Digital transformation… what is all the hype and buzz about?

First came the hype on digital strategy. Followed by the buzz on omnichannel, at least if you were a retailer (which rightfully so also got awarded retail buzzword of the year a couple of years back). Now, digital transformation is the word on everyones lips. Social networks literally overflowing with posts on the topic. And every CEO being required by duty to mention ‘digital’ and ‘transformation’ when talking strategy or presenting  an annual report in order to give confidence to the shareholders that the company is ‘on the case’.

When asked on what ‘digital’ (and hence the transformation) really is all about, answers from both companies and consultants are often vague or dubious. Depending on who you ask you can expect a multitude of different answers, often dependent on their role of work or competence areas

For some companies the focus seems to be mainly about hiring new digital capabilities expected to ‘fix digital’ by launching all sorts of different initiatives (though, far too often putting them in a separate box of their own, implicitly communicating to the rest of the organization that digital is something that is handled ‘over there’ and that the rest of you can continue to do the same old things as always).

For others, digital transformation seems to be about modernizing IT, governance processes and backend systems, moving into the cloud and enabling faster adoptions in an rapid and ever-changing technology landscape. This, often combined with adopting agile ways of working at least in parts of the organization.

While yet others have more recently started building innovation hubs disconnected from the rest of the organizational processes, expected to come up with products and innovations that will ultimately reinforce or save the incumbent business model.

All of these are relevant streams in a digital transformation. However, they are all means to an end. And, as long as the ‘end’ itself remains protected ground – here meaning the question on how the business model itself will need to be transformed for the company to go ‘digital’ – the digital transformation will be doomed to at best create short-term tactical advantages for the incumbent organization waiting to be disrupted. Or, at worst to only be a differently colored and very expensive lipstick.

What got you here won’t take you there

To me, ‘digital’ is first and foremost about a mindset.

It starts with understanding and accepting that the balance of power is shifting rapidly within areas such as information, knowledge, manufacturing, communication and distribution. By embracing this, opportunities will quickly arise from what just recently was seen as threats or obstacles.

Previously, factories and full control of the value chain used to be the key barriers to entry from disruptors. Digital on the contrary is about understanding that customer experience and data are key assets in the new game. Which correctly used can serve as high barriers to entry from disruptors. Uber and Airbnb are good (yet overused) examples who both have emerged as muti-billion dollar companies over just a couple of years without owning anything else beyond those two assets.

As Nick Ayton suggests in a recent blog post called ‘Digital by Design’, digital therefore can be seen as a transportation layer in a growth model.

Digital != operational efficiency

Some might argue that seeking operational efficiency via digital transformation (ultimately striving for higher EBIT) is an as relevant strategy as anything else. As higher EBIT often directly will drive the stock price for listed companies and has far less risk associated with it compared to turning the business model upside down. Understandably, it ought to make investors happier and thus makes sense for the board.

Short-term, this might be all true and companies walking down this path might have some profitable years to come by the help of digital ‘transformation’. However, digital is then being purely tactical rather than serving as any form of strategy, it will still leave the company as vulnerable for disruption as it was before. With the average life-time of Fortune 500-companies declining dramatically and the adoption-times of new innovations reducing rapidly among consumers, this path is all but secure and future proof. Digital transformation therefore can’t be about operational efficiency alone.

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One example of the increasing pace of adoption. Source: Anticipating disruptive strategies in a world of unicorns, black swans and exponentials, Deloitte

Government organizations are partly another story. Here the concept of operational efficiency to some extent makes more sense. The aim here, rather than growing, is (or at least should be) to optimize the usage of taxes paid and keeping the organization as small and efficient as possible. With that in mind, it makes even less sense from a company-perspective.

Digital == growth

Rather than being about operational efficiency, the digital transformation needs to be about transforming the business into capturing new growth opportunities, ultimately seeking to secure its survival for tomorrow.

This won’t however be accomplished by legacy business models focusing on ownership of the complete value chain or by Tayloristic organizational design. But rather by embracing customer experience, data and a fail-fast mindset as the fuel for transformation of the business model. By keeping the current model intact as the fundament for the digital transformation, you risk basically building a Ferrari (or a Tesla, if you may) but driving it without ever releasing the hand-brake.

With a western world under transformation, a growing middle-class in China and an African population going into the service economy directly from farming without passing industrialization, there shouldn’t be any shortage of opportunities.

 

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According to a 2012 study from Capgemini Consulting and MIT Sloan Management, ‘digiratis’, meaning the companies who use digital to excel and transform business models, in the upper right corner are 26% more profitable on average. The gap is likely to be bigger today.

 

By accepting that the current business model will be either disrupted or obsoleted, that the threat most likely comes from outside the current definition of the market, by a company which might not even exist yet, and by aiming to be the disruptors of the own business model – new opportunities to capture growth beyond the current vertical or the current addressable market emerges. This emerging strategy in turn, serves as the needed ‘end’ destination in the digital transformation – giving the other work streams a better context to succeed by being means working to that end.

As I’ve argued for previously, companies of today don’t need a digital strategy – they need a corporate strategy for todays world, utilizing the growth opportunities that digital gives. One that treats digital not as a channel, nor as marketing, IT or makeup, but as a mindset for the future.

Image credit: Jason Tester Guerrilla Future @ Flickr

 

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Christoffer Vollmer

Strategist, project manager, economist, change agent & experience designer with almost 20 years experience of digital strategy, transformation & disruption. Blogging about strategy, disruptive innovation, design thinking and digital transformation.