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Digital transformation — using technology to radically improve performance or reach of enterprises — is becoming a prime topic for companies across the globe.
CEOs no longer think only digital start-ups or high-tech darlings like Amazon, Apple or Google can use digital transformation. Executives in all industries are seeking ways to use digital advances to change customer relationships, internal processes and even business models. Other executives, seeing how fast digital technology disrupted media industries in the past decade, know they need to pay attention to changes in their industries now.
The MIT Center for Digital Business and Capgemini Consulting set out to investigate the ways in which large traditional companies around the world are managing – and benefiting from — digital transformation. They are working to understand how digital technology is changing the business of large companies. Their first report, Digital Transformation: A Roadmap for Billion Dollar Companies was recently recognized as one of the best examples of thought leadership over the past decade.
What technologies spur digital transformation? The authors of the MIT Center for Digital Business/Capgemini Consulting report identify four emerging technologies companies can use to completely rework their customer interaction, their operations and their business models:
- social media;
- embedded devices, or smart RFID tags.
You can call them the SAME gang or skip the cute acronym, but these four technologies form the core of what companies are using to create digital transformation. These technologies build on previous investments in enterprise technology. For instance, companies will have a harder time gaining transformative insights through analytics if they have a poorly implemented ERP system. The new technologies also take advantage of emerging infrastructure technologies like the cloud.
How can senior executives successfully lead digital transformation? While many experts urge companies to get started on the digital transformation journey, few tell how to do it. The examples they do give tend to revolve around young companies that exist because of technology, like Apple and Amazon. Executives in traditional companies often find these examples hollow. Big traditional companies, with decades of history and legacy, are simply different from these newer digital entrants.
For traditional companies, technology is often just one of the tools managers use to support the overall business. And many traditional companies have been burned by unsuccessful technology projects that failed to achieve their promise. In fact, companies have seen that technology can have three effects:
1) a substitution effect, because the technology just substitutes for, or replaces, existing processes.
2) an extension effect, because the technology’s main impact is to extend the company’s brand or product line into a new platform, such as the Web, or mobile;
3) a transformative effect, because the company begins doing business differently.
Obviously, what executives really want to achieve is number three. But the study found that most companies don’t think they’re succeeding at transformation yet. Most of them think they’re gaining either substitution or extension effects.
But there are companies achieving digital transformation. The study discusses how PagesJaunes, the French Yellow Pages, has completely changed its business model based on the idea that it is not a purveyor of advertising books, but of localized advertising. Its technology strategy includes building 100,000 websites for small businesses in France, creating a strong mobile presence and using analytics to help its clients develop better brand and advertising strategies.
There are many different paths to digital transformation. There are a few universals. A main takeaway from the report is that companies succeed in transformation only when top leadership takes a strong interest in making it happen. The CEO does not have to spearhead the implementation, of course, but has to lead the way.
Nor do these transformations happen overnight – companies often need to create digital units and leadership to provide the services the entire organization needs. One case study discussed how a company took six years of planning and restructuring to get to the point where it had achieved digital transformation.
In effect, the pathway to digital transformation often follows these steps:
- Top leaders must lead the way;
- Radical transformation happens in incremental steps;
- Leaders must stay flexible.
The Center for Digital Business and Capgemini Consulting are developing more research on how traditional companies can undergo a digital transformation. We will bring more of their insights as they emerge.
See MIT Sloan Management Review‘s new website area about Digital Transformation for more articles and research related to this topic.