September 20, 2014

(ED NOTE: An example of how this applies to healthcare: I was seeing a patient in a clinic with back pain.  She has just had an MRI at another clinic the week before for the same complaint.  Fine, I said, let me call that clinic, even though it is Saturday and get the report over the phone.  No dice, said the radiology tech; cannot give report over the phone.  Ok, let me put patient on the phone; no dice again, the patient will have to come to the clinic for this.  And, she continued, we can only fax it with the radiologists’ OK, and he is not here.  Well, as this article states at the end,..what is occuring in Healthcare is that “….the greatest barrier to adopting fusion strategies is not skepticism about their promise but inexperience with their execution….” )

In the early days of the digital revolution, many leaders of established companies did their best to ignore the upheaval, convinced that the threat from new technologies wouldn’t ever amount to much. As that premise faltered, many flipped in their thinking, concluding that digital would inexorably destroy their positions. To survive, it seemed, they’d have to stop throwing money at the old businesses, salvage what they could, and launch independent digital ventures. The existing units probably wouldn’t survive, but disruptive digital businesses could replace the zombies in a company’s portfolio.

Both views proved misguided. The failure of the first hardly needs elaboration: No company can safely ignore the changes wrought by digital technologies. The failure of the second may be less obvious but is now well documented. Companies that milked existing businesses while betting on independent digital start-ups that had no competitive advantages usually wound up discarding decades’ worth of physical assets and gambling away millions in real value. Sears Holdings may be the poster child for this kind of miscalculation: Underinvesting in its stores while pouring resources into online ventures, it has suffered a 75% decline in stock price over the past seven years. Similar examples crop up in many industries.

The central problem with either extreme is that it fails to account for how customers have changed: They now weave their digital and physical worlds so tightly together that they can’t fathom why companies haven’t done the same. Let me relate a personal anecdote that illustrates the problem.

Last December my daughter Stacy wanted to buy the Just Dance 4 video game for her little girl. She found it on a major retailer’s website for $29.97. To be on the safe side—Christmas was approaching—she decided to go to the retailer’s local store and pick it up. There, however, it was selling for $47.97, a 60% markup. She was surprised, but she remembered the company’s price-matching guarantee, so she asked for the online price. No dice, said the cashier—the guarantee applied only to competitors’ prices.

“Wait,” Stacy said. “I can buy this game online and have it shipped to the store free, right?” The cashier agreed, but cautioned that it might take several days. My daughter replied, “But it’s on your shelf now. Can’t I just pay for it online and take one from the shelf?” Of course not, was the response; the store and the online operation were separate businesses, and that would mess things up. Standing at the register, Stacy ordered the item on her phone, and a few days later she came back to collect it—another exasperating process.

People experience disconnects like this one all the time. Here we are, a quarter century into the digital revolution, yet many companies still agonize over whether to invest significant resources in digital capabilities. Those that have done so tend to run their digital operations as independent business units—the way companies prefer to manage them, as opposed to the way customers expect to use them.

As the revolution progresses, some companies will go the way of Tower Records, their businesses thoroughly disrupted and destroyed by digital alternatives. But most will find that they must fuse the digital and physical worlds, just as consumers are doing. Look at your own business: Is the physical part of it really going to disappear? Wouldn’t innovations that fuse the digital and the physical open up vast new opportunities? And even if some of these “digical” fusions ultimately prove to be 10- to 20-year transitions toward further disruption, aren’t they still the best way to extend your core business, generate cash to fund continued evolution, and build the capabilities that will be essential for future success?

My colleagues and I have studied more than 300 companies around the globe and have worked directly with hundreds more that are trying to cope with the dazzling but daunting changes reshaping the marketplace. We’ve found that most industries are still in the early stages of digital-physical transformation (see the exhibit “Digical’s Growing Momentum”). We’ve also found that the greatest barrier to adopting fusion strategies is not skepticism about their promise but inexperience with their execution. Executives are intrigued by the possibilities and recognize their potential but are uncertain how to make them work.


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