Going Digital: More Than Technological Capabilities

Being a digital company is more than having the right technologies. It requires both change and transformation to an organisation’s architecture. Decoding what digital means is key to achieving your preferred future. Addressing the critical factors below, will help you to break down the barriers of digital transformation.

One of the objectives of this article is to bring some clarity to the vague and undefined topic of digital (transformation). With digital now dominating every sector of the economy, we can be sure that we are in the midst of a major technological revolution – more specifically a digital revolution. As such, digitization can no longer be overlooked as a fad, but must be understood as a pivotal business challenge. The advancement of technologies is not new, yet the speed and scale of impact is. This brings a myriad of opportunities but also puts additional strain on organisations. Succeeding in the digital age is a challenge that cannot be solved by simply ticking off a checklist of technological capabilities. In a digital organisation, strategies, employees and cultures must also become digital. Whether you want to emerge as an organisation that does digital or a digital organisation, the critical factors below will help you to manage your digital transformation successfully.

In order to make the discussion within this article concrete, arguments will be supported with a number of examples. In particular, a case study from a global FMCG player will be pulled on. In this specific instance, the organisation wanted to address the challenges it faced with regards to its innovation process. While this example may not directly relate to digital transformation, the issues the company faced are no different from the ones’ organisations are confronted with in the digital age. It is important to remember that digital transformation is the ultimate change management challenge, therefore, the fundamentals for getting it right are very similar.

CASE STUDY ON A GLOBAL FMCG ORGANISATION

A global fast moving consumer goods company found that the lack of a clearly defined innovation process was impacting their ability to move rapidly from idea to market. As such, they planned a two-day workshop to create their own NPD model and process. After the workshop, where 25 stakeholders from across the business came together to deliberate the current workings, the organisation decided - rightly so - to “go it alone”. The only external help they sought was from a New Product Development (NPD) consultant who was asked to review the process. This was a simple task that took only two hours, during which a few minor tweaks were made. Subsequently, the newly developed end-to-end innovation process was validated by the marketing, commercial and supply chain directors and received full approval. It was the expectation of the CEO that the process be used from the following day onwards. However, this did not happen. Instead, a number of pilot tests were run using the new process and the outcomes suggested that nothing had really changed. In other words, everyone still worked in their own way and certainly not in a collaborative, cross-functional manner like innovation demands. The problems still experienced were not because of the end-to-end innovation process itself – that was ‘perfect’ – but further enquiry suggested this was due to a clash of cultures. On the one hand, there was marketing with their creative and individualistic flair. On the other, there was supply chain with their rational, KPI-driven, process-focused approach, proud to have achieved the Lean Six Sigma Black Belt level. Finally, to further add complexity to the culture clash, there was the commercial team who were focused on sales numbers, building relationships with distributors and getting the highest bonus possible. In conclusion, the new end-to-end innovation process negotiated and accepted by the parties involved, validated by internal and external experts, and accepted by the board did not lead to a change in behaviour on-the-job by the different stakeholders involved.

Digital Opportunity Versus Digital Disruption

New digital technologies - particularly SMAC technologies (Social, Mobile, Analytics and Cloud) – and connectivity i.e. the Internet of Things are transforming the way organisations operate. They create opportunities both on the supply- and demand-side. Take, for instance, Oral-B who has unveiled the world’s first intelligent toothbrush system. The Oral-B GENIUS and App takes digital guidance to the next level by actively monitoring every brushstroke of the user. This means users receive real time feedback and direction, helping them further improve their dental hygiene as the app shows them which teeth have not been brushed properly. The Oral-B example shows how an organisation can be innovative using digital and ‘deliver happiness’ to their customers through offering a complete service rather than an individual product.  There are countless examples of such digital innovations. Think for a moment about the products or services your organisation offers and consider how they could become digitalized. The outcome should be a product or service that makes the lives of your customers or consumers easier. Next, be creative as to how you can connect your products or services through the Internet of Things. Using the right methodology, you will see that it is not that difficult.

But with the creation of opportunities, new areas of risk appear. Technologies are evolving at an exponential rate, meaning that emergent technologies may no longer be relevant in several years. This leads to uncertainty and sometimes even denial. We regularly hear leaders say: “We have time – our sector will not be hit immediately by the effects of new digital technologies.”

Many organisations view digital as a disruptive force. For instance, research shows that up to 72% of executives in the media sector anticipate that their industry will be hit by moderate or massive digital disruption – i.e. when the velocity of external change is greater than that of internal change - in the next 12 months. Yet, only 39% of executives in the industrial sector feel the same. Banks, to give another example, are concerned about a fully automated digital network called blockchain which may cancel out their role as a trusted third party. So, the digital shock hits different industries at different times and the power with which it disrupts, can also vary. True, there are organisations that are less vulnerable to disruption, while for others it is a clear and present danger.  But it is fair to assume that all organisations will - at some point - face digital disruption and consequently, will cease to exist or they will have to re-engineer how they operate. This will require major change, yet research over the past decades indicates that 70% of transformation initiatives fail. To further understand why, we need to look at the difference between transformation and change.

Change Versus Transformation

To use an analogy: change is a better caterpillar, transformation is a butterfly.  Improvements to your strategy, processes, structure or systems are all changes and therefore, a better caterpillar. In reference to our example above: a new or better end-to-end innovation process, is change. Important, but not enough to guarantee that people will use the process as it is intended. Leaders in organisations think (or hope) that by changing the strategy, structure, processes or systems, a change in behaviour and hence culture will automatically follow (we define culture – among other things - as the sum of behaviours of the individuals in any organisation). Transformation refers to the change in culture that is required in an organisation to achieve its preferred future.

In our example described at the beginning of this paper: apart from a general company culture, there is also an entrenched marketing culture (marketers are creative, individualistic, follow their own rules), a supply chain culture (KPI driven, process focused) and a commercial culture (relationship and bonus driven). These three separate cultures within the same organisation hold strong, differing views on the end-to-end innovation process. The new process will only be successful when the cultural issues are addressed, meaning that existing mental frameworks, beliefs and values are challenged and behaviours and ways of working are aligned.

Tackling this, is a different kettle of fish. Hence, we refer to this change as transformation. Similarly, the term digital transformation does not refer to consuming more digital technology, having a social media presence, building an app or appointing a Chief Digital Officer – these are all examples of change. Rather, it refers to the task of transforming the culture of an organisation to guarantee that whenever a digital strategy, product or service is launched, it has a positive and lasting impact on employees, consumers and other stakeholders. Real digital transformation requires more than adding digital to an existing product or introducing a new digital service. It also demands that attention be given to the architecture of an organisation.

Getting Your House In Order

Broadly speaking, vision, strategy, structures, processes and systems make up the holistic architecture of an organisation. In the metaphorical “organisational house” these are our rooms. There are in total 8 rooms. Besides the three most cited one’s above (vision and strategy are seen as one), there is leadership, culture, people, insights and impact, and digital technologies. Digital technology refers – high level – to infrastructure, data/information, security and applications. The rooms are interconnected, interact simultaneously on multiple levels and should therefore be treated holistically with the customer at the core of every room. The digital revolution demands more of organisations and puts greater emphasis on certain aspects of its architecture. Take, for instance, ‘insights and impact’. The emergence of big data combined with turbulent market conditions, places more importance on this room in the house and how much influence it has on (fixing) the others.

The importance of getting your house in order is not new, it has always been the key to successful transformation. However, before “digital” was introduced into today’s corporate vernacular, leadership teams could get away with not maintaining all rooms. Also, leaders tried – and are still trying – to manage the imperfections of their organisational house by putting in more controls, adding more KPI’s to people’s job description and ignoring the warning signs of an overstretched workforce, a consequence of further controls and KPI’s. But as digitization is rewriting the rules of competition, with incumbent companies most at risk of being left behind, all organisations will have to get their house fully in order. There is no escape this time.

If we consider the case of the global FMCG player, while they addressed a challenge in a specific area (i.e. innovation), other areas key to the successful introduction of the new end-to-end innovation process were left unattended to. As such, not all rooms in their organisational house were in order. Leadership, culture, structure and systems were neglected. The fact that the company ignored the need to fix these, added to the failure to embed the new end-to-end innovation process in the organisation.

At the heart of getting your house in order lies the seamless interplay of vision, leadership and culture. 

Vision, Leadership & Culture

Digital is about capturing value and this is more likely to happen if vision, leadership and culture are aligned. Often visions are not well understood, leadership is inadequate and organisational culture is unsupportive of change. Hence, 70% of all change efforts fail, with 33% being due to leadership behaviour that does not support change and 39% to employee resistance. Hence, leadership is the most important competency for achieving successful change or transformation. Leaders are responsible for (1) creating an inspiring digital vision which translates into a logical and compelling story i.e. the digital strategy, (2) for guiding their teams from the current to the preferred (digital) culture and (3) for coaching employees to behave and act accordingly. Digital transformation requires a change from business-as-usual and hence strong and courageous leadership that creates trust.  Therefore, digital transformation represents the ultimate learning opportunity through which leadership potential can be realised and further developed. Fixing organisational culture is undoubtedly the hardest part of any transformation. Developing the right digital strategy or product/service portfolio, introducing new technologies or finding the right talent, may be complex, but is not complicated. Cultural transformation in organisations is a challenge of a higher order, especially when dealing with deep-rooted legacy. In the digital economy, it is not enough to use or produce digital. An organisation needs to be digital. Hence, its vision, leaders and culture must become ‘digital’ too.

Although – in the example of the global FMCG company above – many of the manufacturing processes have already been digitalized, the organisation in general and particularly, its strategy, leaders and culture, do not talk about digital nor embrace it. Digitally enabled processes in one department do not lead to a digital mind-set across the board. As a consequence, innovation in this company will remain ‘analogue’, rather than becoming ‘digital’.

Many organisations are already feeling the impact of digital and the changes they need to make in response. This can be overwhelming taking into account the magnitude of the tasks ahead – this is understandable. That is why it is essential for organisations to create digital awareness and assess their readiness sooner rather than later. 

Digital Readiness

Digital has little respect for industry boundaries. Therefore, it continues to mount extra pressure on value-chains and existing business models, forcing organisations of all sizes to re-engineer how they operate. Given the consequences of such change, it is important that organisations understand their starting point and assess their digital readiness, recognising key areas to be optimised for digital success. If the gap is too big between the current situation and the organisation’s (digital) aspirations, the transformation will fail.

An effective and efficient analysis must focus on the main areas – the rooms in the organisational house – which influence the digital transformation journey from both a rational and a relational perspective. This in turn will lead to a clear outlook on opportunities, challenges and investments. Leveraging the power of both the rational and the relational side of transformation is key to an organisation’s ability to unlock growth and capture value. Understanding the risks and embracing opportunities of the digital economy is a fundamental prerequisite for a successful digital transformation.

Many organisations – big or small - shy away from assessing their digital readiness. Leaders have no clear grasp of what digital concretely means for them and their organisation and/or fear that an assessment will rock the boat more than is needed and create unrest among employees. In order to make it easier for leaders to initiate debates, put structure and rigor into the conversation around digital and manage its introduction into the organisation, the following four steps or levels may be considered: awareness level, knowledge and insight level, application level and integration level. Application refers a test phase or a pilot, integration means that the change has been embedded into the strategy, structure, processes and/or systems and has thus become part of an organisation’s business-as-usual.

In short, the elephant needs to be consumed in pieces and a step-by-step approach is to be advised.

In our example of a global FMCG player, the executive board was supportive of manufacturing going digital as they saw it as a logical evolution. As this project was successful, they were convinced that a digital readiness assessment was not necessary. However, a new project to introduce an app for the salesforce failed. Insufficient awareness at executive board level of what digital entailed, in combination with a lock of readiness in other areas of the business to go digital was central to the project not leading to the desired outcome.

On the rational and the relational side in our FMCG case:

The leadership team were convinced that the new end-to-end process itself would be enough to make people change their behaviour. This is a rational approach. The right strategy, structure, processes and systems are necessary but not sufficient to change people’s behaviour. One also needs to consider the relational side of change. Because the company was ignorant of this, the introduction of the new app and end-to-end innovation process failed.

Digital Innovation

Once an organisation understands its digital readiness, it can begin to change its strategy, products/services, business and operational model. Of course, for digital native organisations this happens simultaneously. But most companies will need to go through a number of consecutive steps. Indeed, marketplaces, competition and customers and even cities are maturing digitally, meaning expectations of products and services are shifting. As such, organisations can no longer just serve customers. They need to actively engage and collaborate and - hence - connect with them. These connections are made possible thanks to the Internet of Things. There are organisations that use digital, there are organisations that produce digital and there are organisations that are digital. Not all organisation should aspire to become a digital organisation. At least not for now. But every enterprise should attempt to create its Oral-B moment and do everything possible to investigate how they can use digital technologies and connectivity to their advantage. Not doing this today will most likely be called ‘guilty negligence’ in a few years’ time. It does not have to be as creative as the Oral-B GENIUS toothbrush and app, nor as aspirational as the plans to make Singapore the first digital and connected city in the world. But putting employees and (potential) customers and consumers together to exchange ideas on how digital technology can improve your existing products or lead to new ones, is relatively easy to organise and their ideas will help you innovate, motivate your employees and thus increase productivity. Happy customers, growth and further value creation will be the result. 

To explain the opportunities and challenges of digital innovation, let us consider the example of a global cigarette company. In order to reduce the toxic effect of cigarette smoke, the company came up with a ‘heat not burn’ innovation (it is the burning of the tobacco in a cigarette that releases the carcinogenic particles in smoke). It is an innovation that does not produce the typical smell of cigarette smoke any more, hence inhalation by proximity is no longer an issue. It is a “great” innovation but there is nothing digital about it. Imagine the product gave a warning that the battery is low and sent a signal to your mobile phone to show how much battery power is left and where you can find the nearest shop to buy new batteries, that would make it a digital product. Imagine further that all users of the innovative product are able to connect with each other as well as with the company to share their experience and improve the product. Doing so, connectivity would be added to the digital product.

However, digital innovation also has its challenges. Because the product is so successful, employees are eager to work on the new product rather than producing traditional cigarettes. The teams who still produce the latter feel less valued. Hence, the introduction of a (digital) innovation can cause a problem for the culture of an organisation. To solve their cultural challenge, the cigarette manufacturer built a digital innovation into its traditional cigarette. Soon, every cigarette filter will contain sensors that measure lip and finger pressure, the suction power applied and the amount of smoke inhaled just to name a few of the features. This is digital innovation from the perspective of the company, not yet the consumer. The latter comes in when the company is going to use the enormous amounts of data – millions of cigarettes are being smoked every day – and translate these into information and insights to improve consumer smoking experience of traditional cigarettes. The fact that these employees also got the opportunity to be involved in digital innovation, made them very excited and motivated. Hence, productivity was further increased.

A Company That Does Digital or A Digital Company

Having a social media presence, using an app to support and/or check your sales force or a digitalized manufacturing processes, does not make you a digital company. It makes you a company that uses digital.

To become a digital organisation requires the following three conditions:

• The deconstruction of the overall strategy of the organisation, and based on this, the potential introduction of new business models to uncover different ways to deliver value propositions.
• Connectivity and interaction with customers to bring the value propositions to market.
• The continunal generation of data and the translation of these into insights to further inform new ways of operating internally and within a broader eco-system, in order to make and deliver new products and services.

For many organisations looking through this lense is fundamentally different to their current ways of thinking and working. But as mentioned above, the right move for your organisation – for now – may be to become an organisation that uses digital, not necessarily to aspire to be a digital company.

In order to move on the continuum from digital laggard to digital enterprise, leadership teams must be prepared to disrupt their own thinking about digital. As an example: using digital to become more efficient or to increase sales numbers, makes digital a means to an end, rather than an opportunity to be innovative, reinvent ways of working and give employees future perspective. A digital company is an organisation that uses technology as a competitive advantage – to create value. Therefore, digital should be understood less as ‘something’, but more as a mind-set, a new way of doing business. Thus, a strong commitment to using digital and connectivity for innovations with the goal of improving customer experience and building an effective and efficient organisation to do so, should underpin digital transformation.

Having a clear and shared vision on what it means to be a digital company and - based on this - re-examining the way the organisation does things and understanding where value can be captured, allows leaders to envision how existing business models may need to be altered or new ones’ introduced for success in the digital economy. As such, organisations must move from having one strategy to managing different strategies.

An example may further clarify this point:

Traditionally, manufacturers, have focused on producing a physical good and capturing value by transferring ownership of that good to the customer through a sales transaction. The owner then becomes responsible for the costs of servicing the product and other costs of use, while assuming the risks of downtime, other product failures and defects not covered by warranties. Smart, connected products, allow the radical alteration of this long-standing business model*. For instance, in the aviation industry, manufacturers of jet engines are adding networked sensors that send continuous data on the engines’ performance in flight to their computers. This allows for proactive or predictive maintenance and can significantly reduce downtime. This new business model allows the producer to keep maintenance in-house and capture more value through efficiencies in providing this service. It is different business models like this one, that show the power of digital and connectivity but also the potentially disruptive force of it.

As a second example, let us take the Oral-B case a step further. As a result of  the enormous amount of data the company collects through its smart, connected toothbrush, it could decide to share or sell this data to dentists. Furthermore, it could also offer a service to patients and dentists to use the insights based on the data for more individually-tailored dental care. The additional business model in this case would be a health care service for patients and/or dentists.

Understanding and managing the clash between existing and new, digitally enhanced business models, is key to mastering digital innovation and transformation. An example of the latter are platform business models**, which help organisations develop and derive value from the ecosystem of users it connects.

In short: embracing the notions of digital and connectivity at strategic, leadership and cultural level with the goal to improve the customer journey and to create customer intimacy – or as Zappos CEO Tony Hsieh puts it “to deliver happiness” - is what makes you a digital organisation rather than one that uses digital.

There are a further three important critical factors organisations need to observe when climbing the digital ladder and managing their transformations: do it yourself, do it methodologically and engage more than you communicate. 

Your Theory of Business, Change and Execution

As mentioned above, leadership is the core competency for any (digital) transformation. Leaders are responsible for coming up with an inspiring vision and for writing a logical and compelling story around it (the strategy).  It is not a good idea to ask separate functions (e.g. strategy and planning) or employees lower down in the organisation to (help) come up with visions, strategic plans and/or values for the organisation. This is the responsibility of the executive board. An organisation is not a democracy. Of course, it is clear that once a good draft has been developed by the leadership team, the whole organisation should be engaged around the vision, strategy and values. Also, employees expect the leadership team to take up their responsibility. They do not ask to be involved in the writing of the vision and strategy. But they do want to understand how the strategic plan helps them execute their daily job better and they want to have a say in what needs to be added or changed to the strategic plan to break down cross-functional barriers. Besides strategy implementation and leadership, cross-functional collaboration is one of the biggest challenges for organisations worldwide. That is why getting your house in order is so important to guarantee successful digital transformation.

The vision, strategy and values of an organisations are called the theory of business. It is key that this theory of business is first, developed by the executive board and second, further debated extensively  between the executive board and their direct reports – the N-1s. The N-1s are an important group of leaders that can make or break a digital transformation. They need to be engaged early on. Of course, in some cases expert help may be required from outside or within the company. But it is paramount that the leadership team writes its theory of business themselves. Not only because they know the organisation best, or that one avoids the not-invented-here syndrome, but also because it helps to align the executive board around the vision and the strategy. Members of the leadership team should put on their company hat first and their functional hat second. Like that, one avoids that the CEO has to act as the glue between the different functions. Finally, alignment at the top is important because a small difference in interpretation of the strategy in the management board may lead to big issues lower down in the organisation.

Organisations are usually not too bad at writing their own theory of business. It is when moving from strategy to execution, that things go wrong. The vision, strategy and values are – so to speak – dropped into the organisation. However well organisations prepare their theory of business, a theory of change and a theory of execution are nowhere to be found. That is why so many transformation journeys fail. Although it is beyond the purpose of this article to elaborate on the theory of change and the theory of execution, the following four key principles are worth mentioning: (1) go for agreement, rather than consensus, (2) engage your leaders and other employees in negotiation of meaning, (3) create conceptual conflict to facilitate learning and (4) apply the three markers for well-being of any person: the feeling of competence, autonomy and relatedness.

In the example of the global FMCG company, the leaders concerned got the theory of business right: 25 key people from across the organisation built – themselves – the end-to-end innovation model and process. However, they did not write their theory of change. And because of this, they ignored the influence of culture (i.e. marketing vs supply chain vs commercial) and the pivotal role of leadership (not enough talking the walk and walking the talk) which are key for writing their theory of execution. Hence, implementation of the new end-to-end innovation process failed.

Digital technologies and the Internet of Things are only going to put more pressure on organisations to have their theory of change and theory of execution written and implemented. For it to be successful, it will have to be done in a methodological and systematic way.  

A Methodological and Systematic Approach

The return-on-investment of digital is higher if all leaders are clear on what the organisation’s digital transformation ambitions are. Leaders should involve their teams long before they encounter change. Therefore, employees should – at the appropriate time - be part of the decision process and be supported with the right resources. Leaders can prevent change resistance in employees if the latter (1) are involved on time, (2) have a certain control over the change, (3) understand why the change is necessary and (4) find the changes fair. All four principles need to be fulfilled in order to avoid or to be able to manage change resistance.

(Digital) transformation requires a systematic and methodological way of working towards intentional change with a complex character, that puts demands on the consistency and cohesion of the interventions. These should be done with an appreciate perspective of the people involved and their interests***. Hence, employee engagement is paramount. An inconsistent approach – i.e. not having your own theory of business, change and execution - is one of the main reasons why digital transformations fail.

With regards to our example of the FMCG company, as we mentioned above, the leadership failed to develop their theory of change and theory of execution. Hence, the interventions to support the introduction of the end-to-end innovation process were inconsistent and did not take into account the perspective of the other 250 people involved in the process. The lack of a systematic and methodological way of working was one of the main reasons why the embedding of the process into the organisation failed, not the end-to-end innovation model, nor project complexity or the profile of the people concerned.

Engage More Than You Communicate

Communication does not lead to an engaged workforce. It is not enough to inform employees about or train them around the vision, strategy, values or digital transformation. They need to be fully engaged. As such, the number of emails sent as part of a communication strategy does not equate to how well employees understand and embrace the strategy or change. Similarly, communication initiatives such as road shows, newsletters, posters on the work floor or training courses will not lead to engagement as too much emphasis is placed on informing and/or the transfer of knowledge. Often, organisations confuse communication with engagement and are left frustrated when employees fail to commit, act and be accountable. But why would they, when one-way communication rarely helps them to connect the dots and leaves them unconvinced about the change at hand. Developing your own theory of business, change and execution, involving employees in negotiation of meaning, adopting a systematic and consistent approach and using aligned and non-diluted messages, will impact how well people understand what is being communicated and hence what is expected from them. Communication is necessary but not sufficient to create commitment for results among employees. The success of digital transformation is predominantly linked to the degree to which people are engaged and empowered to actively embrace change.

In our example of the  FMCG company, the executive board of directors approved the new end-to-end innovation process on September 30th. They expected the whole organisation to abide by it from October 1st onwards. It was the right thing to do to engage the 25 key players involved in innovation projects to help build the model and process. But the board “forgot” about the other 250 people globallywho also need to use the end-to-end innovation process. These employees did not buy into the new process because nobody engaged them around it. As mentioned above, it is people who make strategies, structures, processes and systems work, not the other way around.

Conclusion

Research shows that organisations are currently only using 30-40% of the full potential of their technologies and – even worse – a mere 10-15% of their employees’ capabilities. Digital, connectivity and leaders creating powerful learning environments are key to unlocking the other respectively 70-80% and 85-90%. But for this to happen, an organisation’s vision, leadership and culture are paramount. Organisational culture is too important to allow a shooting-from-the-hip approach. A combination of getting your house in order and fixing your culture will do the job. But this requires courageous leadership that creates trust. And let’s not forget: digitization drives change but transformation is all about people.

* Chou, T. (2016) Precision: Principles, Practices and Solutions for the Internet of Things, Cloudbook Inc. USA.

** Companies with platform business models include, AirBnB, ESTY, Amazon, Google, Apple, Nike.

*** Ten Have, Ten Have & Janssen. Het veranderboek. Zeventig vragen van managers over organisatie-verandering. Mediawerf. 2010.(our translation).