The role of leadership and strategy in digital transformation

We live in a rapidly changing world. Every part of our society is undergoing fundamental transformation driven by a fast-paced digital revolution. The revolution started more than a decade ago but is now accelerating and becoming more and more overwhelming.

We feel it especially in the business world. New business models are wreaking havoc across all industries. Google is transforming the advertising world, Amazon is transforming the publishing sector, Netflix is transforming the television industry, Airbnb is transforming the hotel business and Uber is transforming taxi services.

The list goes on and yet it is only the beginning. Emerging technologies such as the Internet of Things (IoT), Artificial Intelligence (AI), machine learning, cloud computing, blockchain and 3D printing are giving rise to new amazing products: Self-driving cars, health-monitoring wearables, robotic surgery, precision agriculture, smart factories, etc.

With this tech wave coming at them, business leaders around the world find themselves at an inflection point. They are grappling with the implications of the digital revolution and feel an increasing pressure to act now – either to prevent disruption or to seize a competitive advantage.

Opportunities and threats

According to research, it is indeed important to act now. Companies that embrace new digital technologies combined with strong leadership tend to outperform their peers. They are 26% more profitable and generate 9% more revenue than their average industry competitor (Westerman et al. 2014).

If tackled right, digital transformation presents a tremendous opportunity for almost any type of company. A passive approach, on the other hand, poses the risk of disruption, leading to declining market shares or even bankruptcy.

A good example of the risks involved is the recent transformation of the video business. Netflix entered as a challenger to Blockbuster in the late 1990’s offering DVD subscriptions based on physical delivery. In the early 2000’s, however, the company switched to video on-demand, taking advantage of the improved internet bandwidth.

The growing popularity of streaming video coupled with lower costs turned Netflix into a deadly competitor. After years of declining income and many desparate attempts to catch up with Netflix, Blockbuster closed its remaining 300 stores in 2014 (Rogers 2016).

How to tackle the digital revolution

To take advantage of digital technologies, it is obviously necessary to invest in them. Investment, however, is not enough. Strong leadership is also needed. Without leadership, companies risk implementing trendy, but incompatible, platforms or services that make it harder to achieve true digital mastery.

Strong leadership means, first and foremost, commitment from top management. Chief executives must agree to make the digital journey a core part of the business. They must follow up by setting direction, building momentum and ensuring backing from the entire organization.

According to Ross et al. (2016), leaders should take their organizations through at least the following three steps:

  1. They should craft a compelling digital vision, which motivates employees, informs strategic planning and guides day-to-day decisions across the organization
  2. They should implement an operational backbone capable of serving as the single source of truth (i.e. integrating customer data, product data, transaction data, etc.)
  3. They should develop innovative digital services (websites, mobile apps, etc.) on the basis of the operational backbone

In doing the above, companies may use in-house developed platforms, purchased platforms or cloud-based platforms. The key to success, however, is integration of these platforms.

Crafting a digital vision

A digital vision is perhaps the most important part of the digital journey. It requires not only an understanding of what is technically possible, but also the ability to discover new business opportunities on the basis of this insight. It is not the technology itself that matters, but how it is used to create a strong value proposition in the context of a business plan.

Digital visions are best understood through examples. However, they come in many different forms and are difficult to categorize, let alone conceptualize. Some focus on improved customer relations, some on streamlining operations, some on transforming products and others on creating completely new business models.

The proliferation of digital visions is driven by the development of technology, which continues to create new opportunities. As an example, Artificial Intelligence (AI) is now giving rise to new digital visions in the retail sector. This is illustrated by the competition between Nordstrom and Stitch Fix.

Nordstrom: Bridging the on- and offline world

Nordstrom is a large fashion retailer in the US that uses technology in a clever way to improve customer service. At the core of its strategy is a reward program linked to a payment card that tracks spending and builds detailed customer profiles. Nordstrom can see how often each customer shops, what he or she buys, his or her favorite brands, etc. The data is collected, integrated, analyzed and used in different types of application.

For example, using a personal-book app integrated with Nordstrom’s Point of Sales (POS) system, shop assistants in physical stores can look up a customer’s unique profile when he or she asks for help. After the store visit, the assistant can even use the personal-book app to send emails to the customer about new arrivals or upcoming sales events.

PersonalBookNordstrom’s Personal Book (Sreekanth 2018)

Nordstrom keeps customers engaged beyond the physical store. Customers can log in to Nordstrom’s website or use its mobile app to access styling tips as well as tools that facilitate physical shopping. For example, using the mobile app they can look up availability of a product in a specific store, order the product for pick up or have a shop assistant reserve it for trial in a fitting room.

Nordstrom’s digital strategy has required significant investments, but is not based on the most advanced technology available. Rather, it is guided by a clear vision of excellent customer service. The purpose is not to replace human work, but to help shop assistants become better at what they do in the physical stores. Every technological investment the company makes seems to be based on how well it fits into this vision.

Over the years, this approach has helped Nordstrom build strong loyalty and become a multi-billion dollar corporation.

Stitch Fix: Machine learning with a human touch

While Nordstrom continues to invest in technology and uses it in a sophisticated way, it faces a growing competition from new digitally savvy entrants. A case in point is Stitch Fix, a fast-growing fashion retailer in the US, which uses Artificial Intelligence (AI) to scale personalized customer service.

The vision of Stitch Fix is similar to Nordstrom: It wants to provide excellent customer service on the basis of a deep understanding of individual customer profiles. But there is a difference in the company’s business model and the way it leverages technology.

Stitch Fix operates purely online to reduce operating costs. Like Nordstrom, it uses humans (called “stylists”) to assist customers choosing the right clothes. As opposed to Nordstrom, however, Stitch Fix uses AI to help stylists keep track of customer profiles and to deliver personalized recommendations.

Customers start by filling out an online style profile, which provides basic information on preference, size, shape, budget and lifestyle. Next, both humans and machine handpick a selection of five clothing items that match each customer’s profile. Finally, customers receive the clothes by mail, try them on at home, buy what they like and return the rest.

StitchFix

The choice of customers – what they buy and don’t buy – is registered by Stitch Fix and fed back into the learning algorithms of the recommendation engine. This enables the engine to learn more and more about the taste of the individual customer.

However, the engine also learns from Stitch Fix’s entire customer base. It uses advanced algorithms to learn which types of clothing combinations customers tend to like. As the customer base grows, more and more successful combinations are added to the machine’s memory. By cross referencing this memory with the customer’s unique profile, the machine is often able to recommend new matching items that surprises, but also inspires, the stylist.

Stitch Fix is much smaller than Nordstrom, but its heavy reliance on data science has given it a strong foothold in a specific market segment: career-oriented millennials who have little time for shopping, but who still care about clothes and appearance.

The threat of disruptive innovation

For now Stitch Fix doesn’t seem to be much of a threat to Nordstrom, or to any other large fashion retailer for that matter. After all less than 3% of US consumers have ever tried Stitch Fix, whereas more than 33% have shopped at Nordstrom. Moreover, Stitch Fix operates at the fringe of the market and doesn’t seem to attract customers from traditional fashion retailers (Liverence 2018).

In a longer term perspective, however, Stitch Fix may well turn out to be what Christensen (2015) calls a “disruptive innovator”. Disruptive innovators start by targeting segments overlooked by incumbents. Their offerings typically provide unique benefits to their target groups, but do not appeal to mainstream customers. For this reason, incumbents tend to leave them alone. As their products or services mature, however, disruptive innovators begin to move upmarket, targeting mainstream customers while preserving the advantage that drove their early success. When they start winning over mainstream customers in volume, it is too late for incumbents to retaliate and disruption has occurred.

Although Stitch Fix isn’t yet targeting mainstream customers, it is quietly building a strong competitive advantage in an area of the market, which large fashion retailers don’t care much about. Using an advanced emerging technology mastered by few people in the word, it is not only accumulating data about fashion preferences, but also developing a method for turning this into successful recommendations with the help of human stylists.

It would be unwise for Nordstrom and others to ignore this. If Stitch Fix’s success continues, it may well decide to move upmarket and target mainstream customers by, for example, opening physical stores in addition to its online presence. The preference data it has accumulated, the learning algorithms it has developed, the network of stylists it has built could easily be leveraged in the context of physical stores.

This would unlock demand from mainstream customers and pave the way for a deadly attack on incumbent fashion retailers. Regardless of the response of these retailers, however, Stitch Fix is unlikely to enjoy an unobstructed path to success. A major threat to its business model is the continuous growth and diversification of Amazon – itself a recent entrant well positioned to disrupt the retail sector by means of innovative technology.

References

Christensen, C. M., Raynor, M. E. and McDonald, R. (2015) What Is Disruptive Innovation?

Liverence, B. (2018) Fashion retailers have nothing to fear (yet) from the rise of Stitch Fix.

Rogers, D. (2016) The Digital Transformation Playbook: Rethink Your Business for the Digital Age. Kindle. Harvard Business Review Press.

Ross, J. et al. (2016) Designing Digital Organizations, MIT Center for Information Systems Research.

Sreekanth, S. (2018) The Nordstrom Way to Successful Enterprise Digital Transformation.

Westerman, G., Bonnet, D. and McAfee, A. (2014) Leading Digital: Turning Technology into Business Transformation. Kindle. Harvard Business Review Press.

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