In today’s fast-paced world, running a successful business requires more agility, consumer focus, and innovation than ever. Whether you sell shoes, computers, groceries, or even intangibles like online courses, the digital age can either propel you to boom or bust. Your choice.
And guess what. Winning in the digital age is actually less about how you use technology than about how you use your brain.
Ram Charan understands this better than most, and he turns conventional principles on their head with an ingenious reframing of competitive advantage.
Charan, who earned his MBA and doctorate degrees at Harvard, is one of the highest-profile C-suite advisors in the world today. His clients include many of the biggest businesses in the U.S., India, China, and elsewhere around the globe. His latest book is Rethinking Competitive Advantage: New Rules for the Digital Age.
With an insider’s view of companies like Netflix, Amazon and Alibaba, Charan explains what enables digital giants to soar. He defines the unwritten rules these digital giants seem to follow in using their digital platforms, ecosystems, money-making models, team structures, and leadership approaches—all with a laser focus on the individual customer experience.
The good news? These rules are not the exclusive preserve of big-name companies. They can be applied by any company to gain and keep a competitive edge. But if you want to win, Charan says, you must learn to play a new game.
Are you a C-suite executive? This applies to you. A fledgling entrepreneur? You, too. An employee who’s eager to adapt to a changing world? Check.
Charan offers an insightful and practical guide for leaders and practitioners at every level.
Rodger Dean Duncan: For established (traditional) companies, which mental boundaries present the greatest obstacles for success in the digital age?
Ram Charan: The first is utter ignorance of hundred-year-old algorithmic technology that enables a company to serve a customer on a personalized basis, just as a local corner store has done throughout history.
The second mental barrier is fear—as in, “Will this technology work? Will it pay for itself?” Because technology is mathematical, not physical like a railroad engine or a mass production factory line, or any number of other industrial advances that could be seen and touched. Many, if not most, industrial companies do not yet feel the devastating effect of digital giants like Amazon, Netflix, and Uber.
Duncan: You say the old adage “stick to your knitting”—a colloquial version of “build on your core competencies”—tends to narrow a company’s imagination. What do you recommend as an adage for the digital age? And please give us an example of a company that’s following that adage.
Charan: “Outside in, future back.” When you look at the consumer experience beyond what you or your industry currently provides and think what consumers might want or expect in the future, you realize that you have no choice but to digitize. Whoever uses algorithmic tools to provide that experience will have exponential market scope. Apple’s base of 1.6 billion iPhones combined with an almost unlimited array of apps creates a trajectory of continuing exponential growth. This approach will give you confidence to design your business around what an end-to-end customer experience could be or should be. If you don’t do it, someone will, and you will face a steep, possibly permanent, decline.
Duncan: What role do you see online courses playing in the world of education—competing with traditional universities as well as catering to consumers seeking career enhancement but not necessarily a degree?
Charan: Learning is a personal thing. The most successful people I have met are constant learners—they read voraciously, talk to people from outside the industry continuously, and are incessant in asking questions to test their thinking. Such people will benefit enormously from online courses. Many don’t need a degree. They have confidence that if their learning translates into action, it will propel their careers. Universities have been offering online courses with degrees. But at the same time, companies are recruiting raw talent, especially in the area of algorithms, and regard a degree as discretionary.
Some companies like to recruit people who have an appetite to take ownership of their own learning. Fidelity now requires their people to add one skill every year, and it is linked to compensation. It will largely come from online learning.
Duncan: Through the use of algorithms and arrangements like subscriptions, giant digital companies (think Amazon, Netflix, Adobe) create steady streams of recurring revenues. What kind of thinking can enable small start-ups to create cash-generating trajectories? Can you give us an example?
Charan: Amazon started with one product. Jeff Bezos began with a clear intent to be profitable on a cash basis, and did become profitable on a cash basis in the third year. His EPS was negative, but he got the cash in and offered new products or services to the same customers. Through recommendation algorithms he created recurring revenues, and by adding things like music, he created entirely new revenue streams by serving adjacent needs of the customer. A more important part is that you can create even more by having other partners, otherwise known as an ecosystem. Recently, 58% of Amazon revenues came from partners like Nike. Amazon would not have been able to grow without partnerships with Walmart and Target in the early days. That gave Bezos volume, customer data, and adjacent revenue streams.
Duncan: You write about the “social engine” that drives innovation and execution that’s personalized for each customer. In establishing an organizational culture, what “structure,” behaviors, and mindsets seem to work best in the digital age?
Charan: The mindset change is critical, and it is difficult for those who grew up in legacy companies to get out of the mindset of mass production, mass markets, mass advertising. It’s frozen in many legacy executives, because that’s what got them to the top.
The structure change is to go from seven or eight hierarchical layers (some have 12!) to be team-based. Multi-layered companies are very slow. Information that flows up and down laterally is distorted, delayed, and used as the basis for power. The best social engines organize around cross-functional teams that are close to the customer.
Fidelity moved ahead of all others, reorganizing into three or four layers, 187 teams, making performance transparent with algorithmic trackers. They started with one team, and soon everyone wanted to work that way. When the new organization became fully operational, the speed of innovation shook the industry. Fidelity took a full-page Wall Street Journal ad to announce zero price trading, and it now produces double digit innovations a day, which was not possible before.
The important behavior change is to know your end customers. If you don’t understand the end-to-end customer journey, you will not succeed. Data and its analysis are not sufficient. You need to observe habits, behaviors, needs, and fears. This goes for B2B companies too. Kathy Murphy, president of Fidelity Personal Investing, and her teams plotted the customer traits and journey for each of three main customer segments. They have it mapped, and use that insight to inspire products, pricing, and servicing. The information is continuously updated, and Murphy herself routinely listens to calls with clients to make her own observations. It’s painstaking, tedious work. Supplement that with data analysis and you have a winner.
Duncan: “Simultaneous dialogue,” you say, is a critical component of a company’s “social engine.” Give us an example of what that looks like and what it produces.
Charan: For a hundred years our companies have been organized by silos. But providing for the customer requires integration of decisions across silos. If you’re producing a new car model, it would start in a silo where someone conceives an idea. Then it goes to another silo of someone doing engineering, another one doing design, others working on manufacturability and marketing considerations. Information goes up or down eight or nine layers, then across the top, then up or down.
The whole series of discussions that occur one after the other is called sequential dialogue, and it’s slow and cumbersome. It used to take 86 months from the time somebody conceived an idea to the time a car got to the dealership. That pace would put you out of business today.
In simultaneous dialogue, when someone talks, everyone listens to the same thing unfiltered. People modify their thinking, tradeoffs get made, and things get integrated. Steve Jobs had a meeting every Monday morning with about 40 people for four hours, to discuss one or more products. He would fly in a low-level engineer from Taiwan if necessary, so everyone could hear the same thing and align their thinking.
Today it’s much easier through use of virtual dialogue. The CEO of a great chocolate company in Turkey uses this and may have 20 people on Zoom, including the person closest to the customer. Simultaneous dialogue empowers people at lower levels, helps with follow through and execution, and helps discover talent.
Duncan: When taking over the reins at a traditional company, what are the first three or four things a new leader should do to reinvigorate and reorient the company to compete in the digital economy?
Charan: One is to sincerely and in practical terms learn and decide the need of whatever customers you are going to focus on. Remember to go from the outside in and observe them. Yes, you will see the existing need being satisfied by traditional companies like your own. But refresh that need for the digital age using the concept of an end-to-end experience that has individualized service, pricing, delivery, and so on.
A second thing is to redefine your moneymaking formula, or business model. Think like Bezos—faster, better, cheaper—to create value for customers and shareholders at the same time. Use machine learning and AI to generate cash to fund growth. Give up on the concept of EPS and think instead of cash per share. Cash is the right measure, because unless it’s fraud, it is not manipulated. EPS is discretionary, because of accounting rules.
Third, no leader succeeds without having the right people on the team. It’s agonizing to take out people whose skills are no longer relevant or who are resistant. It’s a tricky thing to steer the ship as you change it. If you cannot change it, you have an option: you could split the company, as Delphi did very successfully. And if you don’t want to split it and think you cannot digitize it, you can sell all or part of the company, as people think Rupert Murdoch did.
And fourth, get a set of advisors who have been around the block on digitization and done transition. Why re-invent the wheel if you can learn from the experienced?
Duncan: There’s no doubt that leadership obsolescence is a reality. You rightly point out that many leaders in traditional companies honed their thinking skills around incrementalism versus rapid and exponential growth, and many of them lack technical skills Rather than just ride off into the sunset, what can these leaders do to reinvent themselves to adjust to today’s requirements?
Charan: It all depends on their attitude and determination to play the new game. You need the determination of an athlete who wants to win the Olympics.
The first thing they must learn in addition to algorithms (you only need to know about a dozen and what they do) is about the customer. Visit other companies, especially on the consumer side, and discard the idea that focusing on the consumer does not apply to an industrial company. I have taken a number of traditional CEOs to visit companies like Apple, Amazon, and now Walmart, because the fact is, a small number of algorithms apply to a large number of situations, industries, companies. The algorithm for marriage.com is very similar to the one used at Google for search.
Now if they cannot do it but believe it is the way to build the company, they need a right-hand person with power to make it happen. One of the best examples is Disney with Bob Iger, how in a period of three years he, with his board, put Disney on a new path. He stayed on as CEO a bit longer to convert Disney to digitization, then selected Bob Chapek to succeed him, a different heir than the one many people were expecting.
Giving up habits is easier said than done. The leader may need a coach. One CEO of a large private equity firm has seen a psychologist every week for much of his career. I think the psychologist would be able to cross-check whether the CEO has reinvented himself.
This column was first published by Forbes, where Dr. Duncan is a regular contributor.