Don’t Underestimate Growth Plus the Digital Operating Basics (Tech Strategy – Podcast 122)

This week’s podcast is about combining two previously covered topics: growth and the digital operating basics. This can be surprisingly powerful.

You can listen to this podcast here or at iTunes and Google Podcasts.

Most of the growth thinking is a summary of work by Chris Zook at Bain’s strategy practice. I am citing the books:

He argues most all sustainable growth is based on 1-2 strong cores that continually adapt.

  • A profitable core is centered on the strongest position in terms of loyal customers, competitive advantage, unique skills, and ability to earn profits.
    • My list for strong cores are growth / market, competitive advantage and attractive unit economics.
  • Adapting the core can be:
    • New products / services
    • New customers – microsegments
    • New geographies
    • New businesses.

Then add growth adjacencies. To assess an adjacency move:

  • Factor 1: Adjacency is tightly tied to a strong core.
    • Economic distance is short. How much does it overlap?
    • Need a strong core or a strong position in a channel, customer segment or product line in weaker core.
    • Usually the linkage is considered superficially. Snapple is close to Gatorade? Production is totally different. So are customers and advertising. And points of purchase and distribution.
  • Factor 2: An attractive adjacency market in terms of profit pools
  • Factor 3: The ability to capture economic leadership in that market. Competitive advantage as an attacker and then an incumbent.

Growth + DOB can sometimes get you the dream scenario:

  1. Grow the revenue line.
    • Add to monthly transacting users (MTUs), services and per user spending. Become a bigger business.
  2. Increase gross profits. An expanding margin with size.
  3. Increase operating leverage with increasing scale. This is more about going for scale.
  4. Invest in R&D, tech and infrastructure. This will result in a better user experience and improve operating efficiency.
    1. Drive efficiencies and increase monetization.
    2. Improve the user experience.
    3. Expand the products and services in high growth areas.
  1. Do targeted M&A. To increase innovation and protect against disruption.

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Related articles:

From the Concept Library, concepts for this article are:

  • Growth: Core vs. Adjacency
  • Digital Operating Basics
  • DOB7: Sustainable Cash Engine that Scales

From the Company Library, companies for this article are:

  • n/a

——-Transcription below

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, don’t underestimate growth plus the digital operating basics. So this one I think is actually gonna be pretty quick. I just kind of wanted to talk about two sort of big ideas that I have covered over the last year or so. One is just about growth. I’ve done… decent number of podcasts on that. I mean, obviously it comes up all the time. The framework I tend to point to is by Chris Zuck, which is from Bain. And he’s written these books about core growth versus adjacency growth. I did a podcast, number 104, about how to think about that. I’ll put the link down below. I think that’s a really solid framework and what he’s talking about when. He talks about growth, he’s talking about sustainable growth. Like they can go on for years and years, which is usually what we’re looking for, right? So that’s kind of one big bucket of thinking, and he’s kind of a growth expert. I think McKinsey has some very good thinking on this as well in their book on valuation, if you’re curious. The other big ideas, you know, just sort of the digital operating basics, which I’ve talked about quite a bit. They’re one of my six levels. there’s a lot in there and that’s really just starting to leverage in the valuable aspects of software and digital into a business. Maybe not valuable is the right word, but the unique, the often powerful. And if you do both of those two things well, you can really move as a company. I mean, that alone, there are those that would argue that this is a competitive advantage in itself. Now, I don’t actually think that’s true. But I definitely can see that I think it can be incredibly effective and incredibly lucrative as well. Just do the digital operating basics well, do very aggressive, very strong growth, and that company can really perform. Now, I generally think that doesn’t last beyond a short period of time. That you need some sort of degree of competitive strength or competitive barrier, because you can get growth in digitization, but you won’t get profits. unless you’re somewhat protected. So that’s obviously where I come into that. Okay, but that’s kind of the two buckets of thinking, digital operating basics and growth. And I’ll sort of use the Chris Zuck framework core versus adjacency. You put all those together, it’s really quite compelling. So I thought I would talk about that today. And this really came up in the context of Grab, which I’ve been writing about. Those of you who are subscribers, I sent you another sort of daily article about Grab the other day. and really looking at sort of their growth versus profitability. You know what really turned out to be effective for Grab? Because you can take that apart by platforms, which I did. If you just do a basic five forces analysis of Grab, you can see, I think, most of the issues going on. The substitutes, the cost of supply, which is really drivers, and then the low barriers to entry. I think that’s mostly what’s defining their fairly low profitability right. That’s a pretty good exercise to do on that company. Anyways, I did that in the article the other day. For those of you who aren’t subscribers, you can go over to jefftausen.com, sign up there, see what you think, 30 day free trial. Standard disclaimer, nothing in this podcast or in my writing or on website is investment advice. The numbers and information for me and any guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. Now, as always, there’s a couple core concepts for each podcast. Today, really three concepts that matter. First one is growth, core versus adjacency. You can go to the concept library, you’ll find that listed right there. Growth is kind of peppered through a lot of these talks and topics, but that’s a pretty solid framework for this. The other concept is digital operating basics, as mentioned. Again, go to the concept library, you’ll see a tab there. And then within that, one I haven’t really talked about much, I’ve kind of glossed over it for the most part, which is of the digital operating basics, there’s seven of them, which I’ll go through. But number seven is operating cash flow that’s basically scales. And that’s not really a digital phenomenon, if you think about it. I’ll go through that one as well. I mean, that’s the one that’s kind of weird on the list because all the digital operating basics are about building out digital tools, digitizing the core operations, innovating on the customer side. I mean, these are all operating ideas. This one is kind of just stuck on the end, which is why it’s number seven, which is all of this needs to throw off some cashflow. And I’ll talk about why that is. So that one kind of just sits. on the end, but it’s actually pretty important. And when you think about grab, I think it’s kind of the biggest factor to pay attention to for that company. So those will be the three concepts for today. Growth, core versus adjacency, the digital operating basics, and then the digital operating basics number seven, which is operating cash flow that scales. Okay, now I think growth is probably the thing to start with. I mean, whenever we’re looking at these digital companies, You know, generally we have a core business that we kind of know. I mean, we kind of know what the core of Alibaba is. It’s always been Taobao and Tmall, the e-commerce platform. You know, we can look at Meituan and it’s pretty much food delivery. We can look at Uber. We’re always, whether they’re platform business models or not, we can look at Adobe. They have a core, which is probably the Adobe reader, although they’ve got a pretty good suite of tools now. So we could call it sort of creator tools is their core. But generally there’s a core business and the companies people tend to get excited about are the ones that have the long, long core growth runway where it’s like, okay, let’s say Uber, people got very excited about Uber because you could see a global market for the core business. So you could sort of project that forward. And I think that’s a good way to think about sustainable growth is the core. versus an adjacency, which is something that is, the guy I’m citing here is basically Chris Zuck, who’s heads up Bain’s strategy practice. And he wrote two very good books about the subject. One was called Profit from the Core, and the other one was called Beyond the Core. And he talks a lot about where does sustainable growth really come from? And you gotta look at always sort of two metrics. And if you’re valuing any company, especially any of these digital companies, you’re gonna have to start making estimates about the growth potential of the company. And everyone always thinks about size. Okay, how big is this opportunity? Here’s Alibaba going from e-commerce into cloud. How big is cloud? Let’s size that opportunity. How big is the core business? How about T-Mall? You size that as a growth opportunity. But the flip side to that is the probability of success. And generally speaking, and there’s lots and lots of studies on this, the further a company goes from its core when it goes for a growth adjacency, the further it goes from its core capabilities or core business or core engine, the less likely it will succeed. And it drops off pretty fast. Now there’s some companies where you could say their core capability is almost innovation, like Elon Musk seems to be that way. he can jump from thing to thing. But even then, his core capability is a lot of technology he’s got in his back pocket. So generally speaking, the further you go from the core, the likelihood of success drops. And when Chris was writing about all this, his books are about 15 years old, he was overwhelmingly not talking about digital. He was talking about traditional businesses, and if you’re selling consulting services, growth is a good thing to sell because people will pay for that if you’re selling to clients. But he would look for sort of one to two strong cores and then look for adjacencies and sort of estimate what’s likely to happen, what’s likely not. Now this starts to change when you get into digital because it’s easy to connect things. It’s much easier to cross sell. Someone on Alibaba. buying things on Taobao and then selling them hotels. Because it’s all on the smartphone. Digital, by its nature, connects things far more easily than in the physical world. So if you look at a company like a Coca-Cola or a beverage company and they jump into say Snapple, which is one that he talked about, you would think, oh, that’s not that big of a jump. But it turns out in the physical world, that was actually a pretty difficult growth adjacency that didn’t work out. Because it turns out Snapple was a different customer base. And it was a lot of different distribution and bottling and other things. So even at first glance when you think, oh, this is two beverage companies, so going from one to the other, that’s not that far of a stretch in terms of a growth adjacency. Turns out it really can be. But one of the things we see in digital is so much of it is about controlling the user. And especially if it’s a network. If it’s a social network, your core asset is your network. And if you have a good social network, like Facebook or WeChat, you can pretty much put any product on top of that and do well. So it’s a little bit different when you move to digital, the jumping from growth to adjacency opportunities can be easier. And it’s also a lot more common. We see digital companies jumping horizontally, industry by industry all the time. In a way that is often shocking, to non-digital businesses. When banks and retailers and healthcare companies suddenly Google or Alibaba jumps into their business, they didn’t even consider those companies competitors. So these horizontal attacks we see all the time, that’s part of that they’re better at doing that. Anyways, so two books, Profit from the Core, Beyond the Core. He basically argues that if you’re going for sustainable growth, which pretty much everything I talk about is about high quality companies that can do well over two, three, four, five years. So I’m looking for sustainable growth, not a token that was issued last week and went to the moon and everyone made a fortune, but then it crashed and burned six months later, which is a pretty good way to make money this year, but that’s not exactly sustainable growth. So his argument is… You want a core. Sustainable growth needs a one to two strong cores. And what is that? A profitable core is centered on something like loyal customers, competitive advantage, unique skills, the ability to earn profits. Those are his definitions, not mine. You kind of can probably. guess what my definition would be. I’d be looking for something with a strong competitive advantage, which could include customer lock-in and positive unit economics. I’d be looking for those two things and then the third factor would be growth. That’s typically how I break things down, but I’d be looking for those two things. Now, one point he makes quite well, which is if you have a strong one to two cores and you want sustainable growth in there, it means you’re gonna have to adapt them. The likelihood that those are just gonna kind of remain stagnant like Coca-Cola, Coca-Cola, Coca-Cola, the world moves too fast, even very effective cores, most of them have to continually adapt to stay where they are. That could be offering sort of new tailored products and services, maybe within your customer base, going after micro segments instead of one size fits all. maybe expanding your McDonald’s from Southern Thailand to Northern Thailand, you are gonna have to adapt the core to keep it going over five to 10 to 15 years, no matter what. And the good companies do this. Coca-Cola does this, Hagen-Dazs does this, McDonald’s has salads, you know. But I would still say all of those are still within their core. They’re just adapting as they go. The other reason you wanna be constantly adapting your core It’s that you don’t get blindsided. You don’t underserve your core customers and then someone else jumps in and takes them. So it’s also a lot of that is just defensive. Okay, let’s say you need one to two strong cores. And then his book Beyond the Core, that’s when he talks about, okay, what about the growth adjacencies? Can you go from there to another? And that’s often what we’re talking about in these digital businesses. We’re talking about C-limited going from gaming to e-commerce. We’re seeing Alibaba make moves. We’re seeing Facebook now trying to make a massive jump from their social network into Metaverse. And the amount they’ve spent is something like $10 billion on R&D on Metaverse. So that’s a, I mean, that’s definitely a growth adjacency, but it’s a major move. Companies like WeChat, Tencent are very good at this. I think Tencent is… is pretty spectacular. I mean they started out doing Messenger, which was QQ in 1998, with their little funny penguin. They jumped into gaming. That turned into a spectacular business. They did web pages and a whole bunch of other businesses nobody ever talks about anymore. They jumped to WeChat. They’ve adapted WeChat. Now they’re into e-commerce. I mean they’re very effective at these sort of growth adjacencies. So, but Chris outlines six growth adjacencies. and I will put the link in the show notes. Basically, new customer segments, under-penetrated segments, completely new geographies. That could be something like Shopee going for Brazilians. Because Shopee has always focused on Southeast Asian consumers. That’s their foundation, that’s their core. They’re making a major jump to get Brazilian and Mexico consumers for the first time. That’s gonna be a very expensive thing. I mean, I’ve kind of talked about this. I kind of, you know, if they pull it off, it’ll be very impressive. I think it’s gonna be very expensive to do that. New geographies, we could call that the same. Global expansion, local expansion. We could talk about new channels. A lot of traditional companies are now doing this. They’re going from their physical stores to their apps. You know, they’re launching apps. They’re trying to go omni-channel. New products entirely. New to the world products. That’s Elon Musk land. He always likes to invent new stuff The area that I like better is compliments because digital it’s very easy to do digital compliments at low cost So Nike is selling sneakers That’s their core business and then they launch You know the online training app and the running club app. Those are digital compliments That makes some money, but mostly they just add to the shoe business more or less. So compliments is a big deal. And then you can do forward and backwards integration. That’s pretty cool. Like one of the things I really like about C Limited was, you know, they built their business off of gaming distribution and localization. And then they jumped into Shopee and that got a lot of attention. Then they dropped into C Money, although they keep naming that different things. The one that people don’t talk about that much is when they did a vertical integration from gaming distribution and publishing to gaming development, which was Free Fire, which is an incredibly popular global game. I mean, I wish they’d do, to be honest, I wish they’d do less funky geographies like India, which they’re now exiting, and I wish they would do more gaming development. That was a really sort of impressive move. Anyways, so you can lay out these sort of six adjacencies. If you want to know more about it, read the book. It’s a pretty great book. But the factors I think that really are valuable. He basically says, okay, so how do you assess an adjacency move? Well, he cites three factors, which I think are pretty useful. The adjacency needs to be tightly tied to the core. It can’t be too far away. It has to be linked. The economic distance has to be linked. You gotta have some advantage. This would be sort of Alibaba 101. Why does Alibaba go to one geography versus another? According to them, they go where they have an advantage. That’s what they’re looking for. I think a lot of this sort of linkage, do we have the same customer base but we’re selling a different product? That’s a nice tight linkage. This tends to be, I think, poorly considered. I think. the linkages between one business and another. I don’t think people tend to go deep enough on that. But you want something, I like to have a really strong advantage. If you’re going from core business to adjacency opportunity, I’d like to see the exact same customer base, like Alibaba. You have a ton of Chinese consumers that are on there every day. They’re using Taobao, let’s sell them hotels. That’s a nice, close adjacency with a tight linkage. That’s factor number one. The adjacency in itself, the market, has attractive profit pools. You’re not just jumping into something that may or not be valuable. We know the money’s there. Now I think you have to give credit to Shopee for this. They made a fairly big jump from Garena to Shopee. That wasn’t tightly linked. Factor one, no way. Well, I mean, they did have the same customer base, so I guess it’s somewhat linked, but it was a major jump. But it was absolutely an attractive target because we know how profitable companies like Shopee and Taobao and Amazon can be. So factor two, they were swinging for the fences. And you could say the same thing with what they’re doing in Brazil. I think it’s a stretch in terms of the economic linkage between where they are and what they’re going after. But I give them credit if they pull that off, that is gonna be an exceptionally profitable situation. So they’re going for the big profit pools. And I think Forrest Lee, I think that’s one of his skills. He is very good at focusing his attention, his energy, on the biggest profit pools in digital. Gaming, very profitable. Shopping, e-commerce, very profitable. E-commerce in Latin America, very profitable. And those are big targets. And then payment with C-Money, I would say the same thing, although that’s changing right now. So factor number two, an attractive adjacency in terms of profit pools. And then factor number three is just sort of like, what is your ability to be the economic leader in that business? Can you win? Are you gonna be one of 10? Are you gonna end up being one of three? you know, don’t play a game that can’t be won. And those are sort of the three. So that’s kind of the, I mean, I use different language for all of that stuff, but it’s pretty much the same idea. Okay, so that’s kind of a reasonable framework for growth versus adjacency, which is generally what we’re talking about when we’re trying to figure out digital businesses. It’s usually those two questions. Which brings me to the next point, which is, why is that so compelling when you take that picture, the growth picture I just gave you, and we combine it with the digital operating basics? Now, the digital operating basics, I’ve sort of been talking about for quite a while, and if you look at my six levels, you can see this is level number two. So this is, I think this is the thing where people think this is a major competitive advantage. I don’t think most of this stuff is. I think this is just how businesses where they are software infused, this is how they work. I think most companies are going to have to do this. Banks, retailers, merchants, brands, factories, probably agriculture, healthcare, they’re going to have operating activities that are digital and that’s what I call the digital operating basics. Now this list I’ve given you seven and I’ll put my standard chart, my graphic in there. I didn’t really come up with this. I’ve edited it and I’ve combined it with some of my stuff, but it’s not really mine. This is pretty standard stuff if you do, you know, digital transformation projects, you almost always end up talking about these seven. And the person who I thought explained this really well was Dr. Ram Chiren, who was a fairly famous consultant. I’ll put a link to the podcast number 98, where I talked about you know, some of his books and stuff. I mean, a lot of this is about two thirds of my digital operating basics is overlap with him probably. He wrote a book called Rethinking Competitive Advantage, where he says this is all about competitive advantage, which I don’t think it is at all. I think this is just sort of the operating basics for most companies. But I mean, and I’ve rewritten it a bit too. So here’s my seven. And I listed them in order on sort of on purpose, like digital operating basics number one. I’ve actually thought about the language pretty specifically. Number one, I called rapid growth at small incremental cost and without constraints. So number one is about growth. Why? Because if you’re gonna become a digital business, if you’re gonna infuse software into your supermarkets or your factories or whatever, you wanna take. advantage of the unique economics of digital. Once you do something that’s digital, I mean, if you’re going to be in digital, you got to go for growth. I mean, digital grows easier than anything. You know, you can make 10 copies of something for no, you know, you have 10 copies of the Avengers. Copies two through nine cost you nothing. Control C, Control V, you have another copy. Anytime you start putting software into your business, you wanna try to scale that part of the business as much as humanly possible, because you can get, as I’ve sort of said here, rapid growth, you can grow very, very quickly. You can grow at small incremental cost. It often costs you very little to grow. And there aren’t constraints. If you have a factory or a hotel, you can only grow to a certain point before you don’t have enough rooms. or your factory’s at capacity, digital stuff doesn’t have a capacity limit. So if you’re doing Nike in China, you’re selling shoes, that’s fine, but if you start offering content through a running club app or online training apps, that part of the business has now become digital. So you can grow that part very, very quickly at small cost and without constraints. So if you’re doing any part of this, Like Dr. Tran talks about this. You gotta be looking for some sort of 10X or 100X opportunity. Cause you can do that stuff in digital. If you’re gonna do 100X opportunity with supermarkets, it’s gonna take you 20 years. But you can do that in digital in 18 months. I mean, TikTok was a thousand X opportunity in two years. Right? So. That’s kind of why I put this one as number one. Like, look, if you’re gonna be playing any part of this digital game, you gotta go for growth. I mean, what’s the point if you’re not doing that? So that’s digital operating basics number one. What part of our business can we scale? Okay, number two, digital operating basics number two. Quote unquote, never ending personalization and customer improvements. Now. This is where you start to think about, okay, I’ve got my customers, and people used to think about customers in terms of products. Well, we’re a beverage company, we sell cokes. So that’s really what we think about, we think about cokes. As you move more and more digital, you start to think about jobs to be done. Is what my customer really wanted, did they want a coke, really? Or were they looking for something refreshing on a hot day? Were they looking for something kind of fun to have at a party? Were they stocking up on beverages for an event? You start to break down that traditional mass market, one size fits all product, we sell cokes. More to customer micro segments and customer specific situations. And maybe we’re not in the beverage business, maybe we’re in the event business. And we wanna be the beverage people buy when they have parties. Well, if that’s the case, then the solution in that scenario is not just a can of Coke. It might be Coke, it might be other beverages, it might be rapid delivery, it might be tie-ins with lots of other companies’ complements that people would buy to have a party, like a pizza company. So you start to shift your thinking away from a product and more to solving customer problems and micro segmenting them and sort of taking them apart and always looking for more, always looking for how else can I innovate to my customers and add. So that’s digital operating base number two, the language again, never ending. This is the game that never ever ends. You never stop doing this. Personalization is your big lever. Let’s, instead of being one type of coke for everybody, let’s personalize to the individual, one customer by one customer. We wanna have my communications and marketing and messaging to Jeff be different than someone else. And we may even want to have different products for him. And we want to have this more be event driven and speak more to happiness because we know Jeff likes this as opposed to whatever. You know, you want to personalize customer by customer if you can. And then you want to do customer improvements, never ending personalization and customer improvements. You just start innovating on the customer experience and it never ends. Every year you’re taking your data. And the more data you get, the more you know about each individual customer. The more they buy of you, the more you know. And you take that data and you continually improve and improve and improve and it never ends. And that’s how you pull apart or pull ahead from your customer or your competitors over time. A company that I really like that does this is Coupang, which is the South Korean sort of Taobao or JD. And the language they use in their filings is, we are in the business of creating quote, wow experiences. So they are always trying to think of ways to wow their customers. And that’s sort of the bar. That’s a pretty good bar to think about. What project should we do this week? Well, is it a wow experience? Are people gonna think that’s amazing? And that game never ends. They’re just always. creating those week after week after week after week. And that’s really the business that you have to be in if you become more digital. You have to be continually thrilling your customers week after week after week, and it always advances. And the bar always raises, and that’s the game you’re in. So never-ending customer improvements and never-ending personalization. That’s kind of big lever number two. And you can do that as you go digital. in a way that you could never do it mass production. Number three, digital core. The digital core for management and operations. This is basically just taking your core operations, all your key processes, all your core workflows, your inventory, your management, your marketing activities, all of that, and making it digital. Getting it all in one place. creating one massive data pool or data lake which becomes a data warehouse and everyone can see the data and Suddenly you’re starting to get real-time total transparency which a company like Snowflake calls a single version of the truth that Everybody can see and that makes you faster and smarter Suddenly when you want to make decisions at a manager, there’s no waiting for monthly reports to see if it works We just start trying stuff and we see how it worked to the next day Let’s move the inventory around. Let’s start discounting these products right now and we can watch the numbers change in real time. And you can sort of see that digital operating basics number three, the digital core, is really probably a prerequisite for number two. It’s hard to do continual customer improvements if you don’t have your core operations digitized. But two and three really go hand in hand. When most companies do digital, they tend to focus on two and three. That’s usually the, you know, the first couple of years of the project for digital transformation is we got to build the digital core. We’ve got to digitize our core operations, and then we focus on customer improvements and personalization. And usually they start with marketing. Let’s start personalizing the marketing because we know we’re spending a lot and it’s not that effective by just buying ads on the subway. Okay, number four, this one is wordy, but I think it’s good, but I wish it wasn’t so wordy. Connectedness, interoperability. and coordination-based operating models, including platforms and ecosystems. That’s terrible, I gotta rewrite that. That’s basically the idea that what digital, like DOB1, Digital Operated Basics 1, is about growth. DOB2 is about personalization. DOB4, this is about connecting to other things because software is good at all three of those things. You can connect with thousands of other businesses. You can offer joint products together with you and 10 other businesses on your webpage or on your app because it’s just APIs. You can create, you can coordinate your research. Software is just really good at connecting with things. So that’s why I called it connectedness, interoperability, and this is the key phrase, coordination-based operating models. Like, We are gonna create one solution for our customer. Like if your customer is gonna have a big party on a Friday, we are gonna connect with other companies and offer one complete coordination-based solution, which is we will provide you everything you need for your party. We will deliver the cokes, we’ll do the last mile delivery. We have tie-ins with 15 food companies, pizza, nachos. blah blah blah. We have service providers that will come in and put up the streamers. We have product companies that will make all the streamers and we will make them personalized to you with your name on the big banners in the room because it’s a party. And we’ll have a service company come and clean up afterwards and we’ll offer this as one product, one solution that we as the Coke company, because we can coordinate with 10 other companies now in a way we couldn’t before. So you start to think about operating models that are based on coordination with multiple companies. And you sort of have a connectedness. Now platform business models and ecosystems, that’s kind of a part of this. But I think that’s, you know, if our goal is to continually thrill our customers, wow experiences. One of the biggest ways to get there is to start to connect with other companies and offer solutions together that no company could ever offer on its own. So that’s DOB number four. DOB number five, DOB number six, which is digital operating basics. I’ve kind of skipped over these because this is sort of a bit out of my area. Number five is leadership and management. And number six is people, culture and teams. This is actually what I’ve been spending a lot of times talking with companies about. Because companies often will say, okay, I get that, that all sounds awesome. How do I do that with my people? You know, we have senior management in a retailer, let’s say in Brazil. Team is great, they know how to do inventory, they know how to do fashion, they know open stores, they don’t know anything about software. How do we do any of this with the current team and the current organizational side? And it becomes a big problem getting talent. And so what, you’re gonna go hire people? Good luck with that. It’s very hard to hire AI people, especially if you’re not Google or some famous company. What you end up doing is you end up doing selective hiring, some contracting and training, which is where I come in. I basically do training services for their current team. And my kind of mantra is look, you’re not gonna hire your way there. You’re gonna have to turn your core management team, which are already committed and loyal to the company, and been here a long time. You’re gonna have to turn them into software people. And that’s not that hard. I’ve been teaching this stuff for years. So DOB5, DOB6, that sort of softer stuff. And that brings me to DOB7, which is Sustainable Cache Engine that Scales. And that is the third topic for today. So I’ve gone through growth, I’ve gone through the digital operating basics. Okay, what happens when you combine, and I’ll sort of finish up here shortly. When you combine growth with the digital operating basics, that can be incredibly powerful. You can grow this business by 10X. You can start to hyper-personalize. your services customer by customer by customer. You can start to connect with other businesses and offer solutions you could never offer as a standalone company. You can do all of that and it can be incredibly powerful. But it doesn’t work if your core operating entity is not throwing off cash. Because everything I just mentioned takes money. That’s kind of the problem. And that’s why digital operating basics number seven is quote unquote, sustainable cash engine that can scale. And this is really the dream of digital companies. And I’ll read you, this is from Grab. When Grab talks about their growth plan, which is in their filings, you can pretty much see the standard dream scenario being cited of what happens when you combine a lot of growth with the digital operating basics. And it’s basically Three to four things. Number one is they wanna grow the revenue line. Yes, usage is great, but what you really want is you wanna 10x the revenue line. I mean, that’s digital operating basics number one and the growth story. You wanna be bite dance, which goes from $8 billion in revenue in one year to 16 the next year to 36 the next year, and now they’re up to 70 plus. You wanna see cash coming in like that on the revenue line because you’re a digital business and you can grow in a way that others can’t. So you wanna grow the revenue line. You wanna be a bigger business. And this is kind of the one where people have routinely underestimated the growth potential of Apple, Facebook, Google, and Amazon. If you go back to 2012. 2010 and you look at the revenue of those companies and the share price everyone was saying oh my god these are overpriced But their revenue just kept going up and up and up and up and now it’s like oh my god We had no idea they were gonna create this much cash So one you want to grow the revenue line and people routinely underestimate how much digital businesses can grow Number two as the revenue line goes up and up and up What you wanna see is the gross margin expanding. And that does happen. As you start to personalize more and more, as you start to do very subtle improvements, you see an expanding gross margin. So the revenue line is going up, which is awesome. And then the gross margin goes from 20 to 22% over three years. And then over the next two to three years, it goes up to 25, 27%. That has a massive impact on your bottom line. So you wanna see big top line growth. They’re dreaming of an expanding gross profit. And then of course the third one, we wanna see operating leverage start to kick in more and more because most of these businesses are mostly about fixed costs. We got a whole lot of servers. It took us a lot of money to build that in the early years, but now the incremental marginal costs are very, very small. So as we get bigger and bigger, the operating leverage kicks in and our profits explode. Those are the three things you wanna see. If that happens, this is like the dream scenario for a digital business. If that happens, then they start to do a couple other things. They start to flood money into R&D, technology, which is IT, and infrastructure, depending what business they’re in. So this is the Alibaba playbook, it’s the JD playbook. Let’s flood money into R&D, let’s flood money into tech, our servers, our AI, things like that, and let’s flood money into logistics and other types of infrastructure. Because by making those investments, we will continually improve the customer experience. That’s how you drive never-ending personalization and customer improvements, is you invest in tech, logistics, and R&D. So they flood money into there, which also makes them impossible to compete with. And then the other thing you get along the way is you get efficiencies and you know, you get better and better at the operating side. So your unit costs do go down a little bit. If you’re spending tons and tons of money making robots for your warehouses, your warehouse operating costs are going to decrease over time per package. So that is kind of, and then the last one on the list would be targeted M&A. As these companies throw off more and more cash, their biggest risk is technological disruption. That someone will come up with something they didn’t think about. Well, the way you, you know, that’s kind of Clayton Christensen’s, the innovator’s dilemma. Well, how do you protect yourself? You just buy all those companies. Which is what these Alibabas and Facebooks, you know, why did Facebook buy Instagram? It was definitely a good investment, but it was also a defensive move. So you do continual M&A with all your cash, and that’s sort of how you keep innovating in-house and out-of-house, and you also sort of protect yourself from disruption. That’s pretty much the dream playbook for these digital businesses. Grow the revenue line. dramatically because software can do that, expand your gross profits, expand your operating leverage over time, outspend everybody in R&D, tech and infrastructure, capture efficiencies, do an M&A. That’s kind of the playbook. And if you add growth plus the digital operating basics, that’s pretty much what you see in the best case scenario. But none of that works if you don’t have DOB7. if you don’t have a core engine that throws off cash. And that’s kind of, you know, that’s the problem I think with Grab. Grab has all of that story, except nothing they’re doing throws off a lot of cash. So how do you do the M&A? How do you continually invest in R&D and logistics to continually advance your operations, to wow your customers? All of that. How do you grow? Growth always costs money, usually. It’s a lot of marketing. When ByteDance grew, I mean, like, ByteDance is an example of growth plus the digital operating basics. But when they grew globally over the last couple years, they spent an unbelievable amount of money on marketing. They were like the biggest purchaser of advertising on Facebook, which was funny, because I don’t think Facebook would allow that now. You know, all of that takes cash. So that’s kind of where DOB7, Sustainable Cash Engine, that scales. Whatever that cash engine is you’re building, you want that to grow with your growth. So they kind of got to go hand in hand. And that’s kind of, when I look at Grab, that was, you know, the big question for me was, okay, I’m looking at Grab, I can see. A lot that I really like about this company, their growth is cool, they’ve got two complimentary platforms, one for mobility, one for food delivery. I love complimentary platforms, although in this case they are much more local. Not all complimentary platforms are equal. This is a fairly weak version of that compared to say, Shoppe or Taobao or something like that. But still there’s a lot to like. They’re growing very quickly. They’ve captured Southeast Asia. All of that is good. There’s a whole long list of stuff that I really like about Grab. But then I get to the problem, which is, look, where is DOB7? Where is their operating cash flow? And they still don’t really have that. Neither does DD, by the way, and neither does most of Uber. Their core business in mobility and food delivery, I mean, they’re just not throwing off a lot of cash. And that’s a real problem that they’ll have to figure out. And I talked about this before and that’s fine. I mean, you don’t get everything in life from the get-go. Some things, you know, they did half the equation incredibly well, now they’re gonna have to figure out the other half. Google had the same problem for a long time. They didn’t have any cash flow coming out of Google and Facebook for a long time. So that’s the big question to solve. And a company like Didi, which I talked about in the last podcast. They haven’t really figured out how to start doing their cash engine, but Metuan, which was unprofitable, they figured out how to do it, and they hit operating profits very quickly after they went public. Now, this year’s a little bit different, but a couple years ago it looked pretty good. So that’s kind of, I think what I wanted to talk about for today, so much for this being a short one. Sorry about that. But I think, you know, that’s my list. So three concepts for today. Core versus adjacency is a pretty decent framework. The digital operating basics. And within that, you really gotta think about digital operating basics number seven because the dream growth, the dream digital scenario requires that for it to work. And some companies have hit that, like Facebook, Google, Amazon, Alibaba. And… ByteDance and others are still struggling to put that operating cash flow piece, DOB7, into place. DeeDee, Grab is there right now. We’ll see if they figure it out. They could. I mean, very well could. Okay, so that I think is it for today. As for me, I’m back home after almost three months on the road. I’ve just been sort of resting. I got some bad food yesterday which kind of wiped me out. Sorry to the people I had to cancel on yesterday. I was really looking forward to a discussion we were gonna have about sense time and I got suddenly knocked out by whatever I ate down the street. So anyways, whatever. But yeah, overall doing great. The thing I’m thinking about, which if you’re open to feedback, I’d appreciate it. I’m thinking about changing the focus of the content of… really a lot of what I’m doing, to no longer be specific to China Asia and instead just to talk about the strategies of great digital businesses. So that’s kind of what I’m always looking for. I mean, I’m always looking for companies that are, you know, from the strategy side, from the business model side, are just like, you know, that company’s spectacular. Alibaba is a spectacular strategy and business model. So is Tencent. So is C Limited, so is Coupang, so is Snowflake. New Bank in Brazil is very interesting. And instead of making it just China Asia specific, which is what it has been for a while, to start to look at US, China, Asia, probably mostly Asia and the US, I think. But anyways, that’s kind of what I’m thinking about doing. So let’s call it, you know. the strategies of the world’s best digital companies, the business models of the world, how to identify those company, who’s gonna really, who do we think’s gonna do well over the next three to five years based on the power of their business model, wherever they may be. But realistically, probably mostly the US and China, Asia. You know, that’s what I’m thinking about. If you have, I’ve been asking people online about this and I think that’s maybe more useful to people as opposed to being China specific. Anyways, if you have any thoughts on that, let me know. I’d appreciate it. I’ve kind of been moving slowly that direction anyways. Anyways, send me a note if you think that’s a good idea. I’d appreciate it. Or in the comments section, if you’re on my webpage looking at this podcast, leave me a note down below. I’d really appreciate it. Or if you think anything better. Yeah, anyways, that is it for me. I am gonna take a little walk before the sun goes down, but I hope everyone is doing well 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.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

2 thoughts on “Don’t Underestimate Growth Plus the Digital Operating Basics (Tech Strategy – Podcast 122)

  1. Stefan Conquist

    April 5, 2022 at 5:31am

    Great to hear that you are thinking of expanding to a more global look at successful digital business strategies!
    The best SAAS companies are doing your 7 DOB’s well.
    DOB4: “Coordination with complementary external services”?

    • jtowson

      April 7, 2022 at 12:08pm

      Thanks. I’m thinking if I focus on just the best of the best it’s doable. Can’t cover all sectors well.

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