Reinventing business in the digital world
The Rafael del Pino Foundation organised, on 27 May 2021, the Master Conference live on the Internet. www.frdelpino.es entitled "The reinvention of the company in the digital world", given by Mauro Guillén.
Mauro F. Guillén will be sworn in as Dean at the Cambridge Judge Business School next. Professor Guillen is a Fellow at Queens' College, University of Cambridge. He is former Director of the Joseph H. Lauder Institute at the University of Pennsylvania, a research and teaching programme combining business administration and international relations, and Professor of International Business Management at the Wharton School, where he holds the Dr. Felix Zandman Chair. Trained as a sociologist and political economist, he has studied multinational companies and the globalisation process for twenty years. Among the many awards he has received, the IV Banco Herrero Foundation Prize for the best Spanish researcher in the social sciences under the age of 40 stands out.
On 27 May 2021, the Rafael del Pino Foundation organised the conference entitled "The reinvention of the company in the digital world", given by Mauro F. Guillén, incoming dean of the Cambridge Judge Business School.
For Mauro Guillén, digital transformation is a critical issue for the future competitiveness of the Spanish economy and its companies. It is an opportunity, even an obligation, because digital technologies are changing the global economy. Companies cannot ignore the challenges and opportunities that digitalisation brings.
Digital technologies are transforming all stages of the value chain. Digitalisation offers all kinds of opportunities to reconfigure that value chain and integrate the different links in a different way. We have, on the one hand, the internal management of the company, where blockchain can have a very important impact on organisational transformation. The R&D phase is also going to develop in a process of accelerated change because companies can now have research teams scattered around the world, connected and coordinated through digital technologies and, in this way, take advantage of their capabilities.
Digital technologies promise to revolutionise relations between companies and their suppliers, making them more agile and fluid. So too are customer relationships, such as marketing activities, the distribution of products to the consumer and, finally, payment systems. On the customer side, there is a whole series of transformations as a result of these technologies. Finally, there are the digital platforms, which are offering new opportunities for traditional companies, but also great challenges because they are offering a disintermediation between company and consumer.
Business transformation is not easy when a company has been successful for thirty or forty years. To better understand the process, Guillén presented four cases of transformation: the recorded music sector, the department store sector, the fashion sector and, finally, the press sector.
Starting with recorded music, revenues in the sector experienced a drop between 2001 and 2014, due to the downloading of music tracks enabled by new digital technology. These downloads opened up a huge opportunity for piracy. But, from 2011 onwards, this downward trend changed and entered a growth phase from 2014 onwards thanks to streaming technology. This technology allows the rights holder to control who is listening to the music. The emergence of platforms such as Spotify or Apple Music has allowed the sector to consolidate because companies can have a more exhaustive control of the number of listeners and charge accordingly.
As regards concert revenues, these had grown in absolute and relative terms. Synchronisation revenues, i.e. payments for the use of music in radio and television commercials, also grew.
This sector has undergone a very accelerated transformation, with two technologies that have changed it from top to bottom. The leading platform for the distribution of that music is streaming. It is a global technology that can be accessed by any consumer. This sector is not monopolised by one or two platforms. Spotify or Apple Music are only leaders in the US, but not in other countries, where other platforms are leaders. This is a paradox, because the market is fragmented even though it is a global technology.
What is happening in this sector is that, on the demand side, there is a huge degree of similarity in consumer tastes. At the same time, there is a trend towards diversity of local artists, which is a first factor in the fragmentation of the market.
The second factor is the distribution channel. To reach the end consumer, Spotify has to convince the consumer to use its platform. To do so, it enters into agreements with telecom operators or mobile phone manufacturers, which pre-install the Spotify app, making it more likely that the buyer will use the app. Finally, there is the payment system. In some countries credit cards are used, in others a bank account, in others a platform such as PayPal.
Economies of scale reduce the degree of fragmentation. They play an important role here because the more users a platform has, the better it can spread fixed costs over a larger base of users, which tends to unify markets.
The third factor is regulation, which has to do with legislation on the protection of intellectual property. Not all countries protect it with the same intensity. In Europe or the US, protection is very strong and piracy is therefore very low, but in other countries it is not. Therefore, platforms have to adapt their strategy to these different degrees of IP protection, which fragments the sector.
Finally, as a consequence of the above three factors, we also see a fragmentation of competition.
So what we have learned is that the first thing any company has to do to transform itself digitally is to understand the new dynamics that these new companies generate. The second step is to look at how a company has to compete.
Walmart is the world's largest department store company, very successful in the United States, but struggling to expand in the rest of the world. It was struggling before digitalisation and is struggling even more now. The global consumer is changing and Walmart must take this into account. There is no one way to approach the consumer. Walmart does not always operate under its own brand because it has grown through acquisitions and often operates under the brand of the acquired companies. It operates in 23 different countries, but not always under its brand.
Walmart therefore finds it difficult to transfer best practices from one country to another. It faces a major challenge in terms of technology, consumer-facing and consumer relations. It is also a company that has recently been confronted with the phenomenon of trade wars. Finally, it is a company that is not well established in the two fastest growing markets in the world, China and India.
Its international expansion has been a bit chaotic. It entered China before entering Europe, which doesn't seem to make much sense. It had to pull out of two markets before the pandemic, Germany and South Korea. In the last two years, there has been the new technology of home food delivery, a sector that is growing a lot with the big platforms, such as Amazon and Alibaba, getting into it. This is a new market trend that is very juicy. Walmart is no longer competing with other superstores, but also with the big platforms. In China there are already more than 400 million users of these platforms, in the United States there are 100 million and in Europe 160 million. The biggest increase in the number of users in the coming years will be in China.
Walmart is facing competition from home delivery. In order to cope, it has in its favour the fact that it is a company that has accumulated a lot of information on supply chains. In addition, it has a large network of warehouses around the world. It also has a lot of experience in managing contracts with suppliers. Finally, it has a great capacity to make new investments in these new technologies. It also has a recognisable and globally recognised brand.
Walmart came to China in 1996, through a joint venture, and had a lot of problems. It did not grow quickly. When it looked like it was going to succeed two years ago, along comes the digital revolution in home delivery with Alibaba, which is a combination of Amazon, Google, PayPal and FedEx in one company, which knows the Chinese market well and is a giant of the digital age.
In the Chinese market there are other companies competing with Alibaba, for example Jd.com. Because consumers want home delivery within an hour, Walmart bought 16% from Jd.com in 2016, which is owned by Tencent, Alibaba's big competitor. Walmart and Tencent have pooled their customer data to compete, they are crowdsourcing delivery, and Tencent is a shareholder in Carrefour's subsidiary in China. Walmart has designed a specific strategy to compete in China, because it has been forced to adapt its strategy to each market, as the structure of competition in each market is very different.
The third case is Zara, owned by Inditex. It is the brand that brought the fast fashion concept to the market, which is a supermarket concept: fresh, fast and perishable fashion. It is a vertically integrated company, which designs and produces its own clothes. It depends on a very tight calculation of the needs of each shop in order to reduce costs. Its strategy is that from design to the arrival of the product in the shop takes only three weeks, a time considerably shorter than in the sector in general. New items are brought into the shop twice a week, which creates incentives to buy earlier. The consumer visits the shop seventeen times a year.
Its headquarters are in Arteixo (A Coruña). Inditex has a high degree of global coordination and controls everything through technology. It has expanded through shops. It does not advertise, but the shop is its shop window. Its expansion does not follow a clear logical sequence because it wanted to make its investment in logistics and brand profitable as quickly as possible, without specific collections for any country.
The system worked well, but then came the digital revolution. This sector is very prone to online shopping, at a higher rate than all other sectors.
The advantages of online sales are lower prices, price comparison, convenience all hours of the day every day of the year, the range of products available, recommendations from other shoppers or influencers. It allows the company to track orders, manage inventory more efficiently and optimise operations.
Consumers find online sales interesting because of price, availability, free shipping, ... This represents a major challenge, because consumers increasingly prefer the online channel. A new omni-channel strategy is emerging. What consumers want, especially in fashion, is an integration of all these channels. Zara has managed to get its online sales to take off. It is going to close physical shops because it prefers to grow through the online channel, because if it does not change its strategy, it may lose its position in the market. It has to reach new consumers without forgetting the customers it already has, so it has to be more adapted to the local market than it has been in the past.
Zara opened its first shop in China in 2012. It now has 175, far fewer than its main competitor, H&M. H&M has more shops, but that is a problem for that company because Zara is going to be able to transform to digital in a more agile way. To do this, it has signed an agreement with Tmall to sell its products online and another agreement with Jd.com to guarantee home delivery. It has adapted locally in a way it did not do before because it has to transform its websites and apps to suit consumers around the world. It now has to spend money on highly targeted digital advertising and develop its presence on other platforms. It has to innovate in payment methods. It has to guarantee the buyer that they can return the product, something it previously tried to minimise, and to organise return procedures.
The latest case is the transformation of print media in the post-Gutenberg era. It is a new business model because it changes content creation, distribution and revenue streams as you can now charge per unit, or by online subscription, or make content free and get revenue from advertising, or direct contributions from readers.
For readers, the press competes with news aggregators and social networks. They all compete for advertising revenue. In the past, one of the biggest sources of revenue was classified ads, but now many platforms have entered that niche. The print media is competing with dozens of digital platforms, so their revenues have fallen because of the drop in advertising revenues. Aggregators and social networks have no legal responsibility for the content disseminated, but newspapers do.
What value do newspapers add? They select news, they have credibility, they do investigative journalism, they have opinion pages, they have community connections, they include entertainment such as crossword puzzles or lifestyle sections, they hold events by invitation. Digital media are characterised by immediacy, ubiquity, accessibility, interactivity, online community, multimedia content, personalisation of content and low cost.
The reaction of newspapers in the US has been to launch digital editions. One 31% offers free content, another 33% charges through a freemium system, one 36% has a soft paywall. Only 3% have a hard payment barrier. In some cases, they are supported by direct contributions from readers.
The New York Times has successfully transformed itself digitally. It suffered a sharp drop in circulation between 2012 and 2018, but less than that of other dailies. It has invested in quality journalism, investigated new formats for disseminating information, developed lifestyle sections, promoted user traffic to its websites, experimented with different payment models and converted free users into paying users. Subscription revenues have grown on its digital properties, both news and lifestyle, and the number of paying users on its digital media has increased.
What these cases show is that in sectors where there is physical distribution of tangible products, it is necessary to adapt to each market; where there is digital distribution of intangible products, the strategy is very different, and very different strategies are possible.
One last note. The agriculture sector is being transformed through the introduction of technology, which is already a high-tech sector.
Digital transformation is a great opportunity to increase creativity and business success, to design new business models.
The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.
The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.