It’s virtually impossible to read anything business related today and not run across a call to arms for digital transformation. While there is still significant debate about what is digital transformation, one common denominator is that it represents a major shift in how a company delivers value to its customers, employees, supply chain partners and other key stakeholders.
The unprecedented assault of multiple waves of digital technology disruption from cloud, social, mobile, anything as a service, data analytics, machine learning and smart devices have enabled companies of any size to penetrate some portion of well-established companies’ value chains. To successfully compete in this new competitive paradigm will require companies to come up with a whole new game plan on how to organize, operate and go-to-market as a digital enterprise.
As I wrote in an earlier blog, historically companies believed that owning and controlling assets was the key to creating sustainable competitive advantage and building high barriers to entry into their markets and industries. However, in the new age of digital disruption, companies no longer have the capital, resources and capacity to own and operate all the assets they need to compete against well-constructed and well-orchestrated business partner ecosystems.
The results of KPMG’s 2016 Global CEO study delivered some very compelling evidence of how important it is for companies to leverage business innovation for their competitive advantage.
-66% of CEO’s believe that their business is at an inflection point and the next three years will be more critical than the last 50 years.
-40% of CEOs expect to be running significantly transformed companies within the next four years.
-70% of CEOs said it’s important to specifically include innovation in their business strategies.
-80% of CEOs are concerned that their existing products and services may not be relevant in 3 to 5 years’ time.
-70% of CEOs believe their organizations’ cultures do not encourage risk-taking and safe-to-fail environments.
The Harvard Business Review conducted a five-year study of corporate growth involving 1,850 companies. The study reached two major conclusions:
The most sustained, profitable growth came from companies that pushed the boundaries of their core business into adjacent space.
Companies consistently and profitably outgrew their competitors by expanding those boundaries in predictable and repeatable ways.
In the age of digital disruption, traditional ways of creating sustainable competitive advantage are no longer effective. The adoption of the new suite of digital technologies including social, mobile, cloud, data analytics is the new competitive imperative for success. Simply put, if you don’t significantly improve your organization’s digital acumen your competitive viability is at risk.
Most companies are lagging in adopting digital technologies
This year’s Harvey Nash/KPMG Survey of 4500 technology leaders found that only 18 percent said their company was effectively using digital technologies to advance their business strategy.
The 2017 New Rules for the Digital Age report from Deloitte found that only 5 percent of the companies surveyed said they have strong digital leadership development programs and 65 percent said that had no significant programs to drive digital leadership skills.
The chart below highlights the breadth, scope and impact of these new disruptive digital technologies:
Bridge the digital technology gap
In order to improve your organization’s digital acumen, you have to get very good a leveraging digital technologies’ to:
Identify what you need to learn to become a digital technology savvy organization
Many companies today don’t have any formal process or initiative in place to expand their knowledge and understanding of the competitive impact digital technologies can have on their businesses. As such, they are often caught off-guard by these disruptive changes and find themselves scrambling for survival.
Here are some ideas to consider to avoid this situation:
Build a digital acumen roadmap
Most successful transformational journeys start with a concise well documented roadmap that highlights the desired outcomes and a timeline for critical deliverables. I think the core framing questions for this digital transformation roadmap are:
Assemble a cross-functional digital transformation team
Once you’ve agreed to the digital strategy, you can then put together a dedicated cross-functional team to develop the roadmap and implementation plan. Unlike most planning exercises, this work cannot be done within vertical functional silos but rather must draw upon a diverse set of skills from across the entire organization. A study conducted by MIT and Deloitte found that 70% of digitally mature companies are organized around cross-functional teams versus just 28% for companies in the early stages of digital development.
To be clear, this work is not about improving the last best version of your old business model, it’s about creating the first best version of your new business model.
The good news is that you don’t have to do everything at once. You can and should identify specific parts of your business that present the best opportunities to conduct a series of pilot experiments where you can learn fast and make changes based on actual customer actions.
Here are some questions to start that process:
Clearly a transformative change of this scope and magnitude is not undertaken lightly and requires:
I have had the opportunity to work with several CIOs and their C-Suite colleagues on this issue and seen first-hand the benefits increasing digital acumen can bring to any organization. As such, if you are thinking about tackling these issues within your company, please reach out to me as I would be happy to share the approach we’ve taken and the results we’ve achieved.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
“There’s never been a better time to be a great CIO or a worse time to be an average one.”
This quote from George Westerman, a leader of MIT’s Initiative on the Digital Economy, sends a clear message that good enough is no longer good enough. CIOs who still feel their primary job is to maintain the systems of record (SOR) that “run the business” are viewed as just average. While CIOs who develop and deploy systems of engagement (SOE) and systems of intelligence (SOI) that “change the business” are seen as making a critically essential contribution to the future competitive success of their organizations as digital enterprises.
To be perfectly clear this is not an either-or proposition but rather a both-and proposition. The key is to reverse the way IT resources are allocated.
What does average look like?
Most IT budgets still allocate 80% of their resources to running the business and 20% to changing the business. The emerging reality is that every dollar invested in SOR-support systems and software produces a diluted return to the company in terms of competitive differentiation. The reason being that 95% of the lifetime value of these investments has already been received. As such, they no longer deliver competitive differentiation.
By contrast, every dollar invested in SOE and SOI systems and software offer a much higher revenue and profit stream because they will be the primary source of future competitive advantage in the new digital era. To go from average to great you have to start by redeploying IT resources away from low value / low return activities to high value / high return activities.
What does great look like?
Historically IT has been viewed as a cost center support function whose primary responsibility is to build and maintain secure and stable platforms and tools that “keep the lights on.” While it is still essential to securely maintain these systems of record, in the new digital era it is now a competitive imperative that IT evolves into a business enablement role that leverages digital technology innovations which deliver increased revenues, margins, and profits. Simply put, IT has to move from the back seat to the front seat to the driver’s seat.
What are some CIOs doing to be great?
Ed McLaughlin, CIO at Mastercard, says “you really have to cease thinking of technology as a cost center. Technology is one of the primary assets of the business. So, you move away from thinking in terms of implementation projects, and more about how to run ongoing programs and get a feedback loop where you’re constantly optimizing those assets.” He and his leadership team are constantly asking two questions:
Deanna Wise, CIO at Dignity Health, says “partnerships with the business, being innovative and seeing how you can drive a better customer experience does translate into revenue. There are a lot of forward-thinking CIOs who ask …what new programs and new initiatives can we use to drive revenue throughout the business?” According to Wise, “CIOs who fail to ask these questions do so at their peril. If IT is perceived as a cost in your organization and you do nothing to change that…you’ve made IT a commodity, and commodities can always be replaced.”
Jim Fowler, CIO at GE, thinks that if you want to turn enterprise technology into a source of monetary value and not just an expense, data is a great place to start. He says that monetary value “in the next ten years is going to come from connecting the value stream of information in a business, information about products, all the data coming off machines, and turning it into signals that will help automate work.”
Vijay Sankaran, CIO at TD Ameritrade, says that for him and his IT team “…design thinking is huge. It has become a critical tool in the pursuit of roboadvisers, chatbots and other customer-facing technologies intended to drive revenue growth.” Design thinking has helped Sankaran’s team visualize the client experience for applications they are building so they can fully understand their value along all the different customer touch points.
Wayne Shurts, CIO at Sysco, says “the burden is on the CIO to make the case that IT is concerned with more than cyber and risk management and it’s more than a cost center. The role of the CIO isn’t to go to the board to discuss every project. It’s to talk about how technology should operate across the organization and how investments support that.”
What can you do to assess where you stand today?
A good starting point to assess where your IT team stands today is to conduct a trapped value audit. This audit starts by determining what percentage of your IT resources and budget are allocated to run the business functions in the left-hand column in the chart below versus change the business functions in the right-hand column. Once you’ve established your resource allocation baseline, you can then begin a systematic review of how you can redeploy resources and budget from the left-hand column to the right-hand column. I am currently working with a CIO and his senior leadership team who have made very measurable progress moving their resource allocations and budgets from 76% – 24% to 60% – 40% in just one year.
What do you want the IT brand to stand for in your company?
As the examples above clearly illustrate, CIOs who aspire to be great have identified very specific ways to demonstrate the impact and value technology brings to their organizations. They have embraced this era of digital disruption as a new leadership challenge and an opportunity to redefine what the IT brand stands for in their companies, including:
While each CIO’s journey from average to great may take different paths, it seems clear that they all start with the recognition that good enough is no longer good enough.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
What business are we in? The technology business.
“The real issue is that every business is now a tech business – whether it wants to be or not – and that means not just new skills and experiences, but a new outlook on opportunity and strategy.” This quote is from a recent Forbes analysis of the different business models companies can deploy and how each one is performing in the new digital world.
What is driving these different performance levels is the emergence of new, more profitable business models that deploy new digital technologies like social, mobile, cloud, analytics and platforms.
A recent Harvard Business School study documented that “leading digital companies generate better gross margins, better earnings, and better net income than organizations that have not adopted a digital-first business growth strategy. Early digital adopters delivered a three-year average gross margin of 55 percent compared to 37 percent for digital laggards.
Most companies are behind the digital technology adoption curve
This year’s Harvey Nash/KPMG Survey of 4500 technology leaders found that only 18 percent said their company was effectively using digital technologies to advance their business strategy.
The 2017 New Rules for the Digital Age report from Deloitte found that only 5 percent of the companies surveyed said they have strong digital leadership development programs and 65 percent said that had no significant programs to drive digital leadership skills.
Digital Technology – The New Work of Business
As the McKinsey chart bellows highlights, there is no escaping the evidence that digital technology is converting the way businesses operate and compete albeit at varying rates of impact. As such, it is no longer a choice of whether companies are going to adopt and deploy digital technologies but rather a choice of when.
Leveraging Digital Technology for Competitive Advantage
Uber reinvented the business model for the transportation industry by leveraging digital technology advances in smartphones, GPS sensors, and networks while Airbnb did the same to the hospitality industry business model.
In 2016, restaurants crossed a “digital milestone” when digital orders using smartphones or tablets (6.6%) exceeded telephone orders (5%).
Starbucks, an early adopter of “digital ordering” in the food & beverage business, says that 25 percent of their orders are now placed and paid for digitally. The digital ordering app has also helped them amass a loyalty program of 13 million active users in the U.S.
Domino’s Pizza has reported 24 consecutive quarters of increased sales in their U.S. stores and state that “technology has clearly been a big part of what’s been driving our business over the last five years.”
Charles Schwab, Goldman Sachs, and Morgan Stanley are deploying digital technology to deliver automated wealth management services to investors with as little as $5,000.00 to invest.
These new “robo-advisory” services make it economically feasible to serve markets that were previously cost prohibitive by the traditional wealth advisory business model.
Apple’s Research Kit is using digital algorithms to gather so much clinical trial data that it could eventually disrupt the pharmaceutical industry by correlating the effectiveness of the medications we take.
Disney Resorts has developed a suite of digital tools to help customers visiting their theme parks have a better experience.
These new tools include the FastPass+ service which allows visitors to reserve access to specific attractions, and the MagicBand, a digital technology enabled wristband that facilitates reservations and customer routing at Disney World.
Lowe’s recently launched a new Innovation Lab with a mandate to work with outside organizations like Google and Microsoft to “develop technology that will improve store operations and customer experience.” Early experiments include:
Silicon Valley Startup Blue River Technology manufactures robotic farming machines to help farmers manage their fields more efficiently.
The traditional approach was to spray an entire field with weed-killing chemicals. Blue River robotic sprayers combine computer vision and machine learning algorithms to spray only those parts of the field that need it thereby reducing herbicide use by a factor of 10.
What does a digital technology business model look like for your company?
Short of facing an existential threat from a disruptive competitor, most companies are reluctant to engage in substantive discussions about modifying or changing their business model. Let’s be clear, not every business is standing in the middle of a burning platform but as the examples above suggest they should all see smoke on the horizon.
Here are some questions that will hopefully help you get the discussions started:
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
A Clear Statement of Intent Drives Desired Business Outcomes
Over the past two years, I observed a very distinct pattern between companies that successfully navigate the new digital world and those that fall behind. As it turns out, those who are emerging as the early leaders in the age of digital disruption share one thing in common – a clear statement of intent. In the illustration above, I have summarized what I think a statement of intent encompasses. What follows are some examples that have helped shape my thinking on this issue.
While Steve Balmer was in the last few years as CEO of Microsoft, he and his leadership team talked about the need to figure out how to migrate their offers to the cloud and mobile devices to better compete with Amazon, Google, Apple and Facebook. What they didn’t do was to make a clear and concise statement of intent to prioritize that outcome. As a result, cloud and mobile revenues languished.
On his first day as CEO, Satya Nadella sent an email to all Microsoft employees saying from that day forward “Microsoft is a cloud first, mobile first company.”
Under his leadership, the company began a systematic rebooting of each of their core businesses to catch the new cloud and mobile waves.
Two years ago, they migrated the Office software business which provided an on-device license for personal productivity software including email which was supported by an on-premise Exchange business to run the back end. They diverted the high margin earnings from the current business to fund the launch of Office 365 on a cloud-based subscription model.
As you can see from the chart below, Microsoft’s Azure Cloud business has grown three-fold in the last two years following Satya Nadella’s clear statement of intent. The $14.8 billion from the commercial cloud businesses represents more than 15 percent of the $96.24 billion in overall revenue that Wall Street expects from Microsoft this year. That’s up from a ratio of about 10 percent in the previous year.
Microsoft: Commercial cloud revenue to jump 55% to nearly $15B this fiscal year
Ford vs. Tesla
When Mark Field was installed as the CEO of Ford three years ago, he talked about a variety of new business growth initiatives including electric and self-driving cars. While sales increased significantly over that three-year period, Ford’s stock declined by 40% as the majority of vehicles sold were the traditional cars and trucks the company has always built. What he didn’t do was to clearly declare his intent to make electric and self-driving cars the business growth priority. As a result, he was recently removed as the CEO of Ford.
At Tesla, CEO Elon Musk, has clearly communicated his desire to develop and deliver new software- enabled electric cars that can ultimately drive themselves. While Tesla’s sales are far less than Ford’s, the market rewarded the company with a higher market valuation in part because they believe in Musk’s statement of intent and the results he has produced thus far.
Other CEO’s are Getting the Message
A number of CEOs now see the value and benefit of clearly stating their intentions and business growth goals.
Two years ago, then-Starbucks CEO Howard Schultz said he was transferring all his operating responsibilities to his President so he could “focus solely on all things digital.”
Google’s new CEO Sundar Pichai declared that going forward “Google is an A.I. Company first.”
Facebook CEO Mark Zuckerberg has said that “Facebook will be a video first company.”
Committing to the J Curve
The reason most well-established companies are still struggling with navigating this new digital world is that they don’t have the resolve and discipline to redirect scarce resources away from funding their current businesses in order to launch and scale a new digital business.
Venture capitalists call this investing in the J Curve to catch the S Curve as shown below:
As the Microsoft example above illustrates, in order for the company to migrate its Office business from on premise and on desktop to the cloud and mobile devices meant sacrificing short-term revenues, margins and earnings for the promise of long term competitive gains. But their recent results suggest that if you have the resolve to stay the course the rewards are significant.
In 2013, Adobe Systems embarked on a major transition from a product/license sales model to a cloud -based subscription model. Revenue shrank 8% in the first year and was basically flat in 2014. The skeptics’ and naysayers’ voices rang loud and clear.
Fortunately, the senior leadership team at the company along with the board stayed true to their intent and Adobe’s revenues reached nearly $6 billion in 2016 up from $4 billion in 2013. Eighty percent of those revenues came from subscriptions and other recurring sources.
By contrast, the recent financial performance of IBM, Hewlett Packard, GE and Ford seem to validate how hard it is for well-established companies to free their company’s future from the pull of their past.
Short-term earnings performance vs. long-term competitive advantage
As these examples illustrate, the single biggest challenge facing CEOs and other C-Suite leaders in well established companies is how to find the right balance between funding the businesses they have versus making significant enough investments in next generation businesses so than can deliver material revenues and profits to the company. Said another way, this challenge pits the demand to deliver short-term quarterly earnings against the desire to create long-term competitive advantage.
Making a transition of this magnitude and impact not only requires strong leadership and intestinal fortitude but increasingly a leader willing to put a stake in the ground and make a clear and compelling statement of intent. It will ultimately redefine the winners and losers in the new age of digital disruption.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com
