Peloton, Goldman Sachs, and Designing a Digital Strategy

By Scott Kirsner |  October 22, 2018

Sunil Gupta has seen a lot of your attempts to make your company more digital. And he is not impressed.He has seen the digital outposts set up far from headquarters, the tsunami of small internal experiments, the collaborations with fast-moving startups.

“Through initiatives like these,” Gupta writes in his new book, Driving Digital Strategy, “managers are using a Band-Aid for a deeper problem. In order to be successful, you can’t just create a separate digital unit, or run experiments, or use technology to improve your efficiency. Instead, you must make digital strategy an integral part of your overall business strategy.”

Gupta is chair of the general management program at Harvard Business School, and co-chair of the executive program on digital strategy there. He has appeared on National Public Radio, CNN, and the BBC, and consulted with companies like American Express, Kaiser Permanente, Unilever, and Vodafone. We spoke in his office on campus just after the spring semester had concluded, and began by tackling the buzzword of the year: digital transformation.

InnoLead: Maybe a good place to start is just to talk a little bit about the term digital transformation, which feels like it’s…I don’t know if it’s the buzzword of 2017 or 2018, but I’m certainly hearing it a lot. When companies are saying, “We need some digital transformation around here,” how do you interpret that? Is it a positive or a negative thing?

Sunil Gupta: There’s obviously a lot of hype around it. Part of that is everybody hears the stories of the Kodaks or the Blackberrys of the world, or Nokia, and they don’t want to be that. The concern that I hear from the executives is, “I need to do something. I don’t know what, but I need to do something.”

I’ve seen a lot of these executives, they bring in their top team, go to Silicon Valley, meet Google and Facebook and all these guys, get very excited, then come back home and say, “But we are not Google. We are not Facebook. What do we do?”

There is a sense of urgency without knowing exactly how we should do it.

InnoLead: Most companies will have a Chief Information Officer in place. Some of these CIOs probably are more strategic and future-focused than others. If you create a VP of Innovation or you create a Chief Digital Officer, or you have a CMO who feels like they should be leading digital transformation, do you see that creating conflicts sometimes—in terms of who’s the leader, who has the most resources?

Gupta: This is one of the things that I talk about in the book—that [digital transformation is] not just [something that] has to be done in marketing or has to be done on operations. There are four components that companies need to look at.

One is the strategy itself. Does our business strategy change—the way we create and capture value?

In lots of companies, that fundamentally changes. It is the CEO’s role to say, “What business are we in? How is Amazon going to disrupt us?”

That’s a bigger question. Once you define where you want to be in the next five to 10 years, then the question is, “How should our operations look?”

Even if the strategy doesn’t change, do I need to automate central operations with AI or algorithms or machine learning? Does my innovation have to be more open innovation, rather than internally relying [on our own expertise]? What happens to my distribution channel? How do I integrate online and offline?

The third component is the customer part. How do we interact with the customers in this world of digital marketing, social media? Does that change? How does the role of the advertising agency change?

The fourth would be organization structures. How do we actually create the organization? My perspective is that you need to strengthen the core and build for the future at the same time. It’s almost like changing the engine of a plane while it’s flying. How do you do that?

Should it be a separate CDO? Should it be part of the organization? I think different companies are experimenting with different stuff.

InnoLead: We did an event in Chicago a couple weeks ago, with 18 or 20 large companies in the room. A number of them had created the “digital committee” as a way to make sure there is enough focus, enough resources, and things are moving quickly enough. Have you seen that? Does that somehow escape the perils or the pitfalls of other committees where it’s hard to get everybody together?

Gupta: I think a good example of that is I did a case study with Goldman Sachs. Goldman Sachs had a financial crisis, went through a lot of the turmoil and changes. They were also concerned about…how the financial services industry is going to change.

Now, in Goldman Sachs, like any other financial institution, there are a lot of silos. The guys who work in fixed income, the guys who work in foreign exchange, etc. These are big guys, because they’re making billions of dollars for the organization.

Their personal bonus is linked to the P&L. As a result, the CIO, in this case, Martin Chavez… basically says, “Look, first of all, there are redundancies across these [businesses]. We need to kill the redundancies, because each division is doing their own stuff. They built a separate organization…but the whole goal of this separate body was to work with each individual silo or business unit to say, “Okay, what is that you do that can be done across the organization? What do you need where I can bring in a fintech [startup] to plug into your business?” They created a platform where all the business units are plugged in, and they plugged in the fintechs and all the other innovations into that platform.

The separate body is the one that can see across the business units. This separate body is actually supported by the top leaders of the organization.

Once you define where you want to be in the next five to 10 years, then the question is, “How should our operations look?”

InnoLead: Is it a committee, or is it like its own digital team?

Gupta: They started with a separate body. Now they also have a committee. It’s two different things that they created. Again, part of [the goal of a committee] is [about getting] buy-in in the organization, as you know…and these are not staff people. These are all line people, which I think is important, because they actually drive their own business. They drive the responsibility for the P&L in some ways.

InnoLead: In addition to Goldman, I think you talk about John Deere in the book. You talk about Best Buy. What are some other examples from the book of companies that are navigating this intelligently?

Gupta: In the book, basically, I look at a series of case studies and from there draw some generalized principles, which are the moral of the story.

Of course, we can start with a company like Amazon, which is changing the rules of the game. My question there was, “Have the rules of strategy changed today compared to what we learned from Michael Porter, for example?”

My sense is in the olden days, strategy was talked about as, make your product better or cheaper, like differentiation or cost leadership. … That was a very product-focused strategy.

In the digital world, there are a lot of connections. Because of these connections, I think what becomes [more] important are complements and network effects. Take WhatsApp or WeChat. The value of WhatsApp is zero if you were the only guy using it. The more people use it, the more its value becomes, without changing the product. So, it’s not about [improving the] product.

Even if you and I created a better Amazon tomorrow, nobody is coming to our Amazon, because there are buyers and sellers on that [existing Amazon] platform. I think those network effects and complements, the razor and blade, become very important, because Amazon can provide loans to the small and medium enterprise at a very low cost, because they can make money somewhere else.

InnoLead: Explain to me what you mean by complements?

Peloton’s $2,000 Internet-connected exercise bike.

Gupta: Razor and blade. Sell [the] razor cheap in order to make money on a blade. That [concept] has been there for a long time, but it’s become far more important now. For example, even take a traditional product like Peloton bikes. This is an exercise bike [that costs] $2,000 bucks.

Peloton could have gone with the old strategy and say, “Our product is better.” But the insight of the founder was [that] when you come back from the gym, nobody says, “Hey, my exercise bike was fantastic.”

You talk about the exercise routine. You talk about your workout. You talk about the instructor and so on. So, [Peloton] says, “We are focusing on the product benefits, but nobody cares about that. We need to worry about the outcomes.”

Rather than [focusing] on the product, they first started on the complements, which was, “These are the free videos,” initially. Now they make people subscribe to those videos. You’re sitting in your home, and you have these videos that tell you the different routines that you can use.

Then they created this community of all the Peloton bikers. If I’m biking at home, I can, in real time, connect with 100 other bikers all around the world as if I’m in the virtual gym. Then, my competitive juices start flowing. That becomes a much stronger competitive advantage as compared to simply focusing on product.

I think we can learn something from Amazon as to how we would change the rules of the game. That’s one example of that.The other example I use is [the task of redesigning] a gas station.

The question I asked my students was, “How would you redesign a gas station?” People talk about it. “Well, we will add more stuff on the convenience store. Or maybe, the car can automatically send a signal to the gas station to fill the gas,” or whatever it is, right? I sort of pause and tell them that, “How many of you love going to a gas station?”

From this, we found our pain point. All new innovations have to start with the consumer pain point, not with technology. Once we found out the pain point—nobody likes going to the gas station—how can we come up with solutions?

Then immediately, somebody will say, “Oh, what if we bring the gas to the customer, rather than the customer coming to you?” And then I start to say, “Okay, but will you be willing to pay a premium for that service?” Some people say, “Yes.” Some people say, “No.”

Then I say, “Okay, what if I provide you convenience of coming to you, filling the gas in your car for exactly the same price that you will pay at the gas station?” Then everybody’s hand goes up.

Then they said, “But how am I going to make money in that process if I do that?” Slowly, somebody emerges and says, “Look, because you don’t have the fixed cost of the gas stations. And the gas stations are at the prime center of the city. If I removed the fixed cost…”

By the way, where did we learn that from? From Amazon. That’s exactly what Amazon did. They didn’t have any stores. That’s why they could compete with Walmart. I think we can learn a lot from these companies. But the idea is to draw some generalized principles.

InnoLead: But there are a lot of businesses that don’t have that direct relationship with customers [that Amazon does].

Gupta: Yeah.

InnoLead: [Like] car manufacturers that sell through dealerships. How can they execute a digital strategy that makes sense?

Gupta: I think almost every company [is] trying to make this direct connection with the customer.

I’ve talked to some of the insurance companies, and they say they have the same challenge, which is, “I’ve been selling it through agents. But now, I want that direct relationship with the customer. But how do you manage this channel conflict?”

Nike used to sell through Foot Locker and others. Now, they want to sell directly to me and also through Amazon, so how do we manage? That omnichannel confusion is always there.

My suggestion—or at least my learning from all this—is the company should not think of another channel as a substitute. They should think about what is the value that you can get from each channel.

I’ll give you an example of an insurance company that gave me some suggestions. They said, “We were facing the challenge that 95 or 99 percent of our business was going through the agents. But we wanted to go direct because we see this is the future channel. But our agents are threatening to leave our business if I go direct, so what do I do?”

They realized that the direct channel, the ecommerce channel, is good for selling simple products, because insurance is a complex thing. They use the online channel for customer acquisition with simple products. Then they handle the customers through the agents for selling more complex products.

InnoLead: The platform war is interesting because it has almost as much buzziness right now as digital transformation. “Oh, we want to become a platform company. We see all these Silicon Valley companies that have established themselves as platforms.”

Gupta: A lot of established companies don’t understand that being a platform means having an API and working with everybody. The reason that Android is a great platform is because they just opened up and said, “You can develop an app, I can develop an app.” Big companies seem to have…problems with that level of openness and interchange.

You’re right. I think that’s the change in the mindset [they need]. The first thing that I see is that they will open up to bring in the small players. The small startups, especially in the business-to-business world, don’t have the capability and access to this kind of technology or the customers.

If I’m a small parts manufacturer for a jet engine, I don’t have the capability of GE. But because I’m a startup, I may have some innovations. GE can easily plug in as an API to these developers. Just like software developers plug in to Android.

I think some companies are beginning to see that. I see it in the banking industry, where they are saying fintech companies can be plugged into our platform.

InnoLead: The data that would be interesting to gather is how high is the threshold of participating in the Goldman Sachs or GE platform, relative to becoming a YouTube content producer or becoming an Android developer.

This is going to be a long journey. Part of that reason is the tech companies, the YouTubes of the world, they haven’t made money for a long time and they’re fine with it. GE will not be fine with it, and their shareholders will not be fine with it.

So, there is a concern that I have so much value that I’m creating. If I open it up [to others as a platform], that gets lost. So, there is a huge downside risk, if you will.

InnoLead: How do companies deal with that—the need to invest over time in building a platform or building these new digital businesses and ecosystems, [yet there are] companies like Amazon and Google that have enormous cash generating machines?

Gupta: That’s the biggest concern or question that I get—that Amazon gets a pass without making money, but if I’m Walmart, I still have to generate cash from the traditional business. It’s a difficult question, but the goal is not to become the Amazon or the Google. The goal is to say, “What strengths do I have that the other guys don’t?”

Large companies do have certain assets. They have brand names, they have customers, they have the cash flow. The question is, “What do I do, rather than just aping somebody else?”

Adobe is a fabulous example of complete transformation. When I wrote the case in 2013, the stock price was $35. Today, it’s more than $250. They went through a complete transformation when they were being beaten [up] by Steve Jobs on the Flash controversy. The New York Times has gone through this transformation, and they’ve done reasonably well.

InnoLead: What’s one more big idea from the book that we haven’t talked about?

Gupta: It’s probably a cliché to say it, but there is no silver bullet. It’s very hard. Every company’s system is different. What works for P&G would not work with General Motors, would not work for GE.

Rather than looking for this one single big idea, or silver bullet, you need to systematically go through these different components, whether your strategy, your operation, your customers. It’s a laborious, boring, and not sexy process, honestly.

The company should realize there aren’t going to become the Google of tomorrow or the Amazon of tomorrow. They should not try and become somebody else. They have certain strong things that they do.

Best Buy is a great example. Best Buy is doing fabulous in what it does. It was almost bankrupt in 2012 when Hubert Joly took over. Now they’re flying very good—and it’s a retail company.

Sunil Gupta delivers a short talk at Future Assembly, a 2018 event organized by the Harvard Business School Digital Initiative.