Digital Transformation

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This lesson is from Digital Transformation Handbook by John Palfreyman

Strategy

Wikipedia says digital transformation is:

  • The use of new, fast and frequently changing digital technology to solve problems

Technopedia says it’s:

  • A term most often associated in the business world where companies are striving to keep up with changing business environments brought about by customer demand and technology’.

John Palfreyman

  • The way that an organisation can gain sustained competitive advantage through the smart use of technology

Strategy First

Strategy First
Source: Digital Transformation Handbook by John Palfreyman
  • The organisation’s strategy must be the driving force for change. Without a clear, shared and understood strategy, any form of transformation (digital or otherwise) is likely to fail.
  • Strategy must always lead and transformational change with digital technology can follow, totally aligned with the strategy.
  • Digital transformation makes it sound like ‘digital’ is in the driving seat, and by its magical powers can transform a business for future success. This could not be further from the truth.
  • Digital technology is one way of achieving one or more strategic objectives, but it can never do that alone! Cultural alignment - which is always harder and takes longer to accomplish - will also be needed to fully exploit the new technologies.

What is strategy?

  • The word is derived from the Greek ‘strategos’ which means ‘military general’. The verb ‘stratego’ means ‘plan the destruction of your enemy through effective use of resources’.
  • Traditionally, strategy is thought of as the long-term direction that an organisation will take.
  • Strategy will usually exist at a corporate level, business level and operational level.
    • Corporate strategy defines where an organisation will compete.
    • How is answered by the business level strategy.
    • The operational level strategy defines how the business will execute its strategy.
  • All three levels must interlock and re-enforce.
  • A good strategy can be seen as answers to three important questions:
    • Where do we compete? Which industries, markets, geographies?
    • What unique value do we bring? How are we different? Or just cheaper?
    • How do we deliver value? What resources or capabilities do we use? What skills, technology and delivery methods will we use?
Characteristics of good and bad strategy
Source: Digital Transformation Handbook by John Palfreyman

A good, well communicated strategy is the prerequisite for a digital transformation.

The strategy will form much needed navigational direction for the organisational change through the smart use of technology

Strategy is the creation of a unique and valuable position, involving a different set of activities. The essence of strategy is choosing what not to do.’ Michael Porter, 1996

Strategic agility ensures that the strategy will evolve and stay relevant as inevitable changes occur

Porter’s positioning - Michael Porter ’s Competitive Advantage, 1985

  • technology and information as ways of creating and sustaining superior organisational performance.
  • However, Porter recommends caution in technology choice, offering analytical steps and tests for ensuring alignment of technology with strategy
  • He argues that correct and sustainable organisational positioning will prevent imitation and deter competition.
Porter’s five forces
Source: Digital Transformation Handbook by John Palfreyman
  • Porter’s five forces analysis is useful if an organisation is thinking of entering or exiting a particular market or looking to strengthen its position in an existing market.
  • The analysis works for organisations of any size / shape, but the impact of the forces may depend on the organisation’s size.
  • For example, a small organisation will be challenged to maintain barriers to entry over a large, investment rich new market entrant.

Case Study – Uber (from Innovation Tactics, Porter’s five forces explained)

  • Bargaining power of buyers (riders) [HIGH]
    • due to strong ride hailing competition from many modes of transport.
  • Bargaining power of suppliers (drivers) [LOW]
    • weak right now, as there is no unionisation which Uber are monitoring closely. Public perception may strengthen and cause this to rise.
  • Threat of new entrants [MEDIUM/HIGH]
    • on the surface anyone could develop an Uber like platform so the barriers should be low.
    • But in practice the new entrant would be challenged to drive up critical mass against the incumbent giant. More likely is locally focused entrants (see Dubai’s careem for example) or new entrants from unexpected markets such as car manufacturers or ‘big tech’.
  • Threat of substitution [LOW]
    • could come from self-driving cars, better public transport or working from home but overall the threat is low due to difference in value proposition.
  • Rivalry among competition [HIGH]
    • competition is stiff for Uber but they are the largest, enjoying first mover advantage.
    • Other location specific competitors are emerging. To combat this, Uber are expanding into adjacent areas such as freight, food delivery, self-driving cars and electric bikes / scooters.
  • Porter’s Four tests to establish whether tech can increase competitive advantage
    • The technological change lowers cost and / or enhances differentiation and the firm’s technological lead is sustainable.
    • The technological change shifts costs or makes the firm product or service more ‘unique’.
      • For example, if technology can be used to efficiently scale up an existing business process so that cost does not rise in a direct proportion to volume.
    • First mover advantage is gained by pioneering technology adding to benefits improving efficiency.
      • First mover advantage can be realised in terms of cost of differentiation.
    • The technology change improves this industry overall, even if this is easily copied. In this case technology can improve the profitability of all organisations in the industry.
  • Care must be taken when the use of tech meets one test but can worsen the organisation’s position via another.

Developing strategy

  • Organisational disasters happen and sadly
    • most leaders don’t have what it takes to prevent this and
    • those who do are often undervalued.
  • Obviously, some organisations get this right, but many struggle to adapt as the external and internal context changes.
  • Equally, there are few strategy professionals and board members
    • who really understand what strategy is and are able to realise it through meaningful and sustained change.
  • ==Default future== is where an organisation will end up if no action is taken other than currently planned. Businesses attain their default future due to a combination of external and internal navigational forces, some of which are easily observable, some less so.
Navigating forces define trajectory, hence default future
Source: Digital Transformation Handbook by John Palfreyman

Case Study – Blockbuster

  • This case study shows what can happen when an organisation fails to confront its default future.
  • Blockbuster opened their first store in Dallas in 1985 and soon became a household name within with their bright blue logo as the place where you would browse videos and select one or more for short term rental and home viewing.
  • In 1987 the VHS video format enjoyed some 90% of the 5.3 Bn market in the United States. The company was acquired by Viacom for 8.4Bn in 1994.
  • Around 2000 broadband internet technologies made streaming of movies possible to a home computer. Initially, the speeds were patchy and pricing models prohibitive. Blockbuster failed to respond to this exogenous navigating force at their peril.
  • In 2004, Blockbuster employed some 60,000 staff in over 9,000 stores globally. But the rapid adoption of broadband / movie streaming decimated their core business model and led them to filing for Chapter 11 bankruptcy just 6 years later.
  • By 2013, as the number of broadband users globally topped 650 million, Blockbuster closed their remaining stores.
  • ==This default future could be better than the current state, or it could be worse depending on its trajectory. This trajectory is determined by navigating forces , which can be either exogenous (originating outside the organisation) or endogenous (originating inside the organisation).==
Exogenous (external) navigating forces
Endogenous (internal) navigating forces
Source: Digital Transformation Handbook by John Palfreyman
  • Altering the trajectory means changing the influence of or responding to some or all of the navigational forces.
  • If exogenous forces change rapidly – for example the rapid onset of the Covid-19 pandemic – then the organisation’s trajectory and hence default future can change without leadership action.
  • It’s useful to understand navigational forces and their organisational impact.

Impact and relative difficulty in changing endogenous (I) and exogenous (E) navigating forces.

Analysis of navigating forces
Source: Digital Transformation Handbook by John Palfreyman

Case Study – Nokia

  • The original Nokia business was formed in 1865 when Finnish-Swede mining engineer Fredrik Idestam established a pulp mill near the town of Tampere.
  • A second pulp mill was opened in 1868 near the neighbouring town of Nokia , offering better hydropower resources.
  • Roll forward just under a hundred years to when Nokia launched the first fully portable mobile phone in 1987.
  • In the early 1990s Nokia recognised the importance of new digital mobile telephony standards and were instrumental in their formulation, believing that mobile phones would become a consumer product.
  • By the mid 90’s Nokia were selling 300,000 mobile phones every day. In 1998, they reported sales of 20 billion making 2.6 billion profit.
  • By 2000, Nokia employed over 55,000 people.
  • Sadly, in the early 2000’s Nokia failed to appreciate seismic changes in several exogenous forces – including the mobile internet - that would enable Apple and other smartphone providers to grab market share from them.
  • Nokia were one of the founder members of the Symbian mobile operating system which they finally dropped in 2011, and in September 2013 their mobile phone division was sold to Microsoft for $7.2 billion

Organisational capabilities

  • Organisational capabilities are a special subset of endogenous navigational forces. These are ‘organisational muscle’ – strengthened over time – and determine how the business operates and behaves.
  • Capabilities are fundamentally different to the skills and competencies of individuals and are formed from shared mental models, languages, mindsets, practices and beliefs.
  • They are part of the fabric of an organisation, so remain when key individuals leave. Once capabilities are formed, they are really difficult to change.
  • Capabilities will need to be understood, categorised, mapped then changed (strengthened, acquired or retired) to alter organisational trajectory
Analysis of organisational capabilities
Source: Digital Transformation Handbook by John Palfreyman
  • Organisational target trajectory (also known as the trajectory of strategic intent) can only be chosen by understanding range of possibilities then determining what’s realistic & feasible.
  • As shown, there are two trajectories that need to be understood. The trajectory of strategic reality is the path from the current state to the default future. The trajectory of strategic opportunity is an envelope of possible futures and an organisation can decide where to ‘aim’ within this envelope
Trajectories
Source: Digital Transformation Handbook by John Palfreyman
  • This trajectory is also determined by the influence of exogenous navigating forces, both industry-specific and global and we’ll come back to this point.
  • The choice of trajectory is best decided through collective leadership, combining learning and experience.
  • Only after understanding the trajectory of strategic opportunity can an informed choice be made on the trajectory of strategic intent .

Executing strategy

  • The purpose of developing strategy is to define the trajectory of strategic intent which moves an organisation away from its default future towards one that the leaders judge to be better. The purpose of executing strategy is to turn strategic intent into operational reality
From intent to reality
Source: Digital Transformation Handbook by John Palfreyman
  • The purpose of strategy is to change an organisation’s trajectory away from its default future and towards one that the leaders judge to be better.
  • But all too often many strategies are explained in a complex and confusing way. And since strategy comes from the top of an organisation it’s hard for employees to question, or simple say ‘I don’t understand that’.
  • Clarity of guidance can come through the use of operating principles which turn strategic intent to everyday action. Operating principles help ensure that change initiatives are aligned with the target future.
  • The default approach to executing a strategy is to work through a series of carefully considered steps that together form a change program, essentially ‘pushing’ the organisation from the current state to the desired future destination.
  • This approach – referred to as implementation – involves delivering a predefined plan where the completion of each step takes us closer to the trajectory of strategic intent.
  • But there is a better way! The pulling approach involves the leaders creating conditions for success and making the strategic trajectory totally clear using operating principles.
  • Then everyone in the organisation (to varying degrees) helps pull us onto the target trajectory.
Push versus pull
Source: Digital Transformation Handbook by John Palfreyman
  • Leadership’s role in creating conditions for success is key to making the ‘pull’ approach work.
  • Executing strategy can be seen as a journey of two parts.
    • The first part is about transitioning from the current trajectory of strategic reality to the trajectory of strategic intent.
    • The second part is continuing to travel on the trajectory of strategic intent, until the whole strategy cycle needs to begin again.