Interview

Sunil Gupta of Harvard Business School On Driving Digital Strategy

In a digital age, while some companies are thriving by reimagining their business, others have been left behind 

Faisal Magray

If we now have everything at our fingertips, why are all businesses not transforming with the changing world? That is because reimagining a business in a digital world is easier said than done. In his book, 'Driving Digital Strategy', Sunil Gupta, Edward W Carter Professor of Business Administration at Harvard Business School delves on the necessity of this transformation. During his recent visit, he talked to Outlook Business about how some organisations have embraced the new world, while the others seem to be waiting for a miracle.

Can you outline how most companies today handle digital disruption?

Companies are dealing with digital disruption in three different ways. First, they are using technology to cut costs and improve efficiencies. For instance, a bank may just decide to cut costs, but it will become the most irrelevant bank in the future if it does not apply technology. After all, Amazon is doing digital payments and Alibaba is doing wealth management. So, efficiency is good but not sufficient.

Then, there are the companies who know what digital can do, but they will not do more than just a little experimenting. Suddenly, everyone in a large company is experimenting and you have hundreds of experiments, which don’t add up to anything. Without any strategic theme, they only become tactical.

Finally, there is an example like Telefonica. A large company of that size has an issue with doing radical things and creates a separate unit. They put money into a new project, send people to different locations, but that won’t work. The reason is that large companies are like large ships. You are looking to launch a speedboat and that takes off, but nothing happens to the ship.

Now, look at the successful companies who make it. They transform the core itself and do not look at the digital change as a side activity. People are scared of disruption with instances of Kodak, Blackberry and Nokia staring them in the face. Companies have to contend with a lack of vision, where they say, “I don’t know what to do” or “How much will that investment in technology eat into my profit?”

The New York Times decided to move to the digital world when they saw that physical newspapers will not exist in the next 10-15 years. They were ready for the challenge of running two organisations – print and digital – with the conviction that profit will go down before they eventually go up. The ‘ostrich mentality’ is slowly changing but many companies are still in the fog about what to do. What worries me is the lack of vision on what to do.

Which companies are more vulnerable to disruption?

Compared to the past, a lot more companies are getting disrupted. Look at Walmart getting shaken up by Amazon. Earlier, it was mismanaged company in trouble. Now, it is a case of well-managed company not waking up to the future. Not doing anything is the riskiest strategy.

No industry will remain untouched by the digital age. Ten years ago, B2Bs were not affected that much, but today IoT is hugely impacting them.

We are also seeing the shortening of the classic product life cycle…

People in Unilever and P&G say, “We have built these soap and shampoo brands over decades or centuries. How can we be disrupted?” Suddenly, you have Dollar Shave Club coming from nowhere. They did not think razor blades could be disrupted. Now, you have one guy who has built something in a garage selling the business to Unilever for $1 billion.

FMCG companies made it difficult for new entrants because they were controlling two major resources— distribution and marketing. Amazon takes care of distribution now, and for marketing, one can post a video on YouTube and spend little. Yes, Unilever has scale of economy, resources and R&D, but a small company can outsource everything and focus only on the consumer. The fact is that the large companies left a hole in the market. A smartphone created an Ola and Uber — ideally, the taxis should have come together to create that kind of an app.

Thus, it is important to look at your value chain or core competence and see how much of this can be disrupted by technology.

That being the case, where does traditional market research go from here?

Earlier, it was a survey-led method. Now, it is feedback on social media. We can do live experiments on the internet – offer a product at a certain price and see if it works. That is much cleaner feedback compared to the survey methodology. But, companies should be cautious about what they hear on social media as majority of the audience remains silent.

Amazon has extended its presence to a host of new areas. Where does that leave its bread and butter business of e-commerce?

The beauty of Amazon is that their core competence is not a static concept. It is dynamic. Why did they have to create AWS, when cloud servicing is a very different business? When Amazon became a marketplace and had third-party sellers, there was a need to educate them on how to do e-commerce on the platform. That’s when they realised that they had to create some standardisation. It was only after they developed a certain level of competence that they were ready to launch AWS.

Similarly, when they built the marketplace, they had millions of products on their website. With that, came the tricky question: How can consumers find something they are looking for? That is why they built a search algorithm, and today, Amazon makes $4-5 billion on advertising and poses serious competition to Google. Therefore, what is Amazon’s core competence – retailing or search?

Are there other examples of core competencies being redefined?

The same thing happened with Alibaba. Originally, it was a trading place for sellers to sell their stuff. The problem was that buyers were not trusting the sellers. The solution was parking the money in an escrow account, which would only be released if the buyer was satisfied with the product. This is how Alibaba learnt to manage people’s money. By doing that, they became one of the biggest wealth managers in the world. This was never their core competence, but they used the muscle to launch a new business.

Do you expect Amazon to go head-to-head against Google in the search business? What could be the downside? 

Google is more concerned about Amazon than any other company. In the US, more product searches take place on Amazon than on Google. Why would I search on Google and then buy on Amazon?

That said, Amazon is vulnerable since they are into so many businesses and are fighting multiple battles. In cloud services, they are up against Microsoft and IBM, while in e-commerce they are fighting Walmart and Flipkart. In video on demand, their competition is Netflix and Disney. The challenge for Amazon is that they are fighting big players and that can be overwhelming beyond a point, especially when most of these companies are focused on one business.

In the digital world, does it make sense to stick to one’s core competence?

Core competence is not industry specific. Google’s core competence is not search, but data analytics. Hence, I can go to any industry where there is a need for this. Look at Google making its move in healthcare, for instance. Earlier, it was a case of being in the same industry, but now, I develop the core competence and take it to another industry. In the process, I develop more muscle and get a new core competence.

There is constant talk of data being the new oil. If everyone has significant access to data, how will companies manage to stand out?

Every company has data, but 80% of them don’t know how to use it. It is the new oil but it is still unrefined and comes with confusion— insights will come only when you refine it. Data is not a core competence, but insight is. And for that, you need good old judgment to ask the right questions. I have seen executives getting lost in data and just not being able to ask the questions. How can you find the solutions unless you know what problem needs to be solved?

Large amounts of data will be put to better use when AI and machine learning takes off. Today, I see retailers in the US who have beacons in stores to track what is being bought. When I ask them what they plan to do with all this, the answer I get is, “I get lots of data, and I will figure out what to do.”

So, what is the right answer?

The goal of a business is to solve a problem, and data and technology are merely enablers of that. Netflix is a company that uses data very well. The streaming platform uses data to decide what genre of content needs to be made. Amazon also does a good job. In some cities in the US, it can deliver something within an hour. They know what I am going to buy before even I know it — they have built predictive modelling using data based on a customer’s historical purchase pattern. Accordingly, that product is stored in the warehouse closest to the buyer’s neighbourhood. The benefit is two-fold – I get the product quickly, and it does not stay in the warehouse for too long. As Amazon gets more data, they get better at this.

You have written in some length on the concept of ‘razor and blades’. Have there been very obvious misses here?

WhatsApp missed it. If I were Facebook and bought WhatsApp, I only had to look at China to know what WeChat is doing. They, too, started as a messenger service and then moved on to payments and shopping. Hence, the messaging is my ‘razor’ since I provide it for free, and then I lay the paid services on top of that, which is the ‘blade’. In fact, WhatsApp should have been a payments platform. I was surprised when they were speaking of advertising, since seeing ads while messaging can be annoying. But you would be open to paying your bills through WhatsApp. So, this was a clear miss and an error in strategy. 

For the longest time, Apple was a device company. Most of the money was coming from selling the iPhone. At some point, as the product differentiation line gets thinner, you are faced with price competition. Apple cannot afford to keep increasing prices, and there is already a switch to Samsung. So now, Apple is pushing Apple music and Apple TV, which they should have done a long time ago. You have a loyal base of customers and iOS is a very unique platform. Why not build those blades around it? If I am using Apple music and Apple payments, the chances of shifting from iPhone are much lower. If Apple music had started early, Spotify may not have been that successful.

How much of that disruption can be attributed to digital?

Disruption may not be only digital. Today, if you are an oil company, people may not like you and might opt for non-fossil fuel. That is not a technological disruption. Those trends take a long time, whereas changes in technology take place very quickly. Take the example of Amazon Echo. Tomorrow, if I get used to voice and order something on Amazon, will I need to listen to an advertisement first? Think of what might happen to the advertising industry. The industry will need to completely change because of technology and new players will emerge. To me, disruption takes place when consumer behaviour shifts or some resources are not required.

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