“Nothing is a greater priority than the digital transformation of our business…” We hear this phrase every day in conversations with executives. The reasons are clear: digital technologies are enabling radically new ways to deliver value to customers, altering competitive landscapes, and changing the underlying economics of markets.
Technological change is nothing new—but this round of change is happening at a rate faster than ever before. Some executives cite the risk of disruption as the impetus for transformation; that risk is certainly real. But while new technologies may threaten established businesses, they can also create unprecedented opportunities. In fact, an increasing number of executives are more concerned with missing opportunities to grow, than being forced into oblivion. It is not digital disruption that impels companies to change, it is digital “FOMO” (Fear Of Missing Out).
In this context, it is surprising that most corporations still view digital transformation too narrowly. First, digital transformation is not monolithic. There are four types of digital transformation: business process, business model, domain, and cultural/organizational. We often see corporations focused solely on process or organizational transformation. Failure to address all four types leaves significant value on the table. Second, the multi-dimensional nature of digital transformation means execution must be a team sport, involving not only the Chief Information Officer (CIO) or Chief Digital Officer (CDO), but also Strategy and Business Unit leadership and it should be championed broadly by the CEO. Third, too many corporations erroneously believe digital transformation must begin with cultural/organizational transformation. Teaching the organization to be more innovative, agile and digital is indeed important, but we see greater success among corporations that first pursue business transformation initiatives.
There are significant opportunities being created by new technologies, but corporations that don’t recognize and pursue transformation in a multi-dimensional way may find themselves missing out. Here are the four types of transformation in more detail:
Process Transformation A significant focus of corporate activity has been in business processes. Data, analytics, APIs, machine learning and other technologies offer corporations valuable new ways to reinvent processes throughout the corporation—with the goal of lowering costs, reducing cycle times, or increasing quality. We see process transformation on the shop floor where companies like Airbus have engaged heads-up display glasses to improve the quality of human inspection of airplanes. We also see process transformations in customer experience, where companies like Domino’s Pizza have completely re-imagined the food ordering process; Dominos’ AnyWare lets customers order from any device. This innovation increased customer convenience so much that it helped push the company to overtake Pizza Hut in sales. And we see companies implementing technologies like robotic process automation to streamline back office processes like accounting and legal, for example. Process transformation can create significant value and adopting technology in these areas is fast becoming table-stakes. Because these transformations tend to be focused efforts around specific areas of the business, they are often successfully led by a CIO or CDO.
Business Model Transformation Some companies are pursuing digital technologies to transform traditional business models. Whereas process transformation focuses on finite areas of the business, business model transformations are aimed at the fundamental building blocks of how value is delivered in the industry. Examples of this kind of innovation are well-known, from Netflix’ reinvention of video distribution, to Apple’s reinvention of music delivery (I-Tunes), to Uber’s reinvention of the taxi industry. But this kind of transformation is occurring elsewhere. Insurance companies like Allstate and Metromile are using data and analytics to un-bundle insurance contracts and charge customers by-the-mile—a wholesale change to the auto insurance business model. And, though not yet a reality, there are numerous efforts underway to transform the business of mining to a wholly robotic exercise, where no humans travel below the surface.
The complex and strategic nature of these opportunities require involvement and leadership by Strategy and/or Business Units and they are often launched as separate initiatives while continuing to operate the traditional business. By changing the fundamental building blocks of value, corporations that achieve business model transformation open significant new opportunities for growth. More companies should pursue this path.
Domain Transformation An area where we see surprisingly little focus—but enormous opportunity—is the area of domain transformation. New technologies are redefining products and services, blurring industry boundaries and creating entirely new sets of non-traditional competitors. What many executives don’t appreciate is the very real opportunity for these new technologies to unlock wholly new businesses for their companies beyond currently served markets. And often, it is this type of transformation is that offers the greatest opportunities to create new value.
A clear example how domain transformation works may be the online retailer, Amazon. Amazon expanded into a new market domain with the launch of Amazon Web Services (AWS), now the largest cloud computing/infrastructure service, in a domain formerly owned by the IT giants like Microsoft and IBM. What made Amazon’s entry into this domain possible was a combination of the strong digital capabilities it had built in storage, computing databases to support its core retail business coupled with an installed base of thousands of relationships with young, growing companies that increasingly needed computing services to grow. AWS is not a mere adjacency or business extension for Amazon, but a wholly different business in a fundamentally different market space. The AWS business now represents nearly 60% % of Amazon’s annual profit.
It may be tempting for Executives of non-tech businesses to view the experience of Amazon or other digitally-native companies (such as Apple or Google that have also expanded into new domains) as special; their ability to acquire and leverage technology may be greater than other companies. But in today’s digital world, technology gaps are no longer a barrier. Any company can access and acquire the new technologies needed to unlock new growth—and do so cheaply and efficiently. The building block technologies that are unlocking new business domains (artificial intelligence, machine learning, internet of things (IOT), augmented reality, etc.) can be sourced today not only from the traditional IT supply-base like Microsoft or IBM but also from a growing startup ecosystem, where we see the greatest innovation taking place. Corporations that know how to reach and leverage this innovation efficiently, particularly from new sources, are reaping the benefits of new growth.
We see (and have helped) numerous industrial companies that have undergone domain transformations. ThyssenKrupp, a diversified industrial engineering company, broadened its offerings to introduce a lucrative new digital business alongside its traditional business. The company leveraged a strong industrial market position and Internet of Things (IOT) capabilities to help clients manage the maintenance of elevators with asset health and predictive maintenance offerings—creating a significant new source of revenue beyond the core. In another example, a major equipment manufacturer is moving beyond its core machine offerings to introduce a digital platform of solutions for its client sites: job-site activity coordination, remote equipment tracking, situational awareness, and supply chain optimization. The company is moving to become no longer merely a heavy equipment provider, but also a digital solutions company.
The lesson is to recognize the new domain opportunities afforded by new technologies and understand they can be captured—even by traditional incumbents. Because these opportunities involve re-defining business boundaries, pursuing these opportunities often involves Strategy and the CEO.
Cultural/Organizational Transformation Full, long-term digital transformation requires redefining organizational mindsets, processes, and talent & capabilities for the digital world. Best-in-class corporations recognize digital requires agile workflows, a bias toward testing and learning, decentralized decision-making, and a greater reliance on business ecosystems. And they take active steps to bring change to their organizations. Experian, the consumer credit agency and one of the most successful digital transformations, changed its organization by embedding agile development and collaboration into its workflows and by driving a fundamental shift in employee focus from equipment to data, company-wide. Similarly, Pitney Bowes, the 100-year old postage equipment company, made the successful transition to become a “technology company” by promoting a “culture of innovation,” according to its head of innovation, and by shifting company values to focus on customer-centricity.
But neither of these companies focused initially on organization and culture–being digital isn’t the same as creating value from digital. Instead, these companies pulled innovation skills, digital mindsets and agility into the corporation on the back of concrete initiatives to drive growth. Experian recognized the importance of beginning with a lighthouse digital project to create internal APIs. It forced teams to adopt digital workflow practices but in doing so demonstrated the power of digital to change old organizational norms. Similarly, Pitney Bowes CEO Mark Lautenbach began its transformation with a primary focus on customer-facing offerings, developing new commerce cloud to allow customers to better manage and pay for shipments. “As you’re thinking about transforming a company… try to realize those cores, those gems that you have that you can pivot off of to create that next chapter,” he told Fortune. Progress on business initiatives dragged organizational change like agile development and innovation along. Cultural/organizational change is a long-term requirement of success, but best in class companies regard the building of these capabilities as a product of, rather than a prerequisite for, business transformation initiatives.
As technology change increases, industries will continue to be forced to change. Corporations that regard and pursue digital transformation in a multi-dimensional way will find greater success than those that don’t.
To learn more on how to exploit the four types of digital transformation to drive growth, see the next article in this series: “The New Playbook for Growth in the Age of Digital Transformation“