This week’s podcast is Part 2 of an introductory explanation for the Digital Operating Basics. This is a very useful framework for thinking about digital transformation.
Here is the link to the TechMoat Consulting.
Here is the link to the China Tech Tour.
Here is my summary of digital operating basics (Dr. Ram’s book combined with some of my own thinking):
- Rapid Growth at Small Incremental Cost. And Without Constraints.
- Never-Ending Personalization and Customer Improvements.
- Digital Core for Management and Operations.
- Connectedness, Interoperability and Coordination-Based Operating Models (Including Platforms and Ecosystems).
- Leadership and Management.
- People, Culture and Teams.
- Sustainable Cash Engine that Scales
Here is my standard framework for digital competition
- Lessons in Digital Operating Basics from Ram Charan. Part 1 of 2 on “Rethinking Competitive Advantage”. (Asia Tech Strategy – Podcast 98)
- Meituan vs. Ctrip vs. Alibaba: Who Will Win in China Services? (Jeff’s Asia Tech Class – Podcast 22)
From the Concept Library, concepts for this article are:
- Digital Operating Basics
From the Company Library, companies for this article are:
Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy podcast from Techmoat Consulting. And the topic for today, part two on the digital operating basics. Now this is a digital strategy lesson and it’s about the digital operating basics which I’m breaking into two parts. Part one is already up there that’s podcast 185. This is sort of part two which is the Now, as mentioned in the previous one, pretty important framework, how you take a traditional business and what operating activities do you sort of need to put in place in a very standardized fashion such that you start to become more like a digital first business. Even if it’s a more traditional business like a factory or a retailer or a bank, something like that. And now if it’s a digital native, something like an e-commerce company, well, okay, they’re born digital. So they’re probably doing these things anyways. But when we sort of do digital transformation projects with companies, this is usually a lot of what we’re talking about is like, look, you gotta be doing these six to seven activities all the time, and you wanna get better at them and better at them. And if you do these in addition to your normal operations, running your stores, running your bank branches, that’s kinda how you go digital first. And it’s a pretty consistent list of six to seven things. that you can see across most businesses. Anyway, so that’s what I’m going through. We went through the digital operating basics one through three in podcast 185. This will be four, five, and six, and kind of seven, and we’ll finish it up. This will be much shorter actually because these are kind of easier. Anyway, so that will be the topic for today. Anything on the to-do list? Standard, we’re having a Beijing tech tour in January. We’re bringing out a group of people to spend a couple days going to some tech companies and a little bit of tourism and fun stuff as well. If you’re interested in that, give me a call. You can go over to techmoconsulting.com. You can find it there or just reach out on LinkedIn and we can talk about that. Okay, and with that, oh wait, standard disclaimer, nothing in this podcast or my writing or website is investment advice. The numbers and information for me and any guests. may be inaccurate. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment, legal, or tax advice. Do your own research. And with that, let’s get into the topic. All right, so in part one, I basically went through three of the digital operating basics. I won’t go through this again, but as mentioned, this is, you know, you’re sort of. baseline operating activities that you want to do systematically. And that would be different than sort of various tactical moves where you might be launching a new product or responding to a competitor move in marketing, something like that. These are the things you build systems around. And number one was rapid growth at small incremental cost and without constraint. All of these things are about leveraging in what digital and data technologies can do that a traditional business really cannot. And one of them is, obviously, it can grow. You can get growth a lot faster, a lot cheaper, and without any natural constraints, as opposed to, let’s say, making traditional products, physical products, shoes, groceries, whatever. So you wanna leverage that sort of DOB1 into the process wherever you can. And maybe you can do that in your core products, if you’re in media or banking, where the products themselves can inherently become digital. In others, let’s say services, physical products like shoes, okay, that’s not gonna change too much, but you can build sort of complimentary services or products that are more digital, like content that goes along with your shoes, and you can lean into the growth there. But either way, if you’re going digital, you wanna be thinking growth, you know, the beginning of every day, because it’s kind of a big part of the point. So that’s number one. DOB2 was never ending personalization and customer improvements. This is the idea that once you become digital, you get a lot more data, you get a lot more visibility into what’s going on in your business, external to the business, what the markets are doing, what the customers, you get a lot more data, a lot more insight, and your decision making gets smarter and faster. Okay, but to what end? Is the goal to become more efficient? Well, you can do that. is the goal to create new products, you can do that. Generally, the most powerful focus for this sort of activity is to start making very rapid improvements to the customer experience. That could be improving your existing products, it could be identifying pain points, it could be offering complimentary products, but you just basically wanna start a flywheel where you are always making rapid. improvements to your products and services, you’re getting data from that, then you’re taking that data and you’re making more improvements. It’s incredibly important. And what tends to happen is when you do that, you stop operating like a normal business, which is sort of top down, where you make decisions on new products, big strategic moves, new factories, and you start working more bottom up, where the data is just coming in and you’re running experiments all the time. Whatever works, you just do. So it’s like throwing stuff against the wall, whatever sticks, let’s do some more of that. That tends to happen and then when the business tends to be a combination of a couple top-down strategic major initiatives, like new product lines, and then constant improvements to the current customer experience that are sort of bottom-up happening. You know, throwing stuff against the wall, it’s sometimes called like an amoeba. Amoeba just sort of grows organically in whatever direction works like that. That’s number two. Number three, digital core for management and operations, DOB3. This is building your digital infrastructure, your architecture. You start getting data, you start to get better visibility, transparency. Usually the first thing that feeds into is smarter and faster decision-making by management and then at the team level. And then you start to get more analytics. From there, you can often start to move forward into things like predictive analytics, which gets you into AI and other things. So those are kind of one through three. When we talk about digital transformation, that’s what most companies are talking about. Well, there’s one more, which is people, which we’ll get to in a minute. Those are kind of the big three that you hear a lot. And if a company’s going digital, that’s kind of their first three to five years. Okay, those three were covered in part one. Let’s get to something new. This is DOB4, Digital Operating Basics 4, which has the worst name. I gotta come up with a better name. Here’s the long, wordy, bad name for this one, which is Connectedness, Interoperability, and Coordination-Based Operating Models, including platforms and ecosystems. So again, terrible. Let me sort of take that apart. One of the things that happens when you go digital, you can get faster as mentioned, you get smarter as mentioned, you can also become more connected to things. You know, your typical business might have five to 10 businesses it deals with on a regular basis, maybe your supplier, maybe your retailers, couple of some strategic partners, things like that. If you’re digital in your core operations, you can connect with tens and hundreds of other businesses. getting connected to other entities and customers and suppliers and complimentary companies becomes much easier. It just turns out digital is really good at this. So you wanna start to connect to other parties, which are usually businesses, can be individuals. You wanna increasingly coordinate with them on what you’re doing and you wanna start sharing, which is easy to do. And usually the first way this happens is you start to connect with everyone in your supply chain. So you look at all your suppliers, you start to integrate your IT systems, your warehouses and all of that. And usually the first thing you do is you start to connect in terms of data sharing. So now you’re seeing what’s moving through your suppliers factory, so you know when it’s gonna hit your inventory and so on. You can start to… coordinate on certain larger activities. You might work with three or four companies, five, six, and start to coordinate things like production. You have a factory, I have a factory, that could be internal or external connectedness. So maybe you are higher in China and you have hundreds of factories internal. You can start to connect all of those and they really start to operate like one entity. So you do data sharing and connectedness, and then you start to do interoperability, where the thing sort of works together. And Hire is, you know, Hire is, they make appliances, washing machines, refrigerators, things like that. They’re a really good example of this, because they were kind of really early to the whole digital thing. They started going digital like 2010-ish. They focused on what I just described as DOB one through three, digitizing. all of that. But really for the last five to six years what they’ve been focused on is the connectedness part. And when the CEO talks he talks about hire as being an ecosystem of flexible production. That’s his word. It’s flexible. If all of your factories are connected in terms of their data and their operations. One, you’re gonna be smarter and more efficient, fine. The other thing you can do is you can start to be more flexible and responsive. So you connect to your customers, your markets, you see what’s going and then your factory start to move more rapidly against that. So your production becomes more flexible and that’s really how Hire describes itself now, is a flexible manufacturing ecosystem. That’s kind of interesting. And I talked about this before in the subject of what we called consumption ecosystems and production ecosystems. You can find those on the web page. Just go to the concept library and look up consumption ecosystem or production ecosystem. That’s what a lot of companies are doing. They’re either coordinating and becoming interoperable internally or with their supply chain. That would be a production ecosystem. Or they’re starting to… and become interoperable with other companies that serve their customers. And even with their own customers themselves, they have direct connections with their customer now. That’s why everyone wants you to download their app. But you can also connect with complementary products. If this is not a great example, but let’s say you’re making tennis racquets. It’s now a smart tennis racket, which means it has a chip and it’s connected and the person’s swinging and you’re getting a lot of data coming back on what they’re doing and you have two-way communication with your customer, fine. What you can also do is then to start to connect with complimentary services like. you know, the tennis courts, the companies that run the tennis courts, companies that make cameras and analyze how players swing their racket. Well, if you all work together with those companies, you have a lot of data flowing from the racket, from the court, from the cameras, and you can start to offer larger, more interesting solutions to your customer. So you can start to coordinate and become interoperable with other complementary products and services and create better solutions. So that’s sort of one way to think about connectedness, interoperability, and coordination-based operating models. Now, there’s a subset within there, which we talk about all the time, which is platform business models. What are platform business models? They are in the business of helping people connect. You know, Facebook’s helped you connect with other people, Lazada helps connect you with merchants, Amazon Web Services connects you. I mean… these companies are all kind of in the connection business first as opposed to a more linear value chain. So I would put platform business models under this category. Most companies can’t go from a traditional business that’s digitizing to a platform. That’s actually pretty rare. But most every company can go to a production ecosystem or a consumption ecosystem like Haier did. So anyways, that’s DOB4. Usually people talk about this stuff and what tends to happen is data sharing. That’s generally where it begins. From there you can start to coordinate operations whether internally or with external partners. Then maybe you go to product development where you’re coordinating. Maybe you go to innovation and investment where you’re coordinating. Anyways the more connected a company is You get more flexibility, you get smarter. You know, my sort of net summary of this one is business is becoming a team sport. You gotta get over the idea that we’re company A and that’s company B. No, you need a gang. You need you and 10 or 20 other companies that are tightly connected now because a team usually beats a solar player. Not always, but it’s kind of a thing. So anyways, that’s DOB4, collaboration. Business models that are based on collaboration can have some pretty powerful advantages. Team sport. Okay, with that let’s move on to DOB5, DOB6. These are gonna be shorter, because these are about people. Now when I talk with companies and we sort of go through what their digital strategy is gonna be in one to two years and then what are the key activities to get there, and we’ll talk about things like digital operating basics, maybe building some competitive advantages. And then it always comes down to a conversation about people. We don’t have the people to do this. We have a bunch of retailer, people who are good at running stores. We don’t have people that can do any of those digital basics we just talked about. Or we have a couple in the IT department. Often the chief marketing officer is pretty digitally savvy. But generally I say that’s gonna be the big bottleneck is people. And that’s DOB5 and DOB6. DOB5 is leadership and management. You do have to build out expertise. You do have to build out sort of digital first behavior, which is much more data-driven, much more experimental, much more okay with the idea that we’re gonna do 10 to 20 things every month, most of them are gonna fail. A lot of businesses, they’ll say that’s okay, but then if you’re the guy who’s failing, you don’t get promoted. So, you know, this sort of… embracing of failure and experimentation as your sort of baseline behavior. A lot of companies really do have a problem with that and even if they say it’s okay people don’t believe it and they just play it safe. Okay so when you start to deal with this sort of issue you break it into two levels. DOB5 is leadership and management, DOB6 is people, culture and teams. Leadership and management We call this crossing the digital divide. I have a book coming out sometime, it keeps getting delayed. But, and rule number five, it’s within this book, we sort of lay out five rules for winning in digital. And rule number five is leadership. And the sub quote is, everybody falls the first time. That to become a digital first business, you have to have it at the board, the management level. Senior management, probably a little down into middle management and definitely the board. You’ve got to cross what we call the digital divide. That you have to go from the way you’ve operated to operating in a different way. The analogy we use is that movie The Matrix where Neo in the first one, you know, number two and number three kind of sucked I thought, but number one was awesome. When Neo goes into The Matrix and it’s the jump program and he jumps from one skyscraper all the way to the other one, well Morpheus does it. like Superman jumps from one building to the other and then Neo tries and he falls. And the quote from Seifer in the, whatever it is, the submarine, the Nebuchadnezzar, he says, everybody falls the first time. That’s kind of the idea with management and leadership needs to cross the digital divide in their behavior and way of thinking and everybody falls the first time. So every company that tries to do this struggles. something goes wrong, a big initiative they launched didn’t work out, people start pointing fingers at the board, you know people leave. The idea of operating this way is a challenge, it’s cool, you know don’t overreact, just understand everybody falls the first time and if you do this a couple more times you’ll get there. So that’s kind of DOB5 is how do you know begin to operate at the management and leadership this way, and you have to start there. And generally speaking, you’ve got to do pretty significant training. You know, the CTO, CEO, maybe the CMO will have a certain level of knowledge on digital strategy and concepts, like we’re talking about here today. There’s gonna be a lot of people on the team who don’t have any baseline of knowledge, and you can’t have certain people not at the same level. You’ve got to have everyone on the management team with a certain baseline level of understanding that we’re talking about the digital operating basics, we’re weak on number two, that’s gonna be our focus for this year. Everyone’s gotta have that minimum level. That’s sort of where you start, you do a lot of training, and then you have to begin to see digital talent. In the digital world, the only asset that matters is people, for the most part. And if we were in manufacturing, The assets that would matter would be factories and inventory. You know, we’re in the physical goods business. Well, in this, we’re in the intangible assets business. We need to systematically manufacture digital talent the same way we would systematically manufacture tables. So you need to do training, you need to do projects, you need to probably have an academy, depending how big you are as a company, and you need to systematically build digital talent all the time. You’re not gonna be able to hire enough from the outside. That’s part of it. You’re gonna lose people because digital talent is rare. People steal people. So you just need to have sort of like an internal factory that’s always producing people with these skills. And that’s what you want. And then generally you gotta sort of pay attention to who the leader is. You really do need sort of a key leader to do this stuff. That tends to impact success pretty good. Okay, so that’s DOB 5, leader and management. That’s a whole subject. Last one, I’m sorry, not last one, almost last one. People, culture, and teams, pretty much the same thing I just mentioned instead of the leadership level. We’re looking at the base and mid-level of the organization. And really what you’re looking at is teams. Most digital first businesses. The unit of organization is small teams that have real good access to data and can see things what’s happening with customers, what’s happening in the market, and has some ability to build, execute, and implement on their own without going back up to the top. You want empowered, autonomous teams that can do things like DOB2. How do we find continuous customer improvements? Well, we have 10, 20, 30 teams, often called pods, and they are always looking at little pain points for the customers when they identify them. They can basically study the data, find the solution, implement the solution, or do A-B testing and get it done without it coming back up to the tops. So you need to sort of get to this level of teams doing lots of activity and a company like ByteDance, which I don’t think people appreciate, they’re very decentralized. I’ve met with them a decent a couple times and talked with them several and I’m amazed at how autonomous their teams are all around the world where people are launching, ByteDance is launching apps all the time. not just internally, they’re putting them up on app stores and seeing what works and what doesn’t. They don’t say bite dance on them, but they’re constantly experimenting at the team level. And if things get traction and get a little interest, then they get elevated to the next level and then it sort of moves up and the successful ones get a lot more support. The ones that aren’t successful, they get disappeared pretty quick. So that’s one, it’s teams, one, you need people, but. really you’re getting to the idea of cultural change. And I think that’s what a lot of these interesting companies do. I’m trying to do an article on culture at ByteDance and how they operate their teams. Hopefully that’ll work out. We’ve been doing some little back and forth, we’ll see. But you know, so people, culture, and teams, that’s a whole subject in itself. All right, that’s number six, and that’s pretty much what I wanted to talk about. Number seven, which is the last one, DOV7. Everything I just mentioned, growth, continuous experimentation and improvements, building the digital core, continuing to advance the digital core, doing connectedness, investing in leadership, investing in teams, all of that requires money. None of one through six works if you’re not generating some cash flow. And as you grow and get more successful, you want that cash flow to scale. There’s no point in going 10x in terms of your growth, DOB1, if your cash flow isn’t going 10x as well. I mean there is a point to it, but it’s better if the cash flow grows. You want that digital growth to translate to more money. That more money will give you more money to invest in new improvements. It will give you more money. So you know the strong get stronger. As long as you have DOB7, which is a sustainable cash engine that scales. Within all of this activity, there needs to be a cash engine that grows with the enterprise. And if you do, DOB1 through 6 all get stronger and stronger with growth. That’s the key. So you need a digital core, throwing off a lot of cash. In theory, you should even generate more cash. Like, you know, a lot of these costs are actually fixed. So when you grow, you should hopefully see the gross profit margin expand, which usually happens. It’s a good, if you’re doing valuation of digital businesses, let’s say like a Lazada, something like that, people tend to underestimate their cash flow in years like five, 10, and 15, because they don’t. assume that the gross margin will expand. And that’s honestly what you want. If you have a good business with nice economics and strong competitive advantages, often you’ll see the gross margin expand five, 10, 15 years out. You can definitely see that with companies like Amazon and others, which is I think why a lot of people undervalued them, even though they were around for 10 years. So anyways, all of this requires cash, every step of the DOB, and If you’re growing, you actually get stronger in each of these six relative to your smaller competitors. So, anyways, that’s DOB7, a sustainable cash engine that scales. It makes you more sustainable. It gives you more money to invest in technology and innovation. It allows you to fund more experiments about the customer experience. It allows you to launch new products and services that can add additional revenue streams. And, almost maybe the most important one, when you have that core engine that’s scaling and throwing off cash, you get an increased ability to make big bets because you can take the losses. And smaller companies, that’s one of the things they can’t do. So you’ll see this, like, I mean, Facebook kinda did this famously with its whole metaverse bet, which in theory, that was not awesome. I mean, When Amazon decided to launch a mobile phone, that was a big bet they made. But they did it sort of organically. They tested and tested and it got some traction and because it had some traction, they grew it and then they threw a lot of money at it and then it didn’t work and they killed it. The whole metaverse Facebook thing, it was kind of a big bet from top down, but it didn’t really look like they ever had product market fit, but. One of the benefits of being those bigger companies is you can make the big bets, which is a lot of what’s going on in generative AI now, because the price tag for playing that game is so high. At the cloud level, if you’re gonna launch a cloud service, it costs a lot of money. If you wanna be a little generative AI app, okay, that doesn’t cost much. But we do see sort of the big boys, Google, Alibaba, Microsoft, placing very big bets. Well, that’s because they have a cash engine that’s scalable at their core. That is pretty much what I wanted to go through for today. I’m at about 26 minutes, so right on time, great. Anyways, I hope that is helpful. I’m doing a little bit of catch up because I was on vacation with the family for the last week, so I’ll be caught up in the next day on articles and podcasts. But yeah, it’s a pretty big subject. It’s, now, one last point and then I’ll finish here. Everything I just told you would be considered digital operating basics, digital transformation. There is another subject that’s sort of emerging which I’m kind of going at as rapidly as I can, which is intelligent transformation, which is instead of doing digital operating basics, we’re talking about intelligent operating basics. What does it mean to build capabilities and Intelligent, increasingly autonomous. Well, it turns out it’s a different playbook. It turns out you need a different tech stack. And I mean, all the way, you need different data centers, you probably need different chips, you need foundation models and so on. So I’ve actually got a proposal on the table right now to go after this question of how do you go from digital transformation to intelligent transformation? and looking at some of the leading companies that are doing that, which a lot of those are in China right now. So anyways, I should know I think if that’s gonna work in the near future, but that’s gonna be a pretty much like DOB, but a different playbook. It’ll be related, but it really looks like it’s pretty different. Anyways, that is it for me. I hope that is helpful, and I will talk to you next week. Bye-bye.
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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