DIGITAL TRANSFORMATION

1. BUS 550 – THE CONTEMPORARY FIRM RAFAEL GARCIA DIGITAL TRANSFORMATION

2. THE SHARK ATTACK https://www.youtube.com/watch?v=AbtKh2A_9Pk

3. Disruptive technology • Disruptive digital companies are “the shark” • The 1st challenge is the disruption itself: They pressure revenue and profit grow • The 2nd is that the results to respond to competition are often underwhelming: the average return on incumbent digital initiative is below 10% (worldwide survey with 2,000 incumbent companies)

4. Digital Strategy • What’s the right digital strategy?

5. Consumer’s New Behavior • With technology and connectivity, consumers find exactly what they want • As well as where and when they want • For the lowest price possible, even for free

6. How to Avoid Digital Disruption Related to Changes in the Nature of Supply, Demand, or Both? • Two approaches: • Modest: Realign markets, finding new (cheaper and easier) ways to connect supply and demand • Extreme: face new competitors and/or opportunities and create/fight network effects

7. REALIGNING MARKETS: newly exposed supply combined with newly undistorted demand gives new market makers opportunity to connect consumers and customers by lowering transaction costs. • Unmet demand and escalating expectations • Exposing new supply • Making a market between them

8. Customers don’t have to buy the whole thing for the one bit they want • They expect best-in-class user experience from all their online and mobile interactions • Consumer experiences with any product or service, now shape demand in the digital world • People are getting used their needs fulfilled where they want, when they want, and often for free. Unmet Demand and Escalating Expectations

9. Your business model may be vulnerable if your customers: • Have to cross-subsidize other customers • Have to buy the whole thing for the one bit they want • Can’t get what they want where and when they want it • Get a user experience that doesn’t match global best practice Unmet Demand and Escalating Expectations

10. Digitization allows new sources to enter product and labor markets in ways that were previously harder to make available • Companies can liberate supply anywhere underutilized assets exist • New supply becomes accessible and gets utilized closer to its maximum rate. Exposing new supply

11. Your business model may be vulnerable if: • Customers use the product only partially. • Production is inelastic to price. • Supply is utilized in a variable or unpredictable way. • Fixed or step costs are high. Exposing new supply

12. Without the market makers, unused supply and latent demand will stay outside of the market • To assess the vulnerability of a given market to new kinds of market makers, you must analyze how difficult transactions are for customers Making a Market Between Them

13. You may be vulnerable if you have any of these: • High information asymmetries between customers and suppliers • High search costs • Fees and layers from intermediaries • Long lead times to complete transactions Making a Market Between Them

14. EXTREME SHIFTS:Companies must understand a number of radical underlying shifts in the forces of supply and demand specific to each industry or ecosystem • New or significantly enhanced value propositions for customers • Reimagined business systems • Hyper scale platforms at the center of entirely new value chains and ecosystems

15. As markets evolve, people’s expectations escalate • To meet this expectations , companies come with new value propositions that give people what they didn’t realize they wanted Examples: • Smartphone: internet in your pocket • FedEx: real-time insights on the progress of deliveries New and enhanced value propositions

16. You may be vulnerable if any of the following is true: • Information or social media could greatly enrich your product or service • You offer a physical product that’s not yet “connected” • There’s significant lag time between when customers purchase when they receive it • The customer has to go and get the product—for instance, rental cars and groceries New and enhanced value propositions

17. Change how value chains work • Enable step-change reductions in both fixed and variable costs • Help turn products into services Examples: • NY Times virtualized newspaper, reducing distribution and production costs • Walmart / Zara: digitally integrated supply chains: cheaper and more effective operations Reimagined business systems

18. Indicators of disruption in this zone include these: • Redundant value-chain activities, such as a high number of handovers or repetitive manual work • Well-entrenched physical distribution or retail networks • Overall industry margins that are higher than those of other industries Reimagined business systems

19. Opportunity to upsell and cross-sell products and services without human intervention • Considerable financial advantages • Create new barriers to entry Examples: • Amazon Kindle: sell books and Amazon Prime subscriptions Hyperscaling Platforms

20. Indicators of disruption in this zone include these: • Existing business models charge customers for information • No single, unified, and integrated set of tools governs interactions between users and suppliers in an industry • The potential for network effects is high Hyperscaling Platforms

21. 6 Types of Digital Strategy (HBR) • Platform Play: customers and suppliers can interact more directly and benefit from network effects. (Accor: online booking platform for independent hotel offers) • New Marginal Supply: previously inaccessible sources of supply at a marginal cost (H&M and Ikea: online reseller options for their own customers) • Digitally-enabled products and services: new products or services with digital features to serve new demand (P&G’s Oral B with Bluetooth-enabled digital guidance).

22. 6 Types of Digital Strategy (HBR) • Rebundling and customizing: rebundle products or services to better serve existing customer (New York Times: people can personalize reading lists and organize the content they read) • Digital Distribution Channel: make it easier for customers to access their products or services (Wall Mart, Costco, etc.) • Cost Efficiency: using digital to improve the cost efficiency through automation or cost scaling. Survival rather than comparative advantage

23. CONCLUSIONS • Understand the nature of disruption we face rather than who “they”are • Return to the fundamentals of supply, demand and market dynamics to clarify the sources of digital disruption • Guess what is the new consumer’s expectations To be dicussed... How can an insurance company be prepared for the driveless cars?

24. QUESTIONS 1. Who is “the shark”? a. Digital Transformation b. Digital Start-ups c. Digital Disruption d. NONE 2. What’s an example of hyperscaling platforms? a. Amazon Kindle b. New York Times vitualized newspaper c. FedEx real-time insights d. None

25. QUESTIONS 3. Which one is NOT a strategy for Realigning Markets a. Unmet demand and escalating expectations b. New and enhanced value propositions c. Exposing new supply d. Making a market between them THANK YOU