Digital is the word of the moment. In boardrooms all around the world, executive teams are contemplating how to successfully (and profitably) move into the “Digital Era”. Whether called digital disruption, digital transformation, digitalization or some other variant, organizations are in a mad dash to “out digital” their competitors. As a result they are launching project after project focused on everything including mobile, cloud, big data, the Internet of Things, cybersecurity, digital marketing and almost anything else that either includes or implies the word “digital”.
The challenge is that successfully transforming your organization into a digital enterprise is not a project and is not a technology that can be purchased. It’s a capability: a capability that must be built.
An Industrial Era Legacy
Modern enterprise organizations are vestiges of the Industrial Era. They were created, built and organized in and for a different time. This includes the physical and logical manifestations of our enterprise organizations: buildings, capital investments, organizational structures, policies and procedures and, bluntly, most everything about how the typical enterprise organization works. But more importantly, it also includes the very essence of our organizations: their culture.
This is why the vast majority of digital transformation efforts will fail. A successful digital transformation is not, in fact, a technology-driven endeavor. It is first and foremost a cultural and organizational transformation. Digital technology is merely the catalyst.
More than that, however, an effective digital transformation should not be undertaken to develop a specific “digital capability”, but rather should be focused on developing a “cultural capability” that will ready the organization for the unique pressures and demands of the digital era.
The digital era will place demands on enterprises that will run counter to most of the well understood operating paradigms of the past. Multi-year planning cycles are being replaced with dynamic strategies. Product cycles, both in terms of development, as well as in terms of marketability, have shorten dramatically. Competitors are emerging at a more rapid rate and from unforeseen quarters as barriers to entry fall. Most industries are seeing all of these things happen right now.
In order to successfully make this transition and cope with these pressures, organizations must ready themselves to become what is being called a “digital enterprise.”
Those organizations that are successfully making this transition are doing so by developing four specific cultural capabilities that I deem the Digital Enterprise Readiness Framework:
• Operational Sustainability
• Organizational Agility
• Strategic Agility
• A Disruptive Culture
The road to being a “digital ready” enterprise starts at the operational level. That may sound counterintuitive, but an organization cannot begin to think about successfully executing a digital transformation effort if they are in a constant state of “hair on fire” because of their lack of organizational discipline. As LNS Research Principal Analyst, Dan Miklovic, states, “Pursuing Digital Transformation without a focus on Operational Excellence is an exercise in futility just as much as pursuing Operational Excellence in business today without considering the need to leverage Digital Transformation.”1
In Miklovic’s article, Operational Excellence Is a Stepping Stone to Digital Transformation, he’s addressing operational excellence from a business perspective and points to examples of organizations that are simultaneously leveraging technology to improve operational performance, while transforming the fundamental approach to their business at the same time.
But there is a trick that is implicit in Miklovic’s statement: balance. Far too many organizations have pursued “operational excellence” from an industrial era perspective in which “operational excellence” becomes almost synonymous with cost optimization. That in turn leads to a relentless pursuit of “excellence”, which at some point (often sooner rather than later) leads to bureaucracy, rigor and ultimately inflexible stasis – the very antithesis of what is required to successfully ready the organization to become a digital enterprise.
The trick is to pursue “just enough” operational excellence to ensure a stable, efficient and optimized operating environment, or as I refer to it: operational sustainability.
Built upon the foundation of operational sustainability, the second capability that digital ready enterprises require is a high degree of organizational agility. This is true no matter your industry. As McKinsey principal Wouter Aghina puts it, “…with today’s levels of uncertainty, ambiguity, volatility in the markets, and globalization…it’s critical to be agile and quickly respond to change and actually benefit from change. And if you think that you’re still in a corner where this doesn’t hold true, wait for the disruption to come. Tomorrow it will be relevant for you.”2
A separate McKinsey study found that organizational agility (which they define as a combination of organizational speed and stability) was a key driver of “organizational health” – the organization’s ability to “align, execute and renew itself faster than the competition…and thus to sustain exceptional performance over time.” This is clearly a requirement of any organization who hopes to compete effectively in the Digital Era.3
Organizational agility is not just about changing direction, however. It is the ability to rapidly adjust the structure, operating processes and/or functions of your organization to adapt to changing market conditions. In fact, according to Aghina, organizational agility requires that you “take things away,” reducing structure and process to enable the organization to respond more rapidly and effectively. As with Operational Sustainability, it comes down to balance. Creating just enough structure and process to ensure stability, but removing anything else that may inhibit the organization’s ability to pivot and move as fast as is necessary to seize market opportunities or respond to market risk.
Organizational agility is about the organizations ability to pivot when directed. Strategic Agility is the ability to know when to pivot.
For most organizations, strategic planning is a well-established element of both the corporate function and culture. The challenge is that the vast majority of organizations still execute their strategic planning apparatus based upon an industrial era timeframe, which results in them sticking to strategies far beyond their “use by” date and failing to pivot in time.
In a Harvard Business School article by James Heskett, UPS Foundation Professor of Business Logistics, Emeritus, he examined whether or not current strategic planning approaches were in fact turning into a liability in the modern age:
“Some are even suggesting that the mind set that has given us strategic planning concepts such as SWOT (strengths, weaknesses, opportunities, threats) analysis, the “five forces,” growth share matrices, five-year plans, and an emphasis on core competencies of the firm may lead to competitive disadvantage in a technology-transformed world in which markets, employee and customer mind sets, and innovations, evolve at a rapid rate.”4
Creating the capability of Strategic Agility requires letting go of a reliance on this idea of establishing and then executing long-term strategies. It’s not that the exercise of strategic planning isn’t worthwhile – it is and should be done. The challenge comes in attempting to stick those strategies even in light of obvious market shifts. The reality is that in the technology-driven Digital Era, we are limited by both our own imagination and our own mental models, making it nearly impossible to truly define these kinds of long term strategies. The market is simply moving too fast and too unpredictably.
Instead, you must create the capability within your organization to continuously monitor both shifts in the market and emerging technologies and then dynamically re-craft the organization’s strategic direction and vision to create competitive advantage and mitigate potential competitive disruption. Professor David J. Teece of UC Berkeley’s Haas School of Business refers to these as “Dynamic Capabilities” and says that what matters is that business develop “the capacity to (1) sense and shape opportunities and threats, (2) seize opportunities, and (3) maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets.”5
The first three layers of the Digital Enterprise Readiness Framework are about creating the structural support within the enterprise to enable it to effectively transform into a digital enterprise: stability and both organizational and strategic agility. But those capabilities will be rendered useless and eventually killed outright if the core culture of the organization is not re-oriented to leverage and utilize the new capabilities. While the mere development of these three foundational capabilities will inherently lay the groundwork for a cultural shift, an explicit effort to transform the culture itself will still be required.
The culture of industrial era enterprises are generally based on a top-down, hierarchical model in which decisions are made at the top and change happens slowly. Moreover, these type of cultures were built to revere tradition and the historical and institutional wisdom of the past. When the core economic driver is efficiency and stability, there is no upside to reinvention.
But in the Digital Era, the opposite type of culture is required, what I call a “Disruptive Culture.” This is essentially the ability to create and sustain an organizational culture that is willing to challenge the status quo, embrace innovation, experimentation and “fast failure” and which is perpetually focused on what’s coming next.
Digital Era organizations will be required to constantly assess changes in the market and in the technology landscape and be willing to challenge virtually everything about how business is done. Harvard Business School professor Lynda M. Applegate says that organizations must be looking for disruptive changes arising in virtually every part of the business landscape including: technology, business models, industry dynamics, offshoring and outsourcing, regulatory, macroeconomic, political and societal.6
Given that scope, everything must be on the table. Yet at the same time, Digital Era leaders must be practical and recognize that a large enterprise cannot and will not change overnight. Therefore, the other side of creating a disruptive culture is that while everything must be “on the table”, only disruptive change that results in competitive advantage should be undertaken.
There are two unassailable facts: enterprise organizations must move swiftly into the Digital Era if they want to survive, and the transition to the Digital Era will be tumultuous and anything but automatic. You must ready your organization for this transition. And the time to act is now.
1 Miklovic, Dan. “Operational Excellence Is a Stepping Stone to Digital Transformation.” Operational Excellence Is a Stepping Stone to Digital Transformation. LNS Research, 10 Mar. 2016. Web. 19 July 2016. http://blog.lnsresearch.com/operational-excellence-is-a-stepping-stone-to-digital-transformation
2 Aghina, Wouter, Aaron De Smet, Monica Murarka, and Luke Collins. “The Keys to Organizational Agility.” McKinsey Insights. McKinsey & Company, Dec. 2015. Web. 19 July 2016. http://www.mckinsey.com/business-functions/organization/our-insights/the-keys-to-organizational-agility
3 Bazigos, Michael, Aaron De Smet,, and Chris Gagnon. “Why Agility Pays.” McKinsey & Company. McKinsey Quarterly, Dec. 2015. Web. 19 July 2016. http://www.mckinsey.com/business-functions/organization/our-insights/why-agility-pays
4 Heskett, James. “How Relevant Is Long-Range Strategic Planning?” Working Knowledge. Harvard Business School, 4 Sept. 2013. Web. 19 July 2016. http://hbswk.hbs.edu/item/how-relevant-is-long-range-strategic-planning
5 Teece, David J. “Dynamic Capabilities.” The Scholar Entrepreneur. N.p., n.d. Web. 19 July 2016. http://davidjteece.com/dynamic-capabilities/
6 Applegate, Lynda M. “Jumpstarting Innovation: Using Disruption to Your Advantage.” Harvard Business School. Working Knowledge, 04 Sept. 2007. Web. 19 July 2016. http://hbswk.hbs.edu/item/jumpstarting-innovation-using-disruption-to-your-advantage
About the Author:
Founder & Institute Fellow
Charles Araujo is a technology analyst and internationally recognized authority on the Digital Enterprise and Leadership in the Digital Era who advises technology companies and enterprise leaders on how to navigate the transition from the Industrial Age to the Digital Era. Having spent over thirty years in the technology industry, he has been researching Digital Transformation long before it became the uber-buzzword of today, and is now focused on helping Digital Era Leaders prepare themselves and their organizations as the macro trends of the primacy of the customer and the primacy of the algorithm collide, ushering us into what he calls The New Human Age.
Principal Analyst with Intellyx, founder of The Institute for Digital Transformation, author of three books, and most recently the co-founder (with his wife) of The MAPS Institute, he is a sought-after keynote speaker and has been quoted or published in CIO, Time, InformationWeek, CIO Insight, NetworkWorld, Computerworld, USA Today, and Forbes.