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Computers today can fit in your pocket, and the software applications that run on them increasingly enable the automation of tasks traditionally done by humans and the virtualization of hardware. In short, digital technology is being applied to almost every part of a company’s value chain. Thus managers are struggling to grasp what digital transformation actually means for them in terms of which opportunities to pursue.
Many managers expect digital transformation to involve a radical disruption of the business, new investments in technology, a switch from physical to virtual channels and the acquisition of tech startups. To be sure, in some cases such a paradigm shift is involved. But our research suggests that for most companies, digital transformation means something very different from outright disruption, in which the old is swept away by the new. More often than not, transformation means incremental steps to better deliver the core value proposition.
We draw on the insights we have gathered to dispel some critical myths about digital transformation and to offer executives a better understanding of how businesses need to respond to the current trends.
MYTH: DIGITAL REQUIRES RADICAL DISRUPTION OF THE VALUE PROPOSITION. REALITY: IT USUALLY MEANS USING DIGITAL TOOLS TO BETTER SERVE A KNOWN CUSTOMER NEED.
Some managers believe that to achieve a digital transformation, they must dramatically alter their company’s value proposition or risk suffering disruption. As a result, at the start of many digital transformations, companies aspire to be like Apple and try to find a new hightech core product that will serve brand-new customer needs. Although some might succeed, we believe that the customer needs most companies serve will look much the same as before. The challenge is to find the best way to serve those needs using digital tools.
The shipping container company Maersk provides a good example. The costs of shipping are affected by global trade barriers and inefficiency in international supply chains. What digital did for Maersk was provide a new way of overcoming this. The company partnered with IBM and government authorities to deploy blockchain technology for fast and secure access to end-to-end supply chain information from a single source. The technology, coupled with an ability to receive real-time sensor data, allows trustworthy cross-organization workflows, lower administrative expenses and better risk assessments in global shipments. This shift allows Maersk to serve its core customers better, and remain a company whose value proposition is providing a reliable, cost-efficient shipping service.
MYTH: DIGITAL WILL REPLACE PHYSICAL. REALITY: IT’S A ‘BOTH/AND.’
There is no doubt that digital often enables the elimination of costly physical infrastructure. But that doesn’t mean the physical goes away entirely. In fact, many retailers are finding ways to create a hybrid of physical and digital that taps into the advantages of each.
The high-end French retailer Galeries Lafayette provides a classic example. Despite intense competition from online stores, GL recognizes the importance of physical proximity to the customer, which only a brick-and-mortar store can offer. Both models have advantages: Physical helps build an emotional relationship with customers, while digital (especially artificial intelligence) helps it better understand customers’ needs. Whereas in the past companies focused too much on the product and not enough on the customer, hybrid models can put the customer at the center of the business.
GL is blending the physical and digital worlds in its new store on the Champs-élysées. The store will carry a curated selection of luxury items, and it will be staffed by salespeople hired for their ability to interact with visitors to the store, their expertise in fashion and style and their facility with social media. These staffers, known as personal shoppers or personal stylists, will establish emotional relationships with their customers, making the physical store an initial customer attraction and touchpoint.
Shoppers value a physical store visit because they can see and feel actual products. They can reserve items online and try them out in the store without obligation. Alternatively, they can buy products online and simply pick them up in the store. In either case, salespeople must understand how to act like personal shoppers, and the product and customer data they have enables them to do so.
MYTH: DIGITAL INVOLVES BUYING STARTUPS. REALITY: IT INVOLVES PROTECTING STARTUPS.
Often companies try to access new technologies by acquiring startups and then integrating them. This approach risks killing the startup’s culture and chasing away the talent acquired during its creation. Smart companies prefer to build hybrid relationships with startups — strong enough to learn and find synergies but weak enough to avoid destroying the culture. So even though they may own the startups, they allow them to operate as semi independent businesses.
Avnet, a $19 billion global technology solutions provider, is a good example. The company made two digital acquisitions: Hackster.io, a platform that allows makers from around the world to post their ideas for new products (such as sensors to monitor city noise and pollution levels), and Dragon Innovation, a startup that helps companies bridge the gap between made-for prototype and industrial-scale electronic products. These companies operate as semi-independent entities and interact with Avnet through Dayna Badhorn, its vice president for emerging businesses. Her role is to protect the acquired companies from the inefficiencies — such as slow product development cycles — of the parent organization while helping Avnet learn agility.
MYTH: DIGITAL IS ABOUT TECHNOLOGY. REALITY: IT’S ABOUT THE CUSTOMER.
Smart companies realize that digital transformation is ultimately about better serving customer needs, whether through more effective operations or new offers. Because digital enables the connection of formerly siloed activities for this purpose, the company must often reorganize both people and technology.
In practice this may mean changing structure — for example, in situations where a more agile structure is merited, creating internal squads with the capabilities and authority necessary to follow projects from beginning to end. Although a squad is a team, it differs from most big-company teams in being empowered to solve key problems quickly, as an entrepreneur would.
The credit card giant Mastercard has a systematic process for building such squads. Employees from various functional areas can submit ideas to qualify for three stage awards: Orange Box, Red Box and Green Box. The Orange Box gives employees a chance to explore their ideas and pitch them. Recipients of this award receive a $1,000 prepaid card and coaching to develop a presentation about solving a specific customer problem. At the Red Box stage people turn an idea into a concept: The team receives $25,000 for testing, prototype development, and research and a 90-day guide outlining the steps needed to refine the concept. The Green Box was designed to create a commercialized product from an official incubation project inside the labs. At this stage team members leave their jobs for six months to work on the project.
MYTH: DIGITAL REQUIRES OVERHAULING LEGACY SYSTEMS. REALITY: IT’S MORE OFTEN ABOUT INCREMENTAL BRIDGING.
Digital transformation may ultimately require radically altering back-end legacy systems, but starting with a sweeping information technology overhaul comes with great risks. Smart companies find a way to quickly develop front-end applications while slowly replacing their legacy systems in a modular, agile fashion. This can be achieved by building a middleware interface to connect the front and back end. Over time the pieces of the legacy system can be decommissioned, but progress in meeting customer needs doesn’t have to wait until then.
