digital business

"How digital is your business?" That challenging question forms the title of Adrian Slywotsky's latest book. It's a fair bet that few managements can answer with any great confidence - or even know what a digital business is. It's a still fairer bet that they need to find the answers, and that right soon.

A digital business has shifted from the conventional form, driven by paper and personal contact. Instead, it uses digital tools and options to collect and distribute information in order to make customer-centric decisions. Put succinctly (by Slywotsky), the digital business "replaces atoms with bits". Some managers are already managing all components of their businesses with bits, but on Slywotsky's reckoning, less than 5% of US businesses are truly digital - and even that tiny figure may well be an exaggeration.

Transformation cannot, however, be achieved overnight. The few who made the great shift took four to five years. But they won enormous prizes: such as a tenfold (or 10X) improvement on key measures like cost, capital requirements, cycle time and productivity. Realised gains in customer satisfaction are also vast - from 20 to 30% on Slywotsky's figures. If he is right, why have so few businesses acted to grab these glittering prizes? What explains the inertia?

Most managements don't understand what has already been achieved. They therefore fail to see the powerful financial advantages for companies which adopt different ways of thinking - and doing business. That last phrase encapsulates the central problem. For all their lip-service to change, most top managements prefer continuity. They regard discontinuity as something forced upon them willy-nilly. Joining the digital revolution, however, compels you to embrace discontinuity voluntarily.

Not only that: the whole organization gets involved. As with any transformation, internal marketing plays a key role. Its principles are identical with those of external marketing: "deliver the right message" says Slywotsky, "a simple message, 700 times". But there's a real personal difficulty inside most companies. The change in mindset must be led by people in their 50s. They are the least comfortable with the new business model, the most comfortable with the old. After all, the old generates enough profit - for the moment.

"Things can change so quickly", warns Slywotsky. Over the next two years, the need to digitize will become painfully clear. The pain arises not only because most companies will start from relative weakness, but because, as a first step, they must reinvent the way they do business. You must create a new business model before starting to digitize. While the worst mistake is to do nothing, the second worst is failing to give business issues top priority and to resolve them before taking serious digital action.

The key question - "what are the most important business issues?" - is one from which many managements shy away. If you lack any strategic thinking, it's asking a lot to demand a new strategy that is customer-led, and will be executed through digital transformation. Slywotsky explains that other transformations are easier to market internally. With quality, for example, the right approach is to instill the quality philosophy: strategy may not be involved. You don't have to ask, "what is my next business option?".

Going digital does require that difficult choice. The next stages need not be difficult at all. First, adopt digital methods where they are easiest to apply, e-mail being an obvious starter. The chief executive of cement manufacturer Cemex started to communicate exclusively by e-mail back in 1992 - much to the consternation of colleagues baffled by a boss who did all that typing himself. The second stage is exemplified by General Electric. It has partnered 50-year-old executives with Web-wise juniors half their age; as they use the Internet to buy, compare, etc., they learn to transact business with the customer in new ways.

Third, do not attack the whole company, but start with one area where digitization is relatively easy, and where much faster transformation can be achieved. "Small, tangible victories are worth more than the most eloquent exhortation", stresses Slywotsky. Also, see what competitors are doing over the Web: or go into GE sites, say, to see an "entirely new customer proposition" at work. Then managements will understand what they need, what tools are required, and how to create "simple-to-do" transactions.

The issue is how to digitize inside a conventional business. Slywotsky points to Southwest Airlines, severely criticised for a site that was "too simple, not sophisticated". But "customers want simplicity". Like EasyJet's business in the UK, that of Southwest (another low-cost, no-frills operator) perfectly matched the digital strategy. Both airlines have consequently recorded rapid, cost-saving gains in on-line purchases to levels far above those of the orthodox competition.

The watershed in the digital era, reckons Slywotsky, came in 1996, with an historic move "from back-end to customer-facing". The back-end, lower-level work in areas like inventories saved costs without altering the business models. Front-end digitization, however, involves a transforming interaction with the customer as people at all levels get deeply engaged. Working from a real-time, more accurate basis for decision-making, management can change information flows to run from the bottom of the pyramid all the way up.

Slywotsky's powerful vision of present and future opportunities, however, could not be based on many case histories: "It's very hard to find good candidates". One hopeful, Intel, "didn't pan out - it's three years behind Cisco". Such lags offer "huge opportunities", even to latecomers. It will take "six to eight" years for digitization to penetrate fully, but Slywotsky expects no more than 20% to convert over the next two years. That digitised fifth will have a "tremendous advantage"; it's certainly not too late to join their number.

Companies should really long to do so. Out goes the old dependence on guesswork, old data, buffer stocks, etc. Companies that digitize "can do business with customers the way we always wanted to", knowing in real-time exactly what they are selling and producing to match those sales. Yet Slywotsky's firm, Mercer Consulting, finds that 80% of top companies are still stuck in the "last-generation, product-centric model". The last thing they want is "price transparency", or any other transfer of power to the customer.

These same top companies, paradoxically, contain the entrants most likely to win the cyberwars. Only a handful of winners will come from the dot.com world. "The greatest new value will be established by existing companies with great customer relationships". The company that already enjoys a solid business has far more leverage than a start-up. Business-to-consumer (B2C) and business-to-business (B2B) have both seen several hundred start-ups. Only three B2C start-ups have become profitable: no more than ten have done likewise in B2B.

Companies like Yahoo and eBay have done wonders, but they are exceptions that prove the rule. "Traditional companies do have options", says Slywotsky, provided that "they can interact with the customer". Whatever the business, it can be run digitally to "dramatically more productive and profitable effect". The intensity will, of course, vary from market to market, case to case. "The digital reading is high for Cisco and low for Wal-Mart". But managers must ask themselves the same two questions in all sectors: 'How many of my competitors are digital-ready? How and when will that proportion change?".

The need for your own investment in digital-readiness, and its timing, must hinge on the answers. Slywotsky emphasises that in the B2C markets, by and large, customers are undecided, but unlikely to desert the traditional retail models entirely. "The winning model will be hybrid", combining stores and the Web. If it's too early to digitize your customer base, however, that's by no means that. You can concentrate on internal processes rather than external. Great financial gains and significant competitive advantage can be won from internal digitization.

Moreover, that provides a firm foundation for going outside. The correct sequence is to "design an offering that works", and then to shape a transition strategy - how much to change, how to change it. The less sophisticated the market, the greater the need for "simplicity of digital operation". But even in sophisticated markets, there is no case for difficult or cumbersome processes which will retard future growth - and which presumably help explain why faster digitization, says Slywotsky, is "hard to detect" at present.

As 2001 unfolds, US recession isn't helping. The emphasis has shifted to cutting costs to combat slow growth. But Slywotsky regards this new climate as a bull factor for the digital economy. Going digital is one of the best ways to cut costs. "Slowdown", he says, "is a wonderful time for improving relative position by investing in and accelerating the transformation to digital" - and for getting the whole organization refocussed on the digital option. By economising and transforming simultaneously, you can have your cake and eat it. If you fail to act, there may well be no cake.