Digital Transformation Dilemmas
Digital Transformation and Disruption: two overly-used phrases that get thrown around so often that they’re losing their essence. Some things get repeated again and again for a reason. Everybody says Paris is beautiful. It’s cliché at this point. But is Paris not beautiful?
This article is about digital transformation dilemmas: the self-imposed boundaries and justifications outlined in Clayton Christiansen’s book The Innovator’s Dilemma, in which the author states a case for striving to produce disruptive innovations. Discussing the topic with organizations across industries, I can confidently say that Christiansen’s book very well lives up to its reputation. Self-imposed boundaries are present in every organization. Are they justified?
1. We depend on existing customers and investors for resources.
1.1 Existing customers
Reaping success from a particular customer segment means operating with proven sales channels, trusted brands and predictable growth. Supplying them with additional products and services is a wise strategy only so long as it is paired with the exploration of new opportunities, outside of that particular segment. In essence, the best performing organizations are able to balance their existing business models while exploring new ones.
For example, according to the authors of Lean Enterprise: How High Performance Organizations Innovate at Scale, Google and Intuit focus on exploring and exploiting products and business models in the following way:
| Horizon 1 | Horizon 2 | Horizon 3 | |
| Intuit | 60% | 30% | 10% |
| 70% | 20% | 10% |
· Horizon 1: 0 to 12 months, generate today’s cash flow
· Horizon 2: 12 to 36 months, today’s revenue growth plus tomorrow’s cash flow
· Horizon 3: 36 to 72 months, high risk, options on future high-growth
While exploitation (H1, partly H2) is important to Google and Intuit, they are deliberately exploring as well (H3).
Too many CIOs focus only on H1, leaving H2 and H3 behind. They convince themselves that there isn’t enough time, budget or people to explore H2 and H3. Google could have easily adopted the same mindset and solely focus on existing customers, remaining only a search engine that would one day get overtaken. Just like any other organization, tech giants like Google operate with limited resources in one way or another. The main difference lies in their realization of the importance of penetrating new customer markets which helps diversifying revenue streams. The higher the limitation on resources, the more ingenuity it takes to penetrate new markets.
Individuals, departments, and entire companies are struggling to make the transition to continuous exploration of H2 and H3. Usually, a visionary CIO, CDO, CMO or Head of Innovation will encounter numerous obstacles when bringing this approach to life. A concrete, resource-light approach to move in this direction is to experiment with products that are in their preview, or beta, stage.
Giving early adopters the liberty to innovate with such products can bring about all kinds of rewards. First, it will spread the hits of Agile religion. Second, the organization creates the opportunity to create competitive advantage, as most organizations do not utilize in-preview software.
1.2 Investors
Optimizing – refining – optimizing again – refining again…. – economies of scale & bumming share price (investors’ paradise) – missed opportunities – trying to change with rigid processes and structure – share price falling (investors’ hell)
Stock owners, private equity, venture capital, business partners, or any other kind of investor: everybody likes a business where risk is spread out and where profits are growing. Victorinox was for generations generating revenues almost exclusively by selling their famous Swiss knives. That was a feasible strategy until 9/11, when the terrorist attacks in New York led aviation authorities to pass a law forbidding knives on planes. Victorinox revenues slashed 30 percent overnight, and their CEO Carl Elsner realized it was time to diversify revenue streams. Smart investors will avoid this situation, by making diversification a priority from the outset.
A leaner, more efficient organization is less likely to struggle getting investors to buy in when proposing a digital transformation. For instance, Elon Musk claims that while Boeing spends $10,000 on meetings and lunches, just to talk about what they might develop, SpaceX, with the same amount of money and time, produces an MVP. Not all organizations are as efficient as SpaceX, but showing signs of efficiency will go a long way when proposing a digital transformation. Two viable options to help slash costs are:
- Ask technology vendors to invest in a project. Many organizations and especially leaders outside of IT departments don’t realize just how much support a major tech vendor like Microsoft can offer: engineering support, money, strategy consultations, funding third parties to execute a project, free software utilization, etc. All of this is available for ambitious projects, free of charge.
- Decrease project costs by partnering with other organizations on proof-of-concepts which benefit everyone involved. This could be done with an organization from inside or outside one’s own industry; as long as there is mutually agreed-upon outcome, the project will most likely be successful.
2. Markets that don’t exist can’t be analyzed–we can’t build a business case that will justify the investment.
A market that is impossible to analyze is a potential goldmine, an untapped resource. While evidence-based management is simple to apply to mature, well defined markets, it is trickier to apply to non-existent markets with non-existent technologies. These instances call for a different kind of evidence-based management: one that involves creating MVPs, coming up with ingenious ways to test the product-market fit, and making educated assumptions how big the market is and how it can evolve.
During one of the projects I was involved in, an ingenious COO decided to grant liberty to innovate to an enthusiastic shop floor worker. With minimum funds, limited time, and no obligation to justify a complex business case, a single shop floor worker produced Augmented Reality MVP which allowed the company to better understand the impact of technology on its business, and spurred an entirely new digital strategy.
There is a lot of noise out there about hip management methods, such as giving employees the freedom to work on their own projects. Plenty of advocates talk the talk, but few walk the walk. Such an approach takes more than just empowering one’s most ambitious employees to go and do something innovative: it is about setting up for success. They need to be aware that getting the process right is just as important as getting the outcome right. Making sure that a team does not lose too much time doing unnecessary tasks, and that it applies an iterative, agile approach, cannot be emphasized enough. Building the project management muscle before undertaking disruptive projects often separates success from failure. Setting time aside to upskill in agile methodology such as SCRUM will aid in success and allow employees to articulate their process and share their knowledge in the future. Be like the ingenious COO: set up a vision, find a few early adopters, build project management muscles and measure the market yourself.
3. Small markets don’t solve the growth needs of our large organization.
The president of IBM from 1914 to 1956, Thomas J. Watson, said he thought there was a global market “for maybe five computers” and “five thousand copying machines”.
A disruptive idea is likely to start small and evolve over time. Facebook was initially intended to facilitate communication solely between Harvard students. Big ideas used to need time to develop. Luckily the times of IBM’s beginnings have passed, and ideas nowadays evolve much faster. Compared to IBM, Facebook needed much less time to develop the market–altogether only about seven years. Compared to physical products, software spreads much faster, which makes feedback loops shorter and allows an organization to rapidly recognize whether a small market can turn into a big one.
Even though that is the case, organizations still kill too many ambitious projects for the wrong reasons, like leaving the decision-making to the highest-paid person. Going back to three horizons and dividing focus into three pieces is a way to make sure that disruptive ideas covering small markets get enough attention and their chance to shine. Adding agile project management and shared budgets between business and IT will increase the chances of evolving a small market into a big one. Budgeting is recommended to follow these principles: (1) can only be used for H3 related activities, (2) does not require a massive business case to obtain the funds, (3) decision-making is delegated also to lower levels of the hierarchy.
4. Our capabilities reside in our processes and values, and new technology would require us to change them.
What happens if you don’t align your processes and culture with the requirements of cyber security, DevOps, IT outsourcing and cloud computing?
Every organization needs to build basic IT capabilities in order to establish the grounds on which digital transformation can take off. Some organizations have pockets of excellence in-house and can develop those into capabilities, whereas others might need to search for excellence outside. But all organizations can start building them by championing small projects, running pilots and making sure that the right kind of culture is supporting their efforts. After all, organizations which focus on transforming culture and building capabilities during a digital transformation are 2.5 times more likely to succeed.
To add to this statement, as a rule of thumb, I find that organizations which do succeed in the longer term consciously or unconsciously approach digital transformation in the following manner:
- They get the foundations right to ensure that the organization is secure, productive, transparent and agile. Moreover, leaders are fostering cultures where change is embraced, and people, rather than fearing to lose their jobs, seek opportunities to automate themselves out of a job and move into a new role.
- Once they possess a relevant degree of IT capability they take full advantage of more advanced digital transformation technologies such as virtual reality or blockchain and AI, among many others.
For more information on prioritizing digital transformation efforts, I recommend the following read – LINK
