Digital Transformation is a little like going to the dentist – you can only put if off for so long until the pain becomes too much to bear, at which point you realize the error of your ways and relent. Word to the wise though – if you leave it too late the situation might be unsalvageable.
We all recognize the current level of disruption ripping through every market, and every industry, is unprecedented in modern times. At its core is the rise of the 4th Industrial Revolution – an almost-Asimovian-sounding ‘fusion of physical, digital and biological systems’. Each time an Industrial Revolution arrives on the scene it impacts us all – as citizens and consumers, as large or small businesses, and across both public and private sectors. The fabric of our world is rewoven before our very eyes. History shows us that these periods of change represent huge opportunity or existential threat, depending on how you respond.
Consider for a moment the ‘purpose questioning’ impact the beginnings of 'Mobility as a Service' is already having on the Automotive Sector. Companies like Didi, Lyft, and, of course, Uber threaten to make personal car ownership a thing of the past. After all, why go to the trouble of purchasing, storing, maintaining and insuring a vehicle when you can summon one at the touch of button – and it could even cost less, to boot? It’s estimated that each fully-shared car costs automotive manufacturers around $375k in lost revenue. A survey carried out by Barclays surmised that by 2035, shared, autonomous vehicles could displace 40% of new car sales. In real terms, that means car manufacturers would need to reduce their manufacturing by around 50%. In this scenario can they realistically survive with the same business model? The answer is self-evident. This is but one example, in one industry.
The pain we refer to in the title of this article goes beyond the pain of being disrupted, there’s also the pain of change and reinvention too. It’s tough, complex and doesn’t happen overnight. It will create a crisis of prioritization and will test the mettle (no automotive pun intended) of even the most passionate and unflappable of leaders.
BMW, known for decades by the tag line ‘The Ultimate Driving Machine’, is one such company wrestling with disruptive pain. But rather than ‘ostrich’ until the pain gets too great, it’s facing the challenge head on and is shifting in a significant way to become ‘a world leading provider of premium products and services for individual mobility’. In other words – a mobile lifestyle brand. How does a company pivot like that? What does success look like? How do they move from measuring how good they are at making and selling cars, to growing the business through the delivery of lifestyle mobility services to the masses? BMW isn’t alone.
Regardless of the sector you sit in today, there’s a high probability you’re feeling the pressure to change, and it’s likely increasing in volume. The ensuing struggle shouldn’t be about ‘WHY’ change is needed – it should be focused on the ‘WHAT’ and the ‘HOW’.
A few forward-thinking companies are already well on their way - but many are not. And, it’s this latter category this article is addressed to. A litmus test is to compare how much of your revenue is being generated by a new business model vs your traditional, or core, business. A guide for those successfully transforming should be around 50% revenue from new, digitally-based business within the next year. If you’re on track for that you already know what the journey entails. If you’re not, you are in the majority - so feel free to read on.
Consider this quote from the noted speaker and consultant W. Edwards Deming who once said, 'it’s not necessary to change - because survival isn’t mandatory'. We think this is especially relevant in the context of change today. No-one wants to be another statistic, or chapter, in the book of ‘So, You Thought You Were Too Big To Fail (or Couldn’t Change Fast Enough)’ because of a false sense of entitlement. So… now what?
As you start to chart the new direction for the business there are some significant implications and interdependencies that sit in wait and need to be addressed. Below are some questions and decisions leadership needs to align to, and agree upon, to move forward. We’ll elaborate on each in subsequent opinion pieces.
1. How well does the executive suite really understand what’s going on? It’s crucial for leaders to have a clear working knowledge of what’s really transforming the world, and its implications for the business. This goes beyond understanding the immediate competitive threat and prevailing trends in a given industry. A broader perspective is needed since the disruption facing organizations is just as likely to come from outside their business sector as within it. The leadership team needs to bring into sharp focus the major factors creating disruption and opportunity to collectively chart a path forward. A lack of digital literacy and skills often leads to narrow and ineffective strategies that have more in common with budget-cutting measures than true innovation.
2. What does the future business look like, does its purpose change? This perhaps sounds a little existential, but for a reason. You can’t define a strategy until you understand your purpose and why you exist - and it might not be what it was in the past. We’d also submit this is not something you should consider outsourcing to someone else. By all means call in experts to provide perspectives and facilitate the ideation process, but if you’re part of the leadership team the finger is ultimately pointing at you!
3. Where will the business fit into an evolving industry value chain, and what will your new ecosystem look like? Numerous new economy business models are emerging in the digital world and all companies must consider whether their current model will remain fit for purpose. These ever-evolving business models are designed as a means to reach the customer in different ways (noting that 'business as usual' is no longer good enough) – the now well-known sharing economy is thriving based on access vs ownership (think Airbnb, Uber, and Lyft); likewise, the co-creation economy has responded strongly with a growing trend for personalisation, while the lifestyle-focused experience economy is also booming. If you haven’t considered how these could help transform your business, you should. They create opportunities, disruption and growth. This is part of the discussion in point (2) above, and leads directly into the business strategy you create. These are the basis for some of your big bets. Each has associated risks, but if you risk nothing, you end up risking everything - so what’s your tolerance for it? We’ll say more on this in an upcoming post.
4. How are you going to use data to create value and meet your customer’s needs? Businesses today are quite literally ‘deluged with data’. They are storing more than ever – both structured and unstructured. Hidden within is huge potential to drive cost efficiency, improve customer experience and pave the way to new business models. For example, location and context can be used to personalize customer offerings; real-time insights can provide critical ‘point of impact’ analysis to workers; when combined with smart instrumentation, operational efficiency and safety improvements can be made; and data modelling and simulations provide opportunities to test concepts and prototypes without having to physically construct anything. However, at the same time businesses must become more aware of the boundaries, known as the ‘freak line’, that should not be crossed as it relates to data privacy. A review of recent Facebook headlines should serve as a cautionary tale.
5. Who will lead the transformation effort? Some companies are blessed with visionary CEOs who are both the face of the company AND personally lead the change – Steve Jobs, Elon Musk, Jeff Bezos, Jack Ma spring to mind. However, this is not the norm for most corporations. The CEO often needs a Transformation Office and a ‘CDO type’, supported by a highly skilled transformation team, to help define and action the forward-looking vision. The Transformation Office plays a critical role in shaping and executing the new strategy across the company. It should include empowered individuals that can steer the organization away from a mess of disconnected projects and science experiments. These transformation leaders need to have a holistic perspective on the business and the market. They have mindsets built for change (think special ops), and can handle ambiguity but operate with agility. Our recent blog on the role of the CDO outlines our views on this.
6. Do you have the right culture for success? As Peter Drucker once said 'culture eats strategy for breakfast'. Ultimately none of this transformation happens without the right people, the right culture, the right work practices, skills and behaviors. Further, don’t think you can replace people with technology or automate everything. Your people are STILL your most important asset. As Satya Nadela recently commented in his 'Hit Refresh' book, 'the C in CEO should stand for culture', ably supported by what we’d call 'the new HR' – a true talent partner with forward thinking approaches designed to attract, develop and retain a motivated, creative and empowered workforce.
7. How do you engage and enlist your employees, customers, partners? You can’t change the company in a vacuum or from the pulpit of the 'ivory tower'. You don’t have all the answers. Therefore, from the outset be transparent about the journey you’re about to embark on – acknowledge openly that you need help. Doing so makes your stakeholders feel like they’re in it with you. This acts to enhance your ability to tap into your ‘sensor network’ and its hidden intelligence as you create the nexus between your past and future states. Does this sound like you might show some vulnerability and maybe even feel a loss of control? Yes and yes. You can’t solely rely on yesteryears practices if you want a different outcome.
8. What about IT? Indeed! As much as the traditional role of HR is changing we’d submit that the case for transformation of the IT department is even stronger. There’s a need for IT to shift from being a classic cost center aligned to the business, focusing on systems integration and support, to an 'IT as a Business Unit' value center. Accenture research states that only 34% of businesses see their IT group as a main driver of innovation. If the world is indeed becoming digital this must get addressed. At the highest level, IT needs to become a key contributor to corporate strategy. Instead of simply aligning IT to the business, today's reality mandates that IT must instead be blended into the business. As such, IT strategy is a wholly-integrated part of the overall business strategy, not a standalone entity. Facilitating this shift will require some transformation of its own. Key to this is an evolved IT skillset with an emphasis on greater external market and customer orientation of staff (how many IT people regularly meet the company's customers and truly understand their needs?), and greater collaboration across the business. Further, the Agile Methods and Devops movements were born in the IT world, meaning IT itself has the opportunity to role model new work cultures to the wider organization.
Finally, it would be remiss to not reference the importance of the Digital Platform in all of this. This should underpin the business strategy and create the platform for innovation across the company. Together, these changes can usher in a new era in the role of IT as a Business Unit, where it is integral to the innovation cycle in the company. In essence, use IT to lead with a business outcomes-based service delivery model and in the process find creative ways to monetize data.
The title of this blog wasn’t intended to be artificially controversial – it’s just that the majority of companies have yet to truly address some of these tenants of change.
In our experience, most organizations are simply optimizing business models with digital rather than truly reinventing and transforming what they do. In the worst cases digital technologies are being used for their own sakes, referred to as ‘digital washing’. Interestingly, Gartner has stated that 66% of CIO’s 'say' they are pursuing transformation, compared to 85% who admit they are simply using digital to optimize the business. However, writes Gartner analysts Ed Gabrys and Jenny Breresford, 'Based on discussions with clients about their actual digital business initiatives, we believe that the number is closer to 10 percent. This chasm leaves most enterprises vulnerable to digital disruption.'
There’s plenty of writing on whiteboards and documents with “transformation plan” headed in bold sat on executive desks across the globe, but if you aren’t able to operationalize it ahead of the market… well… we think we know how the movie ends.
Andrew and Jim.
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