There’s a new type of player in the digital landscape – or rather, a new type of old player.
Recent years have seen an influx of digital natives disrupting industries, turning traditional business models on their head. Among the best known are Uber, Netflix and Airbnb, companies that have overtaken their legacy rivals when it comes to technological innovation and forced rapid changes in how we consume products and services.
Nevertheless, legacy companies with strong digital capabilities are starting to catch up. They’re investing to become more agile and innovative, enabling them to compete with their digital native counterparts. These companies have been termed ‘digital incumbents’.
A recent report by Boston Consulting Group (BCG) describes digital incumbents as traditional businesses that have successfully executed a digital transformation and are making progress in systematically building digital capabilities. They can be found across most industries, and include such names as Adidas, Diageo, ING, John Deere, KLM and L’Oréal. In many cases, their capabilities already overlap those of digital natives.
“Leading incumbents are indeed building the same digital capabilities as digital natives and can participate in value-creating growth from disruptive innovation,” BCG notes. “They start by putting their digital houses in good working order – and a successful digital transformation is the critical first step.”
Facing down disruptors
Take the automotive industry, where legacy companies are going head-to-head with a new wave of digital disruptors. Recent years have seen traditional manufacturers forced to respond to the arrival of new market entrants – often transplants from the tech sector – looking to capitalise on the industry’s pivot to electric vehicles.
However, 2021 research suggests the incumbents are prevailing, despite the odds. It reveals that just 8% of international automotive leaders see digital natives as a threat, despite the likes of Tesla, Foxconn and Lucid gaining ground. Instead, these traditional manufacturers say they’re more concerned about achieving economies of scale and overcoming supply chain issues.
Ironically, the report indicates that digital native disruptors are now hitting these issues as well, suffering through the endless semiconductor shortage. Meanwhile, the incumbents are devising new and creative ways of overcoming them, equipped with experience and heritage.
For example, by using a new type of robotic programming and control software, Škoda has cut the time required to programme robotic inspection from several days to just four hours. It has also reduced the effects of skills gaps on the factory floor.
Elsewhere, French global automotive supplier Valeo uses virtual prototyping to design new electric drive units, reducing time-to-market for the Citroen AMI One from two years to 18 months.
Improving the digital experience
Many companies’ digital transformation plans were fast-tracked during the pandemic, which could be attributed to the revival of the digital incumbent. But just as important is the greater focus today on the customer experience (CX) – especially in the digital world.
According to one study, UK brands risk losing up to £12 billion in UK online sales from poor digital experiences. It found that 24% of consumers were frustrated with a brand that didn’t seem to understand them.
“We need to give [customers] reasons to keep coming back to us,” says Kevin Lee, chief digital officer, consumer at BT. “In a very real sense, for a growing proportion of these customers, this loyalty will be rooted in them having an amazing digital experience with us, wherever they are in a customer journey, whether they’re considering a new service or seeking out support when they encounter an issue.”
BT recognised it needed to be more agile in the way it developed these customer experiences (see box out.) Lee says the company has drawn on a wide bench of data, using artificial intelligence (AI) to inform and drive change in the kinds of experiences and improvements the firm can make.
In the past year, BT has brought online an automated AI-based chat service it created called AIMEE. This draws on millions of customer chat logs, Lee says, and is already answering customer queries first time, 60% of the time. This is just the beginning, he says.
“To build and trial new services like this, we need to [take a holistic approach] to design that incorporates the needs of customers, with our underpinning data and technology platforms. Everything needs to work together together.”
An innovation race
Digital incumbents today are breaking away from both their digital native rivals and their traditional competitors by building the capabilities that can drive growth from disruptive innovation.
However, they must remember that they’re not just positioning themselves against the latest wave of disruptors but setting themselves apart from those legacy firms that are yet to achieve any significant digital transformation. It is these organisations that face real pressure from digital native rivals.
“Right now, we see that there’s an innovation race going on – to stay relevant in the digital world, companies are trying to come up with ways to serve their customers in new, unexpected ways,” says Sarita Runeberg, business development director at tech consultancy Reaktor, which has partnered with Adidas on its digital transformation (see box out).
“Being open-minded and building a culture of experimentation is the way to innovation. Don’t be afraid to test new things and be ready to invest in new ideas.”
With the digital experience now a key battleground in the fight for customers, this advice should serve any digital incumbent well.
Boden reaps rewards of modernisation
Four years ago, clothing retailer Boden embarked on a digital transformation journey.
The company – which has more than 1.5 million customers worldwide – launched boden.com in 1999. However, it realised that the legacy tech it had relied on for years was no longer sufficient to enable the real-time responsiveness needed in retail today. Ultimately, the systems in place for catalogue-driven sales were struggling to keep up with the company’s growth and new omnichannel, digital-first approach.
Boden sought to create a new IT architecture based on microservices and data in motion - that is data that is being transferred or moved. This allowed it to modernise, rather than replace essential systems, and facilitated the shift from catalogue to online sales. It meant moving away from the traditional approach of running reports overnight to instead be able to see what was happening in real time.
Through connecting all its data footprints with event streaming via Confluent’s data platform, Boden says it is now able to benefit from modernised infrastructure, real-time analytics, enhanced CX, improved efficiency and cost reduction, as well as increased clickthrough rates and revenue.
Adidas: a box-fresh transformation
In 2017, Adidas CEO Kasper Rørsted said the company’s “single most important store in the world is our dot-com store – there is no comparison”.
Adidas set an ambitious goal to quadruple its online sales to €4 billion by 2020, which became a lifeline when 70% of its physical stores were closed during the pandemic. In 2021, the €4 billion goal was surpassed.
“Big retailers have had to think differently about how they reach customers and doing so digitally has taken on much more importance. Particularly throughout the pandemic, many retailers invested in ecommerce strategies as more than a contingency measure and instead as a way to stay resilient to change,” says Runeberg.
For an online store, speed directly translates to revenue in the form of conversion and reduced bounce rates. For Adidas, webpage load times reduced by 60%, significantly increasing conversion rates and overall revenue for the brand.
“Together with Adidas, we wanted to improve discoverability and storytelling on the site, ensuring that visiting adidas.com would feel like stepping into an actual store,” says Runeberg. While ‘experiential shopping’ is often discussed, in practice this means “keeping up with rapidly changing consumer demands and expectations”, she adds.
Thames Water customers tap digital dividends
Thames Water is the largest waste and utilities company in the UK, providing services to 15 million people across London and the Thames Valley. The company has undertaken a wholesale digital transformation, which includes a move from legacy on-premises infrastructure to modern cloud platforms.
The challenge facing the previous system was an inability to manage peak contact traffic during times of crisis, which risked leaving customers unsupported when they need help the most. This includes the impact of natural disasters, such as the ‘Beast from the East’ winter storms. It put pressure on the existing call system, risking leaving customers unsupported or unable to be diverted to the correct help systems.
Mike Potter was executive director for digital transformation and group CIO at Thames Water during the project. “Historically, severe weather events prove particularly difficult for Thames Water, with the sheer amount of customer enquiries meaning it’s almost impossible to manage,” he says. “These experiences caused us to realise the need to invest in digital transformation to ensure such difficulties weren’t faced again.”
The company worked with consultancy firm Tecknuovo to turn around a rapid digital transformation project, with the first three APIs designed, built and deployed into a live environment, a first for Thames Water. This took place within weeks during the national lockdown over the 2020 festive period. Since the initial go-live date in Feb 2021, the team designed an additional 18 integrations within 10 weeks of requirements being agreed.
Upon completion, the contact centre will be able to process more than 1,500 concurrent calls, triple its original number. The transformation led to a 52% reduction in the number of customer complaints being referred to The Consumer Council for Water between March and October 2021.
Successful digital transformation projects often rely on peer recognition and proving the value of the project early on to internal stakeholders, according to Potter.
“Any business looking to embark on such a project should take advantage of the power of storytelling as a vehicle to showcase early success in a way that engages everyone, whether technically minded or more concerned with customer experience or the bottom line,” he says. “The stronger the success story, the quicker internal confidence grows.”
BT focuses on the customer experience
BT is undergoing “a dramatic transformation behind the scenes” as it looks to modernise its underpinning technology and platform, according to the company.
This includes rethinking how teams collaborate to build and ship products. BT reorganised its product, engineering and design teams into a product squad model, where smaller, more flexible teams owned end-to-end delivery accountability of their products.
While this encouraged a more collaborative approach, it also highlighted workflow problems. These included too many different tools, inefficient processes, and communication hurdles, which meant more time on version control – tracking and managing changes to software code – than tackling the problems it needed to solve.
BT reacted quickly, deploying a collaborative design platform called Figma for designing and shipping products. It now says it has replaced siloed working and handovers with continual collaboration that can be done from anywhere, boosting teams’ agility, speed, efficiency and transparency. It can also go from wireframes - a blueprint or skeleton of a concept – to clickable prototypes more rapidly, allowing BT to rapidly iterate its product delivery.
“We’ve saved 50% of our design costs and elevated the importance of design within the organisation,” says Lee. “This means a greater focus on the customer experience comes through in our products and services, something we know will go a long way in ensuring we keep our customers’ needs front and centre of everything we do.”