Born-digital companies—fountains of innovation and creativity that are usually in rapid growth mode—have redefined investor mentality and have driven the global, and certainly the US, economy. Such companies have taken advantage of an unprecedented explosion of technological and analytic capabilities to redefine industry after industry. We're only in the early stages of what is arguably the most disruptive force in the history of business, due to its rapid pace.
This article is part of our Born-Digital study, where AlixPartners set out to research born-digital companies' unique blend of strengths and challenges and identify the most pressing needs and areas of focus needed to sustain their success. See all the articles in our series here.
"Our industry does not respect tradition—it only respects innovation."
—Satya Nadella, CEO, Microsoft
What you don't know can hurt you
According to the Oxford Dictionary of Proverbs, the oldest written version of the saying “what you don’t know can’t hurt you” comes from 1576, “so long as I know it not, it hurteth me not.”
While this venerable quote may be true in certain circumstances, based on our in-depth study of born-digital companies nothing could be further from the truth. We have observed a pattern of evolution that has been destructive in many cases by causing companies to back up, catch up, and evaporate billions of dollars along the way. In fact, it was that reality that caused us to undertake this research project as well as conduct in-depth interviews with born-digital investors and executives. All of it was supplemented by scores of on-the-ground, real-world projects performed globally for both born-digital and born-traditional companies in catch-up mode.
The results of the effort yielded this article series, together with two diagnostic tools: one that born-digital companies can use to quickly learn the areas of vulnerability, and then prioritize areas of focus so as to avoid costly missteps; and the other that traditionally born companies can use to quickly focus on and prioritize areas they need to address. This article series covers nine topics, each of them a key finding from our research: what each topic means, and what companies should be thinking about as they face the future.
When we rise above the details of the research and reflect strategically on what all of it means, we find three themes that permeate.
Three Themes of Born-Digital Performance
- What born-digital companies don't know can—and does—hurt them
These amazing enterprises, headed by visionary and driven leaders, are so intensely hyper-focused on innovation, customer acquisition, and growth that they usually make the same mistakes repeatedly. Those mistakes cost time, waste money, cause losses of shareholder and stakeholder value, reduce levels of customer loyalty, diminish reputations, and destroy jobs. We now have enough information to know what the mistakes are, to find the places and reasons they occur, and to devise ways of avoiding them. Business models that unreasonably extend profitability runways, information usage, customer privacy, corporate governance, executive behavior, and communications are only some of the issues in a long list of repetitive missteps that can be avoided—or at least their impact greatly reduced—by proactively rectifying them.
One need only think about the well-publicized and costly missteps at WeWork, Peloton, and others to see that here’s a better way. What has amazed many about born-digital businesses in the past is the rate at which companies can go from unknowns to household names overnight.
Some are now finding, however, that sentiment can turn negative very quickly. WeWork was valued at $47 billion earlier in 2019. Only months later, a potential initial public offering at a valuation of around half that amount was withdrawn when the market reassessed the company’s business model. In another recent example, the fitness streaming platform Peloton went public in September 2019 to a somewhat muted response as investors began to review the firm’s path to profitability. Markets, competition, and customer sentiment are dynamic; and timing is critical. Many born-digital companies push for high valuations that do not withstand the scrutiny of investors who find problems when they evaluate the operations.
- The world is catching up with the first wave of innovators
As with most innovations, early followers have the advantage of learning from the innovators. Early followers can avoid many costly mistakes and can do things more efficiently than the pioneers can—and often by way of more-effective technological platforms. Whereas the initial burst of value creation may not be as spectacular, second wave born-digital companies—and some born-traditional companies—are now creating great value with lower risk.
Later stage born-digital companies are potentially more sustainable than are first-wave companies, many of which are finding that the blazing pace of innovation is rendering their technological underpinnings obsolete already. Six of the top ten e-commerce sites in the US are now traditional, brick-and-mortar retailers.1
- Whether you know it or not, if yours is a born-digital company, you're behind in talent management
Perhaps the study’s most consistent finding is that virtually every born-digital company is behind when it comes to the broad topics of (i) talent management, (ii) diversity in both the traditional (gender and race) and nontraditional (functional and industry experience) senses at both board and executive levels, (iii) succession planning, (iv) performance management, (v) training and development, and (vi) career management. While that’s not surprising given their accelerated rates of growth, the mis-handling of these areas is nevertheless a major cause of performance issues and risk.
As the world catches up to the early innovators, the war for talent will be where the competition is ultimately decided—and at this point, born-digital companies are in serious need of an upgrade.
Both born-digital companies and born-traditional companies can benefit by learning from each other. To compete against digital-savvy businesses, traditional companies built on Industrial Age principles and practices will have to make big changes such as fostering a more innovation-oriented mind-set. Such changes won’t come easy, but taking a page from digital exemplars’ playbooks will help. Born-digital companies can avoid the pitfalls touched on previously through proactive planning in the areas of risk, digital ethics, data privacy, operations, and infrastructure. Plus, those that infuse discipline and rigor into their talent management functions—early on—will stand the best chance of sustaining their earlier successes far into the future.