Digital thinking

Why do digital companies often outcompete conventional ones?

Why do digital companies often outcompete conventional ones?

Once I had dinner with my friend, an entrepreneur who had sold his manufacturing business and started a digital company. He confessed that it was difficult for him to change his approach to running a business when he began working with “digital” people. “They think differently,” he said. But when I asked him what’s the difference between “analog thinking” and the “digital one,” he found it difficult to articulate it clearly.

Then I read an article about an online DIY retailer beating the competition with some brick-and-mortar store chains. The article’s author underscored that brick-and-mortar behemoths had plenty of resources to “digitalize” their businesses. But in the beginning, they stuck to their business model. Then, when they realized that changes were inevitable, they developed their online sales much slower than the cheeky young digital competitor. The author also used the “digital thinking” phrase to explain the contrast between the two avenues.

So, what’s the difference between “digital” thinking and “analog” one?

From my experience, conventional managers see their departments first of all as organizational charts. They govern by KPIs and “people management”. Digital managers see their departments rather as algorithms. And that’s a key point.

Let’s imagine two companies providing grocery delivery services. The first one is old-fashioned — they take the orders by phone and operate manually, which means that many people are involved, and they exchange digital and paper documents, or phone calls, to fulfill the orders. As it happens in many traditional companies, business processes are not well documented, and people simply “know what to do.” The first company’s CEO’s name is, say, John.

The second one is digital; they accept orders through the website and mobile app. Less people are involved, and all the documents and commands are in electronic form. Most employees perform primitive recurring operations directed by algorithms. The second company’s CEO’s name is Mary.

John and his people

Let’s assume that the CEOs of both companies are not satisfied with the speed and accuracy of their companies’ delivery service. What will John do? All he has on hand is the organizational chart (as an answer to a question, “who does report whom?”) and the set of KPIs. John sees that targets are not being met; be he doesn’t know why.

To find it out, John will need to dive deeply into the process, and, given that they are poorly documented, his investigation will take a lot of time and effort. There are two possible sources of the troubles — inefficient processes or people who, for some reason, don’t do their job properly. Maybe they are not well trained or unmotivated.

The common problem of many traditional firms, even the big ones, is that when processes are poorly documented, employees try to achieve their individual indicators the way they believe is the best (the best for them, but not always for the business). They find their lifehacks and workarounds to do their job. They don’t break the rules because there is no rule for every step or operation. So, even if they meet their targets, nobody except them knows how they do it, especially John and C-Suite managers.

Mary and her algorithms

If Mary frowns looking at the KPIs of her business, she knows that some algorithms don’t work properly or need to be improved. She doesn’t need to go to the field and interview employees. Instead, she opens her laptop and dives into algorithms. And they are much more transparent for her than business processes are clear for John. Algorithms don’t invent their lifehacks and don’t seek workarounds; they always work as they were created. And whereas John has only KPIs of the results or outcomes, such as average delivery time or accuracy, Mary can see the efficiency of the algorithms providing these outcomes.

Mary can’t afford the luxury of gathering employees, setting goals, offering them generous incentives, and believing that they somehow will make her firm prosperous. Instead, she must refine and polish every algorithm, command, and operand because algorithms can’t take the initiative and right the wrong if they “see” it. They work in accordance with the prescriptions of their creators, and that’s the only way they do. So, she can improve her business’s performance faster and more efficiently than John.

To right the wrong

Even when John knows what to do to fix the troubles, he has plenty of work to be done. Processes need to be refined. People need to be retrained. The incentive wages system needs to be updated. And changing the process may be difficult for John. As Mark Twain once said, “the only person who likes change is a baby with a wet diaper.” Employees may resist changes, so John will need some time to get them on his side. None of this is an issue for Mary because algorithms are obedient. But as Peter Drucker said, fixing the trouble is not the way to develop a business. If Mary and John have new ideas about their companies, Mary will be able to test and implement them much faster and with fewer errors.

But what makes Mary’s thinking digital is a habit of seeing every task as an algorithm, that is, a succession of actions. And Mary can’t launch a new product or service until those actions are thought out in detail and turned into ones and zeros. Admittedly, it is not simple, which doesn’t make managing a digital business an easier task than being a leader of a conventional one. But if it is done, chances are that such a company will outcompete its traditional rivals, who can start a new project with only an impressive goal, enthusiasm, and motivation.

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