Return of the Thriller “3 Horizons of Digital Transformation”

In “Importance of Thinking Differently…Hint: Don’t Pave the Cow Path”, I introduced the concept of the “3 Horizons of Digital Transformation.”  I wanted to provide a framework that helped organizations differentiate between “Digitalization” versus “Digital Transformation”.  Unfortunately, in succeeding client engagements, I realized I did a crappy job of explaining these 3 horizons.  

So, like how bad movies create “Return of” sequels in order to explain everything they screwed up in the original movie, consider this my justification for “Return of the 3 Horizons of Digital Transformation” thriller!

This “Return of” blog will provide more details on the 3 stages – or horizons – through which your organization must navigate in order to achieve Digital Transformation.  And while I’ll readily admit that Horizon 3 is much more aspirational than reality today, it is important that organizations have some sort of motivational vision towards which to drive.  Besides, nothing wrong with being aspirational as long as you have a plan for how to get there! But first, a word from our sponsor…

Digital Transformation Is Hard…Very Hard!

As a backdrop to this “Return of” conversation, I’ll reference a McKinsey article titled “Unlocking success in digital transformations” that highlights some of the difficulties with which organizations are wrestling with respect to Digital Transformation:

“This year’s [survey] results suggest that digital transformations are even more difficult. Only 16 percent of respondents say their organizations’ digital transformations have successfully improved performance and also equipped them to sustain changes in the long term. An additional 7 percent say that performance improved but that those improvements were not sustained.”

Yea, Digital Transformation is messy, dirty and ugly. Digital Transformation is hard because it requires difficult trade-offs in deciding where and how much to invest for today’s survival (Horizon 1) versus tomorrow’s aspirations (Horizon 2 and 3). It requires organizations to develop a deep understanding of their digital value creation, capture and operationalization processes and capabilities while involving specified use of technology and re-engineering their business models accordingly

Re-Introducing the 3 Horizons of Digital Transformation

In the “3 Horizons of Digital Transformation” blog, I used a Farm Equipment Manufacturer (because I currently do not have a Farm Equipment Manufacturer client) as my illustration of what’s required to circumnavigate the 3 horizons of digital transformation (see Figure 1).

Figure 1: Introducing the 3 Horizons of Digital Transformation

Note: This discussion will be more about economics than about technology and focus on how organizations can master the economics of digital assets (like data and analytics) to identify, capture and operationalize new sources of customer, product and operational value today and into the future.

So, let’s triage our Farm Equipment Manufacturer’s 3 horizons of digital transformation journey.

Horizon 1: Manufacturing Operational Excellence

For our Farm Equipment Manufacturer, Horizon 1 focuses on leveraging new sources of data and advanced analytics to optimize today’s key business and operational decisions or use cases (see Figure 2). 

Figure 2: Horizon 1: Achieving Operational Excellence

Horizon 1 seeks to apply Six Sigma and Data Science rigor to optimize current operational processes such as zero unplanned operational downtime, predictive maintenance, resource scheduling, asset utilization, “first time fix” management, demand forecasting, energy optimization, waste minimization, fraud/theft reduction and inventory optimization.

Horizon 1 is the of world of 1% improvements (though a 1% improvement compounded 365 times does yield a whopping 38 times improvement!).  See the blog “Smart Manufacturing and What It Means to Win the 1% Race” for more details on how organizations can survive in the Horizon 1 world of hand-to-hand combat.

However, with the changing market dynamics and the creation of new business models from startups, being the most efficient organization is no longer sufficient. Focusing on “Paving the cow path” is a great way to ensure irrelevance in the Horizon 2 competition.

Horizon 2: Digitalization of the Business

In our Farm Equipment Manufacturer example, Horizon 2 is about creating digital or “Smart” Farms.  Horizon 2 couples Design Thinking with Data Science to envision the creation of an “augmented intelligent” farming business model that monetizes equipment, worker, soil, crop, weather, commodities pricing, economic and operational insights (see Figure 3).

Figure 3: Horizon 2: Digitalization of the Business

Horizon 2 is all about the “Digitalization” of the farm; leveraging new digital technologies such as IoT, Robotic Process Automation, 5G, Augmented Reality / Virtual Reality, 3D printing, 3D printing and blockchain to replace or augment human-intensive tasks with digital technologies. These new digital technologies are unleashing new sources of data that can be mined with new Artificial Intelligence, Machine Learning and Deep Learning capabilities to uncover new sources customer, product and operational value.

Think about the digitalization (or the creation of digital versions) of key operational entities including tractors, farm implements, compressors, livestock, workers, and technicians in order to dramatically improve and accelerate operational decision making.

See the blog “How to Flourish in Industry 4.0, the Fourth Industrial Revolution” for more details on how organizations can exploit these new digital technologies – and the resulting bounty of customer, product and operational insights – to flourish in Horizon 2.

But do NOT confuse Digitalization – applying digital technologies to augment human-intensive processes – with Digital Transformation – which is the fundamental re-engineering of an organization’s business models to master and exploit the identification, capture and operationalization (monetization) of new sources customer, product and operational value.

Horizon 3: Farming-as-a-Service

For our Farm Equipment Manufacturer, Horizon 3 might be all about the creation of a new business model around Autonomous Farming.  In Horizon 3, our Farm Equipment Manufacturer could seek to exploit new analytics-infused automation technologies with superior equipment, worker, soil, crop, weather, commodities pricing, economic and operational insights to create an entirely new business model around Autonomous Farming (see Figure 4).

Figure 4: Horizon 3:  Business Model Digital Transformation

Horizon 3 is about re-engineering the organization’s business models in order to identify, capture and operationalize new sources of customer, product and operational value. Yea, Horizon 3 and Digital Transformation are about re-engineering your business model, not just re-engineering your business processes.

3 Horizons of Digital Transformation Summary

Horizon 3 sweeps aside traditional industry borders to create and capture new sources of customer, product and operational value.  Remember, Digitalization is applying digital technologies to augment human-intensive processes; to digitalization existing operational processes. However, Digital Transformation is the fundamental re-engineering of an organization’s business models to master and exploit the identification, capture and operationalization (monetization) of new sources customer, product and operational value.

Digital Transformation leverages these new sources of customer, product and operational value to re-engineer the organization’s business models (see Figure 5). 

Figure 5: Digital Business Model Transformation

Again, Horizon 3 is much more aspirational than reality today, but there’s nothing wrong with being aspirational as long as you have a plan for how to get there!