In the context of the Trexcelerator Transformation Board, the term economic environment refers to both micro- and macro-economic conditions that influence a company’s business perspective. It represents all the market-related external factors that define a company’s options for conducting business. However, in contrast to the traditional definition of the term, this neither includes the competitors’ perspective nor any social aspects, which will be addressed specifically in our model.

Businesses create added value for clients and investors by turning (i.e. processing) input into a marketable output. Generally speaking, the economic environment of an enterprise includes all factors that contribute to the production process, from sourcing supplies through delivery of products and services. Considering the multifaceted nature of the economic environment, it is helpful to differentiate three perspectives:

Input perspective – Within the economic environment, companies acquire the resources necessary for their value creation process: they recruit human resources to build up their workforce and contract suppliers to provide the various materials and technologies. The availability, quality, and prices of these inputs regularly have a large impact on a business’s profitability.

ProcessingPerspective – Companies often decide to outsource certain aspects of the value creation process to third party enterprises, either to increase efficiency or because they are not equipped to perform a task internally. Thus, leveraging the options available in the economic environment can increase an enterprise’s operational efficiency, improve flexibility, and reduce time to market.

Output perspective – To survive, companies need to successfully and profitably market and sell their solutions. Their products’ market potential is determined by the size of the relevant market, consumer demand, and the current status of the overall economy(fiscal policies as well as consumer buying-power and confidence-levels).Moreover, a company’s economic environment includes a consideration of complementary products and services that may directly or indirectly impact a product’s market leverage.

A Business’s Transformation Vision Must Align with the Economic Perspective

When elaborating their business transformation goals, companies need to base their approach on a thorough evaluation of the economic environment, especially with regard to expected future developments.

As much opportunity as the economic environment provides for an enterprise to do business, it offers the same to its rivals. Worse, it offers the same options to anyone, allowing companies that are not yet playing in the same field to eventually enter and re-define the rules.

Take the Netflix case (Link to Case Study), as an example. As a start-up, the company leveraged developing web and software technologies to establish a successful mail-order DVD rental service, disrupting the business model of brick-and-mortar DVD rental shops. Netflix then became a global competitor for TV stations andHollywood studios by leveraging streaming technologies to broadcast licensed and self-produced movies and series worldwide.

Companies Need to Leverage the Available Options Comprehensively to Succeed in Transformation

ReedHastings, the founder of Netflix, recognized early in the game that streaming technologies would eventually disrupt the DVD sales and rental market, but he also knew that many competitors would battle for their share of the online-video market. Hence, he leveraged the opportunities he saw across all levels of the economic environment.

• Output perspective: The company collaborated with TV-device manufacturers to get the “Netflix button” onto the remote control of Smart TVs to provide a “shortcut” for users to engage with its service.
• Processing perspective: Netflix outsourced its infrastructure operations to its direct competitor and leveraged Amazon WebServices’ cloud computing to scale and grow their global footprint.
• Input perspective: Aiming to create a lasting competitive edge, Netflix acquired exclusive production rights and engaged with large movie production studios to create Netflix Original content.

Netflix’ move from mail-order DVD rental to streaming video is a well-known example of Digital Transformation—but it’s really much more than that. It is a perfect example of a successful, comprehensive business transformation.

The Development of Digital Technologies Is the Dominant but Not the Only Driving Force

Besides the hopefully temporary impact of Covid-19, the development of digital technologies is currently the major force for change in the global economic environment, making digital transformation the most popular “transformation approach” in recent years.

However, as new technologies are rapidly developing, they are quickly turning yesterday’s innovative opportunities into today’s old-school solutions. (Digital) BusinessTransformation thus needs to follow a more holistic approach. It is not sufficient to just implement digital technologies to create digitalized solutions or optimize organizational structures and processes.

Instead, transformation journeys need to be designed and executed with a comprehensive business perspective. They need to integrate the various aspects of the economic environment with the relevant areas of action. In other words, they need to leverage the options to (1) develop the technology, (2) keep people engaged, (3) increase the efficiency of the organization, and (4) innovate and optimize the solution design—all simultaneously.

Our Transformation Board can help you elaborate the impact of the economic environment on your transformation strategy and approach. It provides a comprehensive structure to develop, evaluate, facilitate, and improve your transformation roadmap in line with your transformation vision. When using it to evaluate the economic environment, consider the following questions:

• Which market trends will impact the availability, quality, and pricing of the resources and technologies required to create and deliver valuable products and services to your clients? What opportunities will evolve from these trends?
• How can technological developments support your value creation process, either by improving the value proposition of your solutions or by facilitating more efficient organizational processes?
• Which developments within the economic environment will influence the size and character of your products’ market potential? How can you actively and positively influence these developments?

To learn more about the other building blocks of the TransformationBoard, check out the blog on our website or participate in one of our training seminars.

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