There is no digital transformation without empowering employees. Technology evolves at an exponential pace. This means that the pace of change will never be as slow as it is today. Organizations that have the ability and willingness to adapt to the “new normal” have the upper hand.
The pace of change has never been as fast as it is today, a famous The New Yorker quote says. One implication of being on an exponential curve is the paradox that at the same time the future pace of change will never be as slow as it is today. Pause for a minute to consider this.
Whether we are moving along an exponential curve we do not know, and we will only be able to determine this in retrospect. But it is unquestionable that we experience profound changes in the way we live our lives, and the way businesses operate. In the business realm, one consequence has been the rise of new unicorn businesses build on new digital technologies, platforms, and product offerings. We all know the most successful ones and today they are the most valuable companies in the world in terms of stock market valuations.
While these new stars are rising, legacy companies seem to have difficulties transforming themselves into the digital age. To fully understand this, you would have to look at each organization individually. But there seems to be commonalities: a) Most legacy companies are designed to minimize mistakes. This seems to be counterproductive when trying to invent and implement new business models based on more radical types of innovation. And b) It seems difficult to be innovative and constantly cost-cutting at the same time.
How to Create Change
Real change begins by creating a vision and empowering the people that should carry out the strategy. This is what leadership in the digital age is all about. In order to transform your business, you obviously need to establish a sense of urgency and create the vision for a new strategy.
Mature leadership knows the importance of human factor and digital capabilities. Digital transformation is first and foremost a cultural transformation. Going from doing digital to being digital. Companies that strive for a diverse culture and create cross-functional teams outperform companies that stick to more traditional approaches.
Research shows that behavior is the single factor that has the highest impact on a company’s ability to execute digital transformation. Companies that go on a digital offensive generate three times more profit growth than their more defensive counterparts.
Your customers demand a multichannel and digital experience. However, to deliver this experience, you need the right skills and behavior and a tech stack that can utilize big data and deliver excellence across platforms.
Cultural Aspects of the Winning Company in the Digital Age
Companies that focus on digital culture achieve breakthrough performance at a much higher rate. Building a digital innovation culture requires that you become able to act faster, be more flexible, think differently, and think beyond your past successes. At the same time, a digital culture also attracts and retains the top talent needed for your journey. 90% of top managers expect their industry to be hit by digital disruption. But more surprisingly, only half say they have a plan. Why is innovation so difficult for incumbents?
The Incumbent’s Dilemma
Incumbents often fail to adapt to new technologies despite it being one of the bases of competitive advantages. It is a good place to start if you wish to stay ahead of the curve and survive. We may ponder as to what is it that keeps incumbents from innovating or why do they find it so difficult to implement. Here are a few reasons that apply to many players:
- Many organizations fail or refuse to cannibalize their previously successful products to make room for new products. Take the example of Kodak; they had important patents that were the basis for the digital photography, but they were very protective of their film business which became their demise as they failed to adapt to new technologies.
- Many organizations are also reluctant because they fear failure. They are afraid of taking the risk but fail to realize that failure is endemic to innovation.
- Many incumbents are too preoccupied with the present that they forget to pay attention to the future. They ignore the possibility and promise a product may deliver by simply deciding the future of innovation on the judgement of the executives.
- Incumbent organizations do not provide any incentives for innovation, do not invest in fostering innovation, and even depower/demotivate innovative thinkers. They follow old and outdated incentive methods that focus on employee loyalty or seniority level.
- Incumbents fail to appreciate or celebrate innovation. It is because of this that they do not have anything similar to internal competitions for innovative ideas or innovation fairs.
- And finally, most organizations fail to identify innovators and fail to appreciate or reward them, which kills innovation. Successful organizations have a culture for designing teams and units that are dedicated to creating and generating innovative ideas. They are provided with resources and means to do so and have the complete support of the organization in the process.
Research have shown that technology matters, but it is not the key driver of business model innovation. The more recent thinking is that organizations need to have intrinsic motivation rather than extrinsic motivation. So it is not just monitory awards but making people identify with the bigger goal of the organization which makes them feel like part of the bigger picture and allows them to establish a strong identity that allows them to deliver value.
An idea of self-managing teams exists where supervision is kept to a bare minimum and people are given more autonomy over their decisions. It results in increased creativity and productivity, when organizations erase these strict lines of command and give people freedom and lay trust in them to be more self-organized. This is a technique called Holacracy which is a fancy title for selfmanaging teams. Simply put, it is a way to manage teams that is not top-down or hierarchically driven and instead, more self-organized. So, organizations need a flexible structure for this, a new meeting format, more autonomy to teams and individuals, and a unique evolving decisionmaking process that allows it to evolve with the way different activities are carried out in the organization. This way of thinking is for instance embedded in the more and more widely used Agile SCRUM framework.
An idea for this Holacracy would be this large Dutch bank called ING which is quite ahead in its attempts to be a digitized bank. Their motto is “we want to be a FinTech” — to be this super agile and highly responsive bank. They even went to Spotify to look for their business model innovation and came up with new management innovations that could help them achieve their fast response times. Spotify is a well-known start-up in Sweden known for its music services. It is a completely different organization which makes us wonder, why would ING go to Spotify to learn? The people at ING were looking for ways to become more agile and reduce their response time, become faster to respond to the needs of the customers and they saw Spotify was good at it even if it is a completely different industry.
They took a lot of lessons from Spotify and tried to implement in ING. So, the idea of Holacracy is that you cut through bureaucracy and try to increase your flexibility, adaptability, and create quicker response time to environmental changes; an example of management innovation.
Another example is Zara. Zara is a famous fashion retailer that is part of this Spanish empire called Inditex which is one of the top three in the world along with H&M and Uniqlo. Zara has created a huge amount of value for investors and it is known for fast fashion. They deliver changes in their fashion line swiftly by picking up on trends and produce new garments at a faster rate. They also create this urge in customers to buy those garments before they go out of fashion and are not repeated.
Zara designed this model by sourcing their manufacturers within Europe at affordable locations and reduced the time to produce garments and make them available online or in retail stores. Their offline stores attract people who are still looking to buy things they might not find again. Zara was able to create this business model through this agile form of organizing which allowed them to source locally for low-cost production instead of going overseas to reduce the build-up of time.
Coming back to organizational forms, the platform model is always worth mentioning. The platform is also a different type of organizing. Instead of having a firm, platform model makes customers a part of the organization. For example, Uber, the largest taxi company in the world, own no vehicles; Facebook, the most popular media owner creates no content; Alibaba, the most valuable retailer, has no inventory; the world’s largest accommodation provider, Airbnb, owns no real estate. We can argue why Airbnb is worth more than Marriot if they do not have any property? Well, Airbnb does not have typical assets, but they are linking us to the service providers.
There is a famous tweet by the CEO of Marriot saying something along the lines of we are going to add X thousand rooms in the next five years, and the owner of Airbnb tweeted back, we are going to do so in three months.
It takes a lot of resources to build capacity for 1000 rooms but what does Airbnb need to do to have a thousand rooms capacity? They just need to link more service providers. Platforms can expand simply by linking more users and create more users and capacity in a relatively different manner than an organization would, such as a hotel trying to expand even 200 rooms. The way this is organized, it is completely different, and this model allows organizations to scale up these demand economies in different ways that traditional organizations can’t. This is another organizational form that allows the organization to deliver value to a wide range of audience by making them a part of the value creation chain.
Happening more often across the board is the idea of cocreation. Although linked to the other three, it is the idea that you are co-creating value together rather than cocreating value as a firm. An example would be P&G innovate, where they take ideas from their customers, suppliers, and all the other stakeholders to inform their innovation process. For innovation to happen, smart people should be working in the organization.
There is no reason to limit innovation to or within your organization. Firms are increasingly realizing that innovative ideas can come from outside their organizations such as their dealers, users, suppliers, or partners. There is no reason you should not leverage the innovative potential of your ecosystem partner and rely only on the firm for innovation when innovation can be user-led, supplier-led, and customer-led as well.
Some people have talked about sharing economy approach within, for example, transportation services like Uber, sharing economy of accommodation, and hospitality services like Airbnb. The shared economy approach uses consumers as a part of value creation rather than just as recipients. This is seen in a lot of industries where users are used for value creation with many examples of sharing economy.
When it comes to co-creation, the focus should be on coproduction and value in use on their Knowledge, Experience, Interaction, Equity, Personalization, or Relationships — as described in detail in the chart below.
The idea of thinking consumers as co-creators is important because:
- In the past, companies thought of customers as targets they could sell things to.
- If we reverse that logic and involve customers in value co-creation, both can create a rich experience and more value for the organization.
- Involving customers in the process creates a much richer experience and at the same time, more value for your organization.
The real benefits and information lie in the use and interaction of the customer with a product. Amazon is buying food stores to learn how people shop. To understand the value in co-creation, is to see value in use and co-production and to see how people use a product.
I believe management (executive or academics) should learn more from anthropologists to get a deeper insight into what people do. Organizations deploying tactics to get a deeper insight into what is it that people want and how people interact with their product will win in the long run.
It really boils down to understanding and acting proactively on the fast-changing consumer habits in a customer-centric way. Behavior is changing rapidly forcing businesses to apply their overall business strategy and training employees to meet the demands of a disrupted new normal.