On the eve of this new decade, it is worth reflecting on what has truly been one of the most talked about, exciting and challenging business transition of the 2010s, digital transformation.
So much ink has been spilled on the topic in the past few years that it is difficult to make sense of what we’ve been through, let alone where we’re going. But, given the scale and the strategic importance of this managerial and technological shift, some reflection is warranted, and hopefully we can collectively draw some learnings for the next decade. Here are some of my observations from a decade riding this “digital rollercoaster”.
The Digital Transformation Narrative Has Been Highjacked
At the time we published the book “Leading Digital”[i], digital transformation was not the “Thing” it has become today. We attempted to put some structures and frameworks to help business leaders successfully navigate this new phase of business transformation. Today, digital transformation is fully part of the corporate lexicon and has reached quasi-fashion status. Digital transformation has become an industry in itself and, with it, the true power of the phenomenon has become diluted to the point where it has virtually lost its meaning. The digital transformation agenda has been hijacked.
The culprits, well intentioned or otherwise, are many. The tech crowd became too enamoured with the “digital” part of digital transformation. Every tech products or applications from cybersecurity to cloud computing to the most obscure piece of software is marketed as the key components of your successful digital transformation. The “transformation” part is quickly forgotten and, with it, the most important driver of business performance. Then came the “disruption evangelists”, focussed on portraying digital transformation solely as being the destruction of established industries at the mercy of innovative newcomers. Power to the small. David and Goliath. Every industry being disrupted, and most large traditional corporations being on the brink of collapse from revolutionary business models. Of course, digital disruption has happened in some industries, like music, and it will happen again. But not all. And often not at the rate that makes catchy headlines.[ii] Not far behind came the quants, with the answer to everything being big data and statistical models. Promising to predict what customers will buy even before they have any intention to purchase, designing self-adjusting marketing mixes through completely programmatic marketing functions and so on. Of course, management has become much more scientific, and this is a good thing. But customer behaviour remains a stubbornly difficult dimension to accurately predict. And fluid data management in large organization is still a managerial tour de force.
Last, but not least, artificial Intelligence (loosely defined, as it often is) and automation have recently crashed the digital transformation party. First in their Armageddon incarnation, where machines take over the world and make most of our jobs redundant. Then in their positivist disguise. Most business problems are solved through algorithms, all diseases are cured through numbers, and we create millions of, yet undefined, new exciting jobs. Hurray!
So, what is there to be learned? Technological progress will continue its relentless advance and will forever provide more possibilities to do amazing things with our lives and our organizations. And that’s a good thing. How we adapt our corporations, organize our work, develop capabilities and ensure a prosperous future for our workforces out of all this technological progress is what really matters.
The “hijacking” of the digital transformation agenda is not a result of evil thinking or deviousness. Scientists and engineers are doing a great job of inventing. But people want to see instant results, big shifts, newsworthy achievements, moon shots and so on. Truth is, digital transformations are fairly long cycles. The old lesson that changing people and organizations takes way more time than developing technology is truer today than ever before. Technology is providing amazing new possibilities for business and organizations. But it’s time to move the cursor back towards the “Transformation” side of the digital transformation equation if we want to extract substantial business benefits from this transition.
A (Steep) Decade-Long learning curve?
The concept of digital transformation is powerful and broad. It is the corporate equivalent of a Swiss Army knife for technology-led organizational change. The reality is that digital transformation comes in many flavours, with differing complexity and impact. There’s been a visible progression in how organizations have evolved their digital transformation efforts to improve performance.
Early in the decade, behind the veil of digital transformation, were a whole array of technology projects that were, in the main, IT and systems improvements. For instance, many firms were improving and integrating their web presence or implementing ERP and CRM systems to streamline their backbone operations. Later, firms moved to automating functions and/or implementing point solutions. For instance, digitizing some of the HR core processes or automating marketing campaign management workflows. When implemented successfully, these efforts all contributed to streamlining and improving firms’ operations. But none were truly transformational. The next cycle was very different. Firms started to look at end-to-end/horizontal processes such as order-to-cash in operations, cross-channel integration at the front-end, or connecting employees through enterprise social networks. At this point, digital applications came face-to-face with the business transformation challenge. Why? Because they cut across natural organizational silos, opened up accountability and governance issues, and exposed the need for changing traditional ways of working. The people challenge and the organizational complexity came to the fore. Despite much talk about disruption and new business models at the time, the key focus of these transformations was on digitizing the current customer interactions and operations. Fundamentally, the processes of how products/services were made and delivered to customers remained the same. It was about modernizing the existing business.
Then came the exciting stuff. Using digital technology to innovate, change how business is done and create new sources of value. Speed became paramount. And many companies got better at fast-tracking innovations from ideation to pilot or prototyping stages using techniques from DevOps to design thinking to agile methodologies. We could visualize digital transformation outcomes quicker than ever before. But in many cases, the process went too far and generated myriads of pilots that never saw the (business return) light of day. Scaling innovations became the main roadblock.
A few firms went even further, radically transforming their business models and how the company makes money. Some, like Michelin, moving from a product centric model to added-value services. Others, such as Nike and Ping An insurance, using the power of digital platforms to develop new ways of serving and engaging their customers.
So, we’ve seen this digital transformation decade go through several development cycles, from modernizing existing businesses to transforming functions and core processes and to creating new digital businesses. Although the evolution has probably not been as “cleanly linear” as presented above, a key question remains: is there a corporate learning curve for firms to move to ever more sophisticated forms of digital transformation? The answer is most probably yes! Leapfrogging strategies might be plausible for small to medium size firms. But no large organization will be immune from this digital learning curve.
We’ve seen traditional firms that have successfully navigated the early forms of digital transformation continuing to digitally improve firm performance in ever more sophisticated and complex ways, such as Burberry in B2C or Schneider Electric in B2B. Equally, we’ve seen others struggling, and some are still struggling today, to grasp the fundamentals of digital transformation (Digital + Transformation, the What and the How). And this is worrying. If this situation persists, we will see a polarization in traditional companies between those that will continue their digital ascendency and those who will be left behind.
The Awakening of the Industrial Sector
Fuelled by advances in mobile apps and social media, the early focus of digital transformation was skewed towards the customer experience particularly in consumer businesses. Companies from Nike to Disney showed the way in how to successfully use digital technology to substantially enhanced how companies relate to their customers from a product, service and experience standpoint. Of course, many industrial and B2B players such as UPS or Schindler were early pioneers of digital transformation, but most of the media interest was on the exciting development at the front end. It all changed with “Industry 4.0”. Emanating from an initiative from the German government, it refocussed the attention on the immense opportunities that digital technology provides for automation and data exchange in manufacturing equipment, processes and systems. The attention turned to digital manufacturing, smart factories, industrial internet and other applications later extended under the theme of the “fourth industrial revolution”.[iii]
The second part of the decade saw a real awakening of the industrial sector to the amazing possibilities for operational excellence created by digital transformation. Fuelled by exciting new technologies such as additive manufacturing or digital twining, smart digital applications from predictive maintenance to intelligent mining fuelled the growth of this new industrial digital transition. No industrial sector remained untouched. Despite many views to the contrary, the engineering mindsets in many industrial players actually helped. Business cases were easier to measure because baseline performance was somewhat clearer to quantify than on the customer side. Some of the potential improvements touched massive parts of the manufacturing cost structure, and technical capabilities were available in larger numbers than in traditional B2C companies. Although hard to quantify, my sense is that today, the digital transformation focus has shifted to a 50/50 model between customer experience and industrial operations. Of course, we will continue to see amazing innovations and new business models in B2C companies. But, fuelled by exciting technologies in areas such as automation and IoT, and the great promise of industrial AI, we will continue to see the share of industrial digital transformation grow in the next decade. This industrial renaissance is only just starting.
A Second Wave of Digital Transformation?
Whereas the first wave of digital transformation was based on point solutions, such as e-com platforms, or the smart meshing together of several digital applications, such as taxi-hailing apps, today’s digital platforms are more complex and far broader in their applications. We are entering a second wave of digital transformation based on general purpose technologies such as IoT, AI, VR/AR, 5G et al that will provide the basis for the next chapter of organizational performance. Why is it a second wave? Because for many firms, the challenge is graduating from the first wave of digital transformation – “digitizing” operations by streamlining processes or connecting to customers and suppliers in more digital ways – to the second – creating new sources of value using this new wave of general-purpose technologies.
Even companies that have worked hard to master the first wave of digital innovations, now find themselves lacking the capabilities needed to harness the second. These capabilities are advanced, rare and expensive. Faced with this challenge, firms have to turn elsewhere to access these capabilities, for example by partnering with universities or other open innovation sources. Successfully navigating this second wave of digital transformation requires closing an important capability gap. Companies will need once again to raise their game by accessing or acquiring new skills and talents, reskilling their existing workforces and adapting their innovation systems. The challenge is immense, but the size of the business prize will be a magnitude greater than during the first wave. Fasten your seatbelt!
Strategy: It was the Best of Time, it was the Worst of Time…
As in all previous decades, many commentators predicted “the death of strategy“. The business and technology landscape were moving too fast to allow for any form of foresight. New competitive rules - with the increasing power of global platforms and a multitude of innovative newcomers. An ever-faster rate of potentially disruptive technologies. An abundance of funding fuelling innovation and, sometimes, irrationality in valuations. More turbulent geo-political environments and urgent environmental concerns. All combined to create more risks and more business unpredictability. Exactly the conditions that make good strategy formulation even more important than before. But old maps won’t get you there.
Much time was spent arguing whether firms needed both a business strategy and a digital strategy or whether they were just two sides of the same coin? Truth is, the strategy playbook has already started to be rewritten. We’ve embraced open innovation models. We have a much better understanding of the economics of platforms and ecosystems. And most companies understand that the traditional strategy planning process is no longer suited. But we still have a long way to go.
So, more uncertainty, new competitive and transformation challenges, more data than ever before, new tools for analysis…and a new strategy rulebook for the digital world to be written. What a great time it is to be a (digital) strategist!
So, What Comes Next?
One of the most common questions I get asked is: “what comes next after digital transformation” or “should we still be talking about digital as a thing since it has become so pervasive?”. I would argue these are the wrong questions. We’ve heard several (so-called) “Futurists” evangelising about the “Post-Digital Economy”, but we’re left with the feeling that the title is more exciting than the content behind it. On the other hand, does it make any sense to still talk about digital marketing? What other form exist today? My conclusion is that such lines of inquiry are not very useful for executives. With the early developments in digital transformation we entered an era where technological development is indissociable from any part of business and competition. Whether you are a strategist, a supply-chain manager or an HR executive. (Digital) Technology is, and will remain, the main driver of business transformation. It is evolving at amazing speed and requires ever more advanced capabilities to capture new opportunities. Our organizations made important headways into becoming digital businesses. But, as was true a decade ago, our ability to adapt our organizational formats and raise our people’ capability is still way behind the speed of technological progress. And that’s why whatever we do, or whatever clever name we find for the next wave of digital transformation, one strong lesson from the past still holds true – people and organizational transformation abilities will remain at the core of successful transformations.
Technology will remain the fuel and, in the second wave, become ever more powerful. How we use these technologies could generate very good or very bad outcomes for people, corporations and society. The next wave of digital transformation, will have to be much more responsible. It is for leaders, organizations and institutions to ensure that we build a positive future out of this next wave.
What a Ride it’s been! It’s been hard at times, but always exhilarating. The next 10 years will be just as exciting and unpredictable (if not more) than the last decade. We ain’t seen nothing yet.
Note: Please join the conversation so we can get smarter about digital transformation in the 20s!
Didier Bonnet is a Professor of Strategy and Digital Transformation at IMD Business School in Switzerland.
[i] “Leading Digital: Turning Technology into Business Transformation”, G. Westerman, D. Bonnet & A. McAfee. Harvard Business Review Press, 2014. [ii] “Lifting the Lid on Digital Disuption”, M.Wade, D.Bonnet & J. Shan. IMD forthcoming working paper,2020. [iii] “The Fourth Industrial Revolution, Klaus Schwab, World Economic Forum, 2016