How do you deal with ‘Digital’?

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By Vijay Pandiarajan, PhD, VP – Digital Transformation, ArborSpot
MIT Sloan Fellow’15

Introduction

Digital has become a new catchword at all levels in the organizational hierarchy including in the corporate board. In our research as well as discussions with senior business and IT leaders, it is apparent that there is no single definition of Digital that emerges. Some imply digitizing everything and automating internal business processes to drive operational efficiency. Others allude to improving customer interactions and thereby enhancing customer experience. And for the rest, similar to blue ocean strategy [3], it is simply reaching out to uncontested new markets where existing business capabilities and product/service portfolio can be augmented to impact growth aspirations. They all seem to justify ‘Digital’ from their respective vantage point of view, but at the enterprise level, a holistic definition of Digital ought to represent a compelling and sustainable value edge for the corporation relative to competition regardless of how it is sliced and diced. In this article, we will review a well-recognized digital leader’s business approach, a pragmatic definition of Digital strategy, and nine key focus areas for you to gain a Digital advantage in your industry.

Digital Leadership in Action – Amazing Amazon

To gain some deeper understanding on Digital success, let us look at an example. Amazon is widely recognized as the Digital leader that has successfully supplanted many traditional brick-and-mortar retail chains since its inception in 1995. At the core of Amazon’s business model is customer obsession that started with launching an online bookstore. It later expanded to include CDs and DVDs in 1998, Toys and Electronics in 1999, web services in 2002, fresh food in 2006, kindle e-book reader in 2007, Drone delivery in 2013 and Echo, Amazon’s voice-activated information and home gadget device in 2014 [1]. It has been an amazing journey for Amazon, which had the vision to build its core platform capacity to deliver basic goods and services and gradually expanding the scale and scope of its capabilities and portfolio of offerings. But, it never lost focus on what was at its core of its business model – the customer obsession. In his recent interview, Amazon CEO Jeff Bezos proudly states that “If you want to be pioneering,
if you want to be inventive and if you want a culture that’s experimental, then you want to be customer-obsessed” [4].

Amazon, for its meteoric rise, effectively used the currency ‘data’ that it collected from its operations, and customer and partner touchpoints. Scalable serviced oriented IT architecture and web services enabled its data-driven business model [15]. Advanced analytics, artificial intelligence and machine learning capabilities allowed Amazon to adapt to customer behavior in real time. Its pioneering leadership in Customer Sentiment Analysis, Behavioral Analytics, Customer Segmentation, Predictive Support, or Fraud Detection is well documented [5, 16]. On the supply chain and logistics front, Amazon’s operational efficiency is on display through 30,000+ robots, drones, and 340+ global fulfillment centers for accelerated delivery for customer enchantment [6].

I cannot imagine a day passing by without seeking the services of Amazon for some of our personal or professional needs. What we witness here is a display of a corporation achieving Master of Digital Leadership [2] status and is significant. Amazon created Digital DNA and the culture that is embedded in the thoughts and actions of its employees at all levels that are well choreographed like an orchestra to generate a corporate outcome that far exceeds customer expectations to sustain a competitive advantage. This makes Porter’s strategy [8] ever more relevant as we embark on the digitally driven global competition.

Defining Digital Strategy

So, let me define Digital Strategy in its most practical way: It is a business approach and a corporate position that strives to make full use of time sensitive business data that exists in different manifestations and locations, both within and outside of the enterprise, attributed to its stakeholders, products, and services to drive sustainable competitive edge. The strategy demands data and its fluidness so that they can truly serve as the lifeblood of the enterprise energizing every part of the business, similar to Amazon. And hence the need for bits and bytes, i.e. digitization of business activities and related outcomes.

How Can I Digitally Transform My Organization?

Now that we have a common understanding of Digital Strategy, let me propose a few enablers for realizing a successful Digital transformation within your organization, regardless of whether you are already a Digital business such as Facebook or a traditional business such as Procter & Gamble.

  1. Corporate Vision Alignment Make sure the corporate vision is clearly understood not only by the senior leadership but also by the employees at all level. For example, Southwest Airlines vision is to become the world’s most-loved, most-flown, and most profitable airline [9]. This is central to everything else that happens within the organization. Why is this important to Digital strategy? Because to achieve the vision, Digitalization of customer interactions, and in-flight and on-ground operations is critical and aligning people on the same purpose simplifies executing Digital activities to realize the vision.
  2. Digital Culture Create a data-centric culture that values and shares data critical to the business success. We have seen time and again, organizational silos that either underestimates the value of sharing data generated within certain functional business units or ill equipped to share data with rest of the organization. For example, real-time market analysis on product demands led by marketing division often lacks transparency and coordination with supply chain teams resulting in subpar operational efficiency. This could either lead to stocking surplus inventory or stock out situations impacting financial targets. The leadership should strive to permeate a Digital thinking across the entire organization with the sole purpose of realizing the enterprise vision consistently. As Amazon does, taking the customer experience metrics such as price, quality, loyalty, net promoter score, willingness to try noncore offerings, etc. as the driver and work backward to design data-driven business capabilities and orchestrate lean activities to create and capture customer value at every level of enterprise value chain. This will, however, require a meticulous planning and continuous change management efforts regardless of the organization’s Digital maturity [2]. As Amazon’s Jeff Bezos suggests [12], embedding and rewarding Digital pioneers or champions at every level of the organization to stimulate Digital thinking should be on the Leadership agenda as you strive to become a Digital master [2]. Breaking down the business and IT silos is equally important as Digital thinking transcends domains. IT partners are no longer at the receiving end of business needs; they should rather be embedded with core Business teams to drive Digital strategy for the organization. The Digital culture is not specific to any one functional group, but is pervasive and should be nurtured consistently across the enterprise.
  3. Corporate Leadership Commitment Digital transformation requires unwavering and visible top-down leadership commitment and support. Mobilizing organizations to embrace Digital transformation is not a trivial task and George Westerman and his co-authors argue [2] that the leadership has to send the right signal to rest of the organization, earn the right to engage everyone, and set a digitally focused behavior. I have experienced over the past 18 years how hard it is to change the legacy behavior in traditional organizations. Instilling a sense of Digital urgency across the enterprise is critical, which requires utmost commitment from the corporate leadership. We witness corporations such as McDonalds and Target elect to install a new title ‘Chief Digital Officer’ to drive accountability and focus. The jury is still out there to assess the veracity of this approach, but what is vivid is senior leadership should be in the driver seat and not expect a miracle to happen with an antiquated off-hand approach. Whirlpool Corporation CEO Mr. Jeff M Fettig is a great example for being such an active leader. As a senior leader at Whirlpool in 2009, I was amazed how Mr. Fettig weathered the real estate/subprime market collapse by refocusing the organization on Digital innovations and getting ready for the next boom. Whirlpool stock has been rewarded now with more than triple its 2008 price levels of $48/share [11].
  4. Strategic Investment in Information Technology Digital strategy requires right IT investments and there is no alternative. The IT investments include Big Data Analytics, Social Integration, Mobile Enablement, Cloud Orchestration and IoT. Depending on the business situation, one or more of these technology components may be necessary. As IT budgets shrink, IT leaders have to be creative in providing new capabilities and maintain stable and secure operational systems for less. How do we do it? The problem of Bi-model IT challenges, building new explorative capabilities vs stabilizing and enhancing legacy IT systems, are well documented by Gartner [14]. However, there are ways to efficiently manage these challenges.
    • Exploiting Cloud Solutions: Cloud technology has reached adequate maturity to guarantee security with desired service levels at affordable costs. Software as a Service, Platform as a Service, Infrastructure as a Service, Analytics as a Service, etc., are widely becoming palatable for businesses and one needs to carefully exploit them for a given business situation. This could significantly reduce system upgrade costs while refocusing key internal IT staff to engage in more innovative value-based Digital activities. For example, business-savvy CIOs challenge their functional VPs to venture outside their Cocoons and leverage cost-effective infrastructure to support business needs. Incenting, instead of punishing, risk taking to advance business goals is becoming an industry norm. Cloud market leaders [10] Amazon, Microsoft, Oracle, etc., could open their true ‘as-a-service’ doors for creative revenue/risk sharing models for cash-strapped organizations and such opportunities cannot be simply passed over.
    • IT Architecture Practices: Digitally focused organizations should invest time and effort in embracing digitally enabled scalable IT architectures that are service focused, agile, open, elastic and secure. Industry standards, including widely used APIs, must be at the core of such architectures, enabling plug and play opportunities. As the Digital world relies on interconnections between systems and people, with undefinable boundaries, embracing interoperable technology components is central to Digital success. One of the key findings of MIT Sloan Management Review and Deloitte Digital business study [13] is that the strength of Digital technologies — social, mobile, analytics and cloud — is not solely driven by the technology individually. Instead, it stems from how companies integrate them to transform their businesses and how they work. Technology integration enabled through strategic IT architecture is essential to advance Digital goals. As speed is critical for Digital business success, except for situations where proprietary techniques such as machine learning or business algorithms may serve as a differentiator, one should avoid non-standard techniques or IT solutions that will soon become a roadblock and growth killer. Architecture standards and policies should clearly articulate these priorities and enforce the adoption through Architecture Review practices. These approaches will reduce development cycles while freeing up significant resources to support exploratory and strategic activities.
  5. Innovation Driven Experiments Taking a page from Amazon, I encourage as many experiments as possible [12] in your organization for exploratory opportunities. After all, experiments feed innovation, which is critical to advance Digital aspirations. Regardless of the domain – product development, logistics, customer service, manufacturing or website updates, experiments foster improvements to existing portfolio or create new growth opportunities to achieve better and faster results. As experiments such as simulation, modeling, AB testing etc., inherently reinforce the use of Digital information, Digital thinking and information sharing will become a second nature to the organization. It is equally important to make sure that HiPPOs, highest paid person’s opinion, that exist at different levels of the organization do not impede experiments and information sharing. By nature, HiPPOs neither share nor have patience for experiments which is detrimental to Digital aspirations.
  6. Process Excellence Digital maturity is not all IT driven. Of course, IT innovations are critical to achieving Digital maturity, but without a robust process backbone, any investments in Digital initiatives will not result in impactful outcomes. Processes, both internal and external, should be agile, secure and transparent. Enabling antiquated and suboptimal processes, including myriads of excel based standalone processes commonly seen in legacy organizations, with Digital means will not only slow down the desired business outcome but will also make the Digital investments a futile exercise due to its incompatibility with the demands of the Digital world. I suggest an end-to-end process audit and redesign of any legacy processes on par with the industry best practices. In one of my Digital transformation initiative engagements, a systematic six sigma lean approach to IT assets and the underlying business processes resulted in over 15% reduction in process steps allowing system consolidation enabling process agility with the accelerated business outcome.
  7. Measurement It is no good if you do not know what business outcomes you want to drive. Any Digital initiative should have a robust set of KPIs. Carefully designed Digital KPIs not only drive accountability within different organizations such as marketing, IT, supply chain etc. but also provide insights into where the blind spots are and how to drive the desired outcome. Good KPIs expose the interdependency of each functional group within the organization, allowing for balanced Digital investments.
  8. Digital Roadmap It always gets tricky when answering a question, “How soon I can digitally mature?” To achieve the Digital nirvana state, one has to first assess where they are in terms of Digital maturity and understand their overall Business goals – say market share, revenue and income growth and new markets penetration. To address any gap, a Digital business case in terms of investments, ROI, priorities, resource models, impacted value chain, and sponsor/owner needs to be developed first. This effort has to be coordinated with both business and IT, and committed by the senior leadership with a strong mandate from the corporate board if necessary. Industry benchmarks could serve as a guidepost if the targeted Digital capabilities are already in practice in the industry. Leveraging internal and external Digital experts, a pragmatic Digital roadmap has to be developed that considers process, technology and resource impacts while keeping current business initiatives in perspective. Without a vision for the target Digital state and the milestones along the way, any Digital investments will prove ineffective and may create chaos within the organization. It is imperative that the senior leadership understands the business impact of the Digital roadmap and commit to driving the Digital agenda.
  9. Strategic Talent Architecture Digital journey requires information transparency within organizations and it can be achieved only through trust and sense of common purpose. Business and IT cannot continue to exist as two separate entities with an opaque wall between them. The reason why shadow IT continues to exist in many organizations is because of distrust between business and IT, which hardly has contributed to fostering a healthy relationship between teams [17]. It is time now to formalize the existence of shadow IT within the business teams to experiment evolving business models and emerging IT capabilities in the marketplace. This requires a complete rethinking of how organizational structures are designed and leveraged. Strategic imperatives of the business, cross-industry technology advancements, customer orientation, and behavioral trends ought to shape the functioning of business teams, and is only possible if embedded experts representing such point of views is at the core of each team. Traditional hierarchy models or matrix structures fall short significantly to stay competitive in the marketplace. A talent architecture that is strategic in focus while being effective on the tactical and operational needs on all fronts is critical to advance the Digital agenda.

Final Thoughts

Digital transformation is neither just an IT initiative nor an isolated effort within an organization. It is a well thought out enterprise level journey driven by senior leadership that permeates all facets of the organization in a well-coordinated manner to achieve competitive advantage. A Digital thinking and supportive culture are prerequisites. Digitally oriented process redesign, innovation focused experiments, and strategic IT investments are critical. Metrics, roadmaps, and strategically focused talent architecture are essential. You can start slow, but in a coordinated fashion and progressively enrich Digital capabilities. Experiments and innovations ought to be incented and be at the core of Digital transformation. You can do it and let us get the Digital ball rolling.

References

  1. http://www.telegraph.co.uk/technology/amazon/11801515/Amazon-timeline-from-internet-bookshop-to-the-worlds-biggest-online-retailer.html.
  2. George Westerman, et al, “Leading Digital,” Harvard Business Review Press, 2014.
  3. W. Chan Kim and Renee Mauborgne, “Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant Hardcover,” Harvard Business Review Press, February 3, 2005.
  4. http://finance.yahoo.com/news/jeff-bezos-jamie-dimon-warren-buffett-on-business-success-164836050.html.
  5. “5 Big Data Use Cases- How Companies Use Big Data,” https://www.dezyre.com/article/5-big-data-use-cases-how-companies-use-big-data/15506 Aug 2015.
  6. Amazon Global Fulfilment Center Network, http://www.mwpvl.com/html/amazon_com. HTML.
  7. Andrew Hill, “Chief digital officer – the role that we will all need to assume,” Financial Times, March 7, 2016.
  8. Michael E. Porter, “What Is Strategy?” HBR, November 01, 1996.
  9. Gary Kelly, Chairman, President, and CEO of Southwest Airlines, “A Relentless Pursuit of Reliability,” Southwest Airlines, 2016.
  10. Joseph Tsidulko, “Keeping up with the Cloud: Top 5 Market-Share Leaders,” http://www.crn.com/slide-shows/cloud/300079669/keeping-up-with-the-cloud-top-5-market-share-leaders.htm/pgno/0/5, February 11, 2016.
  11. Whirlpool Corporation, Historic Price Look Up, http://investors.whirlpoolcorp.com/stocklookup.cfm?historic_Month=10&historic_Day=25&historic_Year=2008.
  12. Kevin Kruse – How to Be Innovative: 6 Secrets from Jeff Bezos, http://www.ceo.com/technology_and_innovation/how-to-be-innovative-6-secrets-from-jeff-bezos/, CEO.COM, July 2013.
  13. MIT Sloan Management Review and Deloitte digital business study: “Strategy, not Technology, Drives Digital Transformation,” Reprint Number 57181, summer 2015.
  14. Mary Mesaglio, Suzanne Adnams and Simon Mingay, “Kick-Start Bimodal IT by Launching Mode 2,” Gartner Research report, ID: G00273955, Refreshed: 29 April 2016.
  15. Amazon Architecture, http://highscalability.com/amazon-architecture.
  16. Amazon Annual Report, 2010.
  17. Javier Puerta-Oracle, “HBR: Rethinking the IT/Business Partnership,” Feb 25, 2015.

Please contact the author Vijay Pandiarajan if you have any questions – vijay.pandiarajan@sloan.mit.edu. ArborSpot, Inc. is a consulting firm that specializes in Digital transformation.