At first glance, digital giants such as Amazon, Apple, Google and Netflix may appear to have little in common with SMEs but studying how their leaders organise and execute provides huge lessons for entrepreneurs as well as legacy businesses of any scale.
That's the conclusion of Ram Charan, business adviser to global chief executives and author of numerous best-selling books on business strategy. His latest book, Rethinking Competitive Advantage, focuses on how born-digital companies have rewritten the rules of business management. Respectfully, he says, it is time to throw out many of the theories of thinkers such as Michael Porter and Gary Hamel developed in the late 20th century, as they are no longer relevant in the digital era.
Speaking to The Irish Times, he says that when you dissect the world’s leading digital companies, several common elements are clear. Crucially, they have a big vision and can imagine a marketplace that doesn’t yet exist. They then focus relentlessly on the needs of customers and work backwards, building a digital platform that will allow them to scale rapidly and generate cash.
“They imagine an end-to-end experience in a person’s life – as the individual travels, eats, shops for goods or seeks medical care and entertainment – that could be greatly improved and, if it were, that a vast number of people would want it. They think about how technology could be used to make the seemingly impossible happen and they focus on the end user even if intermediaries lie between them and the consumer,” he says.
Each has a digital platform at their core consisting of data and algorithms that allow them to experiment fast and reach a huge potential consumer base at a minimal incremental cost as they grow. They also benefit from ecosystem that accelerates their growth, such as third-party sellers on Amazon’s website, Uber’s independent drivers and Apple’s app developers.
A digital platform is not an enduring competitive advantage in itself but not having one is a competitive disadvantage given everything it enables a company to do. This digital platform is what fuses an ecosystem together, directs and analyses the data that flows to and from a large number of sources and customises the end-to-end consumer experience, he explains.
“You digitise or you die,” is Charan’s stark message for those companies that don’t organise themselves in this way. “Prior to Covid-19, big industrial companies had not felt the heat of digital companies. They were not being attacked by the born digital players. Most CEOs came through the ranks in the old system using incremental thinking which doesn’t work any more.”
Companies also need to rethink who their competitors are. Digital companies are not afraid to look beyond their traditional industry boundaries.
In the book, Charan tells how Piyush Gupta, chief executive of DBS, the hugely successful Singapore-headquartered digital bank, met a fellow chief executive at a business conference who told him he had been talking to some of Gupta's competitors.
Gupta asked who and the chief executive cited Citigroup and Bank of America. Gupta quickly corrected him. "Those are not my competitors. My competitors and Google, Amazon, Alibaba and Tencent. "
Charan acknowledges that there is a danger in being intimidated by the success of the digital giants but having paid homage to their guile in strategy and execution, there's a reassuring message in his book that the path trodden by Steve Jobs, Bill Gates and Jeff Bezos is one others can more easily follow now. He notes that each of these companies started with fewer than three people and that they had to build their platforms from scratch.
Today, you can rent what you need from cloud service providers and, in many cases, algorithms are freely available.
“You can build your digital engine quickly and cheaply. You can connect to the customer and use personalisation and there are no boundaries as to how many customers you can reach. The internet will cut through. If your product is good, and your service and last mile is good, you can scale very quickly and your incremental costs will be low so you will continue to generate more cash.”
Artificial intelligence and algorithms can be very helpful in assisting good decision-making but ultimately digital leaders need have the quality of good intuition too, as Charan explains.
“Data increases the scope of intuition but you must observe the customer too and have the capacity for forward thinking. Data will give you a hypothesis. Human perception is still very deep and more powerful than the data you have in your servers. AI is not yet a perceptual device. It only works backwards.”
Another trick to copy from the digital giants’ playbook is to create an ecosystem.
“Ecosystems creates an image of something mystical. It isn’t. If you are a small company, learn about what your customer needs are beyond what you can supply yourself. If you can’t service this need and do a better job at a lower price, find a partner to help you. Get them on your platform or, alternatively, go on someone else’s platform.”
From his work with major organisations around the world, Charan notes that a new breed of leader is now being primed to take over in many traditional businesses.
“Succession planning has changed. Organisations are looking at three levels below the CEO to find those with strong digital entrepreneurial abilities – people who have built something and see if we can train them in seven or eight years to come through to the top. They are now totally bypassing the direct reports to the CEO.”
The capacity for long-term thinking is crucial if you are to be a successful digital leader. If you can think seven or eight years out and work backwards as Jeff Bezos has often done at Amazon, he says, “then there is no competition”.
What is a digital leader?
Charan says that the differences he has observed between the leaders of digital companies and traditional/legacy companies relate to their cognition, skills and psychological orientation. Key qualities he identifies include the following.
Vision: they have the mental capacity to think in terms of 10x or 100x growth, to imagine a future space that does not exist and the confidence that they will overcome whatever obstacles they might encounter to get there.
Data led: they are comfortable with data-based analysis. They blend data with intuition, examine future trends and adjust their actions and offerings as new data and facts emerges.
Fluid thinking: they embrace change and often initiate it. They are motivated to create something new. Their fluid iterative thought process makes the once-a-year strategy review obsolete. Instead it is ongoing.
Create and destroy: they are not afraid to cannibalise what they have or abandon what is not working. Unlike legacy leaders who need every ‘i’ dotted and every ‘t’ crossed before they improve an initiative, digital leaders are willing to make big bets with a sense of urgency.
Execution: they rely on metrics and transparent data to drive execution. They are highly disciplined in ensuring that their people deliver results on time. This also includes knowing who to select for each key function and when to move those who are not performing.
Always learning: they stay abreast of what is new and challenge themselves to learn about things that they know nothing about. Their ability to handle a constant flood of new information allows them to react quickly and to shift resources and rebalance short- and long-term goals.
Rethinking Competitive Advantage – New Rules for the Digital Age, by Ram Charan, is published by Currency