CHAPTER 9

FRAMING THE DIGITAL CHALLENGE

As we showed in chapter 1, digital transformation has already hit every industry we’ve studied. Yet nearly 40 percent of the respondents we surveyed cite “lack of urgency” as a major obstacle to digital transformation.¹ Why is this? One of the key reasons organizations miss out is management inertia—failure to sense the need to change. They react to threats instead of shaping the future.

In industries such as publishing, digital technologies have already created such an upheaval that the context for transformation is clear; it’s a burning platform. In other industries, such as manufacturing, the case for change is less obvious. One manager explained the reason for the skepticism: “There is too much hype. I can’t push harder because of all the hype and the overselling from suppliers. I lose my credibility if I push too hard. So we take a slower approach just to make sure we don’t give the naysayers their way.”²

Combating inertia requires an awareness of the challenge, knowing where you’re starting and deciding where you want to go. You know your industry. As a senior leader, you need to create the appropriate momentum around digital transformation. Do this by addressing three areas early in the process:

• Building awareness: Do top leaders in your organization understand the potential threats and opportunities from digital technologies and the need for transformation?
• Defining your starting point: How mature are your digital competencies, and which current strategic assets will help you to excel? Have you digitally challenged your current business model?
• Creating a shared vision: Have you aligned your top leadership team around a vision of the company’s digital future?

FIGURE 9.1

The digital transformation compass: framing the digital challenge

ARE YOU AWARE OF THE DIGITAL CHALLENGE?

The first step in framing the challenge is to ensure that your top team understands the potential business impact of digital technologies. Only 37 percent of our survey respondents see digital transformation as a permanent fixture on their current executive agenda. By contrast, 61 percent of the same respondents believe that digital transformation will become critical to their business within the next two years.³

Put Digital Transformation at the Top of Your Agenda Now

Engage senior leaders in the debate about the implications of digital technologies for your current and future business. Ask, “How can those technologies potentially disrupt our competitive position?” and equally, “How can they help improve performance and delight our customers?”

As the most senior leader in the organization, the CEO is responsible for ensuring that this framing phase is successful. More often than not, motivational speeches and internal evangelization are not enough. You need to ensure that other leaders in your organization visualize the profound change at hand and understand the business possibilities that technology can already enable today. For good lessons, look to practical examples of companies and industries that have been helped or hurt by digital change.

Understand the Scale and Pace of the Digital Impact

The combination of the scale and pace of the digital impact, along with your own capabilities, will dictate your risk profile as a firm. Finding the right tempo for digital transformation in your organization is a managerial art form. Key aspects of your organization’s culture will also play a role. Is decision making centralized or decentralized? What is the propensity of the organization to collaborate and share? You need to design digital transformation programs that protect profitable existing operations and assets, while making the transition to a new digital business or digitally enhancing part of it.

But be careful. As Andy Grove noted, “Only the paranoid survive.”⁴ Disruptive digital innovations often come from outside your industry. Events can sometimes dictate the pace of the change required. Competitive and industry analyses have become less useful than before. As we described in chapter 4, the London taxi market was not disrupted because incumbent companies failed to go online or develop mobile apps for hailing taxis. It was disrupted when Hailo saw the opportunity to bridge the inefficiencies of this two-sided market, winning the drivers first, then providing a great customer experience. Hailo’s win-win business model allowed the company to sign more than 60 percent of London’s twenty-three thousand licensed taxis in less than two years.⁵

Make the Awareness Process Experiential

Building awareness among the top team is a leadership challenge. Employees can be unforgiving. One of our respondents complained, “Management is composed of old people from fifty-five years and above. They know nothing about technology and its benefits and they don’t want to learn.”⁶

Conduct this awareness phase using sound, fact-based research, but also ensure that you make it a highly experiential exercise for your team. For example, presenting both a digital hall of fame and a digital hall of shame creates a balanced view of the risks and opportunities. We’ve also seen companies conduct a “digital hackathon,” pairing senior executives with tech-savvy employees to understand and shape the potential impacts. Other formats and tools can help as well: analysis of disruptive innovation, war gaming, scenario planning, digital discovery expeditions, and external peer leaders’ testimonies. All can help you to generate the right level of awareness in your executive team.

Consider the case of the CEO of a global manufacturing company. Although he had become convinced that digital technologies and online channels were going to have a profound effect on his company’s operations and competitive position, the members of his management board were less enthusiastic. After a period of slow progress, he invited his board members to California for a weeklong program of intense digital immersion. He enlisted the advice of former CEOs who had failed to grasp the digital opportunity, highlighting the personal significance of what was at stake. He also showcased leading digital technology providers, industry visionaries, and companies that had transformed their businesses successfully, underlining the opportunities that digital technologies made possible. The week was an eye-opener for senior leaders. It elevated digital transformation to the top of the executive team’s agenda.

Build a Coalition of Believers

Do you need everyone on board? Probably not. But we’ve seen many Digital Masters build an early coalition of senior leaders who play key roles in driving digital transformation inside the organization. Joe Gross of Allianz Group explained: “With digital meaning different things to different departments, it became critical to establish a common ground—a uniform understanding of what digital transformation meant.”⁷ Creating awareness helps to unite the core team around a common purpose and sets digital transformation off on the right foot.

The point is not to turn your senior team into technologists. The goal is to ensure that, collectively, they understand the potential threats and opportunities from digital technologies and the need for transformation.

DO YOU UNDERSTAND YOUR STARTING POINT?

Building a powerful coalition among your top leaders is essential, but it’s not enough. Large companies survive major transitions not by radically replacing the old with the new, but by leveraging their existing resources and competencies in the new digital environment. You need to know your starting point. How digitally mature is your organization today? And what current strategic assets will be relevant in a digital world?

Assess Your Digital Mastery

To assess your digital mastery you need to take an unbiased view of your current digital initiatives and skills. Consider in detail both your digital capabilities and your leadership capabilities. They will point to one of the four levels of digital mastery we discussed earlier: Beginner, Conservative, Fashionista, or Digital Master. In chapter 1, we suggested that you assess your company’s digital mastery by using the short maturity assessment tool included in the appendix. But, now that you have seen what Digital Masters do differently, it is time to take this assessment again. Using the Digital Masters described throughout the book as a benchmark, spend some time revisiting your company’s position on the matrix. Consider not just what they do with the technology, but how they lead the change. Highlight strengths and weaknesses in your digital capabilities and your leadership capabilities. You now have an informed view of your company’s transformation starting point.

Chart Your Transformation Journey

Now you can start charting the path and pace of your transformation. Every company is different. Your company might have the ambition of a Burberry—to move directly from Beginner to Digital Master. Doing so will mean simultaneously developing the leadership and digital capabilities to make your strategy a success. Or you might want a more Conservative approach—favoring prudence over innovation. This approach will involve building a foundation of strong leadership capabilities before experimenting too far with new digital technology. Or you might be like the Fashionistas—having already launched a multitude of uncoordinated digital initiatives. Your focus then becomes developing a coherent vision and a robust governance model and then streamlining or harmonizing digital initiatives across business units. If you are in a large global organization, digital mastery may also vary by divisions, lines of business, functions, or geographical locations. Understanding these differences is important as you craft a trajectory that will work for your organization.

Assess Your Strategic Assets

Next, we have seen how several Digital Masters conducted an early assessment of their strategic assets to define those that will be relevant in a digital world, and those that won’t. As we showed in chapter 5, Pages Jaunes executives realized early that selling yellow books via its strong direct-sales force would not be a competitive advantage in the future. The company’s paper-distribution model had no future. However, the company’s direct-sales force and its strong relationships with local businesses were still key strategic assets. Retraining salespeople to sell digital services was a challenge, but gave the company the foothold it needed to move into the digital world.

It takes thoughtful analysis to identify which assets will help make digital transformation successful. You should view strategic assets through the lens of a digitally transformed world and identify those that have value. We showed in chapter 4 that rethinking assets, for instance, in the context of the sharing economy, can yield innovative business-model thinking. Several definitions exist about what constitutes strategic assets.⁸ Beyond financial assets, which can be extremely useful to defend against new entrants, we have observed that four broad categories of assets can serve as the foundation for digital transformation: physical assets, competencies, intangible assets, and data.

Physical Assets. The most obvious assets, physical assets are retail stores, distribution networks, warehouses and depots, products, and so on. Some physical assets may be redundant in a digital world, but combining physical and digital assets in novel ways can often be a keen source of advantage. For example, 62 percent of banking customers in the United States today prefer to bank online.⁹ Does this mean that all retail banks will eventually close their branches? It’s unlikely. About 47 percent of US banking customers believe that a bank is not even legitimate unless it has physical branches.¹⁰ But the industry’s consensus is that a traditional homogeneous, full-service branch network, catering to customers across all segments, is no longer viable. Some branches will offer standardized banking needs, while others will be highly digitized, acting as physical extensions of online and mobile banking. Digital technologies are changing the role of physical branches, but they will not render branches extinct in the near future.

Competencies. This type of asset can also be essential to create a digital advantage. Competencies can reside within your functional skills (e.g., IT, sales) or core competencies—your unique know-how around products, processes, or technologies. For instance, your frontline employees and salespeople can be crucial assets in maintaining customer loyalty. They have amassed important knowledge about customer behaviors and preferences. Similarly, institutional competencies can be reinforced and augmented though the use of digital technologies. Nike has world-class product design and engineering talents. Digital technology helps the two groups work more closely together, speeding the product development process and enabling a radically transformed Flyknit manufacturing process.

Intangible Assets. By their very nature, intangible assets are often the most difficult to gauge. Examples of these assets include brand equity, company culture, patents, proprietary technologies, and an ecosystem of partners. Starbucks, for example, was able to leverage its brand as an asset and extend it online.

Data. This asset class has taken new prominence in the digital world and warrants significant executive attention. Data has become one of the most valuable digital assets for companies that have learned how to master analytics. But often, data is a hidden asset. Many companies still cannot extract value from the data they possess or cannot create new insights through the combination of their data with other sources. However, if you can use your data, you will create a new currency with huge value. Barclays Bank, for example, has started to monetize information on its thirteen million customers, selling aggregated spending habits and trends data to other companies.¹¹

Start by looking at your strategic assets in a different light. Can they offer a competitive advantage in a digital world? Can you reconfigure or combine them to create something new and valuable? Do you have, or can you assemble, data-driven insights that no one else has? Use a broad ideation process to think outside the boundaries of what your firm and its competitors do today. But don’t start with broadly defined brainstorming sessions. Start with known unmet customer needs or sources of complexity in your operations. Ask yourself, How can we use or combine assets differently to address these? And how can we use technology to deliver economically?

Digital Masters examine their strategic assets to align their initial investments with their core skills. Burberry started with its unique customer experience, Asian Paints with its culture of process excellence, and Caesars Entertainment with its strengths in analytics and customer data. It does not matter where you start. What matters is that you start in an area where you can leverage strategic assets early to establish your digital advantage.

Challenge Your Business Model

We showed in chapter 4 that business model innovation can be a huge source of value in digital transformation. But it can also be a threat to your business. As you gauge the scale and pace of the digital impact on your business and you reconsider your strategic assets, it is a good time also to challenge your business model.

Of course, you need first a good grasp of your current business model. Start thinking about how you could deliver greater value to customers. Then, figure out how this extra value can be operationally delivered at a profit. You can, at this point, exploit the possibilities offered by digital technology to look at creative and efficient options to get there. Also learn from how other industries have solved similar problems or taken advantage of similar opportunities.

Multiple avenues will be possible. You will need to prioritize options that generate the greatest value to customers, that are operationally hard to copy, and that can provide you with a profitable economic model. You will also have to de-risk the change by running controlled experiments on your new model. Then, gather data to learn and revise your assumptions.

How is it done? Several practical approaches can help you challenge your existing business model, explore new ones, or defend against a potentially disruptive one. We’ve seen companies conduct gaming sessions such as DYOB (Destroy Your Own Business) or WWAD (What Would Amazon Do?). Some practical frameworks also exist to help structure the thinking, such as the business-model canvas developed by Alexander Osterwalder and Yves Pigneur.¹² It is good practice to spend time going through this business model rethinking with your top team, even if your current business model is not under threat.

IS YOUR TOP TEAM ALIGNED AROUND A SHARED DIGITAL VISION?

You understand the business challenge posed by digitization. You know where you’re starting and the range of possibilities before you. You and your team now need to decide where you want to go.

Craft Your Transformative Vision

Chapter 5 described how Digital Masters craft their visions. You need to do the same. Your vision needs to be focused on enhancing the customer experience, streamlining your operations, or combining both to transform your business model. Don’t fall into the trap of the marketing slogan with no grounding in the reality of your situation. Authenticity matters. Your vision needs to recognize where you are starting from, taking stock of your existing competences and culture. It needs to be built around strategic assets—or a combination of strategic assets—that will be relevant in a digital future. And it needs to be transformative, not incremental.

As you craft a digital vision, focus on your business or your customers, not the technology. Design your vision with a clear intent—a picture of what needs to change—and clear business outcomes, that is, the resulting benefits for your customers, employees, and the company’s performance. Remember, crafting a vision is a journey. So make it specific enough to give direction to the organization, but give yourself room to make the vision live and grow over time. Several processes and facilitated approaches exist to support the design of a good digital vision.¹³

Align Your Top Team

Having a great digital vision will get you part of the way, but not all the way—the vision needs to be shared. Many digital initiatives fail to capture potential value because the vision guiding them is not shared at the top. As Curt Garner, CIO of Starbucks, noted, “Our entire leadership team is very engaged and animated around digital and tech and what it can mean for the company. It is part of the shared goals we have as a leadership team to continue to lead in terms of innovation and customer-facing technology.”¹⁴ A shared digital vision is a prerequisite for successful digital transformation and a key component of Digital Masters’ DNA.

But, of the executives we’ve surveyed, only 57 percent said their teams were aligned around a vision of a digital future.¹⁵ Why is that? Senior leaders often confuse consensus with an aligned executive team. Avoid the trap of assuming that information means understanding and that lack of debate signals alignment. Digital transformation only works when your top team is actively engaged and owns the digital vision. You’ll need to be a role model in this respect; test your vision by making it part of every speech and communication you deliver. Ask for feedback, crowdsource ideas, and iterate. Encourage other members of your top team to do the same, and compare notes.

Aligning executive teams is neither new nor specific to digital transformation. However, one thing is different with digital. Digital transformation will respect none of your traditional organizational boundaries. Digital transformation usually requires the collective talent and effort of cross-disciplinary teams to innovate and drive change. Joe Gross of Allianz Group explained: “The reason we involved marketing, sales and local entities, and not just IT or operations, in our digital transformation is because we needed everyone’s active participation to drive change of this scale.”¹⁶

Many management techniques can be useful to align your top team. Facilitated team-building exercises, individual and collective coaching, and 360-degree feedback are just a few examples. Incentives can also be useful. We’ve seen several companies give each senior leader a digital KPI relevant to the transformation goals. Whatever the technique, good dialogue matters in alignment. Carving out part of your regular management board meetings for a robust discussion on digital transformation is a good practice, as is conducting regular facilitated off-site sessions to steer the progress of your transformation.

How do you know when your team is truly aligned? A good litmus test is when all members of your senior team sense the urgency of transformation (awareness of the challenge), understand their strategic assets and level of digital mastery (starting point), and can articulate what the digital future looks like (shared vision) through words and specific goals. When all three conditions are met, it is time for execution.

So what’s new with digital transformation? Technology adds another dimension to the traditional business challenges. You need to make sure your top team can articulate the new threats and opportunities created by digital technology. Rethinking your traditional assets through a digital lens creates new possibilities. Some assets will still be useful; some won’t. New ones, such as data and insights, will be sources of new value in a digital world. Whereas a functional approach sometimes works in a traditional transformation, digital transformation respects no organizational boundaries. You need to have aligned executives who, as a team, have the authority to drive the change across silos.

HOW WELL HAS YOUR ORGANIZATION FRAMED THE DIGITAL CHALLENGE?

Table 9.1 (page 188) summarizes how to frame the digital challenge in three key steps. Look at the central questions at each step, and give an honest assessment of your company’s progress on a scale from 1 to 7 (1 = strongly disagree; 4 = neutral; 7 = strongly agree). For each of the three steps, total your scores across the individual questions.

For each step, we have provided you with a target score that places you among the Digital Masters. We’ve also provided a threshold below which you should start taking action now to improve your situation. If your score is in the Digital Master range, you are ready to move on. If your score is in the middle range, reflect on why. Your team still needs to work out a few things in the framing phase. If your score is in the lower range, it is time for remedial actions. If it is well below, we recommend you conduct a full framing exercise with your top team.

TABLE 9.1

How well has your organization framed the digital challenge?

Answer each question, using a scale from 1 to 7, where 1 = strongly disagree; 4 = neutral; and 7 = strongly agree, and find the recommended action for your score.

Scoring: Over 15: you understand the digital transformation challenge; 9–15: isolate which part is not complete, and work with your team to remedy; less than 9: need to consider specific team awareness exercises and/or digital discovery programs.

Scoring: Over 16: you know where you are and what your transformation trajectory is; 7–16: build alignment around a viable transformation path; less than 7: conduct a digital maturity assessment and a scan of best practices.

Scoring: Over 16: you believe your team is aligned; 7–16: isolate the root causes of your concerns, and work with your team to remedy; less than 7: start a structured senior executive alignment initiative.