The big topic of the year is generative AI, a massive new technology. And that means lots of transformation and disruption.
I’ve been writing about the implication of generative AI for various business models (platforms, service biz, content biz). It’s complicated and that makes it easy to miss the forest for the trees. Especially for managers who are juggling a lot of things on a daily basis.
So I thought it was worthwhile to pull up to 30,000 feet and talk about about what really matters in digital transformation and digital disruption. And in generative AI.
For all the concepts and frameworks for analyzing the chaos of digitization activity, you can boil down my approach to the following three rules. I find it to be a solid, first pass framework for all of this.
Rule 1: Focus on the Customer Experience First. Give Them EXACTLY What They Want – or Someone Else Will.
Steve Jobs disrupted the music business by letting consumers buy just the one song they wanted on iTunes, instead of buying the entire CD. And you also didn’t have to go to the store to get it. And you could listen to it on your phone, your PC, your iPod, wherever you liked. Plus, a song only cost 99 cents.
Basically, he used software and other new digital tools to let consumers buy exactly what they wanted and listen to it when, how and where they wanted. It was an attack based on increased convenience (plus low price). And this was fairly devastating for music retail stores and publishers, long used to forcing consumers to buy entire CDs, at a store and that could only be played on CD players.
Customers are difficult and finicky. And they always want more. They are never satisfied. It is easy to fall into the trap of “customers accept this”.
- Customers accept having to buy the whole CD.
- Customers accept having to go to the store to buy.
- Customers accept how difficult it is to unsubscribe.
No. They used to accept these things. And then they reset their expectations when given an alternative. Which happened in about 2 seconds.
You have to give them exactly what they want. And this bar is continually being raised with new digital. It can also be called “purification of demand”. And it is the most common vector of attack for competitors and new entrants.
Convenience plus low price is a very common digital attack in B2C.
- Netflix did this to cable companies. Suddenly consumers didn’t need to buy a $110 cable package, with hundreds of channels, lots of advertisements and set viewing times. With a Netflix subscription, they could watch the shows they wanted, when they wanted, on any device you wanted, without ads and they could cancel at any time. Plus, it only cost $6 per month (well my subscription is through Colombia, which is cheaper).
- Another example is Spotify, which later disrupted iTunes with the same approach. They offered consumers tons of streaming music. It turns out being able to access a massive catalog of music at will is more convenient than buying song by song. Steve Jobs unbundled music using CD technology. Spotify re-bundled music using streaming technology.
Digital transformation in China / Asia is basically a faster, more powerful version of this “give the customers exactly what they want” approach.
Mobike and Ofo came along and suddenly you didn’t have to buy a bicycle, store it at your house, lock it up and so on. You could just hop on a bicycle whenever and wherever you wanted. You could ride as little or as much as your wanted and then hop off and forget about it. It was a disruption based on convenience and low price (like 1Rmb for a half hour). And the more bikes they put on the streets, the greater the convenience of the service. It all happened very quickly and the bike manufacturers were left stunned.
So this is rule #1 for digital transformation.
- Focus on the customer experience first. How does this digital tool or capability change this?
- Then give customers EXACTLY what they want – or someone else will.
Isn’t this what is happening with generative AI?
Company after company is integrating generative AI into their products and services. And in their customer experience. Adobe just made major changes to Photoshop. Microsoft is integrating it into almost all its products. The first wave of digital transformation should always focus on products, services and the customer experience. You have to stay on the frontier there.
Any company not doing this is probably at risk. Such as:
- Any service or product with a lag between when you buy it and when you get it.
- Any product you have to go and physically get.
- Any business where one customer group is subsidizing another customer group.
- Any product where you have to own and cannot just access it when you want.
And really you should also keep a look out for these characteristics as well.
- Any physical product with a high grow margin. As Jeff Bezos says “your margin is my opportunity”.
- Any product that is not connected.
- Any product or service that can be embedded with social media.
Rule #2: Digitize and Then Re-Imagine Your Operations.
In digital transformation, it’s normal to start with just digitizing existing operations. Take your current workflows and integrate the new tools. That’s what is happening with generative AI. You can make your current operations much cheaper. You can make them more productive. Digital agents are going to have a big impact here.
But you can then go further. You can start to re-imagine your operations.
Bike-sharing companies don’t have retail space. They don’t have shelf-space. And they don’t have sales staff. That’s the first thing that jumps out about these companies. They just don’t have much of the cost structure of traditional bike retailers and rental companies. Their bikes just sit in the public spaces. Note: they also mostly don’t have many marketing expenses as the bikes market themselves.
They do however have lots of software engineers. They are great at the intricacies of mobile apps. They also have operations and maintenance staff that cruise around the cities to maintain and re-balance their bike fleets. You don’t see any of these types of skills and capabilities in traditional bike companies.
I like the China bike companies. I think they are a great example of how a boring business like renting bikes can be completed re-imagined with just a few digital tools (GPS, smart locks, mobile payment). What these companies did was digitize and completely re-imagine the operations of bicycle manufacturing, sales and rentals. They didn’t just take the existing business and digitize the processes. They re-imagined the operations entirely. And that is rule #2.
You start with the idea of digitizing your operations. Then you move on to re-imagining your operations. And things can start to look very different very quickly.
- In retail, it might be mean integrating AI into your marketing and your logistics – and the getting rid of your real estate.
- In agriculture, it might mean putting sensors in all your fields to measure fertilizer needs.
- In insurance, it might mean getting rid of all your brokers and selling directly – and only online (i.e., Zhong An).
Rule #3: Increase Your Connections and Build Ecosystems.
Generative AI is basically increasing the intelligence of services. It is being plugged into lots of apps as I write this. That means a lot of data sharing and intelligence between large language models and apps. It’s about increasing your connections and building ecosystems. First, with data and then with intelligence.
Recall, the graphics I did for production and consumption ecosystems. Look at the data sharing happening in the supply chain and with complementary products and services. Now imagine those red lines for data sharing as the sharing of intelligence.
Think about what happens to products / services and production when there is shared intelligence?
I’ve written in the past about how industry barriers are shifting and falling. This is a natural consequence of businesses becoming more connected. And behaving more like ecosystems. My standard joke is that business is becoming a team sport. You increasingly need to be part of a connected ecosystem to compete. You need a gang.
And this gets more interesting as the online and physical worlds keep merging. This further erodes traditional industry barriers. This has long been a characteristic of online competition (Amazon can easily sell candy bars and digital media on one site), but it is now increasingly happening in the physical world.
This has a lot to do with the fact that industry barriers have largely been created by tangible fixed assets and their economics. You go to one building for healthcare and another for groceries. And businesses were mostly separate entities, not connected ecosystems. In the real world, you don’t go to one massive store in town for everything you might need to buy.
In China, things seem to be moving rapidly towards a system where you go to the massive B2C marketplace app to get every product you need. And these are part of connected ecosystems that extend into the physical world. You go to a mobility super-app to get all your transportation needs. And maybe soon we will go to a healthcare super-app? And to a financial services app? And so on. This seems to be the general trend.
So this is rule #3 for digital transformation.
- Increase your connections based on new digital capabilities. Think ecosystems and business as a team sport.
So those are three rules. There are tons of other factors of course. And most of this is very industry-specific, but I find these three rules to be pretty helpful for staying focused.
Thanks for reading, – jeff
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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