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Digital transformation is the hottest trend in business. A recent survey by MuleSoft found that 97% of IT decision makers are involved in digital transformation initiatives at their respective organizations. But what exactly is digital transformation, what are the benefits and why is it so essential to so many businesses? The story of Netflix and the last Blockbuster shows that digital transformation can sometimes be the choice between becoming a business icon and becoming extinct.

Tourists from around the United States snap selfies in front of the BlockBuster store on N. Revere Avenue in Bend, Oregon. In March, after a Blockbuster in Perth, Australia closed, the Oregon store officially became the last of its breed.  “It’s a piece of history that I never got to experience,” Cole Stephens told CBS News reporter Jaime Yuccas, “so it’s kind of fun to come and check it out.” The owners say the store is still profitable, but joke that if DVD rentals decline, they can always turn the store into a museum.

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The factors that led to Blockbuster’s disruption are driving business and technology leaders to embrace digital transformation in droves, even if it means overcoming a host of challenges. Ask a leader of these organizations what they want from their transformation, and they will say they want to become as agile as Amazon, as innovative as Google, and as iconic as Netflix. For many, this requires ambitious change initiatives, both technological and organizational. They must adopt not just one new technology, but many, and learn to see their business from the outside-in. Software must become a core competency, and they must develop the ability to use data as a differentiator. 

No wonder most digital transformation strategies  end up being complex and messy. Many companies focus on the “what” rather than the “why” and “how.” They launch projects to accomplish everything from the digitization of paper records to sweeping reorganizations of global businesses. In doing so, they fail to grasp the essence of what makes digital transformations different from large-scale technology shifts they have undertaken in the past.

Adopt not just one new technology, but many

Unlike the move from mainframes to PCs, the Internet, and the cloud — digital transformation is not centered around one single disruptive technology. You cannot buy a digital transformation off the shelf or cobble together a best-of-breed solution. Expertise is hard to come by. Transformation requires a constellation of new skills. Just understanding the impact of new technologies on a particular line of business can be daunting.

And the rub of digital transformation is that learning the ins and outs of new technologies is not enough. To thrive in the digital age companies must realize that digital products are experienced as much as they are consumed and must reimagine these experiences from their customers’ viewpoint. 

See your business from the outside-in

The lesson from the demise of Blockbuster is not that it chose the wrong application monitoring product or CRM. Perhaps Blockbuster’s biggest misstep was that it failed to recognize that it was no longer in the DVD rental business. From its customers’ perspective, Blockbuster was a provider of home movie viewing experiences. As broadband spread around the world, increasingly customers had new options for those experiences provided by web-enabled, software-savvy businesses.

In 2010, three years after the Netflix began introducing video on demand, Blockbuster declared bankruptcy. The next year, Marc Andreessen published his landmark op-ed in the Wall Street Journal, “Why Software is Eating the World.” Andreessen argued that “we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.” The gains from successive technological advances had compounded, and “all the technology required to transform industries through software finally works and can be widely delivered at global scale,” Andreessen wrote.

Develop software as a core competency

It was a core insight that many have failed to grasp. It isn’t enough for businesses to use digital solutions. Going forward, the most successful companies will be those who are able to produce and deliver software as a core competency. Even Netflix was initially slow to react. It was still sending out its trademark red envelopes when Amazon introduced video-on-demand in 2006, and Hulu launched its online streaming service. In January 2007, when Netflix finally unveiled “instant streaming,” it offered only 1,000 titles. Such a small selection had doomed the first generation of download services. But with Netflix, there was a crucial difference.

Reed Hastings, Netflix’s CEO, understood the fundamental opportunity and benefits offered by digital business. Better software didn’t just make companies more efficient; it allowed them to evolve. Starting with the company’s launch, Netflix had maniacally gathered customer input through focus groups, endless A-B testing, even observational visits to their homes. The data drove the design of the website and business decisions, everything from pricing to the location of distribution centers to support faster delivery. However, the innovation that made Netflix hardest to beat was its ability to help customers find movies they loved. 

Make the most of your data

The Cinematch algorithm was the result of years of refinement. Initially based on customer rankings, it grew increasingly sophisticated over time. It clustered customers who liked similar movies together, analyzed that data and observed how a particular cluster reacted to a particular movie. The launch of the streaming service provided even more data for the algorithm. In addition to preference information gathered from a customer’s queue and ratings, there was now behavior information—when customers watched a movie, whether they quit after five minutes or forty, which scenes they watched repeatedly, which they skipped over, and more.

Netflix now boasts the world’s largest streaming service. At the end of 2018, it had more than 117 million subscribers, including 58% of all pay TV subscribers in the United States. It also offers one of the premier case studies for digital transformation. It’s no accident that Netflixed, a 2012 book written by Gina Keating, made it onto Fast Company’s list of 12 books business leaders should read in 2019.

Manage change one project at a time

Netflix transformed a traditional business of sending packaged goods in the mail into a digital experience. But they didn’t become a software company overnight. They moved forward one project at a time, gathering feedback that was then used for the next initiative. Business and IT leaders who are overwhelmed by the scope of their digital transformation initiatives can take heart. Like Netflix, they can create code and build competence and benefits incrementally, acquiring an understanding of how software and digital tools can help their lines of business through a series of successes based on feedback acquired over time.

A key ingredient in Netflix’s digital transformation strategy was their use of APIs within their software landscape, both as a gateway for third-party developers to develop applications for customer experience platforms, as well as components at the core of their internal service delivery systems. We will describe the different benefits APIs can bring in the next section, “How APIs can focus your digital transformation.”

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