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What is Digital Transformation?

What is Digital Transformation?

Digital Transformation is the process of restructuring your company for a digital, 21st century economy that favors technology-enabled business models rather than industrial business models.

The most successful digital transformations occur when you place the initiative outside of the core business. Otherwise, existing initiatives will likely stifle the new business model before it can take root.

While many companies have plans related to digital transformation, most of these companies are simply adding digital interfaces on top of their existing businesses. They aren’t looking to create true digital transformation, which involves looking at how your industry and business can change in fundamental ways to better fit the new business environment. This kind of incremental innovation can create small improvements to your core business, but it won’t address the long-term strategic challenges your company faces.

Creating real digital transformation in large, established companies is no small task. So how should your company approach this challenge?

In this post, we will provide you the recipe for how to create successful digital transformation. We cover these topics below:

  • When is Digital Transformation Needed? 
  • Incremental Versus Disruptive Innovation
  • The Importance of Platform Business Models
  • Examples of Successful (and Failed) Transformations
  • How To Do Digital Transformation Successfully

When is Digital Transformation Needed?

Most companies will only take on true digital transformation when faced with a major new competitive threat, usually from a technology giant entering your industry. Even at that point, most companies will first look to the industry leader to determine what their course of action should be. Both of these mentalities will fail your organization in creating digital transformation.

First, digital transformation has to start at the top, with the CEO and Board of Directors. If your executive leadership doesn’t have the thirst or interest in pursuing a new, digital business model, then your efforts, however well intentioned, will not likely be successful.

So where should you look for inspiration?

One of the best places to look is at the startup community in your industry. If there are startups building new business models in your space and raising Series A or Series B rounds, there’s probably a good reason as to why. Investigating these businesses, or perhaps investing in them, could help your business figure out if a broader digital transformation initiative is needed for your core business.

Lastly, use common sense: if your industry operates like an old industry, then it’s probably time for it to come into the 21st century. If there is a lack of pricing transparency, inefficient supply chains, heavy fragmentation in distribution, high barriers to entry or a highly manual/human-reliant transaction process, these are good signs to warrant further investigation of a new business model that could successfully take root or disrupt your current model.

Incremental Versus Disruptive Innovation

Incremental innovation refers to optimizing the current business model, not fundamentally changing it. For example, adding a mobile app for your publication’s readership. Or, Starbucks being a first-mover to embrace digital wallets and payments. These innovations incrementally improve the consumers’ ability to interact with or digest the content or service that is being sold.

However, the underlying business model doesn’t change. Similarly, looking at the supply chain, Sysco distribution trucks using mobile and GPS location will enable it to provide a better service to its customers with better updates on a delivery’s current location and expected time of arrival.

In all of these examples, none of the existing business changed their core business model. They improved customer service and the delivery model for their goods or services, but the core value proposition remained the same. Incremental innovations enable the existing business to outperform against its competitors, not create a whole new model for competition.

Disruptive innovation does change the existing business model.

The presence of digital technologies, data and changing user behaviors enables new business models to rise to dominance in almost every industry in our economy. Almost all of the biggest technology companies are living examples of disruptive business models created by startups rather than large, existing enterprises.  More on why startups have succeeded at digital transformation in our later section: How To Do Digital Transformation Successfully.

Successful digital transformation initiatives result in a fundamental business model evolution, as described by Clayton Christensen’s disruptive innovation theory. Uber is an example of disruptive innovation and if it were created by a transportation company, like UPS, it would be hailed as the one of the greatest digital transformations of all-time.

So, in essence, digital transformation is a successful disruptive innovation executed in the digital world of the 21st century.

Sounds simple, right? Stay tuned.

Platform Business Models

If digital transformation is synonymous with disruptive innovation in the 21st century. Then, the platform business model is synonymous with the 21st century business model.

The platform business model is the dominant business model, as exhibited by Google, Apple, Microsoft, Uber, Facebook and many other public technology companies.

By starting with by defining the business model up front for a company’s digital transformation efforts, focus is achieved much faster. Many consultants will spend months and months evaluating a hundred different business models, much of which is unnecessary. The only public, non-platform technology company founded over the past twenty years with break-away success is Netflix, which has yet to find a way to make much in the way of profit. The large majority of these dominant, successful technology businesses are platforms.

For most existing businesses starting their digital transformation journey, the platform business model will most likely provide the best opportunity.

Examples of Successful (and Failed) Transformations

A number of large companies have attempted digital transformation and many have failed. Right off the bat, any companies trying to incrementally innovate their business model will fail. The incremental impact on the business won’t be enough to save it from true disruptive innovation that takes place in the industry, so we won’t get into any of those examples.

Walmart is a great example of a company that has been working on digital transformation for over eight years. Starting in 2009, it started Walmart Marketplace, internally. It failed. Then, it bought Jet.com in 2016 which is working quite well. Walmart Marketplace and Jet.com are both examples of a platform business model – specifically, a product marketplace.

Salesforce and Intuit’s Quickbooks have both evolved their SaaS businesses into development platforms. Third-party developers can create apps using the data stored in your Salesforce and Quickbooks accounts. Other SaaS businesses have embraced this form of digital transformation like CAD software leader Autodesk, as well as Amazon’s Amazon Web Services (AWS) division

However, many SaaS companies have tried and failed at this approach as well. Examples include Evernote’s app marketplace, Box and Dropbox. Oracle is also failing with a barren app marketplace.

In heavy industry, Kloeckner is one of the largest metal distributions in the US and Europe. It has embarked on a digital transformation journey to create a product marketplace to buy and sell metal. Its CEO is on the board of the digital transformation committee at the World Economic Forum.

How To Do Digital Transformation Successfully

Digital transformation needs to occur outside of the core business and there are two main approaches: build or buy. In either approach, there are fundamental guidelines that will help your digital transformation journey stay on the right track.

The new business model needs to give as much autonomy as possible while still providing the assistance and benefits that the existing business offers. If too much dependency remains between the startup and the core business, the latter will most likely suffocate the former, resulting in a failed digital transformation.

A clear vision and business model should be defined up-front. Creating a separate business unit for the sake of exploration will lead to prolonged and expensive investigations. The hard part of digital transformation is executing, not ideating.

At Applico, after a three month Platform Design course, a business case has been made and tested with preliminary market participation. After these three months, a new platform business is ready to be spun-out and brought to market.

A separate capitalization table should be setup for the new business initiative. The right talent needs to be attracted and rewards for the risks they are taking. Equity compensation is important to align long-term success (or failure) with the compensation packages provided to the early team members and leaders of the new startup.

If you buy a startup, the M&A process will determine how the above guidelines are brought to life. If you start a business from scratch, the organizational structure of the new entity can embody the ideal structure.

However, one rule holds true in all circumstances: the executive leadership of the existing business needs to embrace the transformation and agree that parts of the core business may be sacrificed in order to make the new business model successful.

Without leadership and vision coming from the very top, no digital transformation initiative can succeed.

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