Corporations always faced the issue of changing their processes with new technologies and adapting to a changing business environment. Success stories such as Netflix, who went from sending DVDs by mail to online streaming, show the potential of utilizing digital technology for business. Not only does innovation hold great potential for growth, but on the flip side it is the greatest threat. Few examples show this more clearly than the story of Kodak; the once-market-leading firm in photography was moved to the background by a failure to adopt digital camera technology, in fear that it would cannibalize their film roll sales. Though the technology often takes the spotlight, the organizational change management behind such a transformation is the most difficult challenge. Results from the McKinsey Global Survey show eight in ten respondents report their organizations to have projects for digital transformation in the past five years, but only 26 percent think it has been successful in terms of performance and sustainable improvements1. Adapting your business model, processes, governance and organization to new technology while maintaining your customer base and staying consistent in service and product quality is a task only few can complete successfully. With the pace of change accelerating, firms are facing increasing difficult pressure to update their organization. The average lifespan of Fortune 500 Companies dropped from 60 years in the 1950s to 20 years today, meaning that is has become harder for established companies to stay ahead of the competition2. Staying relevant entails adapting to the changing customer needs while developing the capabilities digital innovation have enabled, but the size of corporations seems to be an obstacle rather than a benefit in this process. The Quarterly McKinsey show that for organizations with fewer than 100 FTEs are 2.7 times more likely to view their digital transformation when compared to organizations with more than 50,000 FTEs3. Why is it so hard for corporates to transform their organization to use new technologies?
Perhaps the challenges of digital transformation are best introduced through the example of a company that has survived since its inception in 1876: Ericsson, the telecommunication company. As a provider of telecommunication infrastructure with a presence in more than 170 countries, Ericsson faced a wide diversity of customers with heterogeneous demands. Installing hardware for new infrastructure comes with high capital investment. In light of the emergence of Cloud Computing, leading and innovative customers seeking to transform their business and offerings, while laggards were not (yet) interested in it beyond efficiency gains. The degree to which each of these groups were present differed per country, which posed a challenge to Ericsson: do you adapt your organization to a new technology that disrupts your core business? Traditional strategic management literature calls for unified action throughout the whole corporation, but pursuing alignment is difficult when your key customers place conflicting demands on your organization.
A case study of Ericsson done by researchers from Universities in Amsterdam and Rotterdam describe the approach of the Ericsson5. Ericsson’s direction toward adoption of the new technology given by the CEO could be interpreted in multiple ways, while on the one hand, he stressed the alignment of business units; he also stressed closeness to the customer. Facing the aforementioned market heterogeneity, these pursuits are conflicting. However, due to the decentralization of decision making, this did allow the business units to focus on the vision of technological development that best fits their regional customer base. These visions then translated into misaligned actions, concerning their experimentation & trials, deployment strategy, and long-term ecosystem strategy. While in more developed geographical areas they pursued radical innovation and deployment, in less developed areas they focused more on the gradual improvement. Though stressing on customer closeness, a deviation from the precise scope of key customers is inevitable, but the different business units made sure their ecosystem strategy still served the needs of the categories of customers. Ericsson essentially sacrificed efficiency pursuing multiple paths at once, while keeping the categories of customers in vision rather than the individual customers. This is a very complex innovation process, posing difficulties in terms of strategic direction, allocation of resources and organizational structure. Different pursuits have different needs, and as such this resulted in significant organizational tension. Nevertheless, the ambiguity of the strategic vision at the top allowed the business units to interpret it in their way and act on local information that was not available to top management. While this resulted in organizational tension and inefficiency, it also allowed Ericsson to maintain their relationship with different customers and increase their strategic flexibility.
Though the Ericsson case is only a single one, it showcases a challenge any corporation active in diverse markets will face when digital disruption comes. Inferences on what to do are best drawn from a larger sample size, thankfully it is an issue many firms face and hence there is ample attention divided into the research literature. Results from McKinsey speak to the contrary of the Ericsson case, as they posit a key success factor in digital change is for the “management team [to establish a] clear change story for transformation”3. Companies that showed this factor were reported to be three times as likely to be successful in their digital transformation when compared to those who did not. Other key factors found by McKinsey can be found in Table 1 above. The ground basis of factors being associated with successful digital transformation seems to lie in ingraining the technology in the company, engaging and empowering the employees in the transformation with key positions leading the way. Starting the transformation is often most difficult, hence it is advisable to organize a digital sprint workshop to determine the direction and gain support from key stakeholders within the organization is through. This helps to define the pain points and ideate solutions, resulting in an articulated shared vision of the transformation to align the efforts. After the workshop, pre-development planning should entail establishing the business case for change, the technical and financial feasibility, and the investment decision. When these are all clear and deemed favourable, they can be translated into specific action plans and budgets. The last part of preparation is the formulation of the teams and strategic partners and to source the vendors needed, before starting deployment of the digital transformation.
When more factors as described by McKinsey are present in the digital transformation of an organization, the transformation is more often successful. As mentioned, the average success rate of digital transformations is 26%, but when all success factors are included and completed this rises to 79%. Graph 1 below shows the relationship between the success rate and the presence of key success factors in the transformation for all digital transformations, including those with uncompleted initiatives.
The graph shows a clear relationship between the action described by McKinsey and their association with successful digital transformation, at a sample size of 1,713 firms. However, due to aggregation the nuances of the individual level are lost. With complexity posed by corporate digital transformations, the ‘standard’ formula for success should not be followed blindly and must be adapted to the situation. Empirical research should inform strategy, but ultimately what makes ‘the right’ strategy to pursue is dependent on situational factors. What Malaysian firms should take away from this is that change is coming, and the market does not transition smoothly. Due to Malaysia’s proximity to leading nations in terms of Fourth Industrial Revolution technology, such as Singapore and China, there is significant heterogeneity in terms of customer demands. There will be conflicting pressures on each firm, especially those active in multiple markets. The right approach is best determined by a careful study of the market demands, the available technology and the current capabilities of the firm, informed by recommendations from empirical studies.
Digitization changes the business environment, and companies should treat it as a long-term investment as it is paramount to staying relevant5. These technologies are here to stay, hence it is better to prepare for the change rather than await the disruption. In the end, digital transformation is a complex challenge for the companies operating in digitizing markets, but a necessary undertaking to remain relevant. On a more positive note, this also represents an opportunity for the company to redefine themselves and opening up new avenues of business possibilities. The coming years will be defining for the established corporates to see whether they can achieve the success of Netflix or the failure of Kodak, and in either case, the only constant that remains is continuous change.
Written by Koen van Hensbergen, Intern at 27 Advisory, Master of Science Graduate in Strategic Management from the Rotterdam School of Management, Erasmus University Rotterdam. Koen is interested in market disruption and organizational change and seeks to pursue a career in technology companies. After his internship, Koen will travel South East Asia to explore the local nature, culture and history, before returning to Western Europe.
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