May 22, 2017 | Written by: Mark Crowther
Categorized: Business Design
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Design on its own is not sufficient to stand up a new experience or a new business, nor is technology. There are three legs to the stool. The third is business strategy. How will you make money? What is your competitive advantage? How will you win? Take the three together, and you have a solid, balanced foundation to stand up your new business. You also have the foundational elements for building a business by design. Bringing these three elements together, experience design, technology and business strategy-that is the focus of Digital Strategy & iX. It is also the mindset of how VC’s assess and fund start-ups.
Corporations are enamored by Silicon Valley. It’s never been a better time to be an entrepreneur, whether at a start-up or within a corporation. As an entrepreneur, I take that business amour, and tag some of our approach to Digital Reinvention as challenging our clients to “act like start-ups” – in the pace they work, in the business models they should look to disrupt (enabled by new and emerging technology), in focusing on design in value creation (see my first blog post), and the use of technology to support scalable growth (see my last blog post).
It also means advising them to advance a new product or service just like a founding team of a start-up would, with the corporation funding the new product or service like a VC. Creating this mindset breaks down designing, launching and scaling new businesses within large companies into smaller more focused steps. It also sets a discipline to advance through the stages of funding by reviewing all 3 legs of the stool at each stage. As the team learns about and iterates the solution through contact with customers and the market, the design, the technology and the business economics will alter.
The lean start-up approach centered around MVPs (minimum viable products) and agile iterative development applies to any size of company (from start-up to Fortune 500) and is proven to be both a more capital efficient way to advance an idea, and also a more successful way to develop experiences that customers will value and pay for.
If we’re going to work with clients to move at the speed of a start-up, then we need to help them act like a start up:
- Create small cross-functional teams. Bring together design, tech, and business at the same table – literally.
- Empower the team to make decisions. Identify and eliminate lags in decisions going up, across, and back down.
- Develop a value milestone mindset. Embrace agile, rapid prototyping, MVPs, rather than full product launches. As Reed Hoffman, the founder of Linkedin, said, “if you’re not embarrassed by the first version of your product, then you’ve launched it too late.”
- Embrace a culture of experimentation (aka fail fast). Advising them that controlled user testing within limited metros, geos, or customer groups is how we move fast and learn fast. We want to scale customer delight, not failures.
The startup dynamic I outlined above ensures the business value is assessed in conjunction with the experience being designed and the technology roadmap. But every innovation program needs a funding mechanism.
At one level, we help our clients think through the economics of a new product or service as it advances through product development (MVP) to commercialization. On another level, we take a strategic view to help them develop a self-funding Digital Reinvention program with three key phases: optimization, growth, and reinvention.
Optimization is typically an EBITDA story, one I often describe as “doing what you currently do but better with digital”. Examples of optimization can include greater use of customer self-service through new digital services, which in turn reduces the costs.
Companies can grow their existing offering by using digital to access new customers or expand product scope, typically gaining top line revenue growth and margin expansion through economies of scale.
And finally they reinvent their businesses with new businesses enabled by the digital shift – which I often tag as “aiming for the 30/30” – that is, 30% net new revenues at 30% EBITDA margin (with references taken from GE’s digital success).
While the graphic above suggests a linear path, the reality is much more dynamic, with stages running in parallel. The idea is to use a share of the financial rewards of optimization and growth to fund reinvention.
This is the GE story. In 2011, Jeff Immelt set the goal to reduce GE’s SG&A as a percentage of revenue from about 18% to 14% over 5 years. He used some of that savings as the venture fund to invest in the new digital and services businesses that are now over 30% of GE’s revenues and at a higher EBITDA margin than the core business.
This is also the emerging story of CEMEX. They are generating savings through IBM out-sourcing, and investing some of that in their Digital Reinvention program. For more detail on self-funding Digital Reinvention in industrial companies, including the CEMEX case, see the recent IBV study: Sharpening Your Digital Edge.
Visit IBM iX to learn more about how we can partner with you to align design, technology, and business strategy to build business by design. IBM’s ability to support our clients with an end to end integrated approach from idea to MVP to commercialization will be the focus of my next blog.