The Digital Transformation Dilemma, why should you care?
Beware of Darwinism Phenomena, be the future not the Ancient!
A staggering number of companies with excellent track records fail off the cliff to be in the history books. As the digital Darwinism?applies a Draconian rule that does not forgive businesses and organizations that lack attention to change, trends, risks and value creation. Those that adapt, adopt and change as needed survive and thrive, those that stay weak and resist change will just disappear, just like in the biological evolution.
88% of the Fortune 500 firms since 1955 are gone 1, it is not just startups trying to catch some of the market share, some of the known organizations with billions of dollars in assets went bankrupt just like that. You can check 15 of the biggest companies that went bankrupt in this post, and some of these never came back from the bankruptcy adventure. Obviously, some of the bankrupt went bankrupt due to fraud, misleading shareholders in their reports, however, some of these red flags could have been detected inside the organization with proper tools as am trying to advocate here.
Now, many of these companies did not fail because of stupidity, miss management, breaking the law. Some of these same companies with same management were applauded, even seen as some of the best organizations during growth and in golden earnings and profitable years, then over the years these same businesses with same management or perhaps even better started to fail in earnings, profits, margins, till they hit rock bottom and became history! followed with what we call the Halo effect brand destruction!
Halo effect is a misjudgment bias that clutter your vision from looking at the full picture, instead of trying to understand causes for failure or success, you look at one factor as the only driver for success or failure. News are good at this, The problem is the extrapolation and conclusion of success or total failure due to one event or fact rather than the analysis of the full picture. In 2000, Cisco was the darling of the new economy, then in 2001 when its stock plummeted 80%, the news blamed it all on one factor, while the dynamics of the economy at the time were shifting, dotcom bubble etc.
It's the death spiral trap! There are many reasons why businesses fail, rising costs, expenses, unhappy customers, shrinking margins, disappearing competitive advantage, obsolete services and products, lack of innovation and much more.
In this article I will try to outline the importance of building a comprehensive frameworks to tackle devouring business viruses that bring it tumbling on its knees, so you are prepared with the proper antidotes and remedies to keep poisons at bay. Whether capturing the right game changer feature in your product or service, or empowering people to be more productive, reducing cost, increasing margins and more. I think one way to do that is to set the right framework through digital transformation. A framework with a set of working components that in the long run work together and provide insights on how the business is doing within itself, market and the industry. These components should work together aligned toward a strong, clear business strategy.
What happened??
Organizations like Digital Equipment, Kodak, Blockbuster, and more disappeared like they never existed. Failure is across the board horizontally, in all kinds of industries. In the 1980s steel giants in the US, underestimated the potential of mini-mills, till the last one of them went out of business in the late 90s. Clayton Christensen explained how small, unrecognized new comers disrupted these giants. Same phenomena keep on recurring in all industries. These businesses were giants, but could not sustain their success, they got disrupted and could not understand rival business models, kept on ignoring competition and the state of saturation in the business, till reality clicked in, tumbling earnings, amplified operating cost, cumulative debt, stagnant and inert business value.
The future belongs to the fast but focused, alert of rivals, in constant check of the competitive forces (Porter Forces), constantly checking value creation vs. versa cost without exuberance to market bubbles and short-termism performance metrics. Organizations with self-sensing or let's call it self-aware-intelligence of its health through data will know when, how and why to change, improve, pivot a process, or a business model. This happens when you have well established and connected processes in the enterprise info-sphere environment.
Data shows that many organizations slow down very quickly just after they had their most profitable year, or after few very profitable years, victims of what economists call active inertia identified first by Donald Sull an MIT Sloan Professor. Organizations that are in active inertia mode usually resist change, or even improvements, add to that ignorance to incumbents, and those invisible business forces pooling their market share slowly, till they come to their end or slow down till they just vanish or become irrelevant in the market place, or simply become a non growth business. This is called in Psychology the paradox of success, where large organizations don’t pay attention to their strategy, business models to change, adapt and improve, because of arrogance and over confidence in a business. Even if all the data in the world is saying that your current strategy is wrong, they don’t want to adapt, pivot let alone change!!!
This is what Economists call the leaders lose principle, from an economist perspective increasingly you see leaders losing their market dominant position. Sustaining that domination in the market and success is really hard and that what thought leaders spent their life time researching and studying like Clayton Christensen in his innovation talks and books, Mark Flower in his strategy approach and many others.?
Mike Moritz Chairman of Sequoia Capital was asked in Charlie Rose's interview "What makes it (Charlie meant Sequoia) very successful?", Mike's answer was "Afraid to go out of business" it's the fear and the constant checking in on your business models, processes, customers, competition that kept Sequoia for over 45 years doing Capital Ventures and very successful at it. Despite as you may know, capital ventures have many blind-sided layers in their valuations of businesses!
In the rivalry business world, many penetrate and capture markets with some similarities to well established businesses, and start with small, unwanted, or not noticed market segments, so they don’t get crashed by the giants in their business field. If your organization is large and legacy and?you don’t pay attention to rivals, rivals will take over your best and largest customers. It’s important to embrace a transformation with a humble view to the competition so you take from the rivals the good things you don’t have and build on that.?Having said that, "paying attention to rivals", it is important that your digital transformation has a focus on customers engagement a bit away from rivals, as this is a very important factor that drives success in a digital transformation as outlined in a McKinsey research "Three new mandates for capturing a digital transformation’s full value", once customers see the experience different from rivals, congratulations you've just made the competition irrelevant in the eyes of your customers.
The pandemic has seriously nudged many organizations to re-evaluate their business models and strategy to respond to ever changing situations. In addition, with or without pandemic, it is that constant adoption to change, pivoting and risk evaluation in your processes, products, customers, people, innovation and the whole enterprise that will sustain your organization for the next decades to come. This comes with some sort of transformation framework with clear goals and focus areas. Remember it is extremely hard to sustain success let alone innovation in a business as noted by many thought leaders like Clayton Christensen. Hence you need the right tools and framework to minimize failures and increase success.
What is Digital Transformation Anyway?
There are many definitions out there on digital transformation from companies to academia, I think a simple definition that will summarize what we're trying to dissect here is the following:
Digital Transformation is the progressive to total synergy of IT processes, applications, business goals, strategies, business models and its supporting elements, and people.
It is Progressive as it has to be done in steps, progressively with a focus on specific areas of the business, not everything in one shot. As you'll see, some transformations failed in their journey, some research claims as much as 70%.
In a transformation there are three large elements that are all connected by one common source (data) so we have 4 elements to focus on in a digital transformation as outlined in this Gartner figure:
These are large focus areas in a transformation that you connect together using a digital transformation framework via digital building blocks, in this article, I am trying to get your attention away from details of a digital transformation elements of an enterprise, such as having a sales mobile app, or an example of a customer I dealt with in the past, they wanted to digitalize their images contract assets, extract meta data, content and build intelligence and insights. Some organization focus on RPA (Robotic Process Automation), others on hybrid IT, or analytics side of the transformation, and more, we want all these digital building blocks to work together in a synchronized, systematic way aligned to business objectives, strategy, with clear focus on customers, market, and external factors that could affect your business or industry. However, pay attention close look at the middle triangle data, do you have the one source of truth of your data where you can ask it, any questions from anywhere, anyone and any place? Can different departments, different users, ask the same question and not miss any data, any source in your organization. Do you have this critical kernel data ready to transform fully your organization into digital or data driven company?
An enterprise is like a machine where every element is feeding the next move, action, information to the next element or farther away element, so insights are generated to make quick and right decisions, processes are streamlined inside the enterprise, production is efficient, growth is inevitable, human assets are happy and customer stickiness is ineluctable, that's what you should end up with when you have a perfect enterprise machine. We need to think about digital transformation once you have digitally enabled your processes, policies, resources, applications, etc. how they can work together systematically through an exchange of information on a well-defined framework that drives insights and push actions. Once you have that connectivity between various components of the enterprise through "data", that should improve the quality of your decision making, processes, and even your offerings whether products or services to your customers. Ultimately this will end up with improved revenues, reduced costs, and improved margins.
This exchange of information is sourced from data, when I talk about data I don’t mean only internal data, an organization data, I also mean external data, external data with proper plan of integration into your sources can bring another competitive edge to your organization from getting to know your incumbents, hidden projects that could potentially break your future innovation investment or your next acquisition, and more. DATA by itself is nothing, doesn't talk, and does not fit any logical structure unless you define it, it has no meaning, no value, no understanding, no thought, it is useless without defining it through logical business representations! The value is determined by what you put on it, how you classify it, categorize it, define it, what meaning you extract from it, how you and most importantly the consumer perceive it to be. Data will not be sellable or attractive unless it addresses a problem, brings value, or facilitates a process, etc. It is the new oil, but you need to mine it, build the right refineries that prepare it for consumption, so it brings value to the consumers, that is the enterprise, employees and customers.?
Enterprises grapple with huge number of challenges on data; many organizations have data that they don’t know where it came from (provenance and lineage is nowhere to be identified), what is it for, what does it represent, is it fully available for particular use cases, does it fit the analysis purpose, is it enough, is it compliant, is it clean, is in the right format, does it have the right security and governance rules applied. This is if the enterprise knows where is that data. Many organizations do not know where the data is for a particular use case, hence a digital transformation is needed on this level "the data". Data needs to be insightful through business intelligence, machine learning and AI. Companies need to have a unified wide enterprise strategy on use cases and KPIs, you cannot afford to have each business unit and team doing their own un-aligned metrics to the overall corporate strategy and goals. While implementing ML and AI on your data you need to have enough controls around the algorithms used, to avoid biases, the implementation is human guided so pitfalls will happen. De-biasing is a real issue when implementing ML in your digital transformation tools, De-biasing in an algorithm is not only just about gender, race, communities, or sexual orientation etc. it goes beyond that. One of the toughest issues in biases problem, is industry apparent trends, how does your machine learning algorithm avoids industry biasing (trends) and picking up the underneath development and influences to the industry, so you don't lose big! A German electric utility RWE overhauled all their investments processes because they spent over €10 billion on capital-expenditure programs and acquisitions in conventional power plants, enforcing the bias altitude and assumption of most of?industry at the time, that commodity and power prices will just continue to rise,?while ignoring a strong public and community fact that was growing, a sentiment against this conventional power generation. The observation here on machine learning is, you need to factor all good features and parameters, and avoid cutting corners by shrinking data, while removing noise, without enough data, and good models that include market data and your own data, you will miss the right signals. You also need a selection of strong algorithms that fit the use case. This can only be done with platforms that can offer you these kinds of approaches, no downsizing in your data, and no short cuts. Other biases indicated in McKinsey study referred to above, were cognitive biases about how money was invested, such thing has to have had happened before and should have been picked up. Other biases mentioned by Bernhard Günther CFO of RWE are around hierarchy where it was difficult to counter the executive or board decision. In Psychology this is called social proof, or the herd instinct. This kind of biases are also culture and peoples issues, training and policy are the way to address these, but what if you democratize the data in the enterprise, and have people have a say transparently with no fear, a built-in process in the transformation to allow people to say what they think with no fear on projects and ideas, build good models to pick up counter input, so it’s evaluated against the model output, and even the crowd consensus, so you build critical thinking in your processes. This kind of advanced modeling needs strong digital platforms and knowledge to implement them!?
There is a lot of work that needs to be done on this common medium "data" between the elements of a digital transformation: People, Process and Technology. It is imperative that organizations use the right framework on the digital transformation that put governance and data quality through elimination of noise on processes to ensure data ownership and access is democratized, so cooperation, and single source of truth is the guide.?A CIO of a large Pharma company said about eliminating the finger-pointing between IT and business "is by making data available to everyone" of course you still have to apply the right governance, compliance and security in your digital transformation.
IT teams and business need to align closely on strategy, goals and risks, there are at least 4 IT risks that need to be part of the digital transformation journey as an assessment exercise to understand priorities and critical targets, these risks are called the 4 A's - Agility, Accuracy, Access and Availability, check for more information on these "IT Risk: Turning Business Threats into Competitive Advantage" G. Westerman & R. Hunter.?Harvard Business School Press.
One thing enterprises tend to ignore is what Drucker raised in his innovation book around the unexpected success or failure, because typically these "unexpected success or failure" are not immediately measured, because these are outside the business model, and are considered outside factors in the business, they’re hard to measure, and are alien to the business, hence they're ignored and pushed back. Sometimes they might even drag the business to its fall with an almost impossible recovery as it makes the business work against it. Thus the story of RWE that lost billions, they focused on the data they have but didn’t pay attention to the changes in consumer behaviors (external data), new technological trends etc. Others might just ignore un-expected success to grab new opportunities, Drucker gave the example of Macy's one of the largest department stores at the time in the U.S, they had an incredible growth in appliances away from their core business in Fashion, because it's not in the core business model, despite making money, management pushed back on it, and since then Macy's for almost 20 years continued to drift, Drucker said. This is why it's important to build digital tools that can assess and constantly evaluate an organization business model based on data inputs from the enterprise, the market and the industry!
I'll tell you a little story here that I saw with a few customers. In today's world we discuss cyber resiliency, agility and adaptation, no one software can cover every single cyber-attack, including the advanced improved practice through machine learning models, on the other side of deception more sophisticated hackers are also using machine learning models to discover weak spots in the network and the enterprise. By having a solid grip on the overall enterprise elements from processes, applications, human resources, etc. You can expand your cyber capabilities to protect your business outside of your typical cyber security software by building additional use cases that are not covered that could be also very specific, as it's easy for you with proper digital transformation that is agile and extensible to build these additional use cases. I have seen this need in two large customers, one in energy and another one in banking. The truth, when you have these digital elements not well architected this task is very difficult, hence it's important in your digital transformation on the low level design and architectures, the right decisions are made, and most importantly the right challenging questions are asked!
A Digital Transformation is a journey of consolidation, elimination, cleansing, enriching of Processes, Technology, and People through data, that is available and can be consumed, while applying to it the necessary functions that will deliver that data to the consumer in an appropriate plater that conform to the criteria of that consumer and the regulations that apply to the consumer profile, data and geography (Governance). Once an enterprise gets to that level of transparency in acquiring data and piping it (data democratization) through all levels of filters without interruptions or manual third party involvement, then servicing it as needed through a service catalog (IT Service Catalog, HR Service Catalog, Analytics Service Catalog (Reporting, Business intelligence, KPIs, Machine learning and Advanced analytics services), etc., that’s the real digital transformation. This digital transformation will not thrive and survive without a lean and agile methodology, where strong feedback loop is implemented throughout all processes to improve process, functions, features, services etc. The keys to a successful digital transformation are actionable metrics that will continue to improve your business overall and tell you exactly where you are, in your customer satisfaction, products, market trends, innovation, P&L and more.
Now these building blocks People, Process and Technology fall into multiple key digital transformation areas, and this is where you need to do the right assessment to decide which one to focus on first, some of these areas are customer experience (or customer engagement), human resource capital (or employee empowerment), Operations optimization known area which includes sales, channels, backend processing, inventory, etc. your actual products and services and much more. The important thing is proper assessment needs to be done carefully with the right planning and strategies.
Through digital transformation when combining data plus (Technology, People and Process) the business becomes more than a data company, the goal is to become a platform company beyond data. You can combine the enterprise services around Customer Journey Platforms, Business capability platform (company as a service) and IT categories (IT for IT), using data and advanced technologies, you can turn these platforms into services within your organization and outside the organization for monetization purposes.
A transformation is a change and adoption needed in an organization, that should start with an area of focus that needs immediate attention, e.g. Mobile strategy, or operations management and processes, or enablement and empowerment strategy, product, services, customer experience, human resources management, cyber resiliency, governance and compliance, sales force efficiency, etc. hence this change will offer you a step forward to excel in your domain and bring real business outcomes quicker. The change does not stop in one area; the change, adoption, improvement is a long term vision to achieve full digitalization in all areas. I had to outline the one focus area to start, as some organizations failed their digital transformation because they tried to do it all in one go!
At the end of the day, you'll start with one strategy at a time for digital, digital marketing strategy, or digital operations strategy, perhaps digital workforce strategy, or digital customer experience strategy, etc. George Westerman, a research Scientist at MITSloan of business depicted the implementation of a digital transformation as a caterpillar life cycle before it becomes a butterfly, there are stages it needs to go through, digital transformation need to go through stages as well and focus on areas much needed first (critical areas to the business). He said something in these lines "...the best companies don’t try to make the caterpillar faster with tools and cool staff, but rather think as a whole how they can take off and become butterflies with real wings, faster might get you somewhere but soon enough you’ll fall". Successful businesses that used digital transformation, that are ripping additional revenue and distinct competitive advantages with their competitors went through stages in their digital transformation with a focus on critical short-termism. There are few important categories that classify an enterprise with digital capabilities in a business, I will not go into them in this article as it's already too long, but as indicated a business should assess which areas should you start with and are critical to achieve quick business outcomes on all levels. Throughout this article, I've mentioned or hinted to the cohorts of those digital elements capabilities.
The many case studies about companies that ceased to exist, pinpoint sometimes to technology, some argue that many got disrupted by technology, however, when you look deeper at the failure narrative, you'll see technology is just one factor, many other factors such as process, rising cost and expenses, very difficult to use product or service, missing agility and flexibility in the business to pivot and adjust, and many other factors come into play. These potential failure factors can be well tackled and constantly subject of improvement if you have strong digital transformation blocks that communicate with each other, share information and extract the needed insights to act.
This is why, there is more and more pressure on the CIO office and his/her team to move out from being functional and service oriented to being strategic, "As technology becomes increasingly important, an organization’s success depends on whether the CIO can move from being a functional to a strategic business leader.” . This is why many dedicated academia research papers on these subjects outline the importance of bringing, and aligning IT and Technology with Business.
It is extremely important to have a framework and a toolset that constantly check-in your business health structures, processes, business models and strategies and raise the required alerts to pay attention to cost, expenses, risks, including cost and risk in your innovation initiatives, despite being core to growth among others, it's important to have checks in place, to qualify the ones that merit pursuit and those that need to be dropped. These checks could be well organized and coordinated to become systematic in the running of your business. In 2013 The University of Texas MD Anderson Cancer Center launched a "moon shot" project to diagnose certain types of cancer and recommend treatments using IBM Watson Cognitive System, after 4 years of development, in 2017, the project was put on hold after cost reached 62 Million US $, this is an insane cost with no results, and it's a total failure. So, the question is why? What did they miss? How come the project had no results after spending 62 million? What methodology was used to test this project? and many questions that should be extracted from this!
Perhaps with this example, you should take a look at Floridi's thoughts on cognitive AI in his book "The 4th Revolution", I'll let you read it to debate this example. However, you should know there is more to this, such expense after 4 years with no results, reminds us of the importance of having small goals, small steps, short term goals with critical and business outcomes, rather than big goals without checks and balances. It's important to have feedback loops incorporated through the enterprise activities, have lean, design thinking and agile methodologies guide projects so they're constantly evaluated, adjusted easily for quick and sure outcomes.
AI has made tremendous progress including in the area of cognitive AI, with deep learning, and neural networks, etc. There are many categories that could be implemented in what some consider Cognitive AI, not necessarily using machine learning, deep neural networks or anything close to this, it can be achieved with simple implementations such as RPA (Robotic Process Automation) which is mostly a programming approach, yes, there is more progress in RPA many are trying to incorporate ML in it. If you look the figure below from HBR (Harvard Business Review) on how many executives pursue AI, about 250 were surveyed in this paper, you will understand all these cohorts only need two things data and a platform or platforms that can extract patterns, analytics and insights to achieve these business goals.
Credit: HBR - Artificial Intelligence for the Real World - by Davenport and Ronanki
Many smaller companies brought down larger companies not because of technology or capabilities, simply because their product was simpler, easy to use and fitted the market better. Hence, an example where you need to use digital transformation is your products with constant feedback loop on real metrics on your customers and product or service usage. How are your customers using your products? What features work and are easy to use? and many metrics that are critical in improving the product and fitting your offering to the market.
Digital transformation covers all of the following areas:
Credit: The Seven Principles of Digital Business Strategy by Niall McKeown, Mark Durkin
That is why digital transformations are not technology problems only, technology plays a role in helping you see the vision from 30,000 feet above, but it does not resolve the issues in the business by itself. You need a vision and a leader to drive it. Technology is really a bridge that fills a gap between where an organization is, where it wants to be and what is that is pulling it backward (gaps). Hence you see in transformation many examples of organizations that did transform for example the way they operate which gave those organization a significant % improvement in profits and revenues such organizations in Mining, Energy, Banking and other areas. Check McKinsey and MIT "Leading Digital - Turning Technology into Business Transformation" By Andrew McAfee, Didier Bonnet; George Westerman – Harvard Business Review Press.
Does Digital Transformation apply to startup?
Not necessarily in the same way as you would approach it in a well-established enterprise, but smart startups should implement the supporting building elements to be scalable, agile, able to pivot quickly, resilient, measurable, by implementing the right elements to be data driven organization. The advantage of many startups is that they can be data driven from the start with less effort, time and investment. Because startup they can architect from the beginning modern architectures to be fundamentally data driven, and usually they end up less needing to innovate in other spaces to be fully digital. Remember to have Peter Drucker's guiding principle "If you can't measure it, you can't manage it" in other words for our context here make you implement the necessary supporting processes early on to measure what's measurable (I don't mean only $, cost, customer's acquisitions, there is more to this), so you can bring some systematic management to these key metrics that will drive revenue, profits, brand and growth. You can write a whole book about what constitutes measurable in an enterprise and its business model for a startup, why they can be measured, how, and much more. It would be nice if someone took the time to write about key metric measurements that go beyond valuations ratios of a company.
Why do organizations need Digital Transformations?
We don't want to confuse an organization's individual strategy, business models, processes, sales strategies, go to markets, finding a breakthrough chasm with digital transformation. The subject discussion here is to show how digital transformation can help organizations to be self-aware of its health, resilient and agile so it can continue to be profitable and boost growth. It is a larger set of tools and actions that streamline strategy with business goals using technology and data, it streamlines process, technology, people and culture with business strategy of the company.
Leaders should not look at a digital transformation from one lens, say automation, or security, or analytics, etc. you need to look at a transformation as a journey and life cycle improvement of information handling, changes and adjustment so the enterprise is aware of its own environment and surrounding elements of its environment, friendly and unfriendly elements (competition, hackers, danger within, governance, outlaw behavior... etc.) customers, channels, employees, laws and rules, etc. While you need to focus on one area at a time, the grand vision is beyond these smaller focus areas! So you need the technologists but you need the vision for this to succeed.
The end result of this synchronization is an agile, lean, and strong organization, with a sound business strategy that creates a competitive advantage.
As I update this article, Sunday March 12, 23, we are in a confusion tornado of mixed signals on inflation data, how long rates are going to continue rising? (Powell Congressional Testimony) what does this mean for the US economy, soft or hard landing. Good job reports (surprising), collapsing banks (SVB) and others. This data is putting mixed messages, economists are puzzled how we should tackle this inflation, every day Mr. Market has new face depending on the weather news, while some data is good, some other data is scary! So, are you ready to adapt? Do you have your balance sheet in check? Are your expenses under control? Do you have plans to survive through 23 and most of 24. Many questions that can only be done in two ways, "data" and tools that can extract properly this information while applying the correct valuations, or bring expensive consulting firm like McKinsey or Bain to do it for you.
It is important to build a strong strategy that encompass macroeconomics and microeconomics indicators to plan your next moves and plans in the next 6 to 12 months. The micro staff is important but don't ignore the overall full picture of macro variables that can help you in your planning. An example, of how to use macroeconomic data to benefit your strategy, let's look at retail, like Walmart or Target. let's assume the CSI (consumer sentiment index) is down the drain, at its 5 years low, inflation through the roof, un-employment at all-time high, so is the output of the economy GDP, let's assume you can see new change in these indicators of improvements, then based on other data from your organization, consumer data, you should plan to optimize your inventory, lock in good prices with your suppliers, etc. so you can take advantage of these moves. So just as these indicators can be of great help to do trading in currencies and other areas, they do apply to business if you have the right platforms to incorporate this kind of data in your planning and strategy! Again remember macroeconomics are trying to see long term economic growth, but and that's a big but they're also looking at short-term business cycles, in this example a large retailer if they figure out where the short-term business cycle is heading, they can optimize their inventory, consumer products and pricing.
Adaptation to current situations, covers environmental situations, geopolitical situations like the war in Ukraine, and business situations, such as business model disruptions. Having the transformation tools, platforms, and frameworks in place to respond to these disruptions through adaptation is key to survival. We know of few businesses that started to see significant slowdown because their DevOps teams are in the Ukraine. Take a look below at Porters framework, it does apply to almost everything when you understand it!
We're saying manage risk rather than measure, or quantify, there are few people that argue strongly against risk measurement, and say you will never measure risk correctly, like Taleb in his "Fooled by Randomness" book and many others, the idea behind this observation is simple, how can you measure uncertainty, you can only mitigate it through modeling, e.g. climate change impacts, you can only model what is supposed to happen however you will never know. Hence the best you can do is mitigate possible risk. For example, many corporations are funded by much debt and carry little to no cash balance in their balance sheet, this is very common even for large successful corporations they re-invest their cash on equity, capex, shares, etc., however, with today's uncertainty and inflation corporations should factor in the risk of changing interest rates on their debt vs. their current equity, so modeling this kind of situations is important for the unforeseen changes and economic crisis. The impact of inflation on interest rates is not just on the debt of the business it goes beyond that it could trigger a cycle of all kinds of troubles as outlined by many economists. So again, having access to data that speaks on all layers of your enterprise can help you comprehend and manage possible risk.
Without this digital transformation in your enterprise you cannot have any sort of information risk, are you prepared for what's going on in the world of workforce, do you have enough planning to control and mitigate the risk of drying up talent? Do you foresee the impact on your business? Have you seen how COVID disrupted the whole worldwide supply chain in all of its forms, does your corporation supply chain depends on many external factors? There are many questions you should ask yourself so you can start modeling these kinds of risks, and finding possible solutions and plans. Does your organization have any idea on regulations risk? How much of your data is exposed to breaching GDPR, HIPPA, or other forms of compliance. Again, without proper implementation of digital transformation you will have partial risk management albeit very far from acceptable!
Digital transformation should allow the various components to work together to facilitate, capture and measure customer experience. This act of facilitation, capture and measurement starts from the presales phase so you facilitate and capture the life-cycle of your customer's experience in full.
Mark Leslie and Charles Holloway wrote an excellent HBR paper "The Sales Learning Curve" a must for all MBA students and entrepreneurs. They indicated in the old days the problem was concentrated on technology, "if we can build it, they will come", technology now a days is cheap, easy and in abundance, the problem is "when we build it will they come", you need a digital transformation to capture your target market (future customers) or existing customers usage of your products, or services so you can understand if there are any shifts happening in your market-product/service fit, having constant check on your customers is important and digital transformation can help in this area.
Automation should also be planned with strategic goals focused on business outcomes and long-term goals. When done properly it should improve processes, operations margins, efficiencies, revenues, customer satisfaction and more. So it should be planned layer by layer in the organization from critical short-termism to less important. If the pain is in sales operations then the focus should be there, if the organization sluggish performance is due to lack of automation in serving customers, then you should address automation there first.
I'll close this point with this figure from McKinsey's "Operations Practice" to see how much automation is important and it should be part of your digital transformation components:
Credit: McKinsey: Operations Practice: 2021 and beyond: Preparing for the future of SG&A
Compliance teams need to modernize their framework to manage, monitor risk and apply rules and regulations easily and quickly. Meaning they need proper instruments to adapt quickly to changing situations. This means you need pragmatic framework through your enterprise processes and operations that automatically translate rules, regulations and laws to a practice throughout the enterprise. With better understanding of today’s risk you need to assess constantly the business, enterprise risk recognition, tolerance level and what can be accepted and not accepted, and how to avoid it or mitigate risk. This cannot be achieved only by digital tools that only apply rule based compliance, you need ML and AI capabilities as well.
A 2020 McKinsey research noted that banks faced issues calculating value at risk (VAR), which led them to higher regulatory multipliers, with this and some other risk metrics that were challenged, some trading bank in the US was hit with 950 $ million loss, another major European bank was hit with 200 $ million loss, this is due to inadequate models or the need for huge computational power; hence the need for a platforms capable to eliminate these challenges and address the need for modern financial market modeling.?The study goes to discuss the need for optimized trading books, risk positions and accurate and timely valuations. Good valuations require a lot of science even beyond the typical mathematical models, such as behavioral science, cognitive biases, and other dimensions, this is extremely important in valuation of risk and models, while risk is important but the reality it’s unknown hence you need to pay attention to randomness theory, macro-economics are important and more. All of this cannot be done humanly and needs a platform equipped with many tools to supply you with the right models that can extract such intelligence!
Compliance is a broad term and does not apply to only information anonymization, it goes beyond that, it covers storage, information exchange, location, territory and beyond, hence the only way to digitalize the enterprise is to use platforms that cover every angle of compliance applicable to your business and domain. Compliance goes beyond regulatory laws and rules, risk assessment, and measurements need to be incorporated in your transformation, from information processes, business process, biases in analytics and machine learning is a known issue that need to be taken in consideration, to cyber, much of enterprise risk and information exposure comes from cyber, so having processes, applications, frameworks, policies and practices that protects your most valuable assets, information, IP, products, customers, employees, etc. is very important, hence you need a cyber resiliency plan to have a robust compliance plan, from encryption, to information anonymization, to cyber policy controls.
An example of how digital transformation can expand the integration, communication between various IT processes to provide business outcomes and compliance is DevOps integration with Security. DevOps is part of the enterprise going digital but that cannot go without a security integration into DevOps, and working closely with security teams to understand the risk, you might bring into the organization through DevOps. So it's important again to have the leadership team driving the workforce toward a vision and collaboration.
Questions like how is your business recognizing the relationship between DevOps and Security are really important. Amazon web services recognized the breach caused by a misconfiguration in S3 buckets that were the cause behind a number of data breaches, it released 2 new tools Zelkova and Tiros, These tools analyze security configurations, providing automated feedback to administrators on the risk of different set-ups for cloud-based applications.?We see more companies as outlined here extending their cyber security capabilities to their unifying data platform with ML capabilities to extend cyber resiliency through new use cases, and many use cases can be added here, that get facilitated through digital transformation.
An organization that understands its customers' requirements and preferences, dynamically caters to each customer's needs (personalization). Is that enough to identify causality? What makes customer 'A' buy some of your products and similar customer 'B' buy totally another product in the same category profile, while totally different customer profile buys the same product as customer 'A'. Without comprehensive complete platforms it is very hard to identify the drivers for this action (buy/consume) which is the identification of the job that needs to be done and the why. The understanding of the theory in what is called customers buy/consume certain services/products because of a job that is needed, despite the distinct profiles or correlation of a cohort of customers can open up truly new market opportunities! Having the digital tools that can bring data, turn it into information and mine it for insights while factoring all kind of protections so the analysis is right is a critical task for an organization in customer and market development.
You can take a look at many case studies of large companies that vanished, like Blockbuster where their demise was attributed to Netflix at the time, but the reality they resisted change to the new business model in movie rentals "mail-in", management didn't anticipate on-time the danger, when they started to change, it was too late. Many organizations when faced with disruptive business models where "Change" was not triggered or triggered too late, due to path dependency, arrogance, not seeing the big picture, whatever just went into the history book and the museum of doomed corporations! This example shows how important to pivot and change a position in a product or customer fast and efficiently, as Clayton Christensen has demonstrated in the innovation Dilemma that often companies that do not move fast end up on the wrong side of history as one of the factors. Again, having digital tools feeding you the right information internally and externally can help avoid such downfalls!
Organizations need a digital transformation to become data driven so they can challenge their own business models, sometimes even challenge your own story, questions like is it really the only way for me as a business to serve my customers? What can I do to make my processes more efficient? Is there something I am not seeing? An organization needs to ask these questions, so they don't get disrupted, but they become the disruptor. In other words sometimes you need to look at the data and start questioning things and even turn your business model upside down, inverted to find out what's underneath, what is that you are not seeing, what's coming, this needs to happen with data.
If a model is starting to look obsolete, you need to disconnect and move on to a better or totally new model, Telecom New Zealand saw the deterioration of the Yellow Pages business and acted quickly to bang 2.2 billion. Other telco businesses didn't react to this trend fast enough till the Yellow Pages business became obsolete and almost worthless, Telecom New Zealand crossed the Chasm at the right time and benefited while others stayed in their inertia comfort and suffered an almost 0 value and now who is in the world using Yellow Pages!!
Data driven businesses understand customer better through data, using machine learning and AI capabilities; the ability to have that feedback loop in your organization into your software components, means flexibility, agility and faster go to market, hence your competition will have hard time catching up to your success. This is what Jean Ross and co-authors meant in the quote above from MITSloan article.
Coming back to the observation about information consumption, acting on it (adapt, change) and production, I take the note of Dr. Rado in his "Data-Driven Business Models for the Digital Economy" he noted "It is interesting that IBM was in the business of infrastructure management but never thought to build and sell it as a service, while Walmart had the Retail Link system but never thought to package it as a product and rent it to other vendors" that means both had the opportunity as they had the capabilities but didn't use data to develop new opportunities outside their core business model, so they never saw it or they saw it but didn't act on it. On the other hand Amazon saw the opportunity of expanding its offering in its e-commerce through webservices, so they expanded from simple book selling to e-commerce, webservices and microservices and later cloud. So it is important to have tools that help you as an organization to understand data, but also the data is nothing without insights, and insights are nothing without acting on them!
Now, just to show you how digital transformation can affect your operating expenses and ultimately margins, look at this research note from McKinsey "We estimate that just 20 to 30 processes generate 45 percent of the average operator’s operating costs. Using advanced technologies, such as machine learning, to simplify and digitize those processes can cut costs by as much as one-third" McKinsey Typically, large organizations have hundreds or thousands of processes. By using digital platforms and tools that can automate this kind of processes, or even reduce the number of processes, and doing deep analysis of consolidation, elimination of the not needed processes this could significantly decrease an organization operating cost and hence improve margins. This is on the side of operations and many other areas can be improved through digital transformation.
By making sure the digital transformation includes analytics you should be optimizing many aspects of your business by merging your processes with efficiency innovations throughout the enterprise. For example, the manufacturing sector still lacks many of possible efficiencies they can achieve through the engine of analytics, research showed that manufacturers who incorporated analytics into their labor-intensive sectors boost productivity and earnings by double digit percentages - Mckinsey, by analyzing machinery utilization when machines are idle, how much time is wasted during manufacturing, material flow, etc. you could get ideas on how to optimize machinery. Other examples are machines that need to move from one point to another as part of an industrial process, you can look at route optimization, motion measurements, maintenance, predictive analytics on bolts, and pieces of equipment about to fail, workflow performance optimization, where business workflows, manufacturing workflows get improved through analytics, etc. All these could be opportunities through digital transformation that includes analytics be part of your business efficiencies innovation, to distinguish the business from the incumbents.?I recall in one of Christensen's talks or maybe I read it (sorry I don't remember), he gave an example of how an automobile manufacturer (I think Ford) or another manufacturer, saved tons of money by moving some of the supply chain machineries in the warehouse few feet, he gave some numbers, this is simple thing that could be the result of human analysis, imagine having the right tools, platforms that can analysis all your enterprise processes, how much can you improve your operating cost?
As you know many products or services biggest challenge is to have them cross what we call "the chasm" crossing the chasm is a marketing term it means the successful adoption of your products or services, every organization knows that part of that successful crossing the chasm is getting customers to adopt your offering and develop stickiness, this adoption and stickiness happen with one thing customer experience. Customer experience is one of the most important drivers for your successful revenue growth, happy customers, bring happy communities, happy communities bring more happy communities and so on which means $$$. Customer experience starts from the time you pitch your service or product, clear and honest pitches that sets the right expectations to the moment you transfer the customer to your customer success manager, support, professional services etc., through proper onboarding and enablement. Part of this experience is how you handle customer questions, reported or raised issues etc. Without proper digital transformation your customer experience will be lacking many opportunities to keep customers happy. Today's organizations need a modernized digital transformation to lower the number of issues for customers, provide auto-self-care, predict anticipated problems on the product or service, provide AI capable smart chatbots (not tree based) that doesn't know where to go, understand un-structured inputs, these tools can help organizations cut calls by as much as 90% and help customers resolve as much as 75% of their issues, this kind of results for your organization means customers are able to have a solution more quickly, which should turn into ease of use of your product or service, and more adoption.
The lack of self-care tools, AI capable chatbots, good resources (communities, documentations, support portals) etc. usually result in frustration and dissatisfaction of customers, hence the experience is bad, which results in churn and all kind of problems. Without digital tools you cannot achieve adoption goals in your business!
Analyzing the state of Porter's 5 forces principles in your business through digital capabilities
Porter's 5 forces principles for analyzing business competitiveness can be achieved at great length if your organization is ready with digital transformation, this is because you have the tools and means to analyze your own business by looking at the whole data internal and external. For each principle few questions should be asked:
These forces are real and they either threaten a business or constitute a moat to protect it. Business should seek at all times to create moats and keep them as long as possible, through proper analytics you may be able to find new fortitude for your moat. Without a digital transformation that brings data together unified and captures data of all sorts you will always have gaps and blind spots.
These five (5) principles have broader applications than a corporation or a business, these same principles can identify a country's weaknesses as well. Look at Germany and many European countries the reliance on Russian gas (supplier) is threatening their economy in the coming quarters and is putting pressure on political decisions. This is a very simple demonstration of the power of supplier bargain force, it's a real force that can shift balances. The reliance of many countries on wheat and grains on Ukraine and Russia, will have its full effect in 3rd, 4th quarters and early next year on developing countries, if things continue to deteriorate!
In the same way implementing the necessary tools to measure an enterprise's weaknesses, reliance, and power through good data, analytics, and insights is key in succeeding and keeping that success.
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Finally, becoming digitally savvy, and data driven ready can help established companies convince the board on time to approve changes, especially in difficult times where drastic changes need to be made, in difficult times staying away from periphery ideas is to many CEOs and management a must, however, when you have data and the right analysis you may be able to convince the board to pivot and create an investment line that prepare the company for a change in the S-Curve.
The need to be strategically transformed is a need to become a data company, in 2013, GE CEO Jeffrey R. wrote to GE shareholders "We believe that?every industrial company will become a software company" I think he meant a data company that can measure its success, learn from failures, and be resiliently anti-fragile, there is no way for a human or enterprise not to have some strategic mistakes, the important thing is you analyze failure and learn from it, you prepare for what we call anti-fragile scenarios, have enough models embedded in the enterprise to cushion your failure and minimize risk. So in other words every enterprise on the horizontal or vertical axis needs to become a data company, so you need software and you need engineers that can run the software or implement it. Whether you are Walmart, or Coca-Cola or in mining you need to be ready for a meaningful transformation for today’s risks, competitions, and innovations.?
On Jeffrey's note above, there is a recent study from McKinsey outlining how successful digital companies are taking their digital transformation one step further by making their digital solutions (albeit internal) ready to be monetized by selling those digital assets, this means a new source of growth for these companies through digital transformation using software.
Who should own a transformation?
A Transformation is a big take-on in an organization, it's a large investment that requires time, funds, resources and culture which is more difficult to achieve than the rest. Transformations should be owned, championed by CEOs and the leadership. One thing I would put here, is when you look at transformations academia research, books, blogs, etc. you'll see most of it mention the need of leadership ownership, but the focus is on the process, and components; but they don't describe how actually an organization need to look at a transformation. One thing that got my attention in this challenge of transformation in business is the adoption challenge, the kick start challenge, followed by planning etc. I see a resemblance between this challenge "adoption" and "Crossing the Chasm", organizations need to start looking at Digital Transformation from this perspective, getting people and the culture aligned around this journey is critical to the success of a digital transformation. This is why it's important it's owned by the leadership, and communication around goals, planning etc. are clear. The reason you need to look at it like a "Chasm" you want to cross is if it fails it fails big, and if you get the needed adoption by your resources, board you win big and you should be able to unlock more revenue, profits and better efficiency.
Moore talks about Crossing the Chasm in a technological lifecycle, however, truly this framework applies to other things once you understand it. Even when you look at his zones the latest in his work, you might consider his look at the performance zone vs. versa the other zones, leadership need to understand a transformation need an investment and commitment for the better good, hence you will need to move part of your resources early on from the performance zone to another zone, so they focus on achieving this task, otherwise it will not work.
It’s also important to note, in a transformation it’s critical to bring together business and IT, this is well documented, however, one more point I think worth to mention here by understanding the goal and the why of a digital transformation, you need to pay attention to bringing different mindsets into this collaboration, the modern theory in human development states that people who think in one dimension without being exposed to different brain mind sets, keep on thinking in the one nail hammer problem that Abraham Maslow described in his book Psychology of Being "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail" The idea here, when someone thinks from one mindset model (dimension) you will see all problems in the same way, hence you will solve them in the same approach. So, it’s important that the transformation ideas, goals, framework, approach, planning is guided by multi-input teams, consulting firms if needed of different backgrounds and roles as everyone can really contribute with something!?
Do many enterprises miss opportunities to digitalize?
We have seen how good companies missed out and became boring, not competitive, or just disappeared. There is a why? Researchers in this field have outlined this "why" or the reasons behind this missed opportunity. Let me summarize it, in three major factors, and probably there are more. These are the drivers that are missed, hence there is no motive to act, which results in missing the opportunity to digitalize.
“These days, most companies are awash in data. But figuring out how to derive a profit from the data deluge can help distinguish your company in the marketplace.” How to Monetize Your Data by Jeanne W. Ross & Barbara H. Wixom – MIT Sloan Management Review
Few years ago, we worked on a monetization data architecture for a Telco company, what we realized that despite the huge amount of data that Telco company owns many of them are far away from having any kind of digital infrastructure, that can drive information and insights. It is almost like proposing everything from scratch as many and many building blocks are missing or much of the tools they have are obsolete and need to be modernized. Telco companies are pushing for 5G and now many of them are there, but most of them are far from any kind of monetization!
Data monetization can only happen if you can get insights and value from it, the value needs to be quantifiable which is very difficult; in the old days early 80s and so on, data insights was in the form of Data Warehouses, companies started collecting data from their operations and extracting reports and insights, what we call Business Intelligence. Few decades with the explosion of data, and the advancement of Algorithms in AI and Machine learning space, this challenge is beyond a data warehouse, or data lake or data science, hence you need to look at a solution that can offer you many features at the same time or at least can fulfil through simple integration these layers!
Businesses that actually go through a digital transformation journey with such objectives of killing data redundancy, cleaning up data, and having a single source of truth for their data, tend to save millions of dollars with the right platform on top of this data using some simple advanced analytics, or machine learning algorithms. GE used machine learning on integrated supplier data to identify probabilistic matches "data that is associated with the same person or entity", this pattern recognition approach (statistical) saved $80 Million in its first year by finding redundancies and ultimately re-negotiate contract that were previously handled at the business unit level. "a large bank used this technology to extract data on terms from supplier contracts and match it with invoice numbers, identifying tens of millions of dollars in products and services not supplied!". Credit: HBR - Artificial Intelligence for the Real World - by Davenport and Ronanki.
Adapting business models through data
The goal of digital transformation other than being agile, efficient, profitable, competitive is to be able to understand the information's value proposition, this is a challenge. While you may have a well-established business model, a digitally capable business should use the information to assess the strengths and weakness of the business model. An organization needs to be data driven using a digital framework to tackle the question of unique value proposition, remember your unique value proposition might change with time, as competition and copycats start catching up to your story, then you will look the same to the competition, hence use data to adapt and evolve your unique value proposition.
Coming back to the above discussion, it's important to use data to ask the right questions, face reality, and make sure you listen and understand the data. If the only thing differentiating your organization and the competition is price, that is not a competitive advantage, in contrary it could be a catalyst for the organization death spiral. As you see in the Airlines industry many Airlines are not profitable, because they all look the same with same offers, and are constantly competing only on price, the same is happening with many hotel chains.
Data analysis should be a driver to adapt, pivot, adjust and change your business model if required, think about the real value proposition of your services, or products, start differentiating and innovating. Obviously, many organizations do not like to tackle this after having the product acquire hundreds or thousands of customers, hence they like to stay in the comfy zone as it's hard to re-work this.
Uber, Lyft, and others do not own the cars nor invested in expensive taxi licenses, what they spotted is a need, or a job from 2 types of profiles, a profile that need a ride and a profile that need to make extra money, this is all data-based model, from this by filling these two needs they created an incredible business model.
Part of your transformation you need to have an outcome where you change or improve your business models in every part of your business, Brian Tracy or someone sorry don't remember exactly at this moment says in one of his talks “Every business model you are using today is probably obsolete”, that is why there is a practice of business model innovation today.
Now, why do you need some sort of innovations engine along your transformation in your business? that is to keep the competitive advantage of your business! Without that competitive advantage where you can either sell more or sell for a higher price and get away with it, the underlying business will start suffering as time goes on. You start spending more on operating fees, sales fees, marketing fees to compete, which will start affecting your margins. To sustain a successful business, you need a competitive advantage and a durable one, to keep the competitive edge you need innovation of some sort, either in the product or your services, your customers, processes, or even through acquisitions etc. That long term durable competitive advantage is the secret to exceptional businesses that continue to grow. If you don't have these competitive advantages and all Porters 5 forces scores are low, then probably you are competing on price, marketing $$ etc. so you're in the red ocean space and margins are pretty much squeezed, until you find how to get out of the pricing strategy then you're stuck there.
The innovation engine is a must, there are three types of innovation, perhaps I'll write another article on innovation for now I'll just give you this drawing that depicts how innovation in your existing products/services or beyond can really keep your growth for a longtime to come.
I'll leave details of why disruptive innovation is usually out of an organization business model in another article. So ?through proper digital transformation the organization or business becomes a digital master in your field to drive significantly higher level of profits, productivity and performance. .
"Digital Masters outperform their peers. Our work indicates that the masters are 26 percent more profitable than their average industry competitors. They generate 9 percent more revenue with their existing physical capacity and drive more efficiency in their existing products and processes.”
“Digital Masters excel at two essential capabilities. They build digital capabilities by rethinking and improving their business processes, their customer engagements, and their business models. They also build strong leadership capabilities to envision and drive transformation. Each dimension of capability is important on its own. Together, they make you a Digital Master.”
Leading Digital – Turning technology into Business Transformation. By Andrew McAfee, Didier Bonnet, George Westerman Harvard Business Review Press
Scope and Scale through Digital
Digital enterprises gain access to becoming a data driven business when they achieve digitalization, once you achieve it, data becomes an information. Information and data can drive new services, new products, new business models. Access to proper information can be turned into the proper drivers to improve a product, to add a feature that will drive your next decade as the number one choice against the incumbents, yes, feature and not product, Many successful businesses today started as a feature rather than a full product, a feature that solve particular problem, that includes google, yahoo and others. Hence you can bring this mindset approach to your business through data to build new features that your customers want and can be driven into mass market adoption.
Could Digital Transformation help you drive Planned Obsolescence?
Let me put this as another thought in what might be achieved with true digital transformation. Allow me first to explain what economists call Planned Obsolescence. Planned obsolescence is the versioning, cutting, adjustment, or total modification of a product whether physical or digital so its previous version looks obsolete, outdated, non-desired, while the new version looks new, cool, attractive and trending. This is a very common technique in the fashion industry, and its practicalities are across the board. The fashion industry keeps on changing, adding, modifying, styles so people don't want the old anymore. This technique seems to be possible when you have enough data on what you are offering the customer. Today digital tools can simulate much of your architectures, products, without spending a cent in the physical world. Having total insights into your products, customer behavior, market trends, research etc. can drive planned obsolescence which ultimately drive versioning of your products to look as supplements, or even totally new which in return drive revenue. People like new and cool. Businesses that know how to drive this have huge success in their respective markets, like Apple, Amazon and others, as they bring behavior sciences into the equation. Human behavior craves new and novelty, our brains get excited when they detect new things, thus using this technique through data powered by the digital transformation can possibly yield new offerings, new markets and more customers.
Planned obsolescence could be easier in the digital world as the cost of change, modifications, customizations with today's technologies are near zero. However, there is a huge potential in driving customers through digital tools to explore derivations and variations of your products or services where possible, an example, an organization offering Kitchen setup, even if the kitchen of 5 years ago was sold, what if you incorporate a digital tool in your mobile/web app and allow the customer to modify on the fly the same kitchen they bought using your components, or allowing the customer to adjust the kitchen during a certain period for a certain fee, this could turn into a recurring revenue for your organization, thanks to the digital transformation that you incorporated into your business. Dr. Rado in his "Data-Driven Business Models for the Digital Economy" looked at the digital tools, templates, life-cycle supplemental add-on as a subscription revenue, so a recurring revenue, where customers will need to pay for the digital updates, however, there is more opportunity here even for hard to digitalize industries through innovation by offering customers the ability to simulate environments, whether appliances, architectures, design etc. while incorporating of course the dynamic components that the business is offering and is capable to customize. Some companies in retail like shoes and cloths started exploring through AI and graphics this kind of simulations but I think it could go beyond these simple full items try-outs, when driven toward individual customizable components that the business can offer and change.
Is your organization ready?
We're kind of almost out of the woods of the pandemic, yet another disaster happened with Russia's invasion of Ukraine; The human, economic local and global impact is yet to be fully seen especially the economic impact. It is not just oil and gas, it's all the supply chains that will be disrupted by both suppliers Russia and Ukraine. Add to that the ever progressively fatting inflation that will reduce revenues and earnings altogether down, so brace for missed revenues, earnings and abrupt change in consensus. The OECD composite leading indicators point to a slowdown in most economies, if not almost every country; so the critical question is what your organization doing about it?
Many international companies had Russia as one of its important growth sources, large customer pools, wide channels and now it's gone, is your organization prepared to substitute Russia and focus on potential countries where it can grow and survive the next few quarters or may be years?
Have you looked at the Composite Leading Indicator (CLI) all trends indicates the ultimate slowdown in almost every economy, US already dropped 0.4% in the first quarter as am writing this around May 2022, China has already slowed down and missed its target GDP growth, add to that China's strong 0 COVID policy has manifested additional slowdown, which will show in future numbers. These restrictions has already started impacting the global supply chain and trade
In this critical period, I think data and analysis of an enterprise's health, readiness for these upcoming storms is important. This kind of analysis needs proper platforms, tools and infrastructure to be ready.
You might say things are looking good, corporate revenues and earnings are still healthy, consumer sentiment and manager purchasing indexes are good, yes, but remember markets are cyclical and they do affect business as well inflation, and other factors start traversing and working their way into the real world of consumers. To understand more about this take a look at the brain behind one school of thought on economics Professor Milton Friedman talk back in the 1978 on Money and Inflation at University of San Diego and Howard Marks book on "Mastering the Market Cycle", although it's about markets, but there is plenty to learn how market driving factors slowly or abruptly affect the credit and demand, which affect the consumption engine which in turn affects enterprises.
Is your organization modeling risk?
What is risk? Why do you need to measure possible and probable risk? Can you actually measure risk?
Risk is the probability of a bad event happening. It could be anything in your business operations, in the overall business outcome, market, your health, your life. Can you say with certainty when you go out of the door you're coming back? No, the same applies to the enterprise, can you say with certainty that your organization will continue to exist in 1 year, 5, 10,50, how about 100, you will never know!
However, you can model possible bad events happening and estimate the probability of when that happens at least for the near future, if you have the means to face that event.
By having the data you need through a digital transformation you may be able to run a few models and set possible situations (simulations) on how you will survive through it. There is no mathematical function that can predict the future, you can only rely on the past up to a certain point, but that does not guarantee it will happen, however, you can anticipate and assume, in order to factor in what you have now and what possibly you will have in the future in order to have a plan in case things go bad.
Modeling enterprise risk should include all possible factors exterior and interior, to see really what you could be up against. Epidemiologists have been crying out loud for years about the upcoming pandemic burst on humanity, could they predict when? Nobody can say for sure, and there will be more. We can see through history how many pandemics have wiped out millions of people. The thing here is you simulate the risk and then you set a state of the enterprise (within reasonable probability) to understand if you can sustain the storm.
The Federal Reserve banking stress test is based on Dodd-Frank framework/law and Comprehensive Capital Analysis and Review (CCAR), it's a simulation of risk test that "assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses", so really it's looking at risk here to determine if a bank is fit to absorb headwinds.
Questions you may ask, what is my balance sheet at the moment? What is the state of my debt, do you have leverage to negotiate the business debt? what if interest rates shoot through the roof, can you handle it? Do you have any hedging strategy against currency risks? What is the state of your human resources? Could you handle another pandemic? competitors taking your most valuable brains? What is your strategy with your suppliers? Do you depend on one country or multiple countries?
You've seen what happened with Ukraine few companies had their whole engineering and development teams in the Ukraine, this caused the business to slow with huge stress. I know of at least two companies where this crisis has affected them!
Hence the question, did you factor in during business planning and strategy the probability of resources stress? So, we're back to the probability of factoring different scenarios through simulation and having clear answers!
All these questions should be factored as features in your simulations to understand different situations, and have a plan, strategy, as without a plan there is no arrival!!
Measuring the enterprise?
How many metrics does your enterprise as whole have? How many sales metrics do you have? How many human resources management metrics do you have? Do you know exactly how much does the unit item product actually cost you to sell? starting from R&D cost, marketing $, general and administration, sales cost, etc.
Do actually metrics matter? why do we need metrics? do the metrics you have make sense? Do they bring any value to your business and teams? do they actually reveal anything?
All these questions and more are nontrivial to establish the right metrics that actually matter.
Coming back to the importance of measurements, measurements is really the only tool that can tell you if when you started is similar to when you finished by simple comparison you would know. An example, how can you tell actually if you are heavier now then 5 days ago if you don't measure, how much you weighed 5 days ago, vs. versa now, you cannot compare x1 (state) from x0 (state) if you don't have some sort of agreed units of measurement. Hence to measure, you need to understand the context of what you are measuring, the start, the end and the between (variance). You need to understand the data to see the progress, understand the average or median, variance and regression, and understand the behavior of your data, is it skewed, are there outliers etc.
That is why it's important to identify key metrics that matter in the enterprise, and identify the key data points needed to have a correct measurement not a misleading ones. Not all metrics are important, you need to focus on what matters and is truly important to the business. It was said "Not everything that can be counted counts and not everything that counts can be counted" attributed to Albert Einstein.
An example, how do you measure that your marketing campaign is a success? How many leads did you get? How many leads turned into prospects? how many prospects actually end up in buying? How much did you spend? What is your operating expense (for this marketing and all marketing) to sales ratio from this marketing? All these questions are important if you want to have discipline and know exactly how are you doing with some sort of context.
A digital transformation could be the only way to measure an enterprise properly so you actually have a strategy! A strategy is not a one management action it's the overall actions of the enterprise combined together, these actions need to be well thought and guided by data and analytics, where digital transformation comes handy as the tool to make that happen.
Do you need a strategy to implement a working Digital Transformation?
All enterprise business objectives and goals need a strategy, without it your goals, investment, capex could be detrimental. Turning your organization into becoming a data driven, and digitally savvy, you need a plan of actions that are designed to achieve specific goals the business is seeking. Before you can define the steps, the strategy needs to go through a form of evaluation framework of your goals and the environment.
So, before you start any type of digital transformation on any layer of your organization you need to have a strategy in place to achieve the desired goals and outcomes, otherwise you'll be shooting everywhere and the probability of hitting anything becomes feeble. However, as outlined by many thought leaders don't go all in, even with on one category, such as social media or customer experience, or human resources empowerment, you need to be realistic so the business category you want to tackle should be near-term solution that is achievable, and realistic, before you tackle gigantic goals you need to start with critical but achievable goals. However, you need also to answer many questions that will be the path plan for your strategy, you need to answer "why" this critical challenge is important to your business, what is the impact on business if the organization does not solve it? can the business quantify in $ term how much you are losing by ignoring it? and many other questions. Once you have enough logical convincing answers as of to "why", then you start on "how". how can I solve this challenge, what set of steps and actions with what parameters that will guide the organization as a whole to solve this problem. This is critical in defining your strategy to achieve your digital transformation on your designated layer. Then you set clear coherent steps and surround these steps with policies and limits.
Why do you need to build the strategy around digital transformation? because digital transformation as outlined should be led by the leadership and precisely the CEO office, hence, you need solid strategy to build clear communication and messaging to the whole organization, so execution is understood, coherent and systematic. Without strategy you cannot have such an encapsulating environment for the implementation of a digital transformation! I used the word encapsulating intentionally as strategy is not something you touch but something that the organization lives through and works 24x7 like Porter explained it in many of his talks, lectures and books.
There are 2 points here that I'd like to amplify one more time:
I've mentioned Porter 5 forces and its importance to be incorporated in a digital transformation as feedback loops, when you think about it, good agile adaptable strategies plus transformation bring together the business building blocks of an organization to work together toward growth, profitability and sustainability.
During the past 2 years the pandemic was a catalyst for digital transformation, the urgency of operational effectiveness proved to be extremely important, efficiency in all aspect of the value chain, through insights and analytics that are powered by a digital transformation. Michael Porter said "if you are not operationally effective strategy does not matter", This is fundamentally profound in business strategy! Operationally effective on everything including G&A (General and Administrative) cost that eats up an organization’s operating margins, you need operational effectiveness everywhere from your data center, IT operations, business operations, finance operations, HR etc. to have that synchronization with your strategy, you need to streamline processes, IT, business operations, finance and HR, so your strategy is working for you day and night and you don’t need to wake up at night to try figure out which element in your strategy is pulling you back!
A coordinated well planned digital transformation with strong strategy feeding into each element of the enterprise will keep efficiency in check!
Red Ocean vs. Blue Ocean, can a Digital Transformation help on the latter?
Red Ocean is the current market we know of with all competing enterprises, taking each other's market share, competing on price, reputation etc. the more competition and players the bloodiest it is, and the bloodiest it is the narrower the profits are. The blue ocean is unexplored territory yet, it's the un-known.
Many blue ocean industries, products and services started by chance, while some started while looking for something maybe a one customer feature request, many also started as a feature that does not exist. Blue ocean strategy when you land it, should make you unique in the market, distinguished.
The thought here, is, can you use the building blocks you've constructed through digital transformation to discover blue oceans territories?
Yahoo started as a web directory for Stanford, Google wasn't a search engine it was about how to solve the page rank problem, a problem known in computer science, so it was to solve ranking and provide this feature to search engines, so it was type of a plugin, YouTube was about sharing videos from parties with participants, and many other companies didn't start from a product, they started from addressing a feature, a problem they wanted to solve that didn't have a solution. Jim Goetz has an exceptional talk on how things started for these great companies at Stanford Graduate School of Business; I encourage you to check it out.
The idea here, once you implement the digital transformation tools especially in the analytics space, you should explore the discovery of metadata that will give your products and services a distinction. Remember once your products or services start to look the same just as any other competitor in the market, you'll be only competing on price. Raging wars will start between incumbents and margins will shrink. Just like with Airlines, almost all of them are the same hence the only thing the consumer is looking for is a price. So you become a substitute, the only thing that matter is price.
This is something that an organization could pursue just as an innovation, albeit this might end up in a breakthrough, you need to use the data to listen to your customers, look at what's missing, what could be better. Otherwise it becomes harder and harder as the competition narrows in features to explain why a prospect should choose you over your competition!
The enterprise world lives through the same Darwinism phenomena of survival, those enterprises that adjust their strategies, adapt, plan, and discover new funnels of revenue will survive perhaps centuries after we're gone, those that sit and just do the same tasks, same analysis will vanish just like their counterparts before!
Key Takeaways
If you got this far, I thank you for taking the time to read thus far, really appreciate it! But please continue reading almost there! Appreciate also the feedback and your thoughts!
There are more topics I would like to add however, if I continue it won't be an article, and I don't intend to make it more than this.
Now the point am trying to make here is, digital transformation is a framework of various technology components and business objectives and goals intertwined, collaborative, and synchronized. To achieve the desired goals from a digital transformation you need to append your existing enterprise technology, process, workforce and other components with the right platforms that simplify the integration, the communication and desired outcomes.
You will know that the transformation is working when the organization becomes agile with adaptive capabilities that makes the organization adapt to the ever changing environments in the infosphere world.
Key Points:
I'll leave you on this point with this great input from MIT professor Erik Brynjolfsson where he outlines the key pillars of modernization: application, process and infrastructure.
Again, if you read up to this point, I am grateful I hope I have contributed to your thoughts and enriched a bit your knowledge!!!
Appreciate also your feedback and your thoughts!
Thank you!
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