Born-digital companies focused on growing revenues fast sometimes neglect to set up operations required to serve customers effectively at scale.
During crises such as the COVID-19 pandemic—when customers’ needs shift, sometimes dramatically—lack of experience with operating at scale can leave these companies vulnerable to savvier rivals eager to snap up disgruntled customers.
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.
"The scaling of important infrastructure is typically a growing pain that can ultimately limit success. It is exacerbated by the absolute pace of growth in born-digital companies, which are really good at brand building but not so good at the back end. They’re great at products, services, and customer acquisition but not at supply chain."
—Senior private equity executive
For most people, the sexy activities seem obvious:
They’re the ones that directly drive revenue growth. And according to findings from our recent study, the entrepreneurs who run born-digital companies feel the same way.
BORN-DIGITAL COMPANIES FOCUS THEIR DIGITAL EFFORTS PRIMARILY ON REVENUE GROWTH OVER COST REDUCTION
Survey response: "Our digital efforts focus on...."
Successful born-digital companies grow their revenues rapidly, and for many of them, their founders find aggressive growth far more interesting than operations- and infrastructure-related topics like supply chain management, reverse logistics, customer service, information governance, public relations, compliance, tech stack, and data privacy.
But founders who ignore those less-than-glamorous functions put their company in a perilous position. Why? Even a gushing revenue stream won’t translate into fat profit margins and high valuations for very long if the company doesn’t also scale up the infrastructure and operations required to ensure that its key business processes run smoothly—and will keep doing so even after a crisis strikes and the company must pivot quickly to adapt. When companies get forced to double back, admit mistakes, and retool, these costly missteps give competitors a chance to grab customers and market share—and they do.
What’s more, once the worst of a crisis passes and companies venture into a period of recovery, a born-digital business that has scanty experience operating at scale may struggle to jump-start its growth in a new landscape that looks very different from the old one in terms of customer needs and preferences.
DESPITE APPLYING DIGITAL SOLUTIONS, BORN-DIGITAL COMPANIES AREN’T CONFIDENT THAT THEY’RE GETTING THE BEST PRICING OR USING THE MOST EFFECTIVE SUPPLY CHAIN STRATEGIES
A TRICKY PUZZLE
Born-digital companies are grappling with a tricky puzzle. After all, growth in revenues and market share fuel investment and valuation—especially in the early days of a born-digital company’s existence. But diverting funds and talent to other areas of the business that will drive loyalty and profit can curtail growth at this stage.
Under those tough conditions, there’s no single recipe for success. But we’ve seen enough in our work with clients to make the following assertion:
Most born-digital companies lag behind in scaling of the business operations that drive customer loyalty and profit and that help avoid serious risks such as legal nightmares and bad publicity.
Yet even as executives at some companies have given little attention to those priorities, many of them seem to feel comfortable with where things stand on their organizational structures, business processes, and workforce capabilities, as suggested by our survey results. On the other hand, they also recognize the importance of improving their customers’ experience as a way to boost company growth. This suggests that although they view customer experience as important for myriad reasons, it often takes a back seat in their set of priorities.
Managing risk to stakeholders' was rated as one of the top three priorities of born-traditional boards—but not for born-digital boards.
“These companies struggle to solve the question of how to provide minimal infrastructure
so that the overhead is low.”
—Chief Marketing Officer, born-digital company
BORN-DIGITAL COMPANIES REPORTED HIGH CONFIDENCE IN THEIR STRUCTURES AND PROCESSES THAT ARE INTENDED TO SUPPORT THEIR BUSINESS MODEL, AS WELL AS IN THEIR PEOPLE’S ABILITY TO EXECUTE THE COMPANY’S STRATEGY
Survey response: "Our business model is clear; we know how we make money, and we have the structure and processes to support the model"
Survey response: "Our team members have the right skills needed to execute the strategy"
CASES IN POINT
Lower levels of operational maturity can backfire on born-digital companies when crisis upends what customers want to buy, how they want to pay, and how they want to use the products and services they’ve purchased. For instance, some retailers with online-only operating models were blindsided by the surge in demand for their products among sheltering-at-home consumers during the pandemic. These companies had difficulty scaling to meet that demand and struggled to build inventory fast enough to fulfill orders. For some, shipping times were badly delayed. Others asked customers to limit their order volumes.
For born-digital companies that have given short shrift to their operations, the warning is clear: Frustrated customers may end up running into the welcoming arms of a competitor. And that competitor could well be a newcomer to the game. Encouragingly, a number of the executives in our survey who hailed from born-digital companies are at least aware of that threat. That’s an essential first step to beefing up key operations in their enterprises.
BORN-DIGITAL COMPANIES RATED "ENHANCED CUSTOMER EXPERIENCE" AS THE TOP AREA TO INCREASE GROWTH
Approximately 50% of born-digital companies say they believe their products and services are under high risk of disruption from new entrants. Over 80% of young born-digital companies (under 10 years old) have the same concern.
The risk of losing customers and market share to more operations-savvy rivals has only increased with time. Today’s consumers notice when they’re being treated shabbily. They have more options than ever for accessing and using the products and services they want. And they don’t hesitate to switch providers. That’s especially true among younger people, who have grown up with digital technology. It's that very demographic that's gaining in economic importance every year. They now account for roughly 25% of the world's population.
WANTED: SEASONED OPERATIONS EXPERTISE
To avoid being dumped by customers or worse, fast-growing born-digital companies need mature operating capabilities. And to get those capabilities, they have to recruit and hire people who possess the right skills and experience while they also train existing staff to bolster their operations prowess.
But making those moves can lead to a clash of organizational cultures. The fact is, most seasoned operations people come from backgrounds in born-traditional companies—though that’s changing.
People who have grown up digital consider the born-traditional types as inflexible, afraid of risk, overly structured, and too single-mindedly focused on established role definitions and processes. If a born-digital founder or CEO sends the signal that scaling and strengthening the operational areas of the business are less important than investing in areas directly related to driving revenue growth—which happens all too often—the born-traditional types might well feel disrespected and even dismissed. No company can operate effectively under the seething cultural tensions that can arise under conditions like those.
Crises of any kind force companies to re-examine their capabilities and to ask themselves probing questions, such as: “How can we strengthen our operations to make ourselves more resilient in the face of shifting markets, customer needs, and competitor moves, and to safeguard our profitability?" and, "What capabilities are essential for meeting these imperatives, versus capabilities that are merely nice to have?” (Hint: digital supply chains, enterprise reporting automation, and customer self-checkout may join the ranks of must-have capabilities.)
The most forward-looking born-digital business leaders will keep asking such questions long after a crisis has passed.
LEADERS’ TAKEAWAYS
- Identify ways to reliably scale key operations and infrastructure in your company early on.
- Hire the right mix of people with operations experience—including people from born-traditional companies as needed—while also investing in operations training for existing employees.
- Send a clear message that operational excellence and robust infrastructure matter just as much to your company’s success as revenue growth does—by making sure that operational excellence and robust infrastructure receive sufficient funding and human resources.