Changing the rules of the game

Carsten Linz, group digital officer for BASF, prepared a piece for the World Economic Forum which served as an eye opener in terms of how companies should transform their business models for a post-COVID future.

COVID-19, he pointed out, has caused the largest and fastest shift in human behavior change at scale ever.

As digitalization is already underway in almost every organization, this shift, Linz said, has accelerated the adaptation of digital technologies. This is shown in the 35 percent increase in cloud IT infrastructure investments in the second quarter of 2020. As a result of the pandemic with its widespread demand for video communication and home office applications, the business case for IT infrastructure is clear and convinces even critical chief financial officers, he said.

The question, however, is: Are businesses adopting digital technologies the right way?

Linz warns that over-hyping the technical digitalization of existing businesses can make one complacent.

He explained that our future requires more dynamic changes than simply applying digital technologies to do what we have always done, faster and cheaper. “If changes are too small, organizations run the risk of digitizing the past instead of innovating and transforming for the future.

Linz points out that despite the reset on the horizon, many incumbent companies base their business models on yesterday’s logic and risk relying on improvements that only scratch the surface. “To not let the crisis go to waste, we need to challenge our basic assumptions about how to create, deliver, and capture value,” he said.

For instance, he said that their analysis of 250 digital initiatives worldwide revealed that most companies still focus on process automation and efficiency gains. Only a minority transform the operating model, which implies that digital technologies have become an integral part of the organization’s value-creation architecture.

Only a few drive digital transformation in the form of a business model transformation. Linz cited Microsoft, which transformed from the Windows-grounded software product firm into a cloud platform company.

In short, he said that there is an important difference between the digitalization of the existing business model versus a digital transformation towards a new business model. While process automation, re-imagination, and operating model change can be done in an engineering department, a business model transformation cuts across divisions and business function, and requires new leadership and backing from the board.

There may also be a need to change the rules of the game in one’s sector. Linz notes that while retail banking is shrinking in times of social distancing, inclusive platforms have proved their resilience. For instance, Chinese insurance group PingAn transformed into an integrated financial services company and platform player, orchestrating healthcare, auto, real estate, and smart city services. In the sports and fitness sector, while many fitness studio companies filed for Chapter 11, virtual workouts are soaring. Apple launched a subscription program offering personalized workouts for the Apple watch as part of the Apple ecosystem. Even consulting companies, he said, now deliver most projects remotely.

Linz ends by emphasizing that reactionary management is not strategic leadership and hope is not a business model; it is time to reinvent.

Quicken its feet

One company that was quick to realize that digital transformation is not just about digitizing how you do your existing business, but instead may even involve transforming one’s business is businessman Dennis Uy’s Udenna Corporation.

First, it was the fuel business through Phoenix Petroleum. Then the group started diversifying its portfolio. Phoenix acquired digital payment platform Posible, followed by Philippine FamilyMart. Then it started its own chain of auto care shops through Autoworx Plus, launched its app-based loyalty and lifestyle rewards program called Limitless, and acquired fastfood chain Wendy’s and family resto Conti’s.

Limitless, launched July last year, now has over 109,000 members as of March. Company officials explained that this venture serves as the consolidating platform that unites Phoenix’ businesses by rewarding points and other exclusive privileges for purchases at participating merchants, including the company’s own brands.

Phoenix has also introduced a new retail concept that gathers its businesses in one site. Phoenix Block is a multi-purpose retail compound that features a Phoenix gas station, a FamilyMart convenience store, a Phoenix Super LPG Hub, an Autoworx Plus automotive care shop, Posible digital payments, and Limitless digital transactions. The site, located along Sucat Skyway, also has its own Wendy’s take-out and drive-thru counter.

According to Phoenix president Henry Albert Fadullon, the Phoenix Block is a great representation of what the Phoenix brand is today, which is more than just fuel. The company plans to replicate the project in more locations.

He has said that Phoenix considers the pandemic a successful reckoning of its previous years of planning and preparation for growth and explained that the crisis challenged the company to put into action all its plans for brand building, digitalization, fiscal prudence, and operational agility in retail that they have been working on.

Phoenix Block will be made available to franchisees via an innovative franchising system that treats each of its business lines as modular parts that can be combined in various permutations for a customized franchise package to suit the investment budget, operational capabilities, and profit goals of potential partners.

The Phoenix Block also aims to offer consumers a holistic experience through the Limitless digital platform which is an app where coupon and voucher payments will be promoted. Fadullon revealed that the app has so far helped generate 480,000 transactions and total sales of P174 million, even as he predicts that e-commerce can contribute as much as 30 percent of revenue in the next three years.

The digital realm, he emphasized, is full of promise and is the way of the future. But that future, he added, is now, which is why the group’s digital transformation has been in development pre-pandemic. “It was last year’s events that truly inspired us to fast track this process and maximize the potential of this platform,” he said.

This innovation mindset is acknowledged to be one of the reasons why Phoenix has increased its share of the local petroleum market from 6.9 percent to 7.1 percent as of end 2020. It also started 2021 with a P121.3 million net income in the first quarter from a P386 million loss in the same period last year. Overall volume was 43 percent higher year-on-year, supported by the fast-growing liquified petroleum gas (LPG) cylinder business, as well as a strong rebound in the commercial and B2B sectors, company officials said.

Fadullon adds that strict financial discipline helped the company a lot. Operational expenses were reduced by 16 percent. Per liter of fuel, opex went down by as much as 42 percent. Phoenix also managed to bring down finance costs by 56 percent due to lower average debt levels and average interest rates. The company, he said, continues to strengthen its balance sheet by retiring debts, going for longer maturities and lowering financing costs where possible.

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