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PERSPECTIVES FOR MANAGERS APRIL 2014

Digital Business Transformation: Where is your company on the journey

Donald A. MarchandMichael R. Wade

By Emeritus Professor Donald A. Marchand and Professor Michael R. Wade

Digital business transformation (DBT) is happening on a scale and at a speed that managers find both threatening and promising. In a report entitled “The Internet of Everything,” CISCO Systems estimated that 10 billion devices were connected to the internet in 2013, and predicted that this number would rise to 50 billion by 2020. It further projected that $14 trillion in business and economic value would be at stake between 2013 and 2020 across nations, industries and companies through business innovation, higher productivity, increased efficiency in processes, and enhanced customer experiences.

The benefits of DBT are tremendous, but they are unevenly distributed.  A  2011 IBM/MIT study concluded that there was a widening divide between companies in how they leveraged analytics and data for business value. In this article, we help define what DBT means for your company and provide a roadmap for creating and capturing value from digital tools and technologies. At its core, DBT is as much about organizational change as it is about technology, and we offer a framework to help navigate this change and realize DBT’s full potential.

Digital business transformation: Definition and key elements

The roots of DBT can be found in MIT Media Lab founder Nicholas Negroponte’s 1995 book Being Digital which explored the substitutability of bits and atoms. Negroponte suggested that any form of information that exists as atoms (like books and DVDs) can be represented by bits on a digital device. This fundamental insight formed the basis of the early growth of e-commerce, as well as the widespread deployment in more traditional industries of information systems,  for  example for shipment tracking by FedEx, inventory management by Walmart, and the daily tracking of purchases of millions  of  Frito-Lay  snacks by its sales route drivers. The leaders of these companies understood that digital information about their products (and customers) was as important as the products themselves for boosting business performance against their less digitally aware competitors.

Since then,organizationshavewidelyimplemented digital technologies, modified processes to be digitally enabled, and generally become more digitally savvy, but often in an ad hoc manner, without an overarching structure or strategy. Here, we view DBT as a journey that must be approached and navigated mindfully. We define digital business transformation as organizational change through the use of digital technologies to materially improve performance.

AMPS: The newest digital technologies

Digital leaders are companies that manage to harness the power of digital information and technologies to improve business performance. It is important for managers to be aware of digital technologies that have the power to  enable and transform their businesses. We refer to the current wave of these technologies as AMPS. Together, these four digital technologies are having a profound effect on how organizations and industries are transforming, as outlined below.

Analytical tools and applications

These tools and applications are designed to analyze and extract value from the vast amounts of data available to organizations today. The difference between this “big” data and traditional forms of data is related to the three Vs: volume,or the sheer amount of data; variety, or the many different types of structured and unstructured data; and velocity, or the speed at which new data is being created. Oil and gas companies, for example, use sophisticated geological and historical data to better understand where to drill multi-million dollar holes to extract more oil from existing reserves.

Mobile tools and applications

More people connect to the internet today through mobile devices such as smartphones and tablets than via fixed devices like PCs. As a consequence, many companies are pursuing a mobile-first strategy, whereby application development is targeted first at mobile devices and then later modified for computers and other fixed devices. For example, Streetline provides apps to monitor parking space availability in large cities to save delivery drivers and consumers fuel and time in locating parking spaces near their intended destinations.

Platforms to build shareable digital capabilities

Many  traditional  systems  and  processes  are proprietary, meaning that the underlying data and insights cannot easily be shared. Digital platforms are non-proprietary systems that can facilitate the sharing of data, applications and insights across different parts of an organization. Digital libraries of content and applications are being developed to allow for the sharing and reuse of valuable business resources. For example, programmer improvements to the Linux operating system code and applications are freely available in digital libraries on the internet.

Social media

Social media applications like Facebook, LinkedIn and Twitter allow for a two-way flow of information and communication between an organization and its key internal and external stakeholders. They can also be used as learning tools to monitor industry trends, customer sentiment and competitor moves.

The organizational change imperative

Digital business transformation is not just about deploying AMPS in the workplace. Technology implementation without accompanying org- anizational change is likely to result in suboptimal outcomes. Indeed, the benefits of DBT can only be achieved with the right blend of people, skills and organizational structure.

The first challenge  is  for  business  leaders to create a sharing culture in which people are encouraged to express and use their  internal and external knowledge for the company’s benefit. Command and control models of running organizations do not work in the digital age. Nor do organizational cultures that  rely  too  much on individual performance, instead of team collaboration, to solve business problems.

The second challenge is to develop and promote a mindset of curiosity, fostering people’s appetite to better understand what they know and, more importantly, what they don’t know, and link this knowledge to decision-making and business benefits. For example, companies like Intel must invest in microchips well before their uses emerge in specific markets – a form of intelligently sensing where future markets will exist for its products.

The third challenge is to cascade an information- oriented culture throughout the company, and beyond, to customers and partners, to co-create value and innovation through smarter use of digital tools and real-time  information.  Do  managers in your company use digital technologies to cultivate values  and  behaviors  associated with the information  integrity,  transparency, trust and sharing that digitally based business processes and models require? Going digital is as much about transforming the knowledge- and information-based culture of a company as it is about using new digital technologies.

The fourth challenge is to selectively prioritize emerging business areas that leverage digital tools and technologies, while still seeking to optimize areas that are challenged by these changes. Finding the balance between new and established areas can be extremely tricky. For example, multi-line insurance companies have relied for decades on large networks of physical agents who live and work in their clients’ communities. Today, insurance is increasingly being researched and purchased online, with little or no interaction with physical agents. Thus, insurance companies need to develop digital capabilities to design, promote and sell policies through digital channels, while continuing to leverage the strength of their offline network.

Digital business transformation is about smarter performance

Combining digital technologies with the organizational and people changes required to build a digital information-oriented culture allows organizations to significantly improve business performance. Here, we believe that there are six specific areas of performance improvement:

  • Capturing and using real-time data about customer experiences for smarter sales interactions
  • Monitoring and tracking information about product, service and solutions support for continuous improvement
  • Sharing knowledge and information more effectively to act across functions and organization boundaries
  • Applying deeper and more targeted analytics that enable better decision-making
  • Deploying more efficient and agile processes and systems to react to rapid business change
  • Adopting more innovative and resilient business models to create disruptive change and innovation in a particular industry.

While most executives would like to measure digital business  transformation  in  terms  of  increased revenue and decreasing costs, we believe these are lagging indicators in most companies. In our experience, improvements in these indicators will follow from developing leading indicators for the six areas of performance improvement noted above.

Digital business transformation: Where are you on the journey?

Many managers in companies with strong non- digital capabilities struggle  with  the  challenges of “going digital.” Established firms complain that they are encumbered with legacy “non-digital” assets  and  capabilities,  and  look  with  envy  at emerging competitors. But the opposite is also true: Emerging digital players covet the resources available to traditional firms, such as established brands, access to capital, deep product and industry knowledge, and strong networks of relationships with customers and other relevant stakeholders. All these advantages can be leveraged by traditional firms as they transition into new digital areas.

Figure 1 provides our framework for digital business transformation. The horizontal axis focuses on the deployment and usage of AMPS, while the vertical axis focuses on the degree of organizational change. Upward or outward movement on these axes is required to achieve the full benefits of DBT.

Figure 1: Digital Business Transformation Framework

Quadrant 1: Going digital – doing the basics

Many companies with strong non-digital assets and capabilities are still in the “experimentation phase” when it comes to digital. Over the past ten years, they have developed websites, intranets and some extranets to link suppliers and partners. They have also spent heavily on back-office enterprise resource planning (ERP) systems and IT infrastructures. Most managers and employees use mobile phones and PCs, and there may be pockets of e-commerce in different subsidiaries and functions. However, these managers do not have the mindset to seriously move toward exploiting digital technologies, nor do the companies have the business strategies to do so.

While senior managers may talk about going digital, they are often not active users of digital technologies themselves. They believe these tools are for younger generations of workers, not for top teams. While the IT organization and some business units will deploy and use digital sites within the company, the use of digital to monitor customer contacts, experiences and complaints is minimal. Digital communities and information sharing may occur inside the company and across units and functions, but it is largely voluntary and not actively encouraged by senior leaders.

Since digital technologies and organizational change are minimal, so are the business improvement benefits of going digital – a circle of irrelevance! Lagging indicators of revenue and costs are used, traditionally with little connection to digital investments or changes.

Quadrant 2: Strong e-commerce capabilities– separated from the core business

In established industries such manufacturing, distribution, process and chemicals, many companies have developed strong and sophisticated e-commerce capabilities, either as autonomous e-sales and service units or as “bolt-on” e-commerce capabilities. These endeavors typically have little coordination with, or impact on, organizational functions such as manufacturing, R&D and distribution. Senior managers in these companies recognize the importance of going digital in sales and marketing, but have not discovered the “internet of things” where  digital  technologies  are  linked in machine-to-machine (automated assembly by robots) and machine-to-people (navigational safety systems to avoid collisions in cars) applications.

For example, in  distribution-oriented industries such as plumbing or electrical supply, leading companies have developed pockets of e-commerce, but have yet to develop business strategies  that  leverage   product   information to co-create solutions for installers or building contractors. Senior executives in these companies believe that the product expertise and knowledge of their people is best exchanged in face-to-face interactions with business customers in branch networks and building sites, rather than through digital channels. Thus, their non-digital business models are subject to gradual erosion linked to the digitalization of product knowledge by their suppliers and commercial customers.

A danger for companies in this quadrant is that because they have developed e-commerce capabilities, they believe they have “gone digital.” An e-commerce business unit might be successful, but unless digital capabilities and knowledge are integrated into the larger legacy organization, the benefits of DBT are isolated.

Quadrant 3: Exploiting digital data and business insights – building for the future

Some  companies  have  developed  strong digital  capabilities   without   large   investments in technology assets. Over the past six or seven years, many established companies in more traditional industries – such as  oil  and gas, nutrition and wellness, and construction materials – have responded to rapid changes in internet use by targeting specific uses of AMPS inside and outside their companies. For example, Nestlé has developed highly responsive teams of digitally aware  marketing  and  IT  people  at its headquarters to monitor what consumers around the world are saying (social media sites) and seeing (YouTube) in connection with Nestlé products.

Other companies have built on an established operating culture of continuous improvement and innovation to accelerate process improvement efforts throughout the company. CEMEX – a leading global supplier of cement, concrete and aggregates – has organized hundreds of targeted virtual process improvement teams across its local operating companies using social media technology and company intranets. These efforts have improved collaboration among local teams as well as across regions in  the midst  of the global financial and construction industry crises. In oil and gas, senior executives of Ecopetrol in Colombia have embarked on a five-year journey (starting in 2010) to develop a digital business enterprise. They believe these digital capabilities coupled with non-digital assets will best prepare their company to compete in the regional and global oil and gas industry.

Quadrant 4: Digital business capabilities– a global transformation journey

Companies that have reached this quadrant have successfully combined strong AMPS adoption with real organizational change, and they evolve continually. Disney,  for  example,  although  not a newcomer to digital transformation in its entertainment and educational businesses, is leveraging its non-digital assets.  The company has invested $1 billion to roll out “smartband” technology, called MagicBand, for consumers to wear in its theme parks. The objective is to track and improve the customer experience across all services delivered in a Disney park including hotel reservations, hospitality services and the many rides and attractions. The project, known as MY Magic+, aims to ensure that Disney’s 30 million annual visitors have the best possible experience in its parks and facilities, while increasing consumption of Disney services and attractions to increase revenue and profits from its non-digital assets, in this case theme parks.

Navigating the digital business transformation journey

Digital business transformation has been moving steadily through both developed and emerging economies over the last 15 years. The mix of digital and non-digital capabilities has continued to change in different industries. Tourism, banking, entertainment and retail have been in the vanguard of this change. Transportation, insurance and healthcare are emerging quickly. Over the next decade, all industries will be transformed either by new players disrupting established ways of doing business or by established players whose leaders believe that digital transformation is a competitive imperative now and in the future. When we examine DBT in pharmaceuticals, insurance and other industries, seven factors stand out:

  1. Clarity of purpose is essential. Senior managers must have the vision and competence to lead digital transformation in their companies.
  2. The change must include the frontline workforce. In one global healthcare company, the president of the pharma division led the deployment of 25,000 iPads to the global sales force to empower frontline representatives to improve customer engagement with better customer and product information.
  3. Digital transformers must understand the need to invest in AMPS and technology platforms that are sufficiently robust and flexible to be implemented and utilized throughout the company.
  4. Managers  must  develop   people’s   ability to effectively use information, as analytics becomes an increasingly large part of the competencies of the workforce on all levels.
  5. Senior executives must take the lead in modeling the values and behaviors associated with effective knowledge and information use in the digitally enabled company – integrity, transparency, trust, sharing and proactive use of knowledge for decision-making starts at the top.
  6. Measuring progress on the journey to developing digital business capabilities is essential for maintaining momentum for continuous improvement. DBT is a journey, not a destination!
  7. Executives must balance an execution- oriented culture with the inevitability of disruptive change in and across industries. This is the “new normal” for many established companies going forward – the adoption curve of AMPS is accelerating, not slowing, in the global economy.

The Stark Choice of Digital Transformation: Evolve or Be Disrupted

Donald A. MarchandMikolaj Jan PiskorskiMichael R. Wade

By Emeritus Professor Donald A. Marchand, Professor Mikolaj Jan Piskorski, Professor Michael R. Wade and Anouk Lavoie Orlick with Susan Stehli
Contributors: Jim Barrington, Christian Bucheli and Filippo Passerini

 

Over 100 participants from all over the world gathered at IMD in May 2015 to hear Professors Michael Wade and Donald Marchand, along with their guest speakers, talk about “Digital Business Disruption: Creating Opportunities, Defending against Digital Disruption.”

 

 

There have always been market disruptions as new technologies emerge. How is “digital” different? Most importantly, what are the best strategies for businesses to adopt in order to successfully undergo digital transformation? These questions formed the central axis of the IMD Discovery Event hosted by Professors Michael Wade and Donald Marchand. Real-life examples provided by speakers from the Novartis e-Health in Africa non-profit initiative, from Six Payment Services and from Procter & Gamble offered insights into both the opportunities and the disruptive threats inherent in digital transformation.

Digital dodo or technology forerunner?

Many companies have gone the way of Blockbuster Video Entertainment because they were too slow to adapt to changing technologies and too risk averse to give up their profitable core business. For example, it is only in retrospect that the executives at Blockbuster – who passed up the chance to buy Netflix for $50 million – became fully aware of the missed opportunities that cost the company its leadership position and quickly led to its extinction.

However the pace of digital disruption is now so fast that even the disruptors need to quickly disrupt themselves in turn. This is a huge challenge for organizations, even the most nimble, because it involves replacing a successful formula with a risky bet. Netflix had to go through painful organizational change to implement its digital streaming strategy: Many within the company opposed this new direction. The cannibalization of its DVD business also put the company in a vulnerable state during the transition and caused the stock price to plummet in 2012. Self-disruption almost killed Netflix but was necessary for its ultimate success.

Athough many companies today accept, in theory, the need to invest in potentially disruptive innovation, the path to digital business transformation is often rocky. There is a gap between obtaining new technology and adopting it. In practice, the gap is caused by organizational behavior barriers – not simply because change is painful but also because companies struggle to implement digital technologies in a way that materially improves performance. Faced with bundles of new technologies such as Analytics, Mobile, Platforms and Social Media – or “AMPS” – many firms grapple with competing digital strategies. And even once a strategy has been chosen, there are risks of derailment. One way to derail is to talk about digital transformation but do nothing. Another is to deploy AMPS but fail to capture new value for the business.

Stairway to digitization

Given these challenges, an effective way of thinking about digital business transformation is to picture it as an eight-step journey as shown in Figure 1. First, choose a visionary leadership team and make sure they care about the outcome – their jobs should be on the line. Second, elect cross-functional AMPS experts to carry out the project. Third, carry out a “fail fast and learn fast” phase to experiment. Fourth, select the right mix of technologies – this step should resemble a jazz improvisation, in which individual musicians take turns improving their performance during solos, as opposed to an orchestra piece with a fixed score. Fifth, redefine the boundaries between functions and between local, regional and global collaboration (this involves healthy confrontation, which is uncomfortable but necessary in order to generate trust and sharing of knowledge later on). Sixth, foster innovation where it naturally occurs, at the customer interface. The digitization process often starts at the edge of the business, with support from top leaders, and must be protected as it moves up in the organization – middle managers are often most resistant to these innovations. Seventh, allow the innovation to challenge legacy IT. Eighth, redefine and “relabel” the digital transformation based on the new understanding of its value and meaning.

An additional ninth step consists of “resetting” the whole process: Two to three years after deployment, the orientation of the digital strategy may have to be rethought at a high level. This last step is also when the firm can more confidently decide whether to roll out the innovations to other parts of the business.

Figure 1: Eight key ingredients enable sustainable digital transformation journeys (Don Marchand)

Digital: The best ammunition we have to stay ahead of the game

Having been in business for over 170 years, Procter & Gamble takes a longterm perspective on technology adoption. As Filippo Passerini, CIO and Group VP of Global Business Services, highlighted during his presentation at IMD, technology is never the solution – it’s an enabler. The real innovation is in the business model. This is true for P&G, but also for other companies. A significant change brought by the iPod was to allow people to buy a single song at a time. In other words, new technologies should not make us lose sight of the end goal – to enjoy an experience. That being said, Passerini believes that digital technologies are “the best ammunition we have to stay ahead of the game.”

In response to a question about how his company’s big data investments were changing, Passerini noted that reporting has gone to the bottom of the list. In order to respond to a “VUCA world” (Volatile, Uncertain, Complex and Ambiguous), priorities have shifted toward predictive rather than descriptive analytics (see Figure 2). P&G is focusing on simulations and scenario planning: When a new product is launched, what will the competition do? How will the market react? Where will our competitors invest? The goal is to be “pre-ready” with the appropriate scenario. In a fast-paced world, speed is of the essence, but only speed with clear strategic intent.

New product development is another area in which speed is vital. Until recently, P&G built physical mock-ups of products and invited consumers to carry out several rounds of testing. This three- to four-month process has been sped up thanks to virtualization whereby the entire process, including the 3D prototype of a product as well as its packaging, artwork, distribution and layout on shop shelves, is visualized entirely on screens.

In closing, Passerini shared three pieces of advice for staying abreast of innovation. First, find a personal advisor who has gone through a similar process of technological transformation before and use this person as a sounding board. Second, spend time scouting new places, new technologies and new people. This allows you to make unconventional connections. Visiting Israel, for example, offered insights into the country’s terrific ability to “triangulate” government, industry and academia to achieve innovation breakthroughs. Third, look at other industries for ideas as disruptions often come from disruptive cross-fertilization.

Figure 2: The evolution ladder for analytics (Filippo Passerini)

Digital trendspotting

What will be the next disruption in the payments segment of the financial services industry? This is what Christian Bucheli, Head of Strategic Ventures at Six Group, must bring to light and also prepare his firm for. Six Payment Services is owned by banks doing business in Switzerland, and one of its key services is to issue cards on behalf of banks and handle card-based transactions.

A useful framework to think about the changes that will impact Six Group is known as “PEST,” the analysis of the key Political, Economic, Social and Technological trends. Political trends related to Six’s business include the E-Money Directive and the Data Protection Act. The recent macroeconomic trends are generally characterized by a fast pace of change and the decreasing level of security in Western markets, for example the euro crisis and possible Grexit, increasing unemployment, bank disintermediation and shorter economic cycles. Key trends driving consumer behavior and social trends include migration, mobility, social media and digital natives/Millennials. Lastly, the technology landscape is shifting rapidly. Areas such as contactless payments, digital currencies and “blockchain” technology like Bitcoin, as well as omni-channel banking and mobile apps, are likely to shape the way payments are made.

Which of these four “PESTs” should Six focus on to prepare itself for disruptive innovation? Participants voted that the technology trends would be most likely to cause upheaval in the payments industry and that the best response strategy for Six Group to implement – out of the seven strategies outlined by Professor Michael Wade1 – would be to “Invest in disruption,” followed by “Disrupt the current business” and, third, “Milk” the existing business model.

Six Group is indeed investing in new digital technologies such as a mobile pointof-sale (POS) solution and biometricsbased client authentication. To nurture innovation internally, Six Payment Services has also set up a program dubbed the “Innovation Legionnaires.” The program starts with intranet-based idea collection. Employees can then apply to join ad hoc teams to work on specific projects. These three-person teams conduct “innovation sprints” lasting three weeks to come up with prototypes. The output from the Legionnaires is then reviewed at the executive level and, lastly, the selected prototype is integrated as a new product or service in the company’s standard offering.

Six Group is aware of the threat posed by both incumbent and emerging competitors – including Alipay, Google Wallet and Dwolla – and knows that it must fight for a place in the emerging payments ecosystem. However Six is an 85-year-old company that has enjoyed a national monopoly for many years. Change does not come easily. In the eight-step journey to digitization pictured in Figure 1, the company has obtained perhaps five of the necessary ingredients. Therefore the Innovation Legionnaires must march on.

Digital transformation via e-Health in Africa

For companies, seeing their industry undergo digital transformation can be both an opportunity and a threat. However, from a public health perspective, digital transformation definitely falls in the “opportunity” category, especially in lowresource countries. For example, going from paper to digital offers a unique chance to improve health outcomes in African countries affected by stock-outs of essential medicines.

Malaria kills 1,500 people a day, and 85% of African fatalities are children under the age of five. Malaria can be treated very effectively if tablets are administered within 24 hours of the symptoms’ first appearance. However, supply chain problems make it difficult to get medicines to patients on time, especially in rural health clinics. Over the last five years, Jim Barrington, retired CIO of Novartis, has led a uniquely successful initiative to digitize dispensary stock levels. After months of field research, Barrington concluded that an SMS messaging solution would be effective for health facilities. “SMS for Life”was first launched in Tanzania by a public-private partnership. Thanks to its mobile solution (with related health-staff training), antimalarial medicine stock-outs fell from about 75% to 5%.

The success of the program led other African countries to request roll-out of “SMS for Life” as well. Then, Barrington was approached by Ghana to find a solution to coordinate blood bank levels. The next challenge was Nigeria, which had different priorities, such as HIV/AIDS. Creating solutions for these countries became the second wave of the e-Health in Africa initiative. The team used the same back-end system as “SMS for Life” but designed a new front-end (and made the system accessible from any device, including tablets).

Some of the key lessons that Barrington drew from the project were:

• The biggest value did not lie in the technology, it lay in designing a new process.

• Designing for scalability and flexibility from the start allowed the project to expand freely.

• The strength of the team, comprised of one fully-empowered (and skilled!) employee from each of the partners (Novartis, Google, Vodafone, etc.), lay largely in the new patterns of collaboration they established (move fast; no reporting; no invoicing; no budgeting; whatever each person does, their own company pays for it).

• Legacy everything must be challenged, not just legacy IT.

For each new e-Health challenge, the founding principles stayed the same: All the technology would be open source and none of the vendors could have a monopoly. The team also created a “how to” packet for any organization that would like to replicate the methods. This packet was, for example, picked up by another pharmaceutical company to create a tailored e-Health solution for a sub-Saharan country, and it also allowed commercial spin-offs for pharmacists and diabetes patients. In short, the e-Health for Africa initiative was an example of the creative and life-giving – rather than simply disruptive – potential of digital transformation.

 


1- For an overview, see M. Wade, “7 generic strategies to respond to digital disruption,” Tomorrow’s Challenges, IMD, May 2015.

2- For an overview of the project, see the IMD “SMS for Life” case series by D. Marchand and A. Moncef, IMD case nos. IMD-3-2168, IMD-3- 2169 and IMD-3-2171.


Discovery Events are exclusively available to members of IMD’s Corporate Learning Network. To find out more, go to www.imd.org/cln

Digital Business Transformation

Donald A. MarchandMichael R. Wade

By Emeritus Professor Donald A. Marchand, Professor Michael R. Wade and Fang Liu with Susan Stehli
Contributors: Lita Sands and Achim Plueckebaum
 

Almost 100 participants from all over the world part in a Discovery Event on Digital Business Transformation in May 2014, where IMD Professors Donald Marchand and Michael Wade shared the latest information on organizations at different stages on the digital transformation journey, and Novartis guests Lita Sands and Achim Plueckbaum shared their experience about Novartis’s impressive digital business transformation.

 

To read the full article, click here

 

Discovery Events are exclusively available to members of IMD’s Corporate Learning Network. To find out more, go to www.imd.org/cln