You Don’t Have to Be a Software Company to Think Like One

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Every business willingly or unwillingly competes on a software playing field, no matter its sector. You’re competing against platforms like Uber in transportation, Google in automotive, Airbnb in hospitality, LinkedIn in recruiting, Netflix in television, and so on. Software is still king in a world underpinned by ever more powerful, affordable, and public technology platforms. And its importance as a source of value will only continue to grow.

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The Platform Economy
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You may be thinking, but my company isn’t a software company. That may be the case, but the current business environment requires all leaders to view their companies as software businesses — and think like software executives. That doesn’t mean you should stop delivering your current products or services. And it certainly doesn’t mean you should suddenly start selling something labeled “software.” Rather, this approach recognizes a fundamental shift in the sources of value creation and competitive advantage toward software.

The first step toward thinking like a software executive is understanding that understanding some distinctive knowhow that can be codified faces major risks if they fail to recognize this new platform-driven context and its different economic rules. Thinking as a software company starts with basic strategy questions:

What do you do uniquely well, and what do you know how to do that your competitors do not?
What barriers do customers face in realizing value from your current offerings?
Will your value proposition continue to be compelling in the future?
What role could software play in that equation?

For an example, look to Disney World. Long renowned for unmatched guest experiences, the company’s magic had begun to fade in the mid-2000s. Key performance metrics, such as “intent to return,” were worsening, driven by expensive tickets and long lines. Disney executives formed an exploratory team to reinvent the vacation experience, known as the Next Generation Experience project. By understanding what Disney did well that others did not, the team envisioned using technology to create personalized visits with less friction: no turnstiles, shorter waits, and less zigzagging through the park. They recognized that Disney could offer all these features through a software platform, creating a seamless experience for their guests.

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Today, guests interact with this platform by wearing an RFID-enabled MagicBand, a ticket for entry, a store for FastPass rides and dining reservations, a hotel room key, a payment system, and more. Disney has reinvented the customer experience by translating what it exclusively knows about park operations into software, substantively enhancing its customer value proposition. Intent to return has improved substantially, even as Disney can accommodate an additional 5,000 daily visitors.

The software doesn’t simply make existing products smarter or processes more efficient; it enables new delivery, engagement, and innovation models that are far more productive and informative than the old. Here are some ways to think more like a software company:

Codify proprietary knowhow and use digital platforms to scale and monetize your offerings.
The big opportunity here stems from identifying which of your company’s unique capabilities can be built into a software layer that can be made available at scale over digital platforms. For instance, Nordstrom enhanced its valuable customer service by investing in a new point-of-sale system that integrates with their customer database, providing salespeople with information such as purchase histories and interests. The Personal Book software allows Nordstrom to promote sales, special appearances, and store events in a more targeted manner.

Delta executives recognized that to improve the customer experience while simultaneously striving for operational excellence, the airline had to invest rapidly and independently in new proprietary software applications built on its passenger service and operating platforms. One such application is Delta’s rebooking system, which can process thousands of reservations in seconds when an irregular event occurs, allowing passengers to view alternative itineraries on their smartphones.

The strategic importance of the software layer drove Delta’s decision to acquire the data and intellectual property rights associated with the platforms – an example of valuable knowhow — from service provider Travelport, allowing it to control these systems. Today, Delta has industry-leading operations in metrics such as on-time arrivals, flight cancellations, and lost bags.

Software platforms have beautiful economics. They amplify the value embedded in the software layer by making it easier to increase reach and scope. They support profitable growth: a business can deliver margins that increase with scale as it adds each new user to the platform at a modest incremental cost. They can integrate rather than overhaul previously disparate systems. When modular in design, they adapt easily to different markets and can evolve.

An important consequence of the platform economy is that, other things being equal, bigger players often do better than smaller ones. When a larger business invests in a software platform, the gains accrue from more production units, which can justify an investment when a smaller competitor cannot. By leveraging its software capabilities across more customers, employees, and flights, Delta achieves a higher return than a smaller competitor would from the same outlay. This means smaller businesses must build their software platforms for scale from the start. Since scaling quickly is tough, a smaller business may need to create partnerships or networks to help it grow. Either way, scale becomes a critical part of how companies employ software thinking. Leverage scale if you have it; build for scale if you don’t.

Rethink the role of partnerships in your business model.
Digital technologies aren’t just tools of production to improve existing processes; they are also instruments of coordination, making it easier to collaborate with partners. Adopting a software mentality should include rethinking your business model into partnerships with others who can help form richer ecosystems, generate network effects, and improve your overall value proposition. But it also means evaluating whether you may be better served by bringing outsourced capabilities back in-house.

Pratt & Whitney has partnered with IBM to enhance its engine management offering. It is applying knowhow from its defense business, where there is high demand for stringent engine monitoring, to its commercial engines business, offering to improve airline fleet operations. It complements its assets (engines) and domain expertise with IBM’s rich software (data and analytics) assets.
apr16-20-150650821Faced with a swiftly changing auto industry, General Motors has similarly placed multiple bets. It purchased Cruise Automation, a startup developing self-driving software, for over $1 billion. GM executives initially considered a partnership but quickly recognized that self-driving knowhow was a necessary core competence. A future of self-driving cars and ridesharing also requires new ways of thinking about how today’s owner-driver model will evolve. So GM developed a strategic alliance with ridesharing platform provider Lyft (including a $500 million investment). GM will place its cars in transportation hubs for Lyft drivers to use. In the future, GM plans to locate its self-driving vehicles in these hubs. Beyond providing GM entry into the ridesharing market, the partnership informs GM about this evolving marketplace.

This thinking doesn’t always mean gaining a partner – it can sometimes mean losing one. As we saw earlier, Delta Airlines reversed the industry’s traditional shared software model by bringing the intellectual property and data underlying its reservations and operations systems in-house. It decided it should own this essential knowhow- rather than a partner for it.

There isn’t a single answer to whether your company should partner or build its new technologies. The best approach will depend on the industry, scale, existing capabilities, and the nature of competition.

Build an adaptive organization with the right leadership structure.
The last crucial part of any transition to software thinking is the management approach to such a change. With their focus on process and routine, the organizational structures built to manage scale in the industrial age no longer work. Businesses must be redesigned to reflect value creation mechanisms in a software-driven world: knowhow, innovation, and adaptation. This shift in emphasis requires a corresponding organizational structure change that matches the new values. Perhaps most importantly, it demands a leadership structure that can drive digital innovation.

Consider GE. It is a digital pioneer, actively reinventing itself. It has adopted a software mindset, aiming to become both a platform and an applications company. GE is building an innovative organizational model suited to its new vision, encouraging digital innovation in its business units while capturing the benefits of scale. It created the company’s new Chief Digital Officer (CDO) position, which also leads GE Dleadingvision. The CDO is responsible for building new company-wide software capabilities and partnering with the units to exploit their domain-specific knowhow. GE has also hired CDOs for each business unit to facilitate digital innovation and collaboration, who report to the company CDO and the team’s CEO.

GE CEO Jeff Immelt advises all CEOs: “This [digitization] is going to be the most important thing you will work on, at least in this era… You give up your latitude at your peril.”

It’s what companies can reimagine with software that creates real opportunities (and, inevitably, threats). To succeed at digitization, executives must view their businesses as software companies.