It’s no secret that there's a software revolution going on. For the last 20 years, we’ve seen industries upended by software. Here’s how it works: A technology company introduces an innovation into an existing marketplace; this allows the product or service to be sold or performed online. This in turn causes several old-school companies to struggle and some to go out of business. Bookstores. Movie rentals. Travel agents. Repeat cycle. Marc Andreessen elegantly argues in the recent The Wall Street Journal article, "Why Software Is Eating The World," that this pattern only promises to accelerate in the next decade with significant implications for our economy and society.
The question is whether this revolution will mean traditional brick and mortar companies will, one-by-one, inevitiably be forced to close their doors and shut up shop. Can there be some other outcome to this story?
If software is destined to transform an industry, it doesn’t logically follow that established market participants must sit back and watch as software companies digest and destroy their businesses, or that they must cede operational independence and market share to technology pure plays. Instead, they can and should fight victimhood by becoming software companies themselves.
My rallying cry to companies large and small is this: Wake up! Like it or not, you are in the software business. Embrace this new reality and thrive, or ignore it and risk extinction.
To understand what companies need to do next, it’s helpful to think about the competitive relationship between Amazon and traditional, brick-and-mortar retailers. In this e-commerce context, Amazon has one business: it sells things online. It’s great at it. It’s immensely successful at it. It has the luxury of a laser focus on a single value proposition to customers.
Compare this to Walmart, Target, or any of the other brick-and-mortar retailers against which Amazon competes. Those companies have it far more difficult than Amazon. They have to do everything Amazon does and they have to continue doing what they’ve been doing for decades, namely run a massively successful network of stores. So Amazon gets to focus on one thing, one business, while Walmart and everyone else must focus on two things, two businesses: their original business and their new digital business.
Walmart's digital business boils down to something very straightforward: providing the same core products and services it’s always offered, but now through the Internet. This digital enablement is what I call its “software layer.” Essentially, Walmart is wrapping its old-line business in software, allowing all interactions with the company, which used to solely happen in store or by phone, to now happen through digital technology--also known as Walmart.com and Walmart mobile apps. But you can also think about this software layer in more subtle ways: APIs that give outside developers the ability to create new programs and tools using the retailer’s product information and other data; how a business embraces social media and digital marketing; how it uses digital media to attract new employees; and a host of other ways technology is used by businesses to interact with the outside world.
A company’s true transition begins when top-tier leadership accepts that it’s in not one, but two businesses. The first: the original core set of products and services it sells to the marketplace. The second: the development and management of its software layer--the software that surrounds, drives and influences company operations. Increasingly, it is through this software layer that companies will interact with the outside world, find new efficiencies, and respond to changing market environments.
Once company leadership embraces its two-business reality, it must manage those two businesses accordingly. Its core, original business can be run the way it was always run. But to make the software layer a truly successful operation, it must be like Amazon: smart and fast, powered by great technology and by people who understand what it takes run a successful Internet business. The smartest executives then look for synergies and integration opportunities between the two businesses. The goal is to create a single customer experience that spans online and offline. When a company’s offline and online presence is seamlessly united is when the old school company can become a leader in tomorrow’s economy.
[Image: Flickr user star5112]