For more than ten years, I have studied digital strategy and worked with scores of companies around the world on their digital transformation. I have seen first-hand what works and what doesn't. Here are a few highlights.
Why digital efforts fail. Digital efforts fail to provide significant transformation in large organizations for three main reasons:
- Focus on optimization and efficiency: Many companies use technology to cut costs, improve efficiency, or enhance the productivity of their current operations. Artificial intelligence is used to automate processes, robots are deployed to improve efficiency of supply chains, and chat bots are used to cut the cost of call centers. While it is always good to reduce costs and improve efficiency, focusing solely on efficiency implicitly assumes that the current operations and business model are optimal for the future. Optimizing processes that may be disrupted in the future is not the best recipe for long-term success.
- Experimentation: Companies often run hackathons and innovation days that inspire employees to start many new digital projects. Senior management encourages these initiatives as a way to experiment with new ideas—after all, there is a lot of uncertainty about digital future. However, in a global organization, this bottom-up approach often leads to hundreds of experiments that unfortunately do not add up to much. Although new projects drive a sense of activity in different parts of the organization, true progress can be minimal due to lack of cohesion and strategic direction.
- Establishment of independent units: Senior managers often believe that it is hard to create disruptive innovations within the bureaucracy of a large organization. To avoid this internal resistance, they often set up independent units with bright young entrepreneurs who are given significant resources and freedom to come up with new ideas. It is not uncommon for these new units to be physically located far away from the headquarters. However, this approach often fails because of the disconnect between the new unit and the established core of the business. Setting up a new independent unit is like launching a speedboat from a larger vessel-the speedboat may take off but it does not move the large ship.
How to lead successful transformation: What's the best way to approach digital transformation? Successful companies have focused on five key areas:
- Common vision and strategy: One of the most challenging aspects of digital transformation is knowing where to start. Different stakeholders in the company often have different views and definitions of digital strategy. It is important to align the organization along one common vision that focuses on the business problems or opportunities, and not on the technology or the latest buzzword. After all, digital strategy is all about strategy. When Ajay Banga became the CEO of Mastercard, he recognized that more than 85% of the transactions around the world are made with cash or checks. Based on this, he articulated the company's vision as "a world beyond cash." This expanded the addressable market beyond immediate competitors like Visa and encouraged the company to use multiple technology tools to combat cash. More recently, Mastercard formed partnership with Bakkt to enable crypto-as-a-service.
- Three-phase process: Major transformation in a large organization does not happen in one shot. Most successful companies have designed a three-phase approach:
- Optimization: While a sole focus on optimization is not enough, as mentioned above, it is a good way to start the three-phased approach because it is easy for leaders to understand and see its benefits. However, optimization should be done with an eye towards to future to ensure that you don't waste resources on improving operations that are likely to become redundant.
- Growth: Digital transformation should drive growth. For example, digital banking allowed DBS bank of Singapore to expand into India with a fully digital bank—a market it could not compete in previously. Similarly, J.P. Morgan used blockchain technology to introduce Onyx, a new platform for cross-border B2B transactions that provide transparency and information exchange. Growth can also come by leveraging existing capabilities to enter completely new businesses. Alibaba started Taoboa, where buyers and sellers exchanged goods. However, to solve the trust problem between buyers and sellers, Taobao created an escrow account where buyers deposited money that was released to sellers only after the buyer confirmed the authenticity of the goods. Once Alibaba learned how to manage money, it used this capability to create Alipay and become one of the largest asset management companies in the world.
- Reinvention: This phase requires a complete rethinking and reinvention of the business model, or how a company creates and captures value. Traditional strategy argues that competitive advantage comes from being better or cheaper. However, this is a very product-focused view. In today's world, product advantages disappear very quickly. In the digital world, sustainable advantage comes from connections—connecting products and connecting customers. Apple's iPhone and Samsung's Galaxy may have similar features, but iPhone's FaceTime allows families and friends to connect, creating significant barriers to switching. Platforms like Amazon connect buyers and sellers, which creates a flywheel where a single player often dominates the market. As banking products become commoditized, some banks such as BBVA are positioning themselves to become platforms like Amazon to connect third-party fintech firms with its large customer base.
- Connect speedboats to the ship: While launching independent speedboats won't move the ship, connecting these speedboats strategically to the ship allows them to benefit from the resources and capabilities of the larger vessel while still encouraging independence of new ideas that can transform the core. This was the strategy used by Ajay Banga to completely transform Mastercard from a company founded by a consortium of banks to one of the most digitally savvy and innovative companies in the world.
- Lean in: Novice downhill skiers tend to lean back to avoid falling—exactly the opposite of what they should be doing. It is the same with digital technology. A natural reaction of most companies is to protect the status quo and find ways to avoid or discredit the new technology. Apple Pay, digital currency, decentralized finance, cryptocurrency and many such innovations were supposed to disruptor credit card processors like Mastercard. However, the company's philosophy is not to resist the natural trend of technology, but instead lean in and work with multiple players and redefine its role in the new ecosystem.
- Reskilling: All these changes require new skills and capabilities. Performance may falter during this interim period of upskilling, and the incentive and reward system should be adjusted to allow current employees to go through this U-curve of performance.
A final word: Digital transformation requires strengthening the core and building for the future at the same time. And it requires leaders to examine and potentially transform all aspects of their business—strategy, value chain, customer interaction, and organization structure.
Related: Leading Successful Digital Strategy
