Digital Transformation: make or break
Digital transformation is vital to make possible the changes that the new normal demands. Organizations that are able to leverage the power of technology and data will be in a much better place to succeed
By CARLOS DURAN
Mounting evidence suggests that digital transformation is vital to succeeding in the new reality. In the article Business Trends in the New Normal, we discussed how the pandemic impacted our lives and left organizations navigating uncharted territories. The lockdown measures adopted to contain the spread brought the economies around the world to a virtual halt. Now, a few months into the pandemic, we are starting to identify trends that are shaping the new normal. We are witnessing changes in consumer behaviour, new ways of working and conducting business.
Digital: enabling and driving the transformation
Technology and data make possible remote working, automation of processes, the exploration of new products and services, etc. If the digital transformation was accelerating before the pandemic, now the need to expedite has dramatically increased.
In a recent interview Microsoft’s CEO, Satya Nadella, said that “we have seen two years’ worth of digital transformation in two months.” For instance, before the pandemic, experiments with new products or services usually took months to deliver results. During the pandemic, consumers can use the products or services in a matter of days.
By way of example, let’s think of what happened with the shortage of ventilators during the pandemic. Companies, like Tesla and Dyson, for instance, retooled their production lines to produce ventilators in a matter of days. Similarly, we are witnessing the efforts of many organizations working around the clock to develop a vaccine in record time. It is expected to have a vaccine available between 18-24 months, a fraction of the 14 years time that took the vaccine against Influenza-. The world won’t continue to run in a crisis mode from now on; still, companies have learned valuable lessons from the pandemic. The application of digital technologies to deliver solutions during the pandemic will undoubtedly be used in a post-pandemic world.
“We have seen two years’ worth of digital transformation in two months” – Satya Nadella, Microsoft CEO
The use of data
Regarding the use of data, let’s think for a moment of how China managed to crush the curve. They were able to analyze large quantities of data that allowed them to track and rapidly isolate patients and their close contacts.
On the not so bright side, we also have to consider that the use of data and technology will bring along other areas of concern. Data privacy and cybersecurity are important issues that organizations will have to manage.
Technology is driving changes in consumer behaviour
Technological changes are leading to changes in consumer behaviour. Additionally, they are triggering the emergence of new competitors from within and outside the companies’ industries. These changes are requiring companies to transform their business models.
To illustrate this point, let’s think of companies such as Airbnb and Uber. Airbnb has revolutionized the hospitality industry and Uber the transportation industry without owning a single room or a single car.
Paraphrasing Bill Ruh from GE, it is no longer about who owns the assets but how we can configure them to add more value to the customers.
On the other hand, safety concerns and safety measures introduced to contain the pandemic also triggered changes in consumer behaviour. Technology solutions played a significant role in satisfying consumers’ needs. The ability to work and buy from home and telemedicine are just a couple of examples of successful applications of technology.
Risks and opportunities
Even before the pandemic, we were witnessing dramatic advancements in digital technologies in many different domains. Notably, in the last few years, we started to hear more and more about new technology concepts. Indeed, terms such as artificial intelligence, cloud computing, robotics, 3D printing, machine learning and blockchain are familiar to us now. The application of these concepts to core human activities has profound implications. It affects, for instance, how we live, how we work, how we transact, how we communicate, etc. The pandemic has accelerated the process, and we are starting to experience first hand the changes at a larger scale.
The application of technology is no longer a choice or a nice to have. It has become a fundamental component in any modern business strategy that should be seamlessly integrated with the operations.
Furthermore, digital transformation represents significant risks for companies that are not able to adapt to the new reality. At the same time, technologies open up the doors to enormous opportunities for those organizations that are capable of understanding and adapting to the modern business environment.
How to start the digital transformation
The first step in a successful digital transformation is to have a clear understanding of what digital is. It is still common to see executives that find it challenging to make sense of digital. In particular, to understand how these concepts and ideas relate to their business.
This lack of understanding creates risks for organizations. To illustrate the point, let’s consider the risk of launching technology initiatives that are not relevant for the business or of overlaying technology on top of old business models not suitable for the new business environment. All of this increases the likelihood of making substandard digital investments that will add little or no value.
In order to avoid or minimize these risks, executives should seek to educate themselves and incorporate experts into their teams. The idea is to complement their business knowledge with a technical one. It is about gaining a good understanding of how technologies work from the business point of view rather than becoming technical experts.
What is Digital Strategy?
In the article From Surviving to Thriving, we explored critical changes in strategic planning thinking. Let’s examine now in more detail what digital strategy is. To that end, let’s start by defining digital strategy. There are zillion definitions out there. Some business leaders view digital strategy as the improved term for what their IT function does. Others focus on digital marketing or sales or automation of strategic processes. Very few executives have a broad, holistic view of what digital means. In our opinion, digital is the nearly instant, free, and flawless ability to connect people, devices, and physical objects anywhere.
Concerning digital strategy, there are also many definitions. Below is a point fo view that captures very well the different aspects of digital strategy:
“A digital strategy is an integrated set of choices that position an organization in an ecosystem to gain superior value in the long term by leveraging the power of digital technologies.”
Is Digital Strategy different from Business Strategy?
It is common to see organizations that have many different strategies coexisting. For instance, we have heard about a corporate strategy, a marketing strategy, a financial strategy, a supply chain strategy, an “operational strategy,” a human resource strategy, etc. (you get the point). Those “strategies” usually are not talking with each other, resulting in bits and pieces of well-intentioned strategies that are not integrated.
The essential characteristic of a good strategy is that it creates alignment and focus. In that regard, there should be only one business strategy in the organization, and all the efforts should be contributing to shared strategic goals.
In our view, a digital strategy is a business strategy that puts technology at the core.
What digital means for strategy
Concerning what is different in a digital strategy, the first idea is that changes are fundamental. As opposed to a traditional strategy where, in most cases, changes are incremental, a digital strategy implies rethinking the business models and how value will be created.
The strategic choices that leaders face are multiplied, which in turn increases uncertainty. Technology opens up the door to a multitude of opportunities and possibilities that, in the past, went unseen or were not possible to implement because of technological constraints.
Furthermore, another fundamental difference introduced by digital strategy is that the time frame for making and implementing decisions is considerably reduced. Changes are happening rapidly, and the time available to learn and make decisions to correct course reduces dramatically.
In a digital world, an essential part of doing business is to work in ecosystems. To create more value for the customers, the organizations have to work with other players beyond their traditional value chain and even with organizations outside their industry boundaries.
The availability of large quantities of data, much of which is available in real-time, enhances the possibilities for analysis and provides opportunities for tests and experimentation in shorter cycles.
The digital shift
Digital has brought about critical changes in strategic thinking. I summarize below the main components of what we like to call the “digital shift.
From producing and delivering services and products to solving problems and shaping solutions
On the subject of focusing on providing solutions and not products or services, some may argue that this nothing new. Prof. Theodore Levitt authored in 1974 the famous quote: “People don’t want to buy a drill they want to buy a hole,” highlighting what the actual need of the customer is. In a digital world, the power is shifting from the companies to the customers, and this idea gained new momentum.
From product push to customer pull
In the digital age, it is not enough to follow a low cost or differentiation strategy to succeed. There are other sources of competitive advantage. For instance, complementary products and network effects are new sources of competitive advantage.
From old fashioned annual planning to strategy as a continuous journey
In the more stable environments of the industrial age, it was enough to have a yearly review of the plan to assess the effectiveness and correct course. Dramatic changes were sporadic. However, in the digital era, environmental changes are happening at a much faster pace, and they are more profound. Therefore, the mechanisms to manage the strategy need to be updated to cope with the new strategic demands.
From "what business are you in?" to "how to create and capture value"
Of all the shifts, this is perhaps the one that has more profound implications for the businesses. It is about rethinking the fundamental premises on which companies were built and reconfigure them with a focus on value creation. To better illustrate the point, let’s think of car manufacturers, let’s say, Mercedes Benz. Are they in the car business? Or in the transportation business?. Imagine the profound implications for the company that the answer to those questions could imply.
As a business leader, you don’t have to be a technology Guru, but you must develop the necessary understanding to know how applying different technologies could benefit your business.
It is also important to shift the attention from thinking how digital technologies support your current business model only to examining how they could also shape and become the drivers of your future business.
Unprecedented computing power and the analytical capabilities of machine intelligence will undoubtedly provide opportunities for innovations, guidance for strategic decisions and will also enable experimentation and learning. New challenges will emerge and will have to be dealt with, but all the evidence points out to the fact that digital transformation will play a fundamental role in organizations’ success in the new normal.