Understand the Digital Transformation Challenge

Understand the Digital Transformation Challenge

In this article we going to describe the top challenge that an organization have to think about to start approaching its digital transformation from the right foot. A framework by definition tend to give a frame by breaking down the requirement and gives an overview and context about the challenge.

There is four dimensions to consider:

  1. Business Process Digitalization
  2. Digital Disruption
  3. Digital Innovation
  4. Digital Culture

Business Process Digitalization

Business processes from the past are meant to be digitalize where technology will facilitate the recording and processing of those data. Therefore, it goes beyond a simple transition from off line to on line. We expect to re-engineered those processes before and after implementing technology.

Re engineering business processes was a concept originally started in the 1990’s.

This a cycle of continuous improvement that tend to reduce operational cost and improve customer satisfaction whether the experience is online or offline. Applying digital technology amplify the value delivered and cost optimization. On the contrary applying only technology alone will not produce the same results.

“It’s not changing what you do, it’s changing the way you do it”

Jean-Pascal Tricoire, Chairman and Chief Executive Officer, Schneider Electric.

Digital Disruption

A digital disruptor exists only if there is a market to disrupt. That type of shift happens when a new player entering in a market and leveraging digital technologies towards established competitors.

That phenomenon happens during the testing of a new product or service or a new distribution model resulting from an innovative go to market approach.

I noticed a significant increase of digital venture born all around the world, but not every industry has the same maturity level, today customer on Internet expect an Internet of Quality where quality increase over quantity. You could imagine like a product that just keep getting better.

For instance: a search engine more relevant with more search requests made over time.

Some would argue that disruptors are famous for being outsiders, therefore it has not always been the case and there is example of rapid business innovation made by established players with the ability to execute a strategy and become a market leader.

“my real theory is and it’s what venture capital is all about; big transformation happens because the big companies don’t get it right and a startup comes in and run faster than anybody can and build a new industry”

Joe Schoendorf Partner, Accel Partners

Do you remember Kodak fallout during the shift from analog camera to digital camera? FujiFilm was not a startup but they understood how to transform:

More about the Kodak and FujiFilm shift

Digital Innovation

A digital innovation is a new service, product or process giving an unfair advantage leveraging digital technology. Since the third industrial revolution, innovation themselves can change their nature and be digital too. They could be incremental or radical.

You can reinvent a business model with innovation but let’s check what is a business model:

You can revisit the 7 dimensions of the value proposition:

  1. Reduce client’s overall costs
  2. Reduce clients’ hassles
  3. Look for non-customers
  4. Search other segments or industries
  5. Introduce more functionality or more emotions
  6. Modify the revenue stream
  7. Anticipate trends

You can revisit the 7 dimensions of the value chain:

  1. Introduce a technology
  2. Modify one or several steps in the value chain
  3. Eliminate or add a step in the value chain
  4. Partner with competitors
  5. Leverage strategic resources & competencies
  6. Identify complementors
  7. Find new resources

Applying digital innovation to business manage to create today those new digital disruptors where they come as platform as a business. According to Marc Cusumano in his book “The Business of Platforms” it has been noted than comparing to the pre digital age, those platforms tend to have:

  • Similar sales as the previous players from the pre digital age.
  • Twice less employees
  • Twice more growth rates
  • Almost twice more operating profits
  • A market values almost 3 times bigger.
Microsoft$1.1 Trillion
Apple$1 Trillion
Amazon$899 billion
Google/Alphabet$855 billion
Facebook$537 billion
Alibaba$470 billion
Tencent$450 billion
Most Valuable Firms (Platforms) – September 2019

Important fact is today, over 60% of startups unicorns (valuation over $1 billion) are also platform businesses.

Personal ComputersWindows OS, Macintosh
Smartphone OSGoogle, Apple, Huawei
Social MediaFacebook, Twitter, Weibo, Wechat, TikTok/Douyin
Video GamesSony, Nintendo
Enterprise SoftwareSAP, Oracle, Microsoft, Salesforce
MicroprocessorsIntel, ARM, Qualcomm, Nvidia
Power SystemsGasoline vs Hybrid, EV, Hydrogen Fuell Cell
Sharing EconomyUber, Didi, Airbnb, TaskRabbit, HomeStay
MessagingWechat, What’s App, Line, KakaoTalk
PaymentsAlipay, Wechat, Bitcoin, Apple Pay, Paypal, Stripe
Web ServicesAmazon, Microsoft, Google
Internet of ThingsGE, IBM, Oracle, Cisco, Amazon, Salesforce, Microsoft
Platforms are everywhere

What is interesting is they leveraged technology to build a collection of products or technologies than others can build upon or conduct transactions. They gather market sides (minimum of 2).

This triggers a self-reinforcing positive feedbacks loops, where the potential value for each user increases with each additional user or complement, we call it a network effect that change the growth potential from linear to exponential. It results a more complex business models and more market dynamics.

Some historical examples of innovation with network effects: telephones, railroads, Internet, marketplaces.

Key takeaways:

Not every market is platformizable but we can learn that building a product and opening to third party bringing innovations allow to make an innovation platform play.

Building a service and generating more value from connecting market sides instead of owning assets or producing a service directly allow to make a transaction platform play.

Those trying to have a hybrid approach where you distribute with a transaction (Apple Store) and where you innovate by adding complementors (Apple iOS) can make a winning platform overall.

Digital Culture

Digital culture is a concept misunderstood that explain that technology and the Internet significantly shape the way we interact, behave, think, and communicate as humans in the society. Those disruptive technological innovation that changes are pervasive.

All those trends we hear about such as cyber security, transhumanism, artificial intelligence, the Internet and its derives, social engineering and modern psychology are part of the digital culture.

Its even using social media as medium to spread when someone share a story on Instagram or a moment on WeChat, when we pay with Alipay, that collection of smileys in your smartphone, that addiction to notifications all of this represent it contextually in our day to day life, at the end of the day it’s all about the relationship between humans and technology.

As it is pervasive, as we don’t pay attention how we are changing. In 1965 Gordon E, Moore explained that speed of computers increases in an exponential way. Humans will not be able to harness that computing power if their culture does not evolve as well.

Here is a list non exhaustive of topics regarding digital culture:

  • Cloud Computing
  • Digital advertising
  • Digitizing cultural heritage
  • Internet freedom and control
  • Hacking
  • Online politics and social movements
  • Surveillance
  • Social media
  • The Sharing Economy
  • Big data

That very same digital culture will have an impact about how people going to team up to solve a problem in new ways. For a company the challenge is about closing the gap between employee and leadership.

As the importance of having a digital culture is often overlooked by CXO’s, it is a source for competitiveness as it gives a sense of purpose and empowers employees. Without it, it will be difficult to make significant progress on a digital transformation.

Employees get used to old behaviors in an organization would perceive that new norm as a risky move instead of a potential success.

“The big moment for an organization is when they have embraced the fact that digital transformation isn’t a technical issue, but a cultural change.”

Ian Rogers, Ex Chief Experience Officer at Ledger, ex CIO at LVMH,

According to MIT Center for Information System research those 7 areas are the root cause of lack of digital culture in an organization.

Agility and Flexibility: In other terms, the ability for the organization to move quick and adapt in the decision-making process and not be outpace by technology or demand changes.

Collaboration: Cross functional team and inter department team for skills sharing.

Customer centricity: The results of a well-executed customer engagement strategy where reinvent ways to converse with the customer and enchant his journey based on the insights of any employees that can spot and raise an identified room for improvement.

Innovation: Behaviors igniting risk taking, exploration and testing new thinking and ideas

Data-driven Decision-Making: ability to organize, share a common business truth that helps to make better decision between departments and cross functional teams that benefits the company.

Open Culture: Teaming up with external entities such as 3rd party vendors, startups or customers.

Digital First Mindset: a mindset where digital is a reflex, a second nature.

But also, do not fantasize how a digital born enterprise do in terms of culture. Despite Uber’s growth when everyone was thinking that Uber is trendy and the term “uberisation” was in the mouth of everyone, I suggest to have a look here with an interesting article of Fred Wilson from Union Squares Ventures that didn’t invest in Uber in 2017.

Getting Digital Leaders to Drive the Digital Culture

It’s especially difficult when there are no incentives for employees to act differently. To generate a movement, CEOs have to hire or build their digital leaders by empowering them.

Digital leaders align their incentives with the transformation digital strategy, their objectives are transformational, for others their objectives are already aligned in their job description paired with an incentive’s mechanism.

Culture change goes with aligning KPIs and incentives. Digital Leaders pay a great deal of attention of how the culture evolution and still yet rewarded goes and come up with measuring ineffectiveness in the organization. They highlight what could work better and keep iterates on the rest.

They have a compelling vision about where they should go with their collaborators. It is a multiyear process that depends of the size and repartition of the organization.

Worst is when your Digital Leaders leaving because they realized that the maturity of the organization reached a ceiling and it there isn’t any breakthrough anymore.

Some companies like to start with digital ambassadors where others established a special acceleration program (Nestle used to relocate special talents for a 8 month program before to send them back in their subsidiaries to broadcast digital skills among their brands portfolio).

“I really do believe that the future belongs to the fast, but you would be surprised how often people don’t do this; getting the right people, in the right job at the right time with the right attitude. And depending turnarounds, transformations are not for everybody. Do you actually have the people in the organization in the right job who can help you accomplish this? No amount of pressure from the top with the wrong people will bring you that.”

Meg Whitman, President and Chief Executive Officer, Hewlett Packard Enterprise.

Increasing the Culture change starts by focusing on what prevents it. Studies over the years demonstrated that organization hadn’t realized the scale of the challenge by not paying attention to:

  • Breaking down organizational silos between tech and business
  • Employee Engagement which is low
  • Skills / Competency gap that remains.

Digital Framework

According the MIT Center for Information Systems Research, it is recommended for CEOs to aim for setting up their Operational Cornerstone (sometimes called backbone) through business process digitalization and to pick either Customer Engagement or Digitized Solutions as area of development.

4 Key Decisions for CEOs:

1 Define a grand vision: How you going to change your customer’s life?

2 Choose a strategic driver: Customer engagement or Digitized solutions?

3. Establish digital capabilities

4. Architect the business (Transition towards new business models and a new organization matrix)

Operational excellence starts with the basis of an information system well organized.

This is where an IT Department can shine. A seamless integration is mandatory between your Enterprise Resource Planning, Customer Relationship Management and other systems to ensure the reliability, scalability, security, predictability and quality of your operations.

It requires standardization and business rules well defined (the most difficult) and it’s an absolute pre requisite to build the rest.

When your Customer Service, Logistic and Supply Chain gain a substantial productivity you can bring more business to the pipe without disappointing new customers.

Before the digital economy it was important to have one. Today it’s impossible to play in the digital economy without it and on top of it: it’s not enough. Table stakes.

At the intersection of Customer Engagement and Digitized Solutions you can create digital offerings (redefining your value proposition) between what’s possible and what customer wants.

Customer Engagement or Digitized Solution?

Customer Engagement are the tools, avenues, and tactics used for ongoing communication with customers, across all touchpoints they have with your business. For marketers, this means reaching your target audience, offering compelling and valuable content, capture their attention and be on top of their mind at every stage of the customer journey.

It is multi channels (email, social media, web, mobile), require to collect the right data that include engagement metric for marketing operation (emails opens, interactions, visits and clicks) but transactional metrics too (what, when and where there is a purchase and steps that led to the purchase).

Its market driven and is supposed to give a seamless, responsive, customizable and consistent customer experience as you understand who they are and what they really want. It tends to transform the Go to Market approach.

Digitized solutions are product driven, discard what users need and tends to transform business model.

They came from your digital innovation and can actually make a distinction between a market leader and followers. It can set a standard that all competitors have to follow.

But not everyone is Apple and decide without listening their customers. That is also why this notion is still not yet understood as it has specifics depending on business models and industry so it’s a work in progress.

What we do know:

Digitized solution is a multi-year high risk, high rewards approach requiring a high level of:

  • Digital maturity
  • Ability to keep testing along the way with scaling the proper resources
  • Agility for the established organization (Ex. no heavy procurement cycle for an IT agile team).

Nowadays it is recommended to setting up a Digital Platform inside a company that act as a base to rapidly building, reusing and discard a new piece of a business (services/ micro services) and that can on top connects your organization to your ecosystem of partners. It behaves like a startup’s studio with several mini startups inside and it’s an agile organization.

It follows a set of principle for accountability and incredible coaching skills that is a paradigm for old hierarchy to genuinely set up accountabilities:

But the few information I found indicates that new revenues generated by companies testing digital offerings still represent a little fraction vs the their core business.

It takes time to learn how to think different and execute in an effective way.

I believe that a company succeeding a complete digital transformation would be an organization setting up Digital Platform inside an organization.

That team would fundamentally transform the organization in an incremental or radical way through innovation. Imagine a startup inside your organization that become the organization.

Fortunately, not a lot of use case of established players in a given industries had reborn as platforms described in this article yet.

Digital Laoban