Digital Transformation | How to enable? Parallel execution
Ahmed Shokry
MBA | Digital Transformation | Strategy | Business Solutions | Head of Engineering, Digital Systems and Database Solutions at The Egyptian Credit Bureau S.A.E iScore and digital innovation enabler
Even during digital transformation, existing products and services must be delivered and supported for consumers.
Several studies show that a staggering proportion of digital transformation efforts fail. One of the biggest reasons for this is that organizations will not survive if they stop normal operations while transformation is in progress. Revenue needs to be made; missions need to be accomplished. The simultaneous goals of changing and staying the same seem contradictory.
It is easy to underestimate or misunderstand the effect that a digital business initiative has on the status quo. Poor planning often leads to inappropriate support of the digital initiative. Worse, when an organization focuses exclusively on the digital initiative, it neglects the existing business model, undermining the entire business.
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Many digitization initiatives include ‘built-in’ mechanisms for maintaining a steady state while transforming. For example, an organization that wants to improve operational performance by moving a subset of applications to a cloud-based delivery model will use tools included with its chosen platform to migrate with little or no interruption. More complex initiatives, however, require more complex planning. For example, an organization that seeks to transform large parts of its business model or operating model to disrupt an industry or market will need a more cohesive, coordinated plan to maintain a steady state while transforming.
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In this article we will go through:
?A. Parallel operating models
B. Ineffective operating models
C. Pace of transition from the old model to a digital model
D. The role of continual improvement in parallel operating models
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A. Parallel operating models
?Parallel operating models (POMs) are approaches to executing digital strategy while maintaining a steady state. They directly address the sustainment of two business models at the same time. Although POMs rarely exist in a pure state, they can be reduced to four basic models for the sake of comprehension:
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?1-??? ?Cannibalism
?Cannibalism focuses on the rapid destruction of an existing business model and its subsequent replacement with a new digital business model.
?Most forms of cannibalism aim to reduce the degree of parallel operation as much as possible. In these cases, assets or capabilities that can still be used are subsumed into the transformed environment, but often not in their current form.
?Cannibalism is the most aggressive POM, often an extreme reaction to threats. It is often driven by overcrowded markets with many competitors and a dwindling consumer base. In practice, an organization suddenly realizes that its business model (and often its products and services) is unsustainable, or is under serious threat from competitors or radically new applications of technology.
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For some organizations, cannibalization is more proactive. For example, Netflix intentionally transformed from a rental DVD provider, to a consumer provider, to a streaming video provider, to a content creator. It continues to repurpose its business model and intentionally cannibalize its own content. As one Netflix-original program begins to peak in popularity, the company creates and promotes new content. This may draw some customers away from existing content, but it also helps to grow the consumer base.
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Some organizations deliberately use continuous cannibalization to offer multiple parallel products or services. Apple has intentionally cannibalized the Mac with the iPad, and the iPod with the iPhone. This repurposing turned into complementary products and synergy: many consumers own multiple Apple products, including some with crossover functionalities.
?‘If you don’t cannibalize yourself, someone else will.’ Steve Jobs
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2-??? Erosion
?Erosion can be considered a kinder, gentler form of cannibalism where the organization uses the revenues of an existing and still profitable business model to fund a new digital business model.
?Erosion is characterized by three basic conditions:
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For a time, both business models operate simultaneously. The intent is to benefit from the still-lucrative resources of the existing business model for as long as possible. Profits and the other resources of the existing business model are used to fund the emerging model.
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Almost all POMs involve some form of erosion: new digital models need to be funded, and old business models provide revenue. In the case of erosion, however, the intent is to eventually destroy the existing business model. Erosion can be thought of as ‘slow decay’ or ‘measured destruction’.
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As an example, The New York Times (NYT), a leader in the newspaper world, was threatened by declining revenue from print-based advertising, which represented a significant revenue stream. NYT decided to provide online news content and charge users to access it. This bold decision came with significant risks. First, establishing the new digital business was costly. NYT used profits from its existing print business to subsidize the digital business. For several years, NYT’s overall costs increased because it was effectively running two businesses in parallel.
?Second, although NYT recognized that consumer demand supported ‘going digital’, it was unclear if or when the old print business would go away. Thus, swift cannibalization was not ideal; a slower (though aggressive) transition was needed. After several years, NYT print and digital subscription revenue combined was about double its print-based advertising revenue.
?NYT is a classic example of erosion being boldly and proactively employed. For too many organizations, erosion becomes the default option when leaders vacillate and cannot determine what approach to take. No plan is not a good plan.
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3-??? Concurrence
?Concurrence is an approach where the new digital business model neither helps nor harms the existing business model. Concurrence tends to work best when the organization is attempting to gain or increase market share.
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?Concurrence also works well when new consumers are hard to reach through existing channels. For example, a well-established men’s clothier enjoys the loyal following of local clients who shop in-store, but the market is relatively small. Potential customers living outside the area cannot visit the store in person. The clothier opens an online shop, which builds on his brand and existing business model without compromising it.
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In this example, there is no ‘place-based’ competition between the physical and online stores. Local customers continue to visit the physical shop; other customers primarily visit the online store. There is also no major reallocation of resources from the old model to the new one. Both models peacefully co-exist, and each model could exist without the other.
?Arguably, in this scenario the online store does not represent a full digital transformation and is simply an additional sales channel. This point is fair; for this reason, concurrence is often used in channel strategy positioning.
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4-??? Synergism
?The basic idea behind synergism is that two models combined produce a greater or different result than they could have produced individually: 1 + 1 > 2.
?Synergism tends to work best in situations where adjacent or complementary sales channels exist, there is no competition among channels, and customers prefer omnichannel delivery. In other words, some customers want to shop in a physical store sometimes and online at other times.
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Sephora, the cosmetics retailer, recognized that a critical aspect of selling make-up is the ability to try it on in a physical store. However, customers are highly influenced by online and video reviews, and recommendations from social media influencers. Sephora’s mobile application allows in-store consumers to scan codes from physical displays, which navigates the customer to videos, tutorials, and product reviews. Once a customer becomes familiar with a product, they may decide to reorder the same product from the online store instead of travelling to a physical location. Additionally, Sephora created a Virtual Assistant application that allows customers to virtually try on various make-up products regardless of where they are shopping. The physical store business model supports the online business model and vice versa, all aided by digital technology.
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The synergism model also works well when complementary products exist. For example, customers who buy a smartphone may want to listen to music on it, which creates an opportunity to sell downloadable music through an online store owned by the same company that produces the smartphone. In turn, this creates a network effect: a customer’s use of one product reinforces their use of related products. Furthermore, complementary products tend to increase switching costs. In other words, it becomes more expensive or difficult for customers to leave the brand in favor of competing products, which results in customer brand loyalty.
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Although it is not appropriate for every organization, synergism is in many ways the most mature or advanced of the POMs. It may provide the greatest benefits, but it is also the most difficult to execute. This is due in large part to the relationship between the ‘customer excellence’ and ‘operational excellence’ digital positions. It is difficult to earn lasting improvements in customer excellence if tremendous operational efficiencies do not also exist.
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B. Ineffective operating models
The worst POM is none at all. Organizations that have no model are either extraordinarily lucky or no longer in business. Some organizations operate parallel processes, technologies, or products simply by reacting to changes in the environment. Others adopt a model that is inappropriate for their objectives. These models are either too poorly defined, too expensive, or too rigid to be practical.
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Characteristics of ineffective models include:
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C. Pace of transition from the old model to a digital model
?The best POM varies according to the organization, as does the best pace of transition. The appropriate pace will tend towards either a rapid (often painful) transition period, or a cautious approach due to the uncertainties inherent in completely abandoning the old model and replacing it with a new one.
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At least four factors need to be considered in determining the appropriate pace of transition:
1-??? Consumer demand, a good axiom for any organization to consider is ‘when in doubt, ask the consumer’. In some cases, consumer demand dictates that the business model change sooner rather than later. A good indicator is how consumers use technology. A move to mobile, context-sensitive engagement technologies will require the organization to change to support those types of consumer journeys.
?2-???? Organizational capabilities and culture, there is considerable debate in this area. Some suggest that organizations should ignore current strengths and weaknesses, and instead progress aggressively by purchasing new technologies and hiring people with the skills needed to support the future business model. A more tempered approach suggests taking stock of the capabilities the organization currently has, understanding where it wants to be, and performing a gap analysis to understand what capabilities need to be built or acquired to bridge the gap. Digital positioning is helpful in understanding how improving specific practices will achieve a desired position.
?3-???? Maturity of supporting digital technologies, basing a strategy on emerging technology is risky. Technology in the early stages of innovation can be unstable. Early adopters may bet on the success of a particular technology, only to find the market moves in a different direction. An organization may find itself investing in a technology, only to find it being acquired by another vendor that wants to take it in a different direction. Therefore the pace of transition should not be driven primarily by the technology, but rather by what the organization hopes to achieve. Good practice is to start by identifying automation opportunities, and then consider which technologies would best support the future digital business model.
?4-???? Threats from competitors and emerging technologies, there may be times when a competitor’s use of digital technology usurps an organization’s competitive position, prompting an accelerated response. However, prudent organizations avoid rushing into deploying a digital business model or technology to keep up with competitors. A model that works for one organization may not work for another. In some cases, it makes more sense to monitor a competitor to determine whether its digital business model or technology adoption is paying off before investing in a losing position.
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D. The role of continual improvement in parallel operating models
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All organizations that have mastered digital transitions have a common appetite for change. They are not complacent with success or afraid of failure; they are never satisfied with industry-leading results or paralyzed by failures. For them, continual improvement is the way business is done. Digital masters actively look for opportunities to tear down their own digital models, even before they begin to falter, in favor of models that will take them even further.
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However, good leaders do not just perform the steps outlined here and in the related practice guides. Defining and implementing digital and IT strategies requires a fundamental shift in mindset, culture, and capabilities throughout the organization. This shift must start with the leaders.
This will be our next article on the required strategic capabilities.
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Senior Advisor, Digital Transformation Agent at BEYOND20. Co-Author ITIL "Digital and IT Strategy." Creator, World's 1st "Dictionary of Digital Business." Creator DICE Risk Management Framework. Professor.
6 个月Hmmm . . . this is almost word for word what I wrote when I first described what I termed parallel operating models and parallel execution models. Published in various forms via Beyond20 blogs and in the ITIL 4 Digital and IT Strategy publication. I'm glad you like the thought leadership, but a little bit of honesty and attribution would be nice.