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Why Digital Matters

Why does digital matter?  I can download a song on iTunes or go pick up a CD at the local Best Buy.  It all ends up as music in my headphones.  It matters for the same reason that we’re in a major world-wide financial crisis right now–cash flow. 

Businesses don’t go bankrupt because they’re not making a profit.  They go bankrupt because they run out of cash.  Many great companies have died because they didn’t manage their cash flow. 

If I could invent the perfect business, my product would be made from things I could buy at a moments notice, assemble in seconds and only go through my business cycle when the customer requested it (I’m assuming its a product my customers want).  If it cost me $10 in materials to make and I sold it for $12, then I would make a 2$ profit every time I sold one.  The great part is since it only takes seconds to make, and the materials are readily available, then assuming I had lots of customers I could make quick, easy profit without any risk. 

Unfortunately, businesses are not like my imaginary business example.  The materials take time to acquire and cash, the assembly process might take days or months, and the products are often made ahead of time so they can be sold when the customer wants it.  The longer the leadtime between the start of production to the final sale, the more cash is required to keep the business afloat waiting for the profits. 

The world renown Toyota Production System is based on the idea of JIT, or “Just-In-Time” production.  The basis of JIT is to reduce lead time, or really, reduce cash flow.  This is a concept most smart businesses understand and attempt to achieve. 

So back to my original point–why digital matters.  When a product is converted to a digital product (and I don’t mean digital information on a real world media like a CD), it turns into the perfect product from a business point of view.  For simplicities sake, I’m ignoring the marketing or design portion of a digital product. 

Since most people have probably bought a song on iTunes or another digital music site, I’ll use a song as my example.  When someone wants to purchase the song, the product–a digital version of the song–is instantly assembled in their computers and sent to the customer.  The lead time of the production is virtually zero.  No cash need to be borrowed to buy the materials, ship them, assemble them or get them to the customer.  Piles of product inventory didn’t need to be created just in case the customer wanted them.  There are no piles of songs waiting for someone to buy them.  They only exist if someone wants them to exist. 

So for businesses, if they can digitize their product, they can reduce the leadtime down to zero and increase their cash flow to infinite (as always, assuming the product has been designed and the customer knows about it).  And that is why digital matters.