No business executive likes to consider the possible demise of their business let alone the potential collapse of their entire industry. Nevertheless, it can happen. Back in 1942, Harvard Professor Joseph Schumpeter coined the term “creative destruction” to describe this phenomenon. “Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones. This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. Over the long run, the process of creative destruction accounts for over 50 per cent of productivity growth.”[1] Schumpeter considered it “the essential fact about capitalism.” The information age ushered in a new period of creative destruction during which most analysts agree that any business organized around industrial age principles will either transform into a digital enterprise or risk being tossed in history’s dustbin.

The Digital Enterprise Transformation Imperative

Most, if not all, businesses change over time; but, digital enterprise transformation implies much more than evolutionary change. Transformation is defined as a thorough or dramatic change in form or appearance. Some businesses (think Amazon, Google, Uber) were created as digital enterprises. They are often pointed to as examples of why industrial age organizations need to transform. Boston Consulting Group analysts, Stuart Scantlebury, Jeanne Ross, and Wolfgang Bauriedel, assert that companies looking to transform into digital enterprises may be better off looking at companies that have successfully made the transformation rather than looking at companies established from the beginning as digital enterprises. “Many companies that are facing digital disruption and considering digital transformation look to digital natives for models and roadmaps,” they write. “But they can learn as much, or perhaps even more, from traditional companies … that have embraced and executed digital-induced transformation — some of them even before the phenomenon was well recognized. They can also learn from first-generation internet companies that have redesigned their business and operating models in order to stay relevant as their markets evolve. The experiences of these companies provide a new perspective on transformation and the design of digital organizations and provide lessons for companies not as far along the digital adoption curve.”[2]

Back in 2000, Jack Welch, then CEO of GE, famously wrote, “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.” With the business world changing as rapidly as it is, those words should strike terror in the heart of any business not already well along the path to digital transformation. Many analysts believe we are in an era characterized by digital disruption. Maria Minsker (@mariaminsker) observes, “Digital disruption is defined by IMD and Cisco as changes driven by the onset of new ‘digital tools and business models,’ including analytics, cloud environments, machine learning and the sharing economy, among others.”[3] She goes on to note, “While digital disruption has shaken up companies from a technological perspective, it will lead to organizational shake-ups, as well. According to [an IMD/Cisco] study, one of the reasons so few executives feel prepared to take on digitally disruptive competition is that their company leaders are too traditional.” Such reluctance to change is understandable. Business leaders are (and should be) nervous about departing from a course that has historically brought them success. Joe McKendrick (@joemckendrick) rhetorically asks, “What holds business leaders back from plunging full-throttle into digital transformation?” His answer, “It’s fear — fear of the unknown, especially since everyone is learning their way around this new world as they go along.”[4] But, as Bob Dylan famously noted, “The times they are a-changin'”; and, business leaders who fail to embark on transformation efforts probably need to be replaced. IMD/Cisco analysts concluded today’s companies require leaders who are more “collaborative and engaging.” As Minsker explains, “[These traits] lead to quicker innovation and the ability to adapt rapidly to change.”

The Path to Successful Transformation

“The speed of business is fast,” writes Scott Stone, Advertising and E-Business Manager at Cisco-Eagle, “and companies that aren’t successful in adopting, implementing, and optimizing new technologies run the risk of being left behind. However, the key — and challenge — with digital transformation is it involves more than an investment in a new technology, that investment must be part of an overall cultural shift within a company.”[5] He is correct. Successful businesses have always ensured people, processes, and technology were part of their strategic vision. In the digital age, however, technology does play a significant role; especially cognitive technologies. The digital age is grounded in data — big data — but its primary benefits are derived from analysis of that data. That’s where cognitive computing platforms come into play. There is so much data being generated it’s impossible for any manual process to make sense of it. Cognitive computing platforms can automatically gather and analyze both structured and unstructured data and can use that analysis to optimize operations, automate processes, and improve decision making — at the current speed of business.

McKinsey analysts, Jacques Bughin, Laura LaBerge, and Anette Mellbye, insist we are still in the infancy of the digital age. “Digital technology, despite its seeming ubiquity,” they write, “has only begun to penetrate industries. As it continues its advance, the implications for revenues, profits, and opportunities will be dramatic.”[6] Their research found, “More than twice as many leading companies closely tie their digital and corporate strategies than don’t. What’s more, winners tend to respond to digitization by changing their corporate strategies significantly.” McKendrick suggests there are seven “truths” that have emerged about the digital age and the transformation it requires. They are:

1. Digital transformation is hard work. “It’s a really tough challenge. If you are not willing to undertake that part of the journey it’s probably game over anyway.”

2. Digital transformation is not about technology. “While it may seem counter-intuitive, digital transformation shouldn’t be pinned to a particular technology.”

3. Corporate culture and speed matter. “Embracing digital technologies doesn’t make an enterprise a digital enterprise. … Corporate culture is what delivers, along with the ability to boost productivity in a massive way. … These two attributes — and having the right culture and those technological elements — make a digital enterprise.”

4. A digital-savvy corporate culture goes deep. “Startups tend to have what-have-we-got-to-lose cultures, and are comfortable with applying cloud, data analytics, mobile and social media to disrupt and separate established companies from their customers. That’s a far cry from the way established organizations look at the world.”

5. The success of digital transformation depends on the ability to measure progress. “Measurement is key.”

6. Digital leaders are open leaders. “Becoming a digital leader may mean unlearning a lifetime of management skills.”

7. Digital transformation means thinking like an entrepreneur. “What matters in digital transformation is the way people are able to assemble technologies into new ideas or concepts — regardless of how far it may stray from the established business model.”

Stone suggests two other truths, “The path toward digital transformation is different for every company — and it’s a process that’s never complete.”

Summary

Bughin, LaBerge, and Mellbye conclude, “Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t, and the biggest payouts will go to those that initiate digital disruptions.” Eileen Smith, program director in IDC’s customer insights and analysis group, adds, “Changing competitive landscapes and consumerism are disrupting businesses and creating an imperative to invest in digital transformation, unleashing the power of information across the enterprise and thereby improving the customer experience, operational efficiencies, and optimizing the workforce.”[7] As the above discussion suggests, digital transformation is not a passing fad. Most analysts agree that many companies face the stark choice of transforming or eventually finding themselves irrelevant.

Footnotes
[1] “Creative Destruction,” MIT.
[2] Stuart Scantlebury, Jeanne Ross, and Wolfgang Bauriedel, “Designing Digital Organizations,” bcg.perspectives, 5 December 2016.
[3] Maria Minsker, “Companies Not Even ‘Fairly’ Prepared to Handle Digital Disruption,” eMarketer, 31 March 2017.
[4] Joe McKendrick, “7 Emerging Truths Of Digital Disruption,” Forbes, 21 February 2017.
[5] Scott Stone, “Digital Transformation: An Imperative for Industrial Manufacturing in 2017,” Cerasis, 24 March 2017.
[6] Jacques Bughin, Laura LaBerge, and Anette Mellbye, “The case for digital reinvention,” McKinsey Quarterly, February 2017.
[7] Justine Brown, “Digital transformation will be a $1.2 trillion industry in 2017,” CIO Dive, 23 February 2017.