Digital transformation: definition, opportunity, success factors, and plan
The digital revolution that’s upon us is an enormous threat to a lot of businesses, but it can also be a tremendous opportunity for those who leverage new ways of operating. While the pace of change today, is rapid and means that many current organizational architectures need to be modified, it is key to chart a path to make changes step by step. These changes need be evolutionary rather than revolutionary, but the important thing is to chart the course, gauge progress or lack thereof, and course-correct as companies learn going forward.
The digital opportunity
While the average tenure of the S&P 500 in 1958 was 61 years, today, this figure is less than 16 years. And while the average Fortune 500 business takes roughly 20 years to reach a billion-dollar evaluation, digital-native companies such as Uber, WhatsApp, or Snapchat, took less than four. All of this means that digital immigrant companies — those who were born before the digital age — need to think more like the digital native companies, otherwise they will get left off the train.
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A successful digital transformation requires four things:
- Digitizing the organizational culture — with the ever-changing digital technology landscape, hiring for, training, and encouraging learning agility among employees
- Utilizing modern technological solutions — such as using cloud and mobile-enabled technology rather than mainframe technology of the past.
- Developing or recasting an existing R&D arm — seeking new business opportunities that exploit digital technologies at the edge or perhaps adjacent spaces of current offerings, even if they might cannibalize existing businesses
- Thinking about how digital opportunities can transform the core business. An eye toward better customer experience through digital channels should be paramount, as customers expect easier, intuitive, and compelling digital experiences when they become more sophisticated.
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Three main concepts are used often when we hear digital transformation — digitization, digitalization, and digital transformation. There’s a logical sequence from digitization, to digitalization, to digital transformation and it’s important to understand the differences to communicate them effectively
- Digitization — is the conversion of analog or physical information to a digital format or otherwise known as converting atoms to bits, such as converting those from physical paper to a digital format. Digitization has disrupted traditional print media. For example, The New York Times and Washington Post are distributing digitized content through digital channels, such as its website and app.
- Digitalization — is the use of digital technologies and approaches to enable or improve business models and processes. For example, the New York Times pioneered new business models, such as a paywall, expanding its digital product offerings that included video, podcasts, virtual reality, and more. The New York Times also leveraged data analytics to increase usability and drive subscriptions.
- Digital transformation — is the coordinated digitalization efforts at scale, diffused through the operating model and all aspects of a business, including its people, processes, technologies, and metrics. The goal here is to bring meaningful outcomes to the organization. For example, the combined integration of various digitalization initiatives such as augmented reality, 3D printing tools, and IoT-enabled sensors that result in the fundamental transformation of a manufacturing process is a digital transformation.
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Four stages of digital transformation
For a company to transform digitally, there are four stages:
- Digitally active — companies take advantage of the transactional, digital, or e-commerce solutions to increase revenues using a basic level of analytics and operational improvements such as the introduction of agile development methods. Today, even mom and pop operations are likely digitally active as it’s not a major undertaking. Such organizations will likely fade away rather than thrive in their industries. For example, in the retail industry, Amazon the most prominent digital-first retailer will push all other digitally active ones to bankruptcy.
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- Digitally engaged — companies are developing or have developed digital solutions and processes that can be found throughout the organization with a digitally operating model. They use rather advanced analytics and process automation reducing operating costs, freeing up capacity, and gathering critical information for strategic decisions. For example, today, most retailers, for reasons of opportunity and self-preservation, are digitally engaged as they have advanced their capabilities to compete with digital natives (i.e. mainly Amazon).
- Digitally competitive — companies utilize digital solutions and processes to not only drive revenue but also to help forecast future needs and respond quickly to identified gaps. These companies have a digital operating model, predictive analytics, and a microservices architecture that allows them to quickly take customer feedback and turn them into actionable, revenue-generating business solutions. These organizations utilize artificial intelligence and rudimentary machine learning to improve decision-making in their big data analysis. In the retail sector, Walmart is an example of a digitally competitive company, due to the competitive force of Amazon.
- Digitally mature — companies often have an AI-first perspective in their businesses, by turning customers’ data and organizational flexibility into constant opportunities to drive new business opportunities. These organizations have surpassed an omnichannel experience and instead provide a channel-agnostic customer journey. Only a few organizations in the world, such as Apple, Google, and Facebook are truly digitally mature. These companies employ droves of artificial intelligence talent and their greater levels of maturity translate to greater levels of value.
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Focus on customer experience for competitiveness
In the years to come, as important as quality and price have been historical, customer experience will be just as important in determining who wins and who loses. Managing customer relationships digitally means that a company can reach millions of customers overnight, and ironically, the digital customer experience can be highly personalized, giving the feeling that any individual is the only customer of the company, no matter where in the world they may be. For example:
- Amazon knows what you last bought, what you looked at, and decided against, and leverages this information to help you find things that are tuned to your taste
- +50% of what is watched on Netflix is based on recommendations that Netflix’s effective algorithms provide to customers, predicting viewers’ desires based on what they’ve watched in the past.
Key success factors for digital transformation
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Still, many organizations think of the true digital opportunity as one that is revenue-centric, meaning selling existing or new products and services through digital channels such as through a website or mobile application. With such a view, it would seem logical to have a former marketing or sales leader as two of the customer-facing divisions of the company lead the digital transformation unit.
The issue with such leaders is that they lack the operational and technical know-how to manage the process. In such a worldview, the CIO or CTO may seem like the ideal leader to lead the charge. Unfortunately, many CIOs or CTOs do not have customer-facing responsibilities putting them at a disadvantage in suggesting and leading opportunities that should ultimately generate the revenues.
An ideal digital change leader would have who have had internal and external responsibilities. This could include CIOs or CTOs who have naturally had internal operational purviews along with customer-centric or customer-facing responsibilities, sales or marketing leaders who have had operational roles as they progressed through the corporate hierarchy, or even former management consultants with sales and operational delivery responsibilities.
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Skills and new roles needed for digital transformation
The pace and the ultimate success of a digital transformation will only be as good as the team assembled. The new skills necessary for a digital transformation will need to combine business disciplines with technical know-how. There are four roles with various skill sets that are important for a successful digital transformation:
- Agile coaches and skills associated with agile development — agile development focuses on developing projects iteratively, which is in contrast to traditional waterfall methods which happen in serial nature with handoffs along the way. Agile coaches are change managers, consultants, and trainers, that ensure the organization has and builds the right skills and mindsets associated with agile development.
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- Scrum masters and scrum know-how — scrum is a framework associated with agile development that stresses frequent meetings of the entire team to chart the next phase of development and progress with tests and possibly course corrections. Scrum masters have deep technical knowledge, manage the process of how information is exchanged, and are well equipped to lead technical product development teams.
- Product managers and product management — the product manager is the ultimate person responsible for product development. They set the vision, chart the development path, track progress, and ensure that the value is ultimately delivered. Agile coaches and scrum masters work across products but product managers develop deeper expertise in a given product area.
- User experience designer and UX development — UX designers, are both technical experts and able to work with customers individually and through group research. They are familiar with charting journey maps and user experiences for different personas that represent different customer segments.
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Instigating agile processes as a necessity for digital transformation
One of the key process changes necessary to spur digital transformation is Agile Development. The agile manifesto stresses individuals and interactions over processes, ongoing development over documentation, customer collaboration over contract negotiation, responding to change over following a plan, iteration and rapid development over waterfall steps, user involvement during development phases with face-to-face interactions and short feedback loops over development in a black-box, and incorporating quality practices throughout the development cycles
DevOps, the combination of software development and software operation practices, will be a must for agile development. DevOps will be handling scoping, development, integration, testing, releasing, and deployment.
Change management will be of major importance for digital transformation. People are programmed to avoid change as the routine becomes a source of comfort and it is important to identify the change that’s coming, the reasons for the change, and the anticipated value to be derived from the change along with a communications plan for each relevant stakeholder along with training programs taking into account differences in seniority, geography, areas of responsibility, etc.
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Defining the right metrics to gauge progress in the digital transformation and to take corrective action where necessary is essential. That which gets measured gets done, ensuring that the objectives and anticipated value of digital transformation are met. The most common metrics for measuring the success of agile initiatives are on-time delivery, business value, customer/user satisfaction, product quality, velocity, integration burndown, and release burndown.
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Leverage and standardize new technologies
The pace of change in the digital age requires rethinking the corporation’s technology footprint. Following these steps can help build a recipe for technology success:
- Create a mandate for change — highlight the current status of technology, and the risks of not modernizing, and then paint the future picture with relevant advantages.
- Develop more loosely coupled technologies — so that changes to one platform can be made independent of others, such as using microservices and container technologies.
- Develop a cloud-first strategy — cloud technology tends to be more flexible with scaling up and back as needed and tends to be more variable from a cost structure, which means paying as you go and need.
- Leverage enterprise architecture — apply architecture principles and practices to refine the business information, process, and technology changes necessary to execute the new digital transformation strategy.
- Retire old technology — companies are great at introducing the new and poor at eliminating the old and redundant, incurring costs and exposing to security risks.
- Standardize corporate technology — no matter how big and diversified a business, develop a common core technology to be used throughout.
The digital transformation plan
Plan according to the cadence of change
Today, shorter strategic planning cycles are necessary. For example, the plan you set a year ago might be rendered obsolete by new technologies or processes. Follow the four steps below to adapt according to environmental changes:
- Investigate possibilities regarding innovative new technologies — meaning that it’s important to investigate how new technologies such as AI, chatbots, AR, VR, blockchain, etc., might impact the company.
- Work with customers as a source of strategic inspiration — to develop new plans on how digital technology will enhance the customer experience. Share insights from new technological possibilities and their implications with customers and gather their suggestions.
- Modify existing plans — according to the implications of new technologies and customer feedback.
- Refresh — plans frequently and as needed. The key is to do it with a cadence that is appropriate given the pace of change in technology. Long-term strategic planning is still relevant and critical, however short-term plans should inform and lead to changes in the long term.
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- Eradicate UX frictions — modern consumers have multiple devices, have limited attention, and expect instant gratification. Cumbersome and unintuitive UX will reduce user engagement and retention.
- Go to where your customers are — don’t make them come to you; meet your customers on Facebook Messenger, WeChat, and WhatsApp.
- Use AI to enhance the user experience — data analytics and machine learning enable more personalized experiences. For example, in a competitive workplace messenger platform, Slack plans to morph into a full digital chief of staff for each of its users.
- Be cautious of brand disintermediation and focus on improving your core value propositions — while today the most common way to access a ride-hailing company is to open their app and order a ride, in the future, Alexa or Siri will take command and suggest or automatically order the best option. In this referral economy, brands that were once consumer-facing could become service providers that compete or cooperate to best accomplish the needs and desires of the user.
- Create connected products that improve over time by gathering data — as the internet of things expands and products become networked and connected, there’s the opportunity to make products better over time as they collect more data and get upgraded. For example, as Tesla cars drive more miles, their autopilot safety features improve.
While the pace of change today, is rapid and means that many current organizational architectures need to be modified, it is key to chart a path to make changes step by step. These changes need to be evolutionary rather than revolutionary, but the important thing is to chart the course, gauge progress or lack thereof, and course-correct as companies learn going forward.