industry digital transformation and digital strategies. Five

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Industry digital transformation
and digital strategies.
Five lessons to harvest the benefits
of digital technology diffusion
O
By Gianvito Lanzolla
ver the previous several decades, we have observed a symbiotic
relationship between technologies and industries. In the past,
for instance, music companies, publishers, and camera producers operated through “specialized” technologies. Publishers
were associated with paper and printing technologies; music
companies with vinyl disc or magnetic tape technologies; camera producers with chemistry and physics. In the past, telephones were used to make (telephone) calls, portable stereos were used to play cassettes and one could not use a radio to
show pictures or make a telephone call. The pervasive diffusion of digital technologies has
made it possible to overcome several of these symbiotic relationships between technologies
and industries. For instance, it is now possible to convert different kinds of content - a
radio programme, a book, a magazine, a song, a phone call - into digital data. Digital technologies have replaced several of the traditional “specialized” technologies and, in digital
terms, there is now no difference between the “product” provided by a telecommunication
company – for example a voice call – and the “product” of a music company – for example
a song. They both are a series of digital 0s and 1s. As a result of this, for instance, several
digital “products” can now be bundled, or converged, and this trend is often referred to as
“digital convergence” – i.e. the convergence of hardware, software, audio, video and data
“products” into a single interface and device. Telecommunication network operators, media companies, consumer electronics firms, and Information Technology (IT) developers
are all competing to position themselves at the centre of the converging digital world.
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Some executives believes that they can
even expand into other, once disconnected,
industries using the Trojan Horse of digital
technology and that product/service digital
convergence also implies the creation of
“converged” companies that integrate, endto-end, the whole value chain – for example content production and telecommunication services. There have been a number
of examples of such attempts but the performance of these inter-industry converged
firms has been very mixed. In this article,
we build on field research in the telecommunication, IT, consumer electronics and
media industries to shed more light on the
scope of successful inter-industry company
convergence and on the strategies to harvest the benefits of the converged digital
world. Below we elaborate on these points.
1. End-to-end, inter-industry convergence is likely not to be successful.
Our research shows that the required capabilities for content production (such as artist management, creativity, idea scouting,
content marketing), for telecommunication
network management (coverage, quality,
network reliability, customer service), or
for information technology and consumer
electronics development (R&D, technology testing, manufacturing, industrial design) are inherently different and “divergent”, despite the increasingly common
digital underlying technological structure.
In the media industry, for instance, digital
technologies affect the content’s technological structure and the modalities through
which it can be produced, distributed and
enjoyed but not the raw content itself. It
follows that it would be difficult, for instance, for a software engineer to produce
this raw content – for example news or
entertainment. What our study indicates is
Figure 1 – Capability Spaces and the Boundaries to Strategic Convergence
Content Capability Space
Technology Capability Space
Content
Producers
Traditional content
distributor
Analogue
device
manufacturer
e.g. Music, TV.
Movies, News,
Sport, Maps,
etc.
e.g. Blockbuster, Borders
e.g. Sony
Providers of
access to
digital content
e.g. Google,
Apple, You Tube,
Amazon
Digital device
manufacturers
e.g. Apple,
Sony, Nokia
Telecom (digital)
network
operators
e.g. Vodafone,
Sky, BT
Digital services - e.g. rights management, payements, advertising, etc.
Digital Technology Developers
e.g. Ericsson, Microsoft, Nokia, Siemens, IBM
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L’impresa n°4/2011
Other
Capability
Spaces
e.g. Banking,
Advertising,
Law
that there are differences in the required capabilities across legacy industries that are so
hard to overcome that de facto erect barrier
to sustainable end-to-end, inter-industry,
convergence. The disposal of Endemol (a
content production company) by Telefónica (a telecommunication company) or the
divestiture of AOL (Internet services) by
the Time Warner Group (media) provide
further anecdotal evidence on the predictive
power of our model.
2. Build strategic predominance in
your capability space by focusing on
your core strengths and by building
trust. Our research allows us to identify
two capabilities spaces – the content capability space and the technology capability
space – which can help predict the scope,
and the barriers, for telecommunication,
consumer electronics, media and information technology companies’ successful
convergence. Figure 1 shows the boundary
of the capability space and a new taxonomy
to classify telecommunication, consumer
electronics, media and information technology companies in the digital world. The
most significant implication of our results is
that the limits posit by the capability spaces
makes it crucial for firms to build predominance within their own capability spaces
if they want to profit the most from the
opportunities related to digital convergence.
Our research shows that two strategic avenues are available to build predominance:
focus on core strengths and building trust.
For instance, within the content space,
fictional media companies face the challenge of protecting their content from
the threat of commoditization while nonfictional companies also suffer from people
stealing or plagiarizing content, and then
distributing this content for free – consider
for instance how easy it is to immediately
distribute news via Twitter or Facebook.
While the growth of user-generated content is important, trustworthy services that
require content accuracy and timeliness,
and ultimately consumers’ trust will always
be able to be sold at a premium. Our research shows that in the digital world consumers’ trust will be more difficult to gain
than in the traditional analogue world. Yet,
once won, it will be far more rewarding in
terms of value and revenue-creating opportunities. For instance, as trusted financial
news providers, the Wall Street Journal
and Financial Times run successful online
subscription services despite the abundant
supply of free financial news. The key for
digital device manufacturers through their
control of network-service layer interfaces
in the absence of open standards in the
case of the former, and by subsidizing
devices as part of customer contracts for
the latter. Reflecting on their core business, telecommunications companies have
also realized that they could use customer
data and real time location information
about their travel movements to add value to raw information (produced in the
content capability space) to make them
contextually relevant – see for instance the
services of the Android platform.
Digital device manufacturers have the
advantage of producing items that are
visible to customers, and they are trying
to leverage this visibility to build trust and
gain competitive advantage. Furthermore,
device convergence opens other opportunities for differentiation for these companies. For instance, by the end of 2008
there were already more music-enabled
Nokia and Sony-Ericsson phones than
iPods, and more Nokia camera-phones
than digital cameras from any other manufacturer. Not to be squeezed between
branded content and large digital network
operator, device manufacturer face the traditional trade offs of positioning between
premium devices and/or mass market.
Trying to do both, Nokia lost its edge in
the high-end (smart phone) mobile device
industry. Seeking to develop premium devices companies in this space have several
traditional strategic options – for example
brand and design – and more innovative
ones to offer a superior customer experience – for example Apple’s integration
across music player device manufacturing
and music distribution with iPod and
iTunes. On the other end of the spectrum,
for mass market producers, once again
PAPER MANAGERIALE N.1/2011
companies in the content space is then
to reflect on their core business and
re-focus on what they are good at – for
example good journalism, good talent
scouting, good scripts – while constantly
strengthening the value of their brand. It
is then not surprising that Rupert Murdoch has set brand management as the
key strategic objective for the Wall Street
Journal, which he acquired few years ago.
Given their strong legacy capabilities,
media companies have limited room to
expand outside the content capability
space into the technology capability space. Among these limited options, media
companies may become the providers of
access to their own content – for example RAI with its Rai.it portal, and the
organization’s dedicated websites for different entertainment and current affairs
programs. Within the technology space,
companies are trying to take control of
the distribution channels by becoming
the trusted (for customer) digital interaction gateway. Digital interaction gateways can take various forms, such as a
communication network, a digital device,
or an Internet portal. Different players,
coming from consumer electronics, information technology and telecommunication services can all compete to achieve
this goal. Internet companies, for instance, are trying to establish their portals
as the trustworthy gateway to content
(and services). Google, building on its
expertise to combine and organize thirdparties information is paying increasing
attention to providing more services –
maps, emails, videos – and to branding.
The objective for these companies is to
create “stickiness” in a world where it
is otherwise very easy to switch. Telecommunications network operators have
tried in the past to position the mobile
device as an essential lifestyle tool, and
to participate fully in all aspects of the
value chain – from developing content
to consumer marketing. Yet, results have
been very disappointing– see for instance
Vodafone Live! As our research predicts,
converging the capabilities required to
successfully compete in both content
and technology spaces has proved very
difficult. Telecommunication companies
ultimately sit on a commodity – for
example data transfer services - where
the core technological business is increasingly difficult to use as a differentiator.
In some case, these companies have tried
to gain power over content providers and
Table 1 – Digital technology diffusion and Resources and Capabilities
Media
Consumer
electronics
Telecoms
Information
Technology
Quality content
Brand management
People and talent management
Delivery capability
Service capabilities
Customer service
Technology/R&D/Innovation
Customer experience
Alliances and
partnerships management
Content space
Technology space
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PAPER MANAGERIALE N.1/2011
Prof Gianvito Lanzolla
is part of the Faculty of
Management of Cass
Business School, London,
UK. He specializes in
business and corporate
strategy in high velocity
industries and teaches
Mba courses in strategy
and innovation. His
research has been
published in leading
outlets including Harvard
Business Review,
Academy of Management
Review and Journal of
Management.
www.cass.city.ac.uk
70
L’impresa n°4/2011
scale and efficiency will be the key in the
quest for profitability. For example in the
market for entry-level mobile handsets
for developing markets such as India and
China, vendors such as China’s ZTE have
been able to gain significant market share
through cost efficiency and high-volume
production. In Table 1 we provide our elaboration of the capabilities that our study
shows as key to seize the opportunities of the
increasingly converging digital world. Across
capability spaces, it is an old battle reloaded
the one that will be unfolding: content versus
distribution. The digital world provides a
different context to this old battle but the
fundamental logic for superior profitability
remain unchanged: content producers must
try to produce appealing content that people
want while distributors must try to attract
people towards their distribution channels.
4. Deliver the hardware, software
and services underpinning the digital
revolution. For information technology
company there is also the opportunity to
provide the digital world with the tools
to build it. With its Android’s project,
for example, Google is aiming to supply
a complete development environment to
give software developers the tools to create
new Internet applications. Yahoo! is doing
the same to provide users with the Yahoo!
experience, even when people are not yet
on the websites. Some digital technology
developers, such as Cisco, Motorola, and
Microsoft, are also trying to take control
of these development tools. Again, Microsoft’s interest in acquiring Yahoo! is signal
here, while other companies, such as IBM,
HP, and Ericsson, are developing sophisticated system-integration capabilities.
3. Break into new digital value chains.
While full convergence between content
and technology spaces is not a feasible output, our study shows that there are areas in
which the diffusion of digital technologies
open up significant new opportunities is
in the creation of new value chains to provide the backbone “services” for the digital
world (Figure 1). Traditional “analogue”
services are bound to become digital, and
the business opportunities for developing
new value chains here are virtually endless.
Among these opportunities, three are preeminent: provide digital services to enable
online advertising; provide digital services
for rights management; and provide digital
services for financial services.
The amount of advertising on digital channels is projected to increase dramatically,
and the Financial Times estimates that the
global online advertising market reached
$64 billion in 2010. The digitization of
content has made it more difficult to protect intellectual property, and new digital
rights management systems (DRM) infrastructures are required to support firms in
this key value appropriation activity. DRM
systems will strongly influence the future business model of content producers.
Booming digital markets, are triggering
the need to have an infrastructure for
online payments, and the spread of digital communication networks are enabling
firms from outside the banking sector to
offer financial services. Online transaction systems such as PayPal are now well
established and compete with previously
dominant payment systems such as those
offered by Visa and MasterCard.
5. Build capabilities to manage
alliances and partnerships across
capability spaces. By breaking into
these new emerging value chains and
setting their own standards companies
can de facto become rent appropriators.
However, what our research shows is that
in order to be more likely to seize these
opportunities companies should try to
become the orchestrator and integrators
of different capabilities from different
capability spaces, rather than trying to
do everything solo. It follows that, one
of the most valuable capabilities that
companies should build is partnership and
alliances management – see also Table 1.
The digital revolution is over. Long live
the digital revolution! The past five years
has witnessed a period when the diffusion
of digital technologies created significant
uncertainty about the pervasiveness of
the digital revolution. But that stage is
over and the strategic options available to
established firms and new entrants are now
much clearer. The digital revolution will
be pervasive, but it is now time to focus
less on possible future scenarios and turn
to the exploitation of the myriad business
possibilities already emerging from it. The
ability to implement and achieve change
will become increasingly important, and
it will be those firms that can reach the
future first that will be the most successful.
The digital revolution is over. Long live
the digital revolution!
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