Michael Lenox Of University of Virginia’s Darden School of Business On How To Use Digital Transformation To Take Your Company To The Next Level

Deconstruct Value Chains. In many sectors, digitization is opening novel opportunities to target limited parts of industry value chains. Traditional vertically integrated or, at least, highly coordinated value chains are being disrupted as digitally native companies pick off pieces of the value chain. In financial services, the so-called fintech start-ups are disrupting traditional banks by targeting payments, insurance, and investing. Similar disruptions are happening in telecommunications, media, and the energy sector. In each case, data and analytics are opening new opportunities to innovate specific parts of the value chain.

As part of our series about “How To Use Digital Transformation To Take Your Company To The Next Level”, we had the pleasure of interviewing Mike Lenox, Tayloe Murphy Professor of Business at the University of Virginia.

Mike is an award-winning professor, author, speaker, and consultant. For over twenty-five years, he has helped MBA students and executives navigate the competitive dynamics of markets in the face of innovation and disruption. He has served on the faculty at Duke and NYU and as a visiting professor at Harvard, Stanford, and Oxford. He holds a PhD from MIT in Technology Management and Policy and a BS and MS in Systems Engineering from UVA. Mike is the author of the new book, “Strategy in the Digital Age: Mastering Digital Transformation”, from Stanford University Press.

Thank you so much for joining us in this interview series. Before we dive in, our readers would love to “get to know you” a bit better. Can you tell us a bit about your ‘backstory’ and how you got started?

I was born and raised in a small steel mill town in eastern Pennsylvania. My dad was a high school principal. My mom was a high school guidance counselor. So, it was only natural that I would eventually find me way into the family calling of education. After completing my BS and MS in systems engineering, I spent some time in technology consulting before decided to go back to school to get my PhD in economics from MIT with a focus on environmental policy. During my studies, I grew very interested in the intersection of technology, business and public policy which sent me down a path of becoming a business school faculty teaching business strategy and studying the impact of technology on competition and society.

Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lessons or ‘take aways’ you learned from that?

When I first took on a leadership role at my current school, assuming the lead for a well-established and well-funded research center, I inherited a wonderful, dedicated team of about twelve staffers. In our first meeting together, I initiated a discussion about possible new initiatives and activities that we could undertake. As the discussion got going, I started to share my own thoughts and ideas. Suddenly, I realized that my team had stopped sharing ideas and were dutifully taking notes. As a professor, I was used to a certain give and take when sharing ideas — questioning assumptions, pushing back on concepts. Now as the “boss”, I had to recognize the power dynamic and be extra diligent to let others speak and to build a rapport with my team so they felt comfortable pushing back on my crazy ideas.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story?

During my undergraduate studies at UVA, I had the good fortune to take a course with a professor, Ernest Mead, who led a mysterious seminar simply called the “Lawn Seminar” after the University’s famous central quad. The simple premise of the course was to explore topics of the students choosing, but to do so in a rigorous and thoughtful manner. As he would say, as future leaders, we had an obligation to be students for life. Mr. Mead’s passion as an educator and mentor was an inspiration to me and was one of the reasons, I choose to become a professor. One of the greatest honors in my career was being asked to continue the Lawn Seminar after Mr. Mead’s death at the age of 96. He taught the seminar for over 40 years right up to the time of his passing. His passion and enthusiasm for teaching and learning never waned.

Is there a particular book, podcast, or film that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

While it may sound cliché, “To Kill a Mockingbird” is one of my favorite books and had a profound impact on me. The quiet steadfast leadership of Atticus Finch and his dogged pursuit of what he thought was right and just serves as an inspiration to me to this day. He embodied a notion of servant leader that I strive to be in both my work and private life.

Extensive research suggests that “purpose-driven businesses” are more successful in many areas. When your company started, what was its vision, what was its purpose?

One of the joys of being a professor is to work for purpose-driven organizations that have stood the test of time. At the Darden School of Business, where I am currently a faculty, our mission is to improve the world by inspiring responsible leaders through unparalleled transformational learning experiences. Our focus is on what we called student-centered learning. Faculty do not lecture. We use Socratic exchange to facilitate a conversation in class that forces students to state an opinion and to back it up with logic and analysis. Together, we collectively learn, pushing our thinking, exploring the ethical dimensions of decisions, and bringing each of our experiences and expertise to enrich the classroom. Our mission to create transformational experiences that inspire responsible leadership is our North Star and motivates me every day.

Are you working on any new, exciting projects now? How do you think that might help people?

I recently assumed leadership of a cross-university initiative on Democracy and Capitalism run through UVA’s Miller Center for the Presidency and Policy. We are asking the big questions. In our world of division where trust in institutions is at an all-time low, what stresses are these two central pillars of the United States and other leading nations under? Does our current epic portend a forthcoming renewal in our government and markets, or are we entering a dangerous period of revolution where these key institutions collapse? What actions can we take to catalyze the robustness of our democracy and the vibrancy of our economy? I will note that digital transformation is one those mega trends that is having a profound impact on the functioning of our democracy and capitalism.

Thank you for all that. Let’s now turn to the main focus of our discussion about Digital Transformation. For the benefit of our readers, can you help explain what exactly Digital Transformation means? On a practical level what does it look like to engage in a Digital Transformation?

Digital technologies have become pervasive in our society. Digital transformation is about how you leverage those technologies to create value for your various stakeholders — customers, employees, investors, and society more broadly. At the most basic level, digital transformation is about using data and analytics to transform the way you deliver value — enhancing customer value, improving operational efficiency, pioneering new business models. For organizations, this entails building out what I refer to as your digital transformation stack. At the base is your digital infrastructure: how do you collect, store, and exchange data? This often entails building out data lakes and adopting cloud solutions. Next is data analytics: what tools can you use to leverage the data you possess? This includes simple data visualization techniques like dashboards to advanced analytics using machine learning and artificial intelligence. Third are digital applications: what value-adding applications can you create for your various stakeholders? This might be a new system that allows employees to access business intelligence or a new automated process that helps your marketing team build continuous relationships with your customers. And last, but certainly not least, is your digital strategy: how will you establish a differentiated and defensible competitive position for your organization in the marketplace? This is absolutely critical as this should guide the rest of your efforts in your digital transformation stack.

Which companies can most benefit from a Digital Transformation?

Dare I say that I have not yet come across an organization or industry that is not feeling some level of disruption from digital technologies. The pressures to digitally transform are being felt very broadly. Established companies are facing new digitally native ventures that were built with data and analytics in mind from the ground up. The key is to understand the Strategist’s Challenge — how do we establish valuable competitive positions at the intersection of our values and mission as an organization, the opportunities provided by the market, and the capabilities we possess as an organization? What makes this current digital age so disruptive is the market opportunities upon which you built your business may be shifting away from the capabilities you have historically developed. As a result, established companies need to evolve their capabilities to allow them to re-establish valuable competitive positions in a digital disrupted marketplace. I purposefully use the term “evolve” as I have never seen an organization just wholesale reject what made them successful in the past. The challenge in the Strategist’s Challenge is how to develop new capabilities that complement and build off your existing strengths.

Has integrating Digital Transformation been a challenging process for some companies? What are the challenges? How do you help resolve them?

Digital Transformation is often a challenge — especially for established business. To paraphrase business guru Peter Drucker, the failure of once successful businesses is rarely because they forget what made them successful. More often than not, what made them successful in the past is simply no longer relevant in a digital transformed world. Transformation implies change and change can be hard. New products and services may cannibalize current successful legacy businesses. Data can be a source of the power in an organization and those who possess it may be unwilling to yield their data to a central repository like a data lake. Employees may fear that they will be automated out of a job and actively resist digital transformation efforts. The key to resolve these challenges is twofold in my opinion. First, have a clear strategy for where you are heading with your digital transformation. How will you lever digital technologies to achieve a valuable and defensible competitive position in the market? Senior leaders with a well-articulated vision are critical to a successful digital transformation. Second, be intentional in how this vision translates down to individuals in the organization. Recruit digital champions from within the organization — not necessarily people with deep technical expertise, but people who understand and appreciate what technology can do and who can help translate that into the efforts of various units and businesses in the organization. These champions are your field sergeants leading your digital transformation.

Ok. Thank you. Here is the primary question of our discussion. Based on your experience and success, what are “Five Ways a Company Can Use Digital Transformation to Take It to The Next Level”?

Let me highlight five ways that digital transformation is transforming competition and can add value for your business:

1. Enhance Customer Value. This is perhaps the most obvious opportunity from digital transformation. How do you leverage data and analytics to improve the customer experience? Consider Spotify. They collect terabytes of data on individual listening habits. They use this data to construct algorithms that recommend songs you may like to hear based on 1) your listening patterns and the listening patterns of others using collaborative filtering approaches, 2) the underlying structure of songs using convolutional neural networks, and 3) by mining social media discussions about popular songs using natural language processing. Digital transformation allows you to pursue connected strategies with your customers that creates a virtual cycle of data capture, algorithm improvement, and greater customer value.
2. Improve Operational Efficiency. Digital tools can be critical for improving efficiency and lowering costs. For example, manufacturers are creating digital twins — virtual replicas of production facilities that leverage real-time information flows from sensors and other connected devises. They are using these twins to explore possible process improvements, to monitor for system failures to minimize downtown and other disruptions, and train employees to improve productivity. Most interestingly, these types of operational efficiencies don’t necessarily come at the expense of customer value. In fact, they are often complementary — simultaneously raising customers willingness to pay will lowering operating costs.
3. Innovate Business Models. The digital age has led to a flourishing of alternative business models. Fee-for-product models are being complemented by subscription models — like software as a service (SAAS), advertising models — like those used by Google and Facebook, and platform models — like Apple’s App Store and Amazon Marketplace. Freemium models have become particularly salient where basic services are provided for free and more advanced offerings command a premium. Should you leverage some of your data and analytics to provide free services to your customers to attract new uses, build affinity, and upsell on high-margin offerings?
4. Deconstruct Value Chains. In many sectors, digitization is opening novel opportunities to target limited parts of industry value chains. Traditional vertically integrated or, at least, highly coordinated value chains are being disrupted as digitally native companies pick off pieces of the value chain. In financial services, the so-called fintech start-ups are disrupting traditional banks by targeting payments, insurance, and investing. Similar disruptions are happening in telecommunications, media, and the energy sector. In each case, data and analytics are opening new opportunities to innovate specific parts of the value chain.
5. Capture Increasing Returns. Central to the digital age is the concept of “network externalities”. This is just a fancy way of saying the value of a good or service increases as others consume it. Think about social media. The value of an offering like Instagram increases the more others use that service. We similar increasing returns in operating systems and match-making platforms like Uber, AirBnB, and Match.com. In the extreme, network externalities are creating winner-take-all markets where a single firm comes to dominate the market. Digital transformation is like building an onramp to a highway. Once on the highway, your data collective efforts and improved algorithms, send you flying down the road. Too slow to get on that highway and you risk being left permanently behind.

In your opinion, how can companies best create a “culture of innovation” in order to create new competitive advantages?

In our fast-evolving digital age, firm’s must adopt a culture of innovation — to experiment often, learn quickly, and pivot when necessary. First and foremost, firms need to embrace failure and to understand that failure may provide an opportunity for learning. I am an advocate for design thinking principles. Think of each digital transformation initiative as a hypothesis on how you may create and capture value. Associated with that hypothesis is a set of assumptions — how does this create value for key stakeholders, can we execute on this, will this provide a competitive advantage? Initiatives then become a process of de-risking hypotheses by testing key assumptions — preferably using quick, easy tests. If key assumptions underlying the idea prove wrong, well that is a learning opportunity, an opportunity update your hypothesis and begin testing anew. Digital transformation is a journey not a destination.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

As I’ve gotten older, I’ve come to appreciate that there are three truly consequential decisions one makes in life. For the sake alliteration: your partner, your purpose, and your place. Your partner may be your spouse, a family member, or a friend(s). Life is such a rich journey; you will be so enriched by deeply sharing that journey with others. Your purpose is your inspiration, your reason for being. For those who are fortunate enough, your passion will align with your career. I am thankful every day for finding my passion in being an educator and for the opportunity to be a professor. Finally, your place may be a specific geography, an organization, or a community of like-minded individuals. I am blessed to be part of community — a city, a university, and a school — that I am passionate and inspired by every day. Being able to set down deep roots in a specific place enriches my life and gives it deeper meaning and purpose.

How can our readers further follow your work?

You may find my books on Amazon, Barnes & Noble, and Bookshop.org. I encourage readers to follow-me through my website at www.michaellenox.com, on Twitter at https://twitter.com/prof_lenox, and on Linked-In at https://www.linkedin.com/in/michaellenox/. I also have a podcast called Good Disruption with my colleague, Yael Grushka-Cockayne, where we analyze the impact of emerging technologies (see https://gooddisruption.podbean.com).

Thank you so much for sharing these important insights. We wish you continued success and good health!