Dialogue: The second wave of digital transformation

N. Venkat Venkatraman urges us to rethink our business strategies as the next wave of digital transformation approaches.

There’s a fair bit of confusion among leaders today about digital transformation. Many see it as a technology issue to delegate to specialists. Others enlist the help of consultants who generate excitement about the business’s future, but fail to offer a clear roadmap to execution. Still others see digital as relevant only in parts of the economy, like media, music and financial sectors — and not in asset-heavy sectors such as logistics, retail, healthcare or transportation.

The reality is that digital transformation is not about technology. It is the fundamental reshaping of your business, driven by powerful technologies – and it is relevant for every company, in every sector, everywhere in the world. A second wave of digital change is fast approaching, and leaders need to prepare at a strategic level for the changes ahead.

The second wave of digital transformation

As we enter 2020, we are still in the midst of the first wave of digital transformation. Analogue businesses such as books, music, advertising, software, newspapers, music and media have been transformed by digital technologies. Traditional leaders such as Barnes & Noble, Warner Music, 20th Century Fox, the New York Times and NBC have been challenged and often overtaken by ‘born-digital’ companies such as Amazon, Apple, Google, Spotify, Netflix and others. Everywhere we look, the born-digital companies are defining new business models, rewriting the rules of competition and reshaping the ways that value is created and captured.

At the same time, the second wave of transformation is getting started in settings best described as ‘physical + digital.’ Here, physical products and machines may still be necessary, but the value could potentially occur with digital functionality overlaid on physical products; or, the physical products themselves could be transformed with digital functionality, such as sensors and software. This could affect diverse industries. Think about the future of personal transportation: will value lie in the design and manufacture of physical cars, or in the delivery of mobility services orchestrated by digital networks? Or agriculture: how could pockets of value in farming be expanded by a shift towards precision farming, enabled by satellite technology and sensors in the soil?

Incumbents mostly missed the first wave of digital transformation because they did not fully grasp the significance and urgency of digital shifts. That could happen again. So, based on my experience working with companies to apply the ideas presented in my book, I pose five questions to help incumbent leaders think about the oncoming second wave of digital transformation.

1. Do you look at digital trends as headwind or tailwind?

Some leaders look at digital trends – mobile, social, cloud, robotics, artificial intelligence (AI), machine learning and such technologies – as tools that can be deployed without the need for fundamental changes to current business models. They see them as ‘headwind’ trends and work accordingly: minimizing risks and making incremental resource adjustments in the expectation that their existing business models will endure. This is a narrow vision of how digital will shape the future.

In contrast, those who recognize digital transformation as a tailwind can begin to develop a vision of their future business transformed by new technology. They imagine the future of healthcare with wearable devices and personalized medicine. They are excited to reimagine cars as computers on wheels, connected to the cloud and driven autonomously, not just combustion engines with steering wheels. Such scenarios bring to the fore the scale of change that lies ahead.

Digital-as-tailwind is more threatening to the status quo: it means accepting that the future is uncertain and unknown. It is easier to think of digitization as incremental, an extrapolation of the past – but those who see digital-as-tailwind can examine different plausible futures and, as a result, can see the need for new capabilities. They understand the need for radical change.

What is the prevailing view inside your organization: do you and your colleagues see digital as headwind or tailwind?

2. Who will you compete against in 2025 or 2030?

Digital doesn’t warrant serious management attention if it doesn’t have the potential to change the competitive landscape and business models. That potential is widespread. Sometime in the near future, nearly every major company will compete against born-digital companies. We are already seeing early signs. Hotels compete against Airbnb; car makers compete against Waymo, Tesla, Uber, Lyft, Ola and Didi; traditional health clubs compete against Peloton, a home-based fitness experience personalized by technology. Other changes will be unexpected but profound, and incumbents will find themselves competing against companies with entirely different sets of capabilities and drivers of advantage.

Do a simple exercise. Write down the industries that Amazon has already disrupted, starting with books, music, media, grocery, and cloud computing. Now, write down the possible industries that they could disrupt in the future, through robotics, AI, cloud, machine learning and Alexa-enabled voice computing. Do the same with a few of the other digital giants: think about how Google is on its way to transforming the automotive industry with Android Auto and Waymo, or how Apple could reinvent media with Apple TV+, healthcare with its iPhone and Apple Watch apps, and financial services with Apple Card. The chances are that these digital giants have already shown signs of disrupting your industry, or will do soon.

Look, too, at the start-ups funded by venture capitalists. Not all will succeed, but these investments are reasonable indicators of the innovations that could work. Born-digital companies believe that they can leverage the power of digital technologies to create new business value where incumbents cannot. What patterns can you see in the investments made by venture capitalists, and what do they mean for your company?

The competitive landscape of the future will be shaped by agile and ambitious entrepreneurs, by digital giants, and by resurgent incumbents who have managed to adapt. On all fronts, incumbents’ traditional competitive advantages will be challenged by those with digitally-driven competencies. Digital transformation means making sure that you have acquired and assembled the necessary new capabilities to stay competitive.

3. What role will you play in digital business ecosystems?

Digital transformation is not limited to what happens inside your firm. It extends beyond your boundaries and could redefine your organization’s role. Take cars. As they become part of ecosystems that provide personalized mobility solutions, what roles will be played by traditional manufacturers, as opposed to companies such as Uber and Waymo? Who gets to be the primary interface with customers? Who gets to define the business model?

When it comes to looking at ecosystems, we can distinguish between the roles of orchestrators and participants. Orchestration is about pulling together companies with different strengths and connecting them seamlessly to deliver value to customers. Participation is about knowing your strengths and capabilities, and allowing the orchestrator to pull you into the ecosystem so that your contribution is valued.

The orchestrator is the rule-maker while the participant is the rule-taker – and you may find your role changing. Traditional incumbents like Ford, P&G or Samsung orchestrated their industrial ecosystems of supply chains and distribution channels to make sure that they delivered value to customers – but they may soon find themselves participating in ecosystems defined by Waymo, Amazon or Alphabet.

Traditional incumbent leaders need to think through the relative benefits of orchestration vs. participation as ecosystems change. Organizations that lack a proactive strategy to stay relevant and credible will undoubtedly end up as participants and rule-takers.

4. Is your clock speed aligned with your digital future?

Speed is the essence of transformation. You may feel you have already been accelerating, achieving faster time-to-market and speedier customer response times. But digital transformation fundamentally shifts the reference points for time and speed. Customers’ expectations of speed are no longer defined by your industry, but by what they have experienced in other settings.

Being the ‘first mover’ can confer advantages, but it is not always the case. In many situations, it is the ‘fast mover’ who wins – the one who can take an innovation in a specific industry, customer segment, or geography, and scale up fastest. This creates opportunities: you may not be a leader in drone design but, once drones are commercially available, you could be the fastest to deploy them at scale.

Data is critical to speed. Uber can analyze data from over 12 billion rides in more than 700 cities, developing insights far faster than either the traditional car companies or competitors like Lyft and Ola.

Incumbents often calibrate their clock speed against historical internal benchmarks about product launches or process improvements, or in comparison to other traditional competitors, but digital transformation means resetting the clock. As one executive told me: “You may be fast in your little pond, but soon you will see faster species. We have to be prepared for it.”

5. Are you organizing with smart humans and powerful machines?

Your organization is in all likelihood designed using structures, processes, roles, skills and team relationships based on theories from organizational and social psychology. To succeed in the digital future, you must start to think like born-digital companies, which rely on computer science for organizing. That includes thinking beyond human talent and skills to look at how humans and machines can work together to create the capabilities to win.

Delve deeply into how your business is organized. You are likely to find activities that should be fully automated with humans involved in activities where they do not have comparative advantage. You must develop an aggressive plan for automation to take advantage of the impressive developments in digital technologies and minimize the role of humans where possible.

The first step is to define the zone of automation, where machines do both the heavy lifting and make decisions. Second comes the augmentation zone, where machines do the heavy lifting, but humans ultimately evaluate and make decisions. Machines such as IBM Watson or Google DeepMind, for example, can make fast work of previously cumbersome analysis and present alternative options for action. For example, software could present a doctor with two or three plausible treatment options, with supportive arguments for each – but the doctor would make the final decision. Similarly, marketing managers may be given a set of alternatives for pricing and promotion.

Finally, there’s the amplification zone, for thorny problems facing customers or consumers which cannot be solved easily by either humans or machines independently. Examples might be personalized medicine for individuals, or the dynamic customization of advice for farmers based on realtime analysis of disparate datasets. This is where your differentiation exists and where your ability to create and capture a disproportionate share of business value lies.

Using machines to do routine and semi-routine activities frees up people to define unsolved problems and identify new areas for using technology. This is where human talent should be directed. Systematically thinking through the three zones will yield insights about the talent profile you need as you transform.

Your future is not a linear extrapolation from the past to the present and onwards. Business is becoming digital at a rate faster than could have been imagined just a few years ago. Too many companies have so far responded to digital with symbolic moves like appointing chief digital officers, creating incubation units or forming joint ventures with well-known digital companies. These one-off, piecemeal moves are not enough.

The effects of digital’s first wave are still being felt, but there is no time to pause. Leaders must confront the implications of the fast-approaching second wave, which will profoundly change the strategic landscape. Digital is a tailwind, and it will create untold changes across your business. Well-reasoned and timely responses will be needed for any firm that wants to win in 2025 and beyond.

— N Venkat Venkatraman is the David J McGrath Jr professor of management at the Boston University business school and author of The Digital Matrix: New Rules for Business Transformation through Technology. He teaches in Duke Corporate Education’s Building Strategic Agility online course.