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Adapting for Digital Survival

By Marc J. Epstein
February 1, 2018
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If your company is slow to react and adapt its strategy, business model, and operations to change, it may fare the same way as many such companies have—think Nokia, Kodak, Sony, Borders, and recently Toys “R” Us. In “Organizing Your Business for the Internet Evolution” in the July 2000 issue of Strategic Finance, I presented the case for just this kind of adaptation—the integration between brick-and-mortar businesses and their ecommerce activities. Rather than seeing these as two separate businesses, I argued a “likely outcome: the Amazons will look more like traditional retailers while the traditional retailers will establish substantial web operations and look more like Amazon.”

 

The digital revolution has changed the way we all do business, but it also changes how we live our lives on a daily basis, including how we buy our goods and spend our time. For financial executives, this influences the way their businesses operate and their daily activities in performing their own professional services. And for those financial executives who are slow to update their skills and knowledge or are slow to change company financial structure and systems, the coming changes will likely cause great harm to their careers and their companies’ success.

 

In 2000, my proposal was controversial, as brick-and-mortar companies were competing with ecommerce and often even separating their ecommerce activities from their in-store operations and competing with them. Yet as I projected, those that did reinvent themselves and integrate ecommerce throughout their operations have generally succeeded. Those that didn’t have struggled or failed.

 

From 2000 to 2016, on the other hand, Amazon’s sales grew from $2 billion to $136 billion. And in 2017, we saw the beginnings of Amazon’s new bookstores, its $13.7 billion acquisition of Whole Foods, and its new, large, and growing brick-and-mortar presence through both stores and massive distribution centers. In 2017 alone, Amazon captured 44% of all U.S. ecommerce sales. Since Amazon got in the game early two decades ago, we’ve seen increasing integration of ecommerce and brick-and-mortar throughout all industries and increasing dependence on digital activities to increase revenues. Both of these are now widely accepted as integral to growth.

 

The dramatic effect of the digital marketplace isn’t news, and it’s nowhere more evident than in the significant drop in the financial performance and stock prices of most retailers, the numbers of retail stores closing, and the drop of in-store sales in what many are calling the retail apocalypse of 2017, with a plethora of our favorite retail chains filing for bankruptcy. There have been extensive analyses of the causes.

 

EARLY STAKES: AMAZON

 

Amazon is the biggest story. Sales continue to skyrocket as it invests heavily in new warehouses, delivery capacity, and additional staff. It has changed retail forever—disrupting many other industries where purchases online can be easier and less expensive for the consumer. So even as Amazon was buying Whole Foods and entering the supermarket industry, discussions pivoted to Amazon’s potential business moves into supermarket food delivery, prepared food delivery, and the pharmacy space.

 

Competitors are taking note. Though more than 50% of product searches begin at Amazon, Walmart is trying to make major inroads but is far behind. That’s one of the important lessons of Amazon’s two-decade head start. Catching up is really hard! Walmart has a vast network of stores, is improving its online sales rapidly, and is competing forcefully on both price and convenience. Walmart has focused on better blending of online and in-store customer experiences and sales through an omnichannel approach that seamlessly integrates all channels and minimizes the differences from a customer perspective. (See “Multichannel vs. Omnichannel.”)

 

New approaches to in-store pickup are significant. It has also begun a partnership with Google to offer customers the ability to purchase Walmart products through Google Assistant. Though it’s hard to predict which of these retailers will dominate, what is clear is that those that haven’t adapted to the change in the use of digital technologies and online sales will falter. Similarly, in other areas, such as manufacturing, real estate, and services, the lack of a serious focus on innovation and digitization will lead to disaster.

 

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As digital assistants and smart devices, homes, and cars continue to personalize, simplify, and enrich our life experiences through voice activation for media and entertainment as well as monitoring things like health and wellness, finances, home security, utility usage, and energy consumption, organizations’ commitment to being responsive to consumer expectations and habits isn’t enough. They now need to be ahead of that curve, innovating first.

 

DIGITAL-TO-HOME: WARBY PARKER

 

Warby Parker began with a novel online business model: encourage customers to try on eyeglasses virtually or at home and provide free shipping and returns for their Home Try-ons. It has since been opening more retail brick-and-mortar stores. Online start-ups Bonobos and Untuckit have done likewise, while Rent the Runway is one of the more prominent companies that permit shoppers to browse dresses online and rent them for a few days. Amazon has of course joined the fray with its Prime Wardrobe.

 

Conversely, those companies with a brick-and-mortar presence may retain an advantage if played right. Many retailers are combining their strengths in both brick-and-mortar and online sales through omnichannel approaches like emphasizing online purchases with the store pickups previously discussed. For example, more than 40% of online sales at Home Depot are picked up at its stores.

 

Like many other retailers, Disney is revamping its stores to accommodate customers’ preferences for purchasing entertainment and experiences for their in-store activities rather than only products that they could just as easily purchase online. Disney is developing a closer tie-in with promotions to its theme parks, television holdings, and videos.

 

Since purchase transactions now can happen anywhere and any time, physical locations must augment that feature by building relationships, providing personal service, answering questions, and solving problems. For example, Pottery Barn believes that its brick-and-mortar presence will enable it to dominate the new online furniture and mattress stores that have no physical presence.

 

ANTICIPATING NEEDS: BEST BUY

 

Best Buy knew it needed to compete with Amazon on price and to go beyond the showrooming that was already commonplace in the industry. It created a place to try out the equipment and play with it with employee help and at the same price as Amazon. This new service, along with the in-home consultations on what to buy and how to install it, has increased sales. These in-home consultations are free and provide opportunities for consumers to test devices like speakers and voice-activated devices and learn about, and possibly purchase, the latest technologies.

 

These innovations in Best Buy services have differentiated it from competitors and enabled it to succeed as its competitors have failed. Amazon Smart Home Services is now also providing similar services and continuing the march to integrated brick-and-mortar and online sales. Apple is also changing its retail stores to introduce more classes and meeting space to drive more foot traffic to its stores. CVS has begun next-day delivery of prescriptions as a way to counter any potential competition from Amazon or other online retailers.

 

Experimenting in showrooming is occurring in other retail chains as well. Nordstrom Local has opened with a 3,000-foot store instead of its typical 100,000-plus-square-foot store. There is no inventory for sale, just stylists to help put together outfits for purchase. As with other innovations, some of these experiments will succeed, and many will fail. But unless companies experiment with new business models and technologies, they will certainly fall far behind.

 

Whatever path it takes, every business must be digital. It isn’t brick-and-mortar vs. ecommerce but a coherent integration of the two that’s key.

 

THE TECH DRIVING THE CHANGE

 

These changes in society are driven by rapid and dramatic changes in technology. Interconnected digital technologies already in development include 3D printing, smartphones, data gathering and analytics, the Internet of Things, advanced robotics, artificial intelligence (AI), sophisticated sensors, and many others. These technologies can be used separately but can also be linked to integrate the physical and virtual worlds. They are being used increasingly in manufacturing, retail, and our daily personal lives. (See “Five Game-changing Technologies” for brief descriptions.)

 

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Augmented reality and AI are changing the way companies do business. Augmented reality can blend physical shopping with digital shopping, personalizing based on both demographics and browsing or buying history. At cosmetics retailers like Sephora, for example, you can see online how various products will look on your face before purchasing. Virtual dressing rooms such as N-Show (already in stores) and FXMirror (to be used on your own computer; see p. 28) are likewise enabling customers to view how the clothes look on them, with Amazon going a step further with its recent acquisition of the 3D-body-modeling tech firm, Body Labs. Furniture stores such as Pottery Barn and IKEA also already enable customers to see how furniture will look inside their home, and home improvement companies like Home Depot have tools that can show what your updated home exterior could look like.

 

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Augmented reality is also changing manufacturing operations by superimposing information that enables better monitoring of operations, training of personnel, and instructions for workers. This can significantly increase reliability, efficiency, and profitability. In retail, by pointing a smartphone in a store or at an ad, augmented reality can easily provide personalization that can benefit both the consumer and the store owner. It can tie into loyalty programs to access historical purchasing behavior, recommend potential purchases, and provide discounts, if desired.

 

AI is among the most developed of these new technologies. The use of AI and machine learning across all industries in manufacturing, retail, and back-office management is changing work processes and enabling a rapid increase in productivity. In daily life, AI applications can be seen in all of our digital technologies. Leading companies recognize that in many cases the costs seem high now, but development and installation costs will likely decrease rapidly, and the costs of being a laggard in this area may likely lead to being destroyed by competitors.

 

Self-driving cars are about to change our lives and our businesses. As the technology develops, it will increase consumer free time. Consider the decreased need for parking lots and personal automobiles or the reduction in almost all auto accidents and their associated costs that will result from the removal of the human-error factor.

 

The Internet of Things is also growing rapidly. Connected factories and smart equipment are already in wide use. And we’re all very familiar with global positioning systems (GPS) and other technologies in our vehicles. In our homes, we have connected appliances and temperature controls. To better monitor and improve our health, we have fitness trackers and connected hearing aids. The Internet of Things enables connectivity between a variety of devices to improve manufacturing processes and our personal lives alike. It can monitor machines and infrastructures. Chips can be almost anywhere to provide information to humans or to other devices and improve performance.

 

Many of us have already seen the use of 3D printing in our dentist’s office, as dentists now commonly use a digital camera inserted in the patient’s mouth and computer-aided design software to send an image to a 3D printer and create a crown while you wait. The use in medicine is increasing rapidly and already includes hearing aids and some organs. And 3D printing will continue to be applied throughout manufacturing and retail, facilitating mass customization. Adidas, Nike, and others are developing 3D-printed running shoes, with plans to have 3D printers in shoe stores globally to generate custom footwear for each customer. And the applications in other areas will continue to grow, including manufacture of furniture, clothing, and food—in many cases, reducing both the time and cost of delivery. Those companies that aren’t already considering its use in their industry are probably behind already.

 

The takeaway from every one of these companies and technologies is this: Companies and their leaders should be examining how such developments would impact them and which actions they might take to capitalize on these new developments now. The slow adoption of ecommerce activities has destroyed many companies as they watched, took no actions, and concluded that ecommerce by companies like Amazon would have minimal impact on their businesses. This includes not only traditional retailers in books, toys, and clothing but retailers in food, entertainment, real estate, and others. Many of those businesses have failed or are now failing.

 

IMPLICATIONS FOR FINANCE

 

The demands that the developments of the digital marketplace present for corporate financial executives involve the availability of new digital features, personalized or customized products, and new analytics for improving operations and customer relationships. Real-time data and associated analytics afford financial executives the opportunities to provide senior leadership with valuable inputs that stand to improve relationships with customers and suppliers and increase operational efficiency and effectiveness.

 

This can also lead to the full digitization of a company’s operations, including inventory management systems that connect all relevant parties: retailers, suppliers, distributors, and transporters, as well as the redesign of products and services to be fully integrated within the digital economy.

 

Financial executives play a critical role in these disruptive changes. Company business models, technologies, and operations must often change to adapt. Financial executives must be assertive to ensure their organizations’ competitive survival, which means adapting to changes in financial services, treasury, and accounting functions.

 

Financial technology (FinTech) is growing rapidly and disrupting traditional financial services including asset management, investing, banking, financing, and mobile payments. As acceptance increases, distributed ledgers, blockchain-based platforms (like Ethereum, Bitcoin, and their related digital currencies), and digital payments (including mobile wallets) will have even more impact in the future. These and other technologies are reducing the costs of accounting services, improving access to data, and facilitating much better data analytics and decisions. The auditing function is also changing rapidly. Robotics, automation, and AI are changing the way audits are performed and analyses are produced as well as the costs involved and insights that can be provided to improve operations and decisions. Financial executives require the analytical and data-science skills that are needed to manage the corporate finance function effectively.

 

Blockchain can include money, music, titles, data, and so forth. It can include food traceability and transparent supply chains, medical records, and an endless list of other uses of collecting and storing data. Though most discussions have been around its use in financial services and the related cryptocurrencies such as Bitcoin, its applications are potentially far greater in business and society. Since data is easily accessible, transaction and coordination costs could decrease significantly.

 

FinTech will significantly impact accountants and financial professionals in almost every arena: auditors and tax professionals, management accountants and corporate finance executives, and the entire financial services industry. Commercial and investment bankers and investment advisors will find that many of their services will be replaced with new financial technologies. Though we are seeing the growth of “robo-advisors” to provide investment advice to the mass market, it won’t be long before companies like Amazon that have strong digital capabilities make an easy move into this industry.

 

These new technologies can increase speed and reduce costs and error rates; they’ll also likely reduce accounting and finance personnel in most organizations. Robotics is increasingly being used to automate various tasks in financial reporting, and forecasting is relying more on algorithms than finance personnel calculations. With robotics, cost often goes down while speed and accuracy increase. This provides the opportunity for finance personnel to be involved in more advanced and complex business decision making when they are freed from their previous repetitive tasks that are increasingly being completed by these new technologies. These are wonderful opportunities to be in more senior strategy and decision-making roles as their functions evolve.

 

Surveys have shown that though companies across industries are actively discussing the importance of digital technologies for their business operations, few are aggressively pursuing projects that will integrate these as quickly as needed. Having a plan isn’t enough. Effective implementation is critical, and the time to do it is now. And as was the case with previous technology and business model changes, those that don’t move quickly and boldly will likely fail.

 

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New technologies are changing the way we manufacture goods, operate our offices (see “WeWork Spaces”), and live at home. Technology is now the biggest differentiator of success. Digital technologies affect every business and every person—and the effects will only grow. If you—and your company—aren’t paying close attention to these developments and making immediate changes in the way you do business, you will likely be left behind. These aren’t separate technologies and societal changes that can be looked at discretely or incrementally but rather a series of shifts that need to be seamlessly integrated into changing businesses for not only success but survival. This isn’t science fiction, and it isn’t years away from development. Don’t dismiss these innovations as crazy ideas for the future. They are happening now.


Read about EDGE COMPUTING, another developing technology that will impact businesses, in SF Tech Forum.


What Should Companies Do Now?

 

Begin by asking questions. Investigate how these new technologies can help you better engage customers, suppliers, and others and improve manufacturing processes.

 

  • Which of the five game-changing technologies discussed in this article can be used effectively in your company today or in the near future?
  • Do you need to improve skills or knowledge in your company?
  • Does data already exist at your company (or with customers or suppliers) to facilitate the use of these technologies, or do you need to start collecting it?
  • What changes in society and technology are likely to affect your business?
  • Are there ways that you can lead your competitors in the use of these technologies?
  • Are there opportunities to collaborate with others that provide improved access to customers or capabilities?

 

Develop an integrated digital strategy. Companies that proceed without developing a coherent strategy and instead randomly add on digital activities seldom succeed.

 

Experiment now. Companies need to start experimenting with the use of digital technologies immediately. Some of these experiments will be successful, and others won’t. But successful innovation requires experimentation and likely some failure.

 

Engage with younger staff and customers to better assess likely current and future opportunities for innovation in the digital revolution.

 

Integrate carefully and thoroughly. Though a new digital business model is required, implementing it requires significant effort. It can’t just be tacked onto existing models; rather, it must be integrated into the overall business model and operations.

 

Be bold. Changes are coming rapidly, and you need to be leading. Otherwise, yours will be among the thousands of companies that no longer exist. These innovations are changing all facets of business operations, including manufacturing processes, customer engagement, and back-office management. Incremental improvements or copying current competitors’ activities won’t likely succeed. Both business models and technology must change. Only by being bold and leading the industry will companies win.


What Should Management Accountants Do Now?

 

The changes in the way people work and live, the disruptions in the sales of retail products and services, and the advances in digital technologies are changing organizational structures and systems dramatically. Innovations are coming faster and with more impact than ever. To improve the success of both your company and your own career in this new environment, you must:

 

  1. Continually update your skills and competencies to be completely comfortable with these new technologies and societal changes.

 

  1. Recognize that these changes are gaining speed and that they will impact every company. Too many business leaders have been complacent in their current personal and company leadership positions and have ignored the signs of change. Company graveyards are filled with those businesses that ignored leading indicators and trends.

 

  1. Scan the environment for changes in the management accounting profession for new ways of doing business. Accounting, auditing, financial services, asset management, inventory management, quality control, banking, and all other aspects of the accounting and finance functions are changing dramatically because of the availability of new digital technologies like AI and blockchain.

 

  1. Act now. Wait-and-see doesn’t usually work in this environment since many others are taking action now. This is true with your business, your work in accounting, and your skills and competencies. If you aren’t leading in your profession and your company isn’t leading in its industry, you’re falling behind.

 

Marc J. Epstein, Ph.D., until recently was Distinguished Research Professor of Management at Jones Graduate School of Business at Rice University. Prior to joining Rice, he was a professor at Stanford Business School, Harvard Business School, and INSEAD (European Institute of Business Administration). An IMA member, he is currently focusing on presentations to both academic and business audiences, advising senior leaders in governments and global corporations, and continuing research and writing projects. You can reach Marc at epstein@rice.edu.
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