WHAT DOES HARVARD BUSINESS REVIEW THINK OF DIGITAL TRANSFORMATIONS
WHAT DOES HARVARD BUSINESS THINK OF DIGITAL TRANSFORMATIONS?
REPRINTED FROM HBR MAY 2021
The CEO of a large retail company recently brought a $500 million digital-transformation-investment plan to his board. The board reviewed the proposal, but after asking a number of questions, they were unable to evaluate it. Was it too costly? Was it aiming too low? Was it focused on the right priorities? One board member admitted he just didn’t know.
Similar scenes have been playing out in boardrooms around the world for years. “I hear lots of digital buzzwords, but I’m not sure how to deal with it,” as the chairman of a different board put it. “I know digital is important, but how do we capture the value?”
Even before the pandemic, 92 percent of companies surveyed by McKinsey believed their business models would have to change given rates of digitalization at the time. Covid-19 has only accelerated that timeline, with estimates indicating we’ve moved three to four years forward in digital adoption in a matter of months. Digital transformation has become a matter of corporate survival and a top priority for boards.
While many board members have told us they know that digital is essential to keeping current business models viable while developing new revenue streams, they struggle to see how they can best add value. The complexity of technology and the speed of digital can make board members feel like they’re always playing catchup.
Discussions with dozens of board members reveal how digital transformation is increasing the scope of the board’s mandate, opening up new fronts for risk and competition. Rising to the challenge doesn’t mean completely reinventing the board model, but it does require a thoughtful recalibration of where to focus directors’ energies. Asking the following five questions will ensure that boards are focused on the most important digital challenges. While some of these questions are more strategic, and others more operational, boards that address all of them can help push companies to achieve the digital transformations essential to today’s competitive advantage.
1. Does the board understand the implications of digital and technology well enough to provide valuable guidance?
Building up the board’s digital aptitude isn’t about turning directors into proficient technologists. Rather, the goal is for the board to understand the implications of technology and digital on the business and sources of revenue. Take artificial intelligence (AI), for instance. When thoughtfully applied, it can enable a huge leap over standard approaches in terms of delivery speeds, costs, and quality – often by a factor of 10. This allows companies to test new markets, products, and business models at much greater speeds, and at lower costs. Adding in other technology trends at varying degrees of maturity and applicability — such as quantum computing, distributed IT infrastructures, and process automation and virtualization — means boards have their work cut out for them in navigating potential impacts on the business.
Bringing on tech experts, setting up advisory groups, or visiting tech companies to see how they work are useful but ultimately insufficient steps, because they often reflect a board-level view that digital is merely a sidebar to the core business.
Two practices go further. First, boards can take a more strategic view when bringing on new directors. Leading boards dig into their target hire’s actual experience in digital transformations and rigorously review how well it fits with the company’s digital strategy. For example, one retailer looking to speed up its digital enablement brought an executive onto the board who’d recently done exactly that for another retailer, upending an industry in the process. Another retailer looking to better integrate the digital logistics of its e-commerce and brick-and-mortar operations targeted someone with exactly that top-management experience and expertise.
Another best practice is to put board members through intensive training programs led by external faculty or top technologists from the company that focus on the business implications of key technologies and methodologies. We spoke to 75 board members who completed this kind of immersive training and found that more than 50% insisted on making digital transformation the top agenda item for the business. The point of this kind of training isn’t to build up digital skills but to shift mindsets: Coming out of a learning session, one board member said that only at that moment did he realize that digital transformation wasn’t a chief information officer (CIO) or chief technology officer (CTO) responsibility, but a CEO one.
2. Is the digital transformation fundamentally changing how the business (and sector) creates value?
One of the board’s main obligations is to push company leadership on business models and value creation and capture. In the context of a digital transformation, there are three vectors of value: scale (is the new value big enough?), source (where is the value coming from?), and scope (are we thinking long term enough?).
Scale: One director who sits on multiple boards told us, “In almost every case, the digital aspirations of the business aren’t bold enough.” Businesses often settle on aspirations that are based on last year’s performance plus 5 or 10%. But the pandemic has shown that businesses can take huge leaps when pressed. Our power-curve research emphasizes that bold moves are required to jump into the top quintile of performance. As a rule of thumb, digital initiatives should change more than 20% of operating profits — even as revenue and profit-growth targets continue to rise. That means conversations at the board level, and between the board and management, must tackle the ways digital will change the technology model, operating model, or business model of the company — or even its industry.
Source: Too many board conversations default to how technology can improve efficiency and cut costs. Efficiency can indeed generate meaningful savings that can help meet the ongoing investment needs of a digital transformation. But digital is a game changer when it comes to generating new sources of revenue. Recent , research into cloud technology for example, has shown that as much as 75% of the $1 trillion at stake in cloud will come from business innovation. Boards need to push management to develop a granular understanding the company’s real sources of competitive advantage and how the transformation leverages these advantages to deliver significant new sources of revenue.
Scope: Investment horizons at many companies tend to be too focused on the short term. Amazon, in contrast, has had a seven year planning horizon. For many companies facing short-term pressures, this long-term focus can be particularly challenging (especially in capital markets) since digital transformations cost a lot while promising cash-flow and revenue payoffs that won’t arrive till much later. By developing a clear view of long term value, however, the board can press the business to make the multiyear operating-expenditure and capital-expenditure spend that’s necessary to capture that value.
A long-term view of where the value is heading is crucial to getting digital transformations right. Too often companies invest for competitive advantage and wind up with table stakes instead, as everyone else in the industry has been making the same investments. Distribution centers, for example, now require continued investment rounds to modernize management systems, develop automation capabilities, share data with suppliers and customers in real time, and more. One retail company had to replatform frequently to compete in e-commerce, mobile, and logistics.
The faster pace of investment means boards must press hard on management assumptions, pushing top executives to articulate how they see the industry evolving now and in the future. The executive team’s analysis must account for the shifts digital brings to the underlying supply-and-demand elements of an industry, as evolving ecosystems and hyperscale platforms shake up traditional value chains, disintermediating and often substituting for the offerings of traditional competitors. For example, successful ecosystems can tap into huge pools of value by dominating customer interfaces and controlling points such as search, advertising, and messaging. The board’s role is to push the top team to peer around corners and take into account the falling barriers across industries and sectors. Only then can the board feel confident that the proposed investment will help the business jump up the curve, rather than merely stay mired in the middle of the pack.
3. How does the board know if the digital transformation is working?
Digital transformations are complex programs with dozens or even hundreds of initiatives. This can generate a soothing level of activity, but it tells you very little about whether your digital transformation is on track.
To get past the noise, boards can start with a hard-nosed assessment of the strategy and road map. “You better make sure that there is a common understanding of the business’ digital strategy, and that management has broken apart every part of the business model to assess where the value is,” as one board member said. Another board member insisted that the only way to have confidence in the strategy and road map is to have it independently vetted.
The board should work with management to ensure that the business is focusing its digital-transformation efforts on the two or three domains that create the most value for the company. This focus helps avoid a number of persistent failure modes, including spreading resources thinly across multiple initiatives or focusing on a handful of disconnected experiments that can’t scale.
When tracking progress against the strategy and road map, boards should focus on two sets of metrics. The first tracks outcomes and important leading indicators tied to value (for example, customer fulfillment in e-commerce, or reduced time to first quote in insurance). As obvious as this may sound, many companies do not track ROI on their digital and technology investments or cash flow — and if they do, it often trails too far after the fact to be of real-time use. Part of measuring ROI is to establish baselines so there’s a starting point against which to track progress — something else that is also surprisingly rare and which boards can help establish.
The other set of metrics surfaces progress in the guts of the transformation itself. These metrics address changes in behaviors and processes deep in the organization. One key metric is the speed with which new ideas are translated into frontline tools. Another is the percentage of talent that’s actually working in agile teams where true change occurs. One consumer goods company tracks how many prices put into the system were AI-driven, rather than coming from the traditional route of middle-management expertise. Another board at a consumer goods company has a digital-maturity index to track how many processes have been automated, which is then benchmarked against competitors. “If you focus on the transformation, the digital part will take care of itself because digital is the only way to make the transformation happen,” as one board member told us.
4. Does the board have a sufficiently expansive view of talent?
The digital-talent discussion at the board level is often limited to expressing the need to hire more executives who are digital natives or people from consumer-facing companies that might be further along on their digital journeys. This is only part of the story. Given the scope of change required across the entire business, boards must develop an expansive view and pressure test the talent road map as much as they might the technology or digital-transformation road map.
It goes without saying that any new top-executive hire (including CEO succession candidates) must have good baseline knowledge of technology and digital. When it comes to digital transformations, however, executive hires aren’t always the most important ones. In digital companies, it’s often the data engineers, product managers, and scrum coaches — among many others — who form the backbone of the business. A McKinsey analysis shows, for example, that top engineers can be 10 times more productive than their more junior peers. Boards shouldn’t be involved at the individual hiring level, of course, but they do need to engage with senior leadership on progress made in developing this talent bench of digital expertise.
Tracking the progress of a company’s talent also extends to building up the business’ “learning” muscle. Boards can help test whether upskilling programs actually create digital capabilities across all key businesses and functions — especially in traditional IT, digital, analytics, and data. Specific questions, such as which capabilities are being bolstered and how, can help the board stay on top of talent development. As businesses ramp up their talent engine, the board can be especially helpful by helping management focus on talent needs six to 12 months in the future.
5. Does the board have a clear view of emerging threats?
Digital expands companies’ competitive footprint by blurring traditional sector boundaries. While this creates new opportunities for companies to participate in emerging ecosystems, it also generates a more complex set of threats to assess.
On the risk side, boards generally have a clear understanding of the importance of cybersecurity. Many have a framework, vetted by third parties, to help evaluate cyber risk. Digital, however, opens new and different pools of risk. Regulations about privacy grab headlines, but local compliance or national security laws, for example, have introduced unforeseen risks to businesses when their servers are located in those corresponding locations.
Keeping track of competitive threats poses similar challenges. On the one hand, there is the sheer volume of new businesses and technologies that burst onto the scene, often seemingly from nowhere. On the other hand, there’s the threat potential of established businesses operating in brand-new sectors: Think about e-commerce businesses getting into data management, tech companies moving into banking, or retailers into logistics.
Boards can help address these issues by pressing executive teams to be more externally oriented, to take the “outside view” by looking for analogs rather than direct competitors, and to inject more creativity and rigor into scenario-planning exercises. Some hedge funds, in fact, are turning to AI- and machine learning–driven analyses to provide views of the companies they invest in from the outside in, to better understand trends and their implications and to provide more sophisticated scenario plans. That can help address one board member’s concern that boards often just don’t have enough time to really pressure test strategies: “The board’s best value is asking the ‘what if’ or ‘Have you thought about …’ questions. But there’s just never enough time to dig in.”
“Digital is what we’re going to be doing for the rest of our lives,” as one executive is fond of saying. The urgency and longevity that underlie that statement make supporting a successful digital transformation job number one for boards. As the pressures and complexities of digital increase, boards have a key role to play in guiding their institutions through successful, long-term digital transformations.
WHAT IS THE DIFFERENCE BETWEEN INFORMATION TECHNOLOGY AND DIGITAL?
Information Technology (IT) and Digital are two terms that are often used interchangeably, but they have distinct differences.
IT refers to the use of computers, hardware, software, and networks to store, process, retrieve, and transmit data. It involves the use of technology to manage, store, and secure data, maintain computer systems, and provide technical support to users. IT is more focused on the infrastructure and systems that support the organization's operations.
On the other hand, digital refers to the use of technology to transform business operations and create new value propositions. Digital encompasses the use of technologies such as social media, mobile devices, analytics, cloud computing, and the internet of things (IoT) to create new business models, products, and services. Digital is more focused on using technology to enable new business capabilities, reach new customers, and create new revenue streams.
Another difference is that IT is focused on managing the technology infrastructure and supporting internal business operations. It is concerned with ensuring that internal systems are secure, reliable, and efficient, and that data is managed appropriately. The primary goal of IT is to support the internal business operations of the organization.
On the other hand, digital is focused on external-facing activities such as reaching new customers, creating new revenue streams, and providing a more personalized and engaging customer experience. Digital technologies enable organizations to create new business models, products, and services that meet the needs of customers in a rapidly changing business environment. The primary goal of digital is to enable new business capabilities that help the organization stay competitive and grow in the marketplace.
From a “User” perspective there are differences in user acceptance between internal and external applications, such as a website. Here are some factors that can influence user acceptance:
1. User familiarity: Internal applications are designed for employees who are familiar with the company's processes and culture. External applications, such as a website, are designed for customers who may not be as familiar with the company or its products and services.
2. User motivation: Internal applications are often mandatory for employees to use as part of their job responsibilities. External applications, on the other hand, rely on user motivation to engage with the platform. This means that external applications may need to offer more incentives and a better user experience to attract and retain users.
3. User expectations: Customers may have higher expectations for external applications, such as a website, because they are used to interacting with a variety of digital platforms. Internal applications may not need to meet the same level of user expectations since they are often designed to solve specific business needs rather than offer a consumer-like experience.
4. Accessibility: Internal applications are typically only accessible to employees within the company, while external applications like a website are accessible to anyone with an internet connection. This means that external applications may need to account for a wider range of user needs and accessibility requirements.
Overall, the acceptance of an application depends on a variety of factors, including the user's needs, motivation, familiarity, and expectations. Both internal and external applications have their unique challenges and opportunities, and it's important to consider these factors when designing and launching a new platform.
Therefore, while IT and digital do use different technologies and systems development and project management approaches, the main difference is that IT has an internal focus, while digital has an external focus and with this focus comes control or no-control over use behavior and adoption
USING TECHNOLOGY TO LEVERAGE BLUE OCEAN STRATEGY
Technology has played a significant role in enabling companies to implement Blue Ocean Strategy by creating new market spaces and offering unique value propositions to customers. Here are some ways in which technology has been used in Blue Ocean Strategy:
1. Disrupting Traditional Industries: Technology has been used to disrupt traditional industries by creating new market spaces. Companies like Uber and Airbnb, for example, used technology to create new market spaces in the transportation and hospitality industries, respectively, by offering unique value propositions that were not available before.
2. Innovating Products and Services: Technology has enabled companies to innovate their products and services by creating new features, functions, and capabilities that differentiate them from the competition. For example, Apple's iPhone disrupted the mobile phone industry by offering a new way to interact with a smartphone, which included features like a touch screen and intuitive user interface.
3. Enhancing Customer Experience: Technology has been used to enhance the customer experience by offering new and innovative ways to interact with a company's products or services. For example, Amazon's one-click ordering and same-day delivery options have changed the way customers shop online, making the experience more convenient and personalized.
4. Leveraging Data Analytics: Technology has enabled companies to leverage data analytics to gain insights into customer behavior and preferences, allowing them to tailor their offerings to meet customer needs more effectively. This can lead to new market spaces and value propositions that were not previously possible.
Overall, technology has been a critical enabler of Blue Ocean Strategy by providing companies with the tools and capabilities to create new market spaces, innovate their offerings, and enhance the customer experience. By leveraging technology in strategic ways, companies can differentiate themselves from the competition and capture demand in new and untapped markets.
WHAT IS BLUE OCEAN STRATEGY?
The central principle of Blue Ocean Strategy is to create uncontested market space by identifying and developing a new market that does not exist in the current market space. This strategy is in contrast to traditional business strategies that focus on competing in existing market spaces, where companies fight for market share, which often results in a "red ocean" of fierce competition, limited differentiation, and declining profits.
Blue Ocean Strategy suggests that companies should focus on creating "blue oceans" of new, untapped market space, where they can capture demand and create new value for customers. To achieve this, the strategy proposes two key concepts:
1. Value Innovation: This concept involves creating a new market space by simultaneously pursuing differentiation and low cost. By offering a unique value proposition that meets the needs of customers in an entirely new way, companies can create new demand and break away from the competition.
2. The Four Actions Framework: This framework helps companies identify the key factors that drive customer value and differentiate their offerings from the competition. It involves identifying which factors to eliminate, reduce, raise, and create to create a new market space.
Overall, the central principle of Blue Ocean Strategy is to create new value for customers by focusing on differentiation and innovation rather than competition. By doing so, companies can open up new market spaces, capture demand, and grow their business in a sustainable way.
WHAT STRATEGY MODELS ARE COMMONLY USED TO DEVELOP DIGITAL STRATEGIES?
Here are some strategic models that are commonly used in the digital space:
1. SWOT Analysis: SWOT analysis is a strategic planning tool that helps companies identify their strengths, weaknesses, opportunities, and threats. It can be used to analyze both the internal and external factors that impact a company's digital strategy.
2. PEST Analysis: PEST analysis is another strategic planning tool that helps companies analyze the external factors that impact their business, including political, economic, social, and technological factors.
3. Porter's Five Forces: Porter's Five Forces is a framework that helps companies analyze the competitive intensity of an industry and the attractiveness of entering that industry. It can be used to evaluate the digital landscape and identify potential opportunities and threats.
4. Digital Maturity Model: The Digital Maturity Model is a strategic framework that helps companies assess their digital capabilities and identify areas for improvement. It provides a structured approach for developing and implementing a digital strategy that aligns with the company's overall business goals.
5. Lean Startup: The Lean Startup model is a methodology for developing and launching new products and services. It emphasizes rapid experimentation, customer feedback, and iteration, and it can be used to test and refine digital products and services.
6. Business Model Canvas: The Business Model Canvas is a strategic tool that helps companies describe, design, and analyze their business models. It can be used to map out a company's digital strategy and identify opportunities for growth and innovation.
Overall, these strategic models can help companies develop and implement a digital strategy that aligns with their business goals and responds to the changing digital landscape
WHAT IS THE WEAKNESS OF SWOT ANALYSIS
While SWOT analysis is a widely used and popular tool for strategic planning, it has some limitations and weaknesses that should be taken into consideration. Here are a few weaknesses of SWOT analysis:
1. Lack of Objectivity: SWOT analysis can be subjective and biased, depending on who is conducting the analysis. This can lead to an incomplete or inaccurate assessment of a company's strengths, weaknesses, opportunities, and threats.
2. Limited Scope: SWOT analysis focuses on the internal and external factors that impact a company, but it may not capture all of the factors that are relevant to a particular situation or decision. This can lead to a narrow and incomplete assessment of the company's situation.
3. Lack of Prioritization: SWOT analysis does not prioritize the factors that are identified, which can make it difficult to determine which ones are most critical or relevant to the company's strategy. This can lead to a lack of focus and direction in developing and implementing a strategic plan.
4. Lack of Actionability: SWOT analysis may not provide clear recommendations or action steps for addressing the identified issues or taking advantage of the opportunities. This can make it difficult to translate the analysis into actionable steps for the company.
5. Limited Value in Dynamic Environments: SWOT analysis may not be suitable for companies operating in dynamic and rapidly changing environments. The analysis may become quickly outdated, and the factors identified may no longer be relevant.
Despite these weaknesses, SWOT analysis can still be a useful tool for strategic planning when used appropriately and in conjunction with other tools and frameworks. It is important to be aware of its limitations and to supplement it with other analytical tools and data sources to ensure a comprehensive and objective assessment of the company's situation
WHAT IS THE WEAKNESS OF BUSINESS CANVAS APPROACH TO STRATEGY PLANNING?
The Business Model Canvas is a strategic tool that helps companies describe, design, and analyze their business models. While it is a popular and widely used framework, it also has some limitations and weaknesses that should be considered. Here are a few weaknesses of the Business Model Canvas:
1. Limited Detail: The Business Model Canvas is a high-level framework, and it may not capture all the details of a company's operations and business processes. This can make it challenging to develop a comprehensive understanding of the company's business model.
2. Lack of Prioritization: Similar to SWOT analysis, the Business Model Canvas does not prioritize the elements that are identified, which can make it difficult to determine which ones are most critical or relevant to the company's strategy.
3. Lack of Dynamic Assessment: The Business Model Canvas is a static framework and may not be suitable for companies operating in dynamic and rapidly changing environments. It may require frequent updates and revisions to ensure it remains relevant and useful.
4. Limited Value in Complex Environments: The Business Model Canvas may not be suitable for companies with complex business models or operating in complex environments. It may not be able to capture the interdependencies and relationships between different elements of the business model.
5. Lack of Guidance: The Business Model Canvas is a flexible framework that provides a structure for thinking about a company's business model. However, it may not provide clear guidance on how to develop or implement a strategic plan based on the analysis.
Despite these weaknesses, the Business Model Canvas remains a valuable tool for strategic planning and analysis. It can provide a clear and concise overview of a company's business model and highlight areas that require further investigation and analysis. To ensure a comprehensive and actionable analysis, it is important to supplement the Business Model Canvas with other analytical tools and data sources.
WHAT IS THE WEAKNESS OF PEST STRATEGY PLANNING PROCESS?
PEST analysis is a widely used tool for analyzing the external macro-environmental factors that may impact a company's operations and strategic planning. However, it also has some limitations and weaknesses that should be considered. Here are a few weaknesses of PEST analysis:
1. Lack of Specificity: PEST analysis is a high-level framework and may not provide enough detail on specific factors that may impact a company's operations. This can make it challenging to develop a comprehensive understanding of the company's situation.
2. Lack of Prioritization: PEST analysis may not prioritize the external factors that are identified, which can make it difficult to determine which ones are most critical or relevant to the company's strategy.
3. Lack of Contextualization: PEST analysis may not take into account the unique context and circumstances of a company or industry. This can make it challenging to develop a relevant and accurate assessment of the company's situation.
4. Limited Value in Dynamic Environments: PEST analysis may not be suitable for companies operating in dynamic and rapidly changing environments. The analysis may become quickly outdated, and the factors identified may no longer be relevant.
5. Lack of Guidance: PEST analysis is a framework that provides a structure for thinking about external factors that may impact a company's operations. However, it may not provide clear guidance on how to develop or implement a strategic plan based on the analysis.
Despite these weaknesses, PEST analysis remains a valuable tool for strategic planning and analysis. It can provide a clear and concise overview of the external macro-environmental factors that may impact a company's operations and highlight areas that require further investigation and analysis. To ensure a comprehensive and actionable analysis, it is important to supplement PEST analysis with other analytical tools and data sources.
HOW SHOULD THE BOARD USE A DIGITAL ROAD MAP?
The board of directors can play an important role in shaping the digital and IT roadmap of a company by providing strategic guidance and oversight. Here are a few ways that the board can use a product roadmap:
1. Ensure Alignment with Strategic Goals: The board should review the product roadmap to ensure that it is aligned with the company's overall strategic goals and objectives. They should ensure that the roadmap prioritizes projects that will help the company achieve its long-term vision.
2. Monitor Progress: The board should regularly review progress against the product roadmap to ensure that the company is on track to achieve its goals. They should monitor key performance indicators (KPIs) and other metrics to assess the success of the projects and identify any areas that require adjustment.
3. Assess Risks and Opportunities: The board should assess the risks and opportunities associated with the product roadmap. They should identify potential obstacles or challenges that may impact the success of the projects and develop plans to mitigate those risks. They should also look for opportunities to capitalize on emerging trends or market shifts.
4. Provide Strategic Guidance: The board should provide strategic guidance to the product team to help shape the direction of the product roadmap. They should offer insights and advice on industry trends, customer needs, and competitive dynamics.
5. Support Resource Allocation: The board should ensure that the company has the necessary resources to execute the product roadmap successfully. They should assess the allocation of resources and provide guidance on how to prioritize investments in product development.
Overall, the board should use the product roadmap as a tool to help guide the company's strategic direction and ensure that it is on track to achieve its goals. They should provide oversight, guidance, and support to the product team to help ensure the successful execution of the roadmap
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