Here is a genuine question: Is digital transformation any different this time? Or is it just new words and terminologies describing the decades-old phenomenon of organizational change induced by information technologies (IT)? To paraphrase the well-known adage, is it a case of the more technologies change, the more their impact on businesses remains the same?
Recent research has shown that there are extensive similarities between IT-enabled organizational transformation on one hand, and digital transformation on the other. This is a relief because it means we can apply many of the hard-learned lessons of the past.
Recently, Jeanne Ross from MIT summarized a common aphorism about digital transformation as follows: “All the digitization in the world won’t, on its own, make a business a digital company.” Even though this is widely accepted, most of the attention is still focused on technologies and systems. Perhaps this is because technology is more exciting, more tangible, possibly better defined, or simply because technology is something that can be bought and sold. In any case, this phrase is as true about digital transformation today as it has always been about all investments in information technology over the past 30-40 years.
The same can be said about repeated studies showing that less than 30% of digital transformation initiatives meet their stated objectives. The diagnosis of digital transformation failures reveals nothing surprising. Companies often nurture unrealistic beliefs that advanced digital technologies will, on their own, solve problems of organization or strategy. Sometimes, peer pressure or hype drives investments without clarity of objectives. Less obvious are problems related to the governance of digital transformation which prevent key people from taking ownership. Too often we discover that the adoption of innovation contradicts deeply held beliefs and routines which are rooted in our organizational culture. Again, these are all issues that have been well documented and understood over decades of organizational transformation enabled by information technology.
However, this time, there is one critical difference. Whereas IT-enabled organizational transformation supports the pre-existing value proposition and organizational identity, digital transformation pushes companies to redefine who they are and what they offer their customers.
For example: A telecoms operator may become (among other things) a content and entertainment provider; an electricity utility may become and IoT (internet of things) ecosystem orchestrator for energy management in homes, commercial buildings or entire cities; a news publisher may become an e-commerce marketplace; a retailer may become a supply chain orchestrator; an appliance manufacturer may become a heating and cooling service provider.
In practice, such digital transformations translate into new revenue streams (different value proposition) and a new set of core capabilities (different identity). Obviously, companies need to invest both in digital transformation and in IT-enabled organizational transformation simultaneously.
Based on the above, we can understand digital transformation as the process by which 20th century companies change in order to survive and compete in the face of 21st century digital disruption.
There are three key elements in this definition. First, the rules of survival and competition are different in the 21st century than they used to be in the 20th. The reference to the 20th and 21st centuries is symbolic, alluding to the different ways of organizing businesses and competing in markets. Second, digital disruption is the force that makes the difference. Third, digital transformation is a process, not a destination: think of it as an open-ended invitation to continuously learn, discover and innovate.
Faced with this challenge, some companies invest in digital in order to protect their legacy operating model – which is their older ways in which they create and capture value – rather than disrupting their own business to develop new sources of revenue. This is not surprising, as most of us, when facing a threat, are psychologically inclined to prioritize loss avoidance over the pursuit of risky opportunities.
Therefore, one of the leadership challenges in this environment is to manage this paradox: to sustain current capabilities and past successes, while at the same time disrupting them – self-cannibalizing them – through digital innovation.
If digital disruption is the key to understanding digital transformation, what difference does it make? Overall, the main difference is that data and algorithms are the most potent source of value creation in every industry. In this sense, all companies are now technology companies.
In turn, this changes markets and competition. Specifically, economies of scale and network effects create the “winner takes all” or “winner takes most” phenomenon, leading to industry consolidation. Further, dominant platforms tend to commoditize the brands that trade on them (this is why strong brands tend to avoid platforms or build their own). Moreover, digitization leads to low marginal costs, which, in turn, means low or zero prices, making legacy business models nonviable. Finally, the way consumers experience the value they purchase is increasingly virtual, dematerialized (we see this all the way from social media to sharing economy platforms like Airbnb and Douleutaras).
If these are the disruptive threats, then 20th century incumbents (who need to digitally transform) are facing some obstacles. Typically, successful incumbents are optimized to repeat the time-tested recipes of past success and have limited capacity for unrelated experiments. Moreover, they have been chosen by investors for the reliability and predictability of their financial performance, which means that these investors are comparatively risk-averse, further preventing them from taking the kinds of risks required for discontinuous innovation. Finally, size can be a disadvantage if pivoting involves widespread restructuring or if innovations don’t scale as fast as the legacy business declines.
These obstacles notwithstanding, if digital transformation for these incumbents is about redefining their organizational identity and value proposition in the face of digital disruption, then we can list seven areas where the transformation “battle” must be won. The overall success of digital transformation hangs on winning each of these battlefields.
1. Whereas IT infrastructure used to be tightly coupled with business processes and business rules, today companies rely on the flexibility of infrastructure-as-a-platform enabling rapid code releases and rapid deployment of new services using APIs (application programming interfaces).
2. Intelligent operations rely on machine learning and other technologies to achieve economies of scale with minimal human intervention. Employees support the work of algorithmic operations, not the other way around.
3. Economic value is created when intelligent algorithms make data actionable. With certain exceptions, everything else is being commoditized.
4. A strategy based on analysis of competitive forces, value chains and market attractiveness is inadequate if it doesn’t deliberately account for the dynamics of platforms and ecosystems.
5. In 2008, Harvard Professor Clayton Christensen argued against the misuse of mainstream financial tools as “innovation killers” and supported the idea of discovery-driven planning. Eric Ries and others have taken these ideas further and written in more detail about innovation accounting, chained early indicators, and relevant rates of change that are better suited for controlling a portfolio of innovation experiments.
6. Command and control hierarchical organizations have always pondered how to instill a sense of ownership in employees and managers. The answer is embarrassingly simple, at least conceptually (though very hard to implement in legacy organizations): Trust small teams with the autonomy to self-organize in the pursuit of their mission.
7. Customers are demanding and active co-creators of our services and brand reputation, and they possess a loud voice via social media. They compare brand and service experience against the best digital experience they get without regard for industry or geography: If Apple and Amazon are doing it, they why can’t my bank or my mobile operator do it too? It follows that the most loyal customers, even when complaining, are the most valuable “employees” as they “work” for the company (share data, advocate for the brand, are lead users, are first to report problems or ask for improvements). Similarly, if we expect engagement and ownership from our own employees, we ought to treat them with the care and attention that we bestow our most valuable customers – and more!
These are the battlefields where, in addition to digital technologies, leaders fight the challenge of digital transformation.
Nikos Mylonopoulos is Associate Professor of Digital Business at Alba Graduate Business School, The American College of Greece, a member of the Association of Information Systems and a Board Member of the Hellenic Society of Informatics Professionals (HEPIS).