Published: 11. 7. 2017 in President word by Branislav Vujovic, President of New Frontier Group

Digital Transformation – Why And How?

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The analysis of the durability of all stock market companies shows that in the last 30 years, the life of almost all the companies have been cut from 60 to less than 30 years. This analysis indicates another trend, implying a change  in investor’s attitudes. 

The analysis of the durability of all stock market companies shows that in the last 30 years, the life of almost all the companies have been cut from 60 to less than 30 years. This analysis indicates another trend, implying a change  in investor’s attitudes. Previously, they invested into companies with less material capacities (factories, machinery, buildings, hotels) and material resources have a high impact in or for a company’s value. In the last 30 years, there are more investments into companies, which do not possess their own material resources, but possess intellectual properties, patents, clients, solutions and business models that increase the value of a company. This process of “dematerialization” has caused nearly two times larger investments and validation of companies with new digital business models. In 2015, the market value of the 500 most valuable companies in the world comprised 87% of the value coming from non-material sources, unlike in 1975, when this rate was the opposite. 

Current business environment changes rapidly and significantly. Digital start-up companies and other global players create new competition. Value is assigned to the new participants in the supplier chain, based on the use of new services and products, based on new technologies. There is a separation between property of material resources and valuables that can help their realization and that is how the incoming barriers in many industrial branches can be reduced. Although AirBnB and Uber do not own a single room or bed, or respectively a vehicle, they are becoming more valuable than big hotel chains or the largest taxi services. This happens due to their separation between material values from the values of services they offer in their platforms. The new business models impose changes to laws and regulations, many processes are simplified and at the same time, clients dictate changes of definitions and features of products and services, as well as their prices. Clients become centers and attach more value to the openness, transparency, speed as well as honesty and correct information, in addition to the possibilities of communication. Macroeconomic strengths change, too. Markets adapt to new, global conditions, availability of resources is different, indusas well as the prices of raw materials. New key trends are based on the new technologies, automatization and algorithms, with the use of artificial intelligence. Basic business activities change – the number of activities in the area of procurement, sales, marketing and services conducted online increases and get more automatized.

As a confirmation of these changes, it is interesting to analyze a list of retail companies and their market values in the last 10 years. It should be noted that the value of Amazon in 2016 was higher than the value of eight of the largest regular sales chain together.

This table clearly shows that Sears and JCPenny face huge problems, but a few days ago, Motley Fool published a report indicating Nordstrom’s improved position by investing into e-sale and Nordstrom Rack, the section that sells widely known brands with reduced prices.

The report also mentions two more US companies which successfully transferred their catalog sales into online sales, indicating that the online sales experience the fastest growth.

At the same time, Amazon opened its first “physical” store, named Amazon Go. The store operates without lines at the cashier, and you enter it with an Amazon card, chose your products and simply leave the store. The system calculates the shopping and charges it into your account. There have been different options tested, such as taking goods from shelves and returning before exiting the store, different combinations of products etc. The first store has preliminary opened in Seattle, and the company has announced opening more stores in the US and UK.

With this activity, Amazon confirms that physical stores have a significant role in sales in the future. The ‘Omnichannel’ approach (combining different digital and physical channels), allows clients to use different channels even for one transaction. Maximum automatization of all the processes, simple and automatic payment options, many options of self-services, opennes and transparency – these are all features of the new system of sales.

Transition from the ‘material based’ model (owning stores) and a large number of people to the new business model, using options of the digital economy and new technologies is faster, although not easy at all.

There is a key question raising from every company – HOW to adapt to new changes and secure the future. The answer lies with digital transformation. But, the problem is that there are too many different interpretations of digital transformation. Many people perceive it as a technological issue, and find solutions in adding digital channels (internet and mobile) to already existing business model, expecting results. They usually leave it to their IT departments, which are then proclaimed as innovators and visionaries of development of the company.

First of all, this is a critical issue for every company and it needs to be dealt with by the top management. They should not fear, as this is not the matter of technology, even though technology is the source of the digital revolution. Second, the company director or executive board must take responsibility and lead the process of digital transformation. It should be noted that this is a matter of strategy, not technology.

The process of defining objectives and phases of digital transformation begins with the analysis of the existing business model (which companies do themselves or with consultants’ support). This is followed by an analysis of advanced ideas as well as good practices from not only the industrial branch of the company, but also from another branches. This step should expand the horizons of the whole team and introduce them to innovations in existing digital models, but also creation of the new ones, adjusted to their general strategy and vision.

Innovations and generating digital business models are conducted through work in the individual elements of business models. Besides channels and users’ experiences that are most frequently perceived as a complete digital transformation, it is necessary to analyze other elements as well. Analysis and improvements of offers for existing or new groups of clients are also beneficial. Clients and their problems become the center of the business model, and working on new business models focuses on creating more values for clients through solving their problems. New products and services are to be considered, and selection is made among those that actually bring value to clients and those which are distinctive among competitors’ offers. Products selected this way are innovated and adjusted to the digital economy.

This has been achieved by converting physical products into digital services or adjusting products and entering new industrial branches. For example, the Metropoliten Opera has recorded their performance in New York and sold it in digital form, available to watch at home. So instead of selling 3,800 tickets, as many as the Metropoliten Opera House has, they offer direct online streaming and increase their incomes. Software producers replaced software boxes with paying monthly fees for using the program without sending a physical component. Instead of purchasing a server, one would rent a monthly service of using online servers. Britannica Encyclopaedia is no longer printed or sold physically, but only online. Now, every morning, you can read the New York Times on your phone or tablet, if you subscribe to the online version. Car2Go turned car, an industrial product, into a digital service. You can search for a vehicle online, reserve it and use it. The bill comes at the end of the month, and it is calculated by the minute of usage.

There are more key activities to be defined, taking into consideration the possibilities of automatization and algoritmization. Key resources are to be defined, in order to execute selected activities in a proper way. The most valuable quality of a digital economy is the importance of information.

It is necessary to select new partners and create a new digital ecosystem. The simplest is to remove intermediaries from the supply chain and thus reduce costs, find new products and services and use the possibilities of cooperation in activities or components, where a partner has significant economic and financial advantage.

Coming back to the sale of clothes and accessories, there have been a lot of discussions on the new model, patented by Amazon, which is production on request. This kind of production and delivery will revolutionize this industrial branch and will make ordering tailored clothes possible. This model resembles Dell’s succesfull, but unfortunately unsustainable concept, that implemented many years ago in the production of computers. In April, the New York Times explained the Amazon patent in details:

In the end, it is necessary to calculate the economic effects for each of the over-complicated business models, by analyzing expenditures and incomes. In the digital economy, many new possibilities have opened up in using services and payment modes, such as subscription and profit share, free services and products, all used to win the market.

When the whole team defines goals and directions of digital transformation, they make plans for actions and their execution. Surely, not all the ideas can bring about desirable results, and it is necessary to closely observe and make corrections, and sometimes abandon unsuccessful models. Companies should not wait for business to reach a critical situation, but should start digital transformation as soon as possible. New Frontier Group and our members from Serbia, Saga, NF Innova, Smart and NPS take part in many projects of digital transformation and we can surely help you as well.  

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