“Gartner predicts that by 2017, 20% of all market leaders will lose their number one position to a company founded after the year 2000 because of a lack of digital business advantage.”
Despite this rapidly evolving digital Darwinism, 3gamma is witnessing how many companies are slow to start their digital transformation journeys. To remain competitive, taking action is imperative – the ability to anticipate and respond to digital disruption in a timely manner determines the difference between being displaced and staying in the game. Executives must get their organisations ready to advance into a digitally transformed future by making digital strategy and transformation a primary objective and placing digital innovation at the centre of the business. To their advantage, large companies have resources, assets, relationships, and data that entrants lack. However, they tend to suffer from an inability to reimagine their business model and a reluctance to create products and services that might cannibalise their current business, thereby leaving existing and potential customers an easy target for more agile startups.
“Incumbents need to adopt a more startup-like approach and realise that digital transformation is about entirely new business opportunities.”
Incumbents need to adopt a more startup-like approach and realise that digital transformation is about entirely new business opportunities. This demands a holistic and open minded view on how digital can be leveraged to transform the business and resolve unmet customer needs – generating new innovative products, services and business models. As the world becomes increasingly software-driven, industry boundaries are fading. This means that companies must both watch out for competitors entering from other industries and explore opportunities outside their own industry.
Why are incumbents slow to respond?
Given the circumstances detailed above, why do so many incumbent companies fail to react to digital disruptions – clinging to outmoded technologies, processes and products – while others manage to capitalise on the opportunities of the digital era?
“The problem more often lies in culture and politics than technology. Influential stakeholders feel compromised and attempt to neutralise disruptive new innovation efforts.”
A common initial response is to dismiss potential disruptors, failing to acknowledge them as a threat and disruptive force, until realising too late that the disruptors can have real effect on the business. The problem more often lies in culture and politics than technology. Influential stakeholders feel compromised and attempt to neutralise disruptive new innovation efforts. But when companies engage in these kinds of political ballgames, they’re headed down the road to obsolescence. Cap Gemini has identified five main reasons behind the failure of incumbents to react to digital disruption.
- Slow decision cycles
As technology development accelerates, corporate decision cycles have become longer than technology cycles.
- Complacency about existing business models
Many businesses can’t keep pace with the rapidly evolving world or react to disruptions quickly enough. They’re unable to imagine a new reality where their old business model doesn’t work anymore and therefore don’t recognise the need to transform. However, new digital technologies don’t care for history and tradition.
- Fear of cannibalising existing business
Many organisations fear cannibalising their existing business, which prevents them from taking new innovative products and services to market. But businesses who don’t cannibalise their own offerings, will eventually be cannibalised by someone else.
- Lower margins in the transition
In sectors where a digital business model involves lower margins than the traditional model, incumbents hesitate to move because they fear it will impact profitability. This can blind management to many new opportunities and potential revenue sources.
- Key resources unaligned to opportunities
With few exceptions, people are tied to roles and functions. Although digital disruptions cut across entire organisations, new opportunities are often put into existing structures despite a poor fit. Furthermore, senior executives tend to resist letting go of assigned resources, which means they get locked within divisions.
Embarking on a successful digital transformation journey
In 3gamma’s experience, a good number of organisations know they need to digitise their business but don’t know how to approach it. Depending on capability, situation and aspiration, digital transformation journeys will no doubt look different. While some companies merely need to revamp their current business and operating model to boost productivity, others will need a complete transformation of operations, processes, and business model to get the most out of digital technologies and to power growth.
The digital agenda must be championed by leaders with digital fluency
The digital agenda must be must be led from the top and be championed by an executive management team that is not only supportive but also accountable. Organisations at the early stages of digital maturity often lack the ability conceptualise how new technologies can impact the business. In digitally mature companies on the other hand, employees have high confidence in their leaders’ digital fluency. This means that the leaders understand what can be achieved at the intersection of business and technology and are able to communicate the value of digital technologies to the organisation’s future. They lead the way in conceptualising how digital technology can transform and improve the business.
Digital prowess demands a clear-cut transformation strategy
For companies in the early stages of a digital transformation journey, the lack of a well-defined strategy is the main obstacle to digital maturity. Without such a strategy in place, the implementation of new digital technologies falls short because the companies don’t succeed in adopting the necessary mindset, processes and culture to bring about the change. Meanwhile, digital frontrunners have a clear digital vision and strategy in place, both grounded in a firm understanding about the future of technology.
To accelerate strategy execution and ensure that new technologies reach the desired effect, companies with high digital maturity build a number of essential and differentiating capabilities, which are often sophisticated cross-functional combinations of people, processes, tools and expertise. They succeed in fostering a culture capable of driving transformation and inventing the new – bringing everyone in the company together working towards the same vision. Through their commitment to digital progress, they also succeed in attracting and retaining top talent looking for the best digital opportunities.
“The strength of digital technologies doesn’t lie in the technologies individually, but rather in how they can be integrated to transform the business.”
The effectiveness of a digital transformation strategy depends on its objectives and scope. Digitally immature organisations tend to have operationally focussed strategies emphasising specific technologies to solve isolated business problems. However, the strength of digital technologies doesn’t lie in individual technologies, but rather in how they can be integrated to transform the business. Best-in-class organisations have digital strategies that go beyond the technologies themselves. To them, it’s about more than building IT functionality and rolling out new projects – it’s about thinking end-to-end about where digital efforts can produce major improvements in performance and value for their customers. They realise it’s about fundamentally digitising and transforming the company’s core business.
To reach its full potential, a digital transformation program should target improvements in innovation across the entire business by addressing four interdependent key areas:
- Launching new digital products and services to meet ever-changing customer expectation
New offerings that complement current assets and business model enable companies to extend their current value proposition and expand to new areas of the value chain.
- Digitising and improving communication, marketing and customer experience
Consumers today expect being able to shift smoothly between channels, which means that companies have to deliver a seamless multichannel experience.
- Transforming internal processes and operations
By digitising business processes and improving internal operations through automation, companies can enhance efficiency, accuracy and customer response times. It also helps organisations become leaner and more agile, reducing waste and costs.
- Using big data and advanced analytics for customer insight, processes and decision making
Organisations that make extensive use of big data gain competitive advantage over their counterparts and generate higher revenues. Leveraging the data that companies hold not only allows them to continuously improve performance and the customer experience – it also provides entirely new opportunities to create value and generate new businesses and revenue streams.
Avoid analysis paralysis
As important as a well thought out strategy is, a common pitfall is to get caught in analysis paralysis and lengthy considerations, spending months researching and planning in the belief that the whole digital transformation journey must be understood from beginning to end. But the fast evolution of digital technologies means this approach will cause companies to be late to the game. In a fast-moving digital world where velocity and action are key, launching quick-win initiatives based on limited information is better than trying to complete a far-reaching analysis before getting started.
“In a fast-moving digital world where velocity and action are key, launching quick-win initiatives based on limited information is better than trying to complete a far-reaching analysis before getting started.”
Innovate with a startup mindset
Knowing that they can’t tell in advance which investments will succeed, digital leaders manage multiple initiatives in parallel rather than putting all resources into one major, strategic venture. Equipped with the same entrepreneurial mindset as their startup competitors and an action-oriented approach, they try out new business models and products with small investments – ready to scale up the winners or quickly pivot and close down failing initiatives.
Foster a culture of initiative, agility and open collaboration
Responding to digital disruption requires openness to change and a corporate mindset that spurs digital progress by embracing innovation, creativity and risk-taking. Companies with high digital maturity typically have a culture of initiative and collaborative experimentation where people feel comfortable making decisions amid uncertainty. They use their culture as a competitive force to drive differentiation and build a more connected, agile and digitally enabled enterprise.
To progress at the same rapid speed as consumer needs and competitive landscapes are evolving today, companies need to adopt a trial-and-error mindset that accepts failure as part of the process and understand that capabilities are built up through experience over time. Fostering a bottom-up and empowering culture is key to creating a breeding ground for ideas: where digital talents can flourish and learn from similarly talented team members. The days of controlling bureaucracies with strict hierarchies that suppress new thinking are long gone.
Adopt a test-and-learn approach to strategy and development
Companies must leave behind the traditional top-down, strategy-driven and linear approach to innovation where new digital products and services first must be perfected internally before they can be pushed to market. It’s no longer viable to spend months in planning and research, writing intricate business plans. Digital leaders instead recognise that they have a number of untested hypotheses, which they quickly test and evaluate by prototyping and refining products and strategies in close cooperation with customers.
“It’s no longer viable to spend months in planning and research, writing intricate business plans. Digital leaders instead recognise that they have a number of untested hypotheses, which they quickly test and evaluate in search of something that works.”
Using frameworks such as the lean startup methodology and the business model canvas, they translate company ideas into business model hypotheses that they test through customer development, asking for feedback. With an emphasis on nimbleness and speed, they proceed to prototype a minimum viable product or service, testing the proposed solution in the real world and refining the concept iteratively using input from customers. If the feedback reveals that the hypotheses are wrong, they either revise them or pivot to test a new hypothesis.
Developing products and services iteratively and incrementally using agile development eliminates wasted time and resources. Once a model has been proven and the product or service has been refined enough to be rolled out on a larger scale, the process will already have generated customers, solved actual problems and provided requirements for further development. The company can then start building demand, scaling up the initiative and designing an organisation to execute the model.
“With the ever increasing pace of technological change, a competitive advantage today may well change into a liability tomorrow.”
Question the status quo and continuously revisit the business model
Too many companies stick with the same strategy that has served them well for years, even though the premises it rests on may no longer hold true. With the ever increasing pace of technological change, a competitive advantage today may well change into a liability tomorrow. It’s therefore key for incumbents to stay on constant alert to changing circumstances and continuously review their business model to confirm its validity.
Can disruption be predicted?
Most digital disruptions don’t happen unexpectedly but take place over time. By looking at the right data it’s actually possible to anticipate potential future disruptions. A problem is that many companies get so caught up in day-to-day operations that they never take a step back to think about what the future might hold. Others only look at lagging indicators that reflect the past and therefore don’t invest enough in initiatives that will drive future profitability.
“Many companies get so caught up in day-to-day operations that they never take a step back to think about what the future might hold.”
Look at the right indicators
Companies need to develop an understanding about their external environment and where it is headed by proactively scanning for digital trends that currently affect the industry, or are likely to do so in the future, as well as observe the digital capabilities of competitors. Rita Gunther McGrath, Professor at Columbia Business School, author and expert on strategy in uncertain and volatile environments, argues that by looking at leading indicators, such as data showing a new product from an unfamiliar competitor gaining popularity, companies can get signals about future disruption. In many companies however, these indicators are either overlooked or the processes for detecting them are weak because they’re subjective or difficult to decode.
Keep a constant eye on customers’ needs and pain-points
Since only a fraction of all startups achieve critical mass, it’s not easy to separate the truly disruptive ones from the hype. But what incumbents can do is pay attention to where startups have identified and are addressing unresolved customer pain-points. Startups that succeed in disrupting existing markets find ways to simplify complex and frustrating customer experiences by identifying gaps between what customers want and what incumbents currently provide. Then they build a value proposition around resolving the customer problem.
“When companies put their customers at the centre – learning about their desires, pains and workarounds, and building user experiences that address these issues in previously unimagined ways – they can shape their digital future instead of being shaped by it.”
To protect against disruption, incumbents must therefore identify where their customers’ needs are not being satisfied. If there are underserved needs, there will be a market opportunity for new entrants. When companies put their customers at the centre – learning about their desires, pains and workarounds, and building user experiences that address these issues in previously unimagined ways – they can shape their digital future instead of being shaped by it.
Leverage ecosystems and embrace open innovation
By shifting to an open innovation model and teaming up with players in the broader ecosystem, incumbent companies are in a better position to spot the early signs of disruption as well as build digital capabilities to respond. This involves collaborating with partners, institutions and customers across industries to align value chains and work towards common goals. In engaging with small companies driving innovation, and by setting up incubators and partnering with startup accelerators, incumbents can stay close to the sources of disruptive innovation as it emerges and see it before others do. It also helps them inject a startup mentality into their own organisation and tap into key digital talent for supporting internal innovation initiatives.
Setting up a responsive organisation able to drive innovation and growth
To ensure a sound foundation for digital transformation, companies need to evaluate their digital readiness. Having the right internal resources and organisation in place with structures, governance and incentives is essential to drive digital transformation and make sure innovation projects receive the necessary support to reach their full potential and become sustainable at scale – without being discarded before they start producing real results.
Build a social framework that supports quick decision making and reduces silos
A cornerstone in creating resilience to disruption is to reduce the uncertainty that business model transitions involve by building an organisational culture that supports swift decision making and action, thereby enabling organisations to better adapt to new situations. This involves establishing a social framework around shared values and principles that form a common foundation for how the business operates and help the organisation overcome functional silos so that organisational roles and structures become less of a concern to employees.
Focus resources on opportunities and pursue continuous reconfiguration
Large organisations undeniably have potential to become disruptors themselves. But if they enter new markets with the same set-up they’ve used for traditional markets, they‘ll face an uphill battle. Generally, companies follow a traditional resource allocation process where resources are assigned to separate business or market units where they get locked. Responding to digital disruption requires that organisations focus their resource allocation on opportunities rather than existing structures, as well as adopt the right business models and organisation design for the markets they’re going after. By pursuing a continuous reconfiguration process with rapid resource reallocation and organisational adaptation, companies achieve higher responsiveness and facilitate redirecting resources from past opportunities towards new future-oriented ventures.
“Responding to digital disruption requires that organisations focus their resource allocation on opportunities rather than existing structures.”
Free innovation groups from organisational constraints
For incumbent companies, a major obstacle to innovation are the constraints that the existing organisation put on new innovation initiatives, with intrapreneurs getting caught up in day-to-day operational issues and having to fight for resources together with regular business units. Establishing innovation labs separate from the core business has therefore become an increasingly common approach to creating innovation opportunities, with the added benefit of restricting potential negative effects on the existing business in the event of failure.
Creating an IT organisation fit for digital innovation in close partnership with the business
Organisations that leverage digital technologies effectively, realise that all parts of the organisation are essential for bringing digital efforts to life and purposely strive to build a close relationship between IT and the business with effective collaboration between executives. When both IT and the business are equally involved in crafting the digital transformation strategy and work together on digital initiatives, organisations can accelerate time-to-market with reduced costs and fewer process delays. Furthermore, digitally mature companies recognise the key role of IT in the organisation as an enabler of digital transformation and driver of productivity and competitive advantage. Hence, they build IT departments fit for meeting the needs of the digital age to provide a foundation for future growth.
CIOs need to empower the business
CIOs play a critical role in bringing about digital transformation and pushing their organisations into the digital future. They must persistently work to strengthen the IT-business relationship and adapt the IT organisation to the changing needs of the business. Accomplished CIOs invest in creating digital platforms that enable business teams to quickly launch new digital products that help them reach their goals. Rather than trying to own all IT and implementation decisions, these CIOs share control with business teams and empower them by providing enabling environments where business teams can test product ideas and build their own digital solutions that IT helps them implement.
Digital innovation projects must be run at rapid pace and be adaptable to change
A key challenge is to fit digital innovation projects together with the company’s established operations. These projects require specific capabilities and often benefit from having a clear place in the organisation with dedicated resources. While traditional IT and legacy systems have slow release cycles, digital initiatives – particularly those involving customer and analytics focused processes – have short time-to-market and must be run at a quicker pace with fast software cycles and be highly responsive to evolving circumstances. CIOs should therefore design the IT organisation to run at two speeds – allowing digital initiatives to be rolled out quickly, while making sure that conventional projects continue running dependably.
Form cross-functional teams
Another challenge involves ensuring that staff at all levels across departments come together and collaborate. Merely aligning IT priorities with business objectives is no longer sufficient: organisations must break down silo structures and move away from the traditional working model of separately operating units where the business provides the requirements and IT delivers the technology. A successful digital transformation demands a new way of working that combines the expertise of IT and business teams and promotes dialogue, mutual understanding and trust. But it’s not just about bridging the traditional IT-business divide. It’s also about interconnecting different business units that in many organisations tend to work in silos, and bringing together the necessary skills to create products and services that provide a holistic, connected customer experience.
“CIOs should establish digital IT units with cross-functional team formations where people from both IT and business work together in partnership towards a shared vision and goal with common budgets, KPIs and objectives.”
To support this new way of working and speed up digital innovation, CIOs should establish digital IT units with cross-functional team formations where people from both IT and business work together in partnership towards a shared vision and goal with common budgets, KPIs and objectives – developing new product ideas and taking them to market. With cross-functional teams bringing more perspectives to projects, problems can be discovered and eliminated early, and work duplication can be limited, which means that costs are reduced and promising ideas are pushed to market faster. To really ensure that digital initiatives are developed with a holistic business perspective – delivering not only technology solutions, but also ensuring that business processes are properly adapted – digital units benefit from a combined leadership of executives from both IT and the business.
A great example of how this has played out in the real world is Starbucks, where the “Digital Ventures” unit has brought together marketing’s product and consumer knowledge with IT’s technical expertise. By integrating IT with customer offerings and marketing programs, and through close collaboration between the CIO and CMO in developing technical as well as go-to-market strategies, Starbucks has succeeded in leveraging digital technologies to provide an exceptional customer experience.
Use DevOps to speed up digital transformation
It’s not only between IT and the business where silos need to be erased; this also applies to the different functions within the IT department itself. A successful digital transformation requires an agile development approach with effective collaboration between IT development and operations, and the alignment of processes to shared business objectives. Moving to a continuous deployment model for digital initiatives using DevOps helps organisations achieve this. When development and operations work effortlessly in concert, they can detect and correct problems at an earlier stage, which results in faster software releases and reduced costs. Following DevOps practices can enable companies to reduce the time taken to deploy apps from as much as weeks to days.
Fund digital initiatives by rationalising IT infrastructure
One of the biggest barriers to digital transformation is the lack of sustained funding. With the short cycle times in digital investments, organisations must manage costs with agility and flexibility and eliminate avoidable expenditures, so they have funds to invest in strategic key projects and can quickly redirect resources to initiatives that are important for future growth and innovation. Over time, organisations tend to accumulate many redundant, deeply customised systems and applications that increase the complexity of the IT environment. By improving the efficiency of traditional IT operations and reducing spending on maintaining legacy infrastructure, cost savings can be directed to digital innovation initiatives and new product development. This is done by rationalising existing IT infrastructure through consolidation and simplification that reduces the complexity of the IT landscape. Consolidation involves reducing IT assets either by centralisation of infrastructure or by the use of fewer, more efficient systems. IT simplification involves the standardisation of applications and tools, and the use of reusable assets as far as possible. Using off-the-shelf cloud solutions is one example of how companies both can reduce costs and drive transformation.
Digital innovation leaders dare to reimagine their future, fundamentally rethink their business model and create their own challenger businesses to stave off competitors. They digitise and reinvent every dimension of their business, embrace data-driven analytics and leverage their ecosystems. Using a cross-functional, build-measure-learn approach to strategy and development, digital masters are prepared to take on risks and they accept failure as a part of the path to success, knowing that they have no other option if they want to stay competitive.