurious analyses that still seem to permeate the industry.

Rebuild Your Organization

Managing Digital Transition

Incumbents have to strengthen their core and build for the future at the same time — a much harder task than starting from scratch. Sometimes the future direction becomes clear when conditions limit options for current business practices.

The future path also becomes clear if you broaden your lens.

Adobe. IBM and Oracle were the go-to companies for CIOs, and Salesforce had cornered the market for sales executives, but there was a white space for CMOs. Adobe’s acquisition of Omniture turned out to be a remarkable success, and by the end of FY2016, the company had generated almost $ 1.7 billion from digital marketing, which represented about 30 percent of the company’s total revenue.

Digital transition involves managing existing business and building for the future at the same time. It is like changing the engine of a plane while in flight. The plane is going to go down first before it goes up again. You have to find some internally galvanizing functions to show why change is needed. What was needed was an ability to paint [a] picture [of] how this transition would happen in the next three years so the financial community could make a good assessment.

The speed of transition depends on three key factors:

  • Consumers. The first and most critical factor is the trend in consumers’ behavior.
  • Competitors.
  • Company. Perhaps the most significant bottleneck in any digital transition is the company itself — its skills, capabilities, and organizational structure.

Many companies go through digital transition in three stages.

  • The first stage usually involves using technology to reduce cost and improve efficiency in existing business operations.
  • In the second stage, companies open up their technology platform to clients.
  • In the third stage, companies tend to move toward a platform strategy by opening up their system to third-party players, sometimes even competitors.

Digitization often leads to significant changes in the internal operations of a company, and every company should be ready for those changes to ensure a successful transition.

Designing an Organization for Innovation

Can you morph an old company into a new one by transforming it from within?

At Mastercard, Ajay Banga is trying to “build a new company from inside an established one”.

Inspired by Lou Gerstner’s transformation of IBM from a hardware to a services company, Goldman Sachs embarked on a journey to create a new firm from within by leveraging technology.

Lloyd Blankfein, Goldman’s CEO, and R. Martin Chavez, Goldman’s chief information officer at the time (now its CFO), led the company on a journey that had three broad phases. First, they built a technology platform for the entire firm by centralizing core components of work, removing duplication and breaking divisional silos. Next, in order to strengthen the core, Goldman opened up its platform to its clients.

To position itself for the future, Goldman also started building new businesses. Two examples of this are SIMON, its platform for structured notes, which even Goldman’s competitors are invited to join, and Marcus, its online consumer-lending unit. To implement this strategy, Goldman formed two internal groups: Principal Strategic Investment (PSI) and the Digital Strategies Group (DSG).

PSI, led by Global Head Darren Cohen, had the dual goal of leveraging new technology to shape and strengthen the core businesses of Goldman, and also managing the firm’s $ 1 billion strategic-investment portfolio by identifying promising technology startups.

A June 2016 internal memo introduced the DSG: “As our digital initiatives expand, the DSG will enable us to make globally coordinated, cross-product, timely decisions on the strategy, resourcing, implementation and marketing of our digital offering”.[6]

Skills, Capability, and Talent Management

One powerful approach for leveraging massive amounts of data is through machine learning and artificial intelligence (AI). Today, AI is the force behind automation, and it creates fear and excitement at the same time.

In 2012, a team led by Geoff Hinton, at the University of Toronto, used a novel approach, called “deep learning” which allowed them to improve the image-recognition accuracy to 85 percent.

Deep learning is based on artificial neural networks (ANNs), which are rooted in how the human brain works. ANNs have been around for several decades, but the breakthrough came from a new method called “convolution neural net”. Effectively, this approach shows that with a single “layer” of network you can identify only simple patterns, but with multiple layers you can find patterns of patterns. Networks with twenty to thirty layers are now commonly used.

Unsupervised learning is extremely difficult, and scholars struggled for a long time to find a way to make it work. The breakthrough came in 2011, when Quoc Le, a doctoral student of the leading AI scholar Andrew Ng, developed an approach that successfully detected cats from millions of unlabeled YouTube videos.

The ability to collect data and train machines to analyze and learn is transforming every industry, and it is going to have a major impact on jobs.

Guy Halfteck, founder and CEO of Knack, a startup based in Silicon Valley, believes that by using mobile games and analytics his company can do as well as or better than companies that use the traditional interview process for recruiting consultants, financial analysts, surgeons, or people of just about any skill.

Knack’s games create an incredibly immersive and engaging digital experience. Playing a game involves up to 2,500 microbehaviors per game, or about 250 microbehaviors per minute. These include active and passive decisions, actions, reactions, learning, exploration and more. Knack scores are computed from the patterns of how an individual plays the game, rather than how well they score on the game.

Rino Piazzolla of AXA Group is now using Knack for executive development. This is how he described it: Knack originally positioned itself for recruiting, but I talked to Guy [founder of Knack] and said that if you can see my strengths, then you can also see my weaknesses, which could be valuable for assessment and development purposes.

Rapid changes in technology also warrant continuous learning. The need for continuous learning also raises important questions for our education system. Is the four-year college degree, which has been around for centuries, the right model today? Many countries, such as India, are investing heavily in skill-based education that needs to be constantly updated as the skill requirements change and evolve.

Digital tools and technology are now allowing firms to test new and faster ways to assess employees’ performance. Technology is not only useful in providing real-time feedback. The data-driven approach can also identify good performers without any bias inherent in rater-driven evaluations.

Retaining talented employees is a constant challenge for every organization. Human resource decisions ranging from recruiting and training to evaluation and retention will be driven by data and machine-learning algorithms.


[1] In the book on page 55

[2] In the book on page 76

[3] In the book on page 87

[4] In the book on page 92

[5] In the book on page 150

[6] In the book ona page 185

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