Six Steps CEOs Need To Take To Save Their Digital Transformation
In most large companies, digital transformations fail. Even before the COVID-19 pandemic, the gap in terms of profit and market capitalization was widening between companies that mastered the dynamics of the digital economy and those that were still managed industrially. The pandemic has accelerated digital adoption and widened the gap further. It has accentuated the rapid scale-up, network effects and win-win dynamics of the digital economy and further separated the winners from the losers, even in sectors that were once non-tech.
Winning in the digital age not only requires superior digital technology, more agile delivery, and a more tech-savvy C suite. It also requires a different way of thinking about strategy and innovation, inspired and supported by the top.
Most companies attempting digital transformations are concerned with the digitization of internal processes and existing products and services for existing customers. Yet the main financial gains of the digital economy usually come from the generation of innovations that involve new business models and create entirely new markets by turning non-customers into customers.
Digital transformations fail in part because strategic thinking about innovation is still conceptually rooted in improving the past. Many companies are still suffering from the legacy of the industrial age strategy, embodied by Harvard professor Michael Porter, who has studied the past in detail to identify a lasting competitive advantage that could be extrapolated into the future. In a rapidly changing economy, this inevitably led to strategies that didn’t fit in the future. Instead, what is needed to deliver innovation that meets changing customer needs is a different way of thinking. Companies must not only improve the existing activity: they must develop the capacity to generate market-creating innovations.
Market-creating innovations are innovations that open up markets that did not exist before.
Sometimes they turn complicated, impractical and expensive products into products so much more affordable, practical and accessible that many more people can buy and use them, for example, home delivery of groceries or restaurant meals (Instacart , DoorDash).
· Sometimes new products fulfill a need that people didn’t realize they had and create “must” momentum for customers, even though the product can be relatively expensive, eg iPhone from Apple.
Sometimes innovation involves creating new ways of organizing, such as platforms and ecosystems, such as Haier’s Rendanheyi model and Apple’s App Store, and managing data as a ‘active (John Deere).
In addition, new exponential digital technologies, and the interactions between them, create extraordinary new possibilities for market-creating innovation, with the benefits that flow from rapid scale-up and network effects.
Five reasons why market-creating innovations require different thinking
Many senior executives in large companies are puzzled by the slow pace of innovation and digital transformation within their companies. Responsibility for innovation in these companies is usually assigned to business units, which typically generate incremental innovations. Efforts to undertake innovations that would have a significant impact on the business in the future are rare. Transformational ideas rarely even get to top management for consideration.
There are five reasons why standard management practices of a large corporation consistently discourage market-creating innovation.
First, in a continuous organization, business units know the existing users and therefore innovation efforts inevitably focus on improving them.
Second, market-creating innovations sometimes involve eliminate functionalities, without adding or improving them, for example the physical keyboard of the iPhone. Yet the decision to eliminate popular features is not an easy one at lower levels of the business.
Third, market-creating innovations can lead to self-cannibalization of the company’s existing products and thus generate reluctance to interfere with a current revenue stream.
Fourth, within the business, the business incentives typically go to those who can show immediate results by improving an existing product for existing customers. As a result, any slow “big bets” under consideration will tend to turn into “small bets” which generate quick wins.
Finally, working on bold new innovations can require substantial investments, decisions that can usually only be made at the highest level of the organization.
Why structural fixes don’t work either
In the face of these challenges, senior leaders often cling to a variety of structural fixes. They assign the responsibility to a new business unit, or a new division within a business unit, or a new division of companies, only to find that revolutionary ideas still do not reach the top. Or they turn the responsibility over to R&D, only to see them hunt for shiny objects that are far removed from customer needs. Or they turn the responsibility over to a senior manager, only to find that such managers become entangled in company politics.
Ultimately, they find – if they stay in office long enough – that there is no structural solution to the problem. The pursuit of such solutions only shifts the problem elsewhere in the company.
Instead, the entire organization, like at Microsoft, Netflix, and Amazon, needs to focus on creating value for customers. In such enterprises, innovation is without authorization. Everyone is expected to have a responsibility to innovate.
Six Necessary Steps CEO Leadership Must Take
To create such dedication, the CEO must take six key steps that can only be taken from above.
First, the CEO must establish unambiguous primacy across the enterprise to create increasing value for customers and users. Other goals are important, but customer value must come first.
Second, management should make it clear that the goals of individual divisions and units are subordinate to the organizational goal of creating more value for customers and users. The organization must act as one.
Third, the CEO must stop the loss of legacy businesses that don’t add value to customers, as Satya Nadella did when he took over as Microsoft in 2014, saving resources and money. energy for more productive paths.
Fourth, compensation across the company must be aligned with these goals.
Fifth, senior management must institute and continually support a value creation process that works backwards from the future, such as Amazon’s PR / FAQ process or SRI’s NABC process. Such processes typically involve setting up value creation forums that fuel innovation across the business.
Finally, the CEO must move the organization itself from an abrupt hierarchy of authority to a network of self-organized teams, units or microenterprises. In a traditional hierarchy of steep authorities, a CEO will be too busy to complete the previous five steps. There will be too many ridings that will seek CEO approval. As a 2018 Harvard Business School study found, CEOs of traditionally managed companies hardly have time to think about the future. They are so busy running the existing business. With “broad encompassing functional programs, business unit programs, multiple organizational levels and a myriad of external issues.” It also involves a wide range of target groups: shareholders, customers, employees, board of directors, media, government, community organizations, etc. Unlike any other leader, the CEO must engage with them all. Indeed, it is only through the company operating as a network of self-organized entities that a CEO will have the time to undertake a digital transformation.
And read also:
Why digital transformations fail