This article is the first in a three-part series discussing the forces driving companies to pursue Digital Transformation strategies, as well as the unique challenges that such endeavors will likely create and approaches to mitigate them.
This first article will discuss Digital Transformation; What it is, what's motivating companies to pursue Digital Transformation strategies, and why it's happening now.
The second article will introduce and define the concept of a business's "RPPs" (Resources, Processes, and Priorities) as a means of assessing the relative alignment of a new strategy or business with a company's core business, and why RPP alignment gaps are the biggest killer of innovation in large businesses.
Finally, the 3rd article will describe why Digital Transformation Strategies are very likely to create RPP alignment challenges for many, if not most, businesses as well as some approaches to mitigating the risks those challenges pose to the Digital Transformation process.
Introduction
According to IDC, “One-third of the top 20 firms in industry segments will be disrupted by new competitors within five years, and that it's a matter of ‘transform or perish’” [1] Many companies are turning to Digital Transformation to defend, differentiate, or disrupt their industry.
Yet, the same IDC report goes on to predict that, by 2018, “70 percent of siloed Digital Transformation initiatives will ultimately fail because of insufficient collaboration, integration, sourcing or project management.” [1] We pose that many of these initiatives fall into the Resources, Processes, and Priorities (RPP) Mismatch trap. In this article, we will define Digital Transformation, RPP Mismatches, and how these two forces are destined to collide in the majority of industries.
INDUSTRIES DISRUPTED BY DIGITAL TRANSFORMATION
- Music Industry CDs -> Streaming
- Book publishing -> Kindle
- Print Media -> Internet Content
- Taxis -> Uber/Ride hailing
- Hotel Properties -> Airbnb
COMPANIES DIFFERENTIATED BY DIGITAL TRANSFORMATION
- Progressive Insurance – Snapshot data collector that enabled personalized insurance rates
COMPANIES USING DIGITAL TRANSFORMATION TO DEFEND
- The security company ADT’s primary activity used to be deploying security guards, today it is a digital home automation systems company.
Introduction to Digital Transformation
What is Digital Transformation? Simply put, it is when a company radically changes core aspects of its business, enabled by and dependent on emerging digital technologies. Unlike incremental improvements that technology has been bringing to business for decades, Digital Transformations represent fundamental changes that are truly ‘transformative’ for the business.
Three Types of Digital Transformation
There are many forms of Digital Transformation, but we break them down into three buckets based on the nature of their business impact: Operations Focused, Customer Focused, and finally New Business Model Focused transformations.
1. Operations Focused
Operations Focused Digital Transformations are when companies instrument their processes and utilize the data to optimize their operations. This, for example, can range from utilizing digital data for optimizing manufacturing lines in real-time to making better hiring and career decisions based on the use of digital information combined with new technologies, such as machine learning and artificial intelligence. For example, many companies like Intel and others switch from calendar-based maintenance of industrial motors to a digital approach. [2] Vibration sensors added to industrial motors produce a constant stream of digital data, that are run through a machine learning algorithm, which can predict failures weeks in advance reducing manufacturing downtime. A more cutting-edge example is the digitization of hiring data and the use of artificial intelligence algorithms by human resource departments to link applicant traits to business outcomes which remove unconscious hiring bias. [3] Companies like SAP, IBM, now monitor real-time data and AI to help hire employees and advance careers. [4]
2. Customer Focused
Customer Focused Digital Transformation is utilizing digital connections to customers that change the way a company interacts with and services their customers. For example, utilizing social media, mobile apps, chatbots, digital assistants, or internet connected smart devices that can facilitate direct consumer relationships that are software driven. These can be powerful and highly resource efficient channels that can inform product design through digital instrumentation, can turn products into services with recurring revenue, and are powerful ways to interact with your consumer in a regular non-invasive way.
For example, Nest developed a smart thermostat that digitized HVAC control and consumer interactions. They provided an app that allowed the customer to program the thermostat and even change the home temperature remotely. As a result, Nest, unlike traditional thermostat companies, had reason and opportunity to interact with their customers on an ongoing basis through the thermostat, the app, and periodic emails that showed the customer’s power consumption vs. other consumers in their area. These interactions were of value to the customer and gave Nest ongoing opportunities to (1) improve their products with usage data and (2) introduce new products and create customer loyalty. A classic example of customer-focused Digital Transformation is Amazon’s introduction of the Kindle digital reader. Amazon took physical print, digitized it, and radically changed the way in which we purchase books. This user experience change made buying books from Amazon the path of least resistance with the bookstore built into the reading device.
3. New Business Model Focused
New Business Model Focused Digital Transformation is changing significant parts of a business model wither it be changes in partners, activities, resources, value propositions, customer relationships, channels, customer segments, cost structures, or revenue streams. Perhaps the most powerful form of Digital Transformation, this class often results in disruptive new business models that, if not executed with mitigations for their unique risks, have the highest probability for failure (due to RPP alignment gaps, discussed in parts 2 & 3 of this blog series).
For example, GE went from selling jet engines to digitally instrumenting the engines, utilizing the data to shift the business model to selling engine up-time.
In another example, Netflix digitally transformed the DVD rental business by utilizing a web-based interface, effectively digitizing the brick & mortar store, and mailing DVDs to consumers directly. They then utilized preference data they collected to start generating original content, further transforming their business model.
What's Driving Digital Transformation?
There are three foundational elements that are enabling and driving Digital Transformation. They are:
- Ubiquitous Digital Connectivity & Communications - email, the web, mobile, Internet of Things, etc. that enable direct communications between parties, anytime, anywhere.
- Increasing Digital Instrumentation – Logging of metadata from digital interactions, as well as the growing number and types of connected sensors from IoT.
- Ubiquitous Distributed Computing – Software driven business processes based on data analytics, and now including machine learning and AI.
The combination of these three enabling capabilities is increasing the levels of automation, dynamic personalization, customization, and adaptability of virtually every aspect of a business. They provide the ability to sense & measure virtually anything, the ability to automate virtually anything with software, and the ability to act, influence or communicate. This combination can help companies add value (dynamic, real-time, mass-personalization), or improve efficiencies (via speed and automation), or in many cases enable entirely new or disruptive business models that were not previously feasible.
All three of those enabling capabilities continue to move rapidly down their respective cost curves, making their impact on efficiencies greater and greater over time.
Why Transform Now?
Digital Transformation can be a daunting undertaking involving changes to core company competencies, so why transform now if your business is humming along fine? That depends on if you are motivated into action via fear or via the allure of the upside. In either case, the efficiencies and potential for disruption from Digital Transformation will be increasingly difficult to avoid.
“In a study of 450 heads of Digital Transformation, 80 percent of respondents said that they were at risk of being left behind by digital transformation. Moreover, 54 percent agreed that unless their Digital Transformation efforts are successful, their companies will go out of business or be absorbed by a competitor within four years, according to the survey, commissioned by Couchbase and conducted by Vanson Bourne.
On the other hand, another recent study looked at the differences between the ‘top 100 leaders’ in Digital Transformation versus other companies, turning up much more hopeful results. Performed by SAP, with research and analysis support from Oxford Economics, the study found that, on average, the leaders expect a 23 percent growth rate over the next two years through Digital Transformation.” [5]
Summary
In summary, Digital Transformation is utilizing digital data and communication paths to defend, differentiate, or disrupt. While operational transformations can have a material impact on the bottom line, the customer and new business model focused transformations can impact both the top line and the bottom line. We believe they are the most interesting and the least well understood, but all three can radically change how companies work. In doing so, companies will increasingly view less tangible digital assets as critical and recognize the ability to extract insights from digital sources as a core competency.
These transformations can put a heavy tax on existing operations, as they require exploration and experimentation to find the right combination that will achieve the desired transformation. In part two and three of this series, we'll define and discuss how the alignment of a new innovative process or business model with a business's "RPPs" (Resources, Processes, and Priorities) can determine its probability of success and why that's of particular concern when considered Digital Transformation initiatives. Stay tuned...
In part two and three of this series, we'll define and discuss how the alignment of a new innovative process or business model with a business's "RPPs" (Resources, Processes, and Priorities) can determine its probability of success and why that's of particular concern when considered Digital Transformation initiatives.
Part 2: When Digital Transformation Collides with Operational Norms = Part 2 of 3 (RPPs)
WORKS CITED:
[1] The Enterprisers Project, "What is Digital Transformation?," The Enterprisers Project, [Online]. Available: https://enterprisersproject.com/what-is-digital-transformation#q1.
[2] H. Messe, "Optimizing Assets, Operations, and Workforce with Smart Manufacturing," Intel, 2016. [Online]. Available: https://www.intel.com/content/dam/www/public/us/en/documents/brief/optimization-with-smart-manufacturing-brief.pdf.
[3] D. Faggella, "Machine Learning in Human Resources - Applications and Trends," Techemergence, [Online]. Available: https://www.techemergence.com/machine-learning-in-human-resources/.
[4] P. O. M. S. B. W. Erica Volini, "Digital HR: Platforms, people, and work," Deloitte Insights, 28 2 2017. [Online]. Available: https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2017/digital-transformation-in-hr.html#endnote-8.
[5] J. Emigh, "10 top Digital Transformation trends for 2018," SDTimes, 4 1 2018. [Online]. Available: https://sdtimes.com/digx/10-top-digital-transformation-trends-2018.
[6] C. M. Christensen and S. P. Kaugman, "Assessing Your Organization's Capabilities: Resources, Processes, and Priorities," Harvard Business Review, 13 September 2006. [Online]. Available: https://hbr.org/product/assessing-your-organization-s-capabilities-resources-processes-and-priorities/607014-PDF-ENG.
[7] R. Miller, "The Path To Successful Digital Transformation Starts With Pockets Of Innovation," Techcrunch, 7 11 2014. [Online]. Available: https://techcrunch.com/2014/11/07/the-path-to-successful-digital-transformation-starts-with-pockets-of-innovation/.
[8] i-scoop, "Digital Transformation: online guide to digital business transformation," i-scoop, [Online]. Available: https://www.i-scoop.eu/digital-transformation/#Digital_business_transformation_8211_a_holistic_approach.
[9] B. Schmarzo, "What is Digital Transformation?," CIO From IDG, 31 5 2017. [Online]. Available: https://www.cio.com/article/3199030/analytics/what-is-digital-transformation.html.
