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When digital shift becomes inevitable

Expanding the digital arsenal inevitably entails identifying which new capabilities the company needs and which needs an upgrade.

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Wolfgang Kirsch, CEO of Media Saturn Germany, at the headquarters in Ingolstad. Store managers now can offer different pricing to move certain products - but only lower pricing than online.

AS digital continues to upend business operations and markets, traditional organisations struggle to cope. Countless TED Talks suggest that executives should be asking "blow it all up" questions: Does the concept of an organisational structure still make sense, or should we move everything to self-organising, manager-less teams? Should we scrap the idea of careers and employee loyalty in order to attract millennial talent for "tours of duty"?

While digital technologies clearly provoke change, most organisations do not need to make such drastic moves. The fundamental elements of an effective operating model remain as important as ever.

What makes the shift to more robust digital offerings, channels and operations so tricky is the stress it puts on large companies' operating models. Legacy processes, which often are tied to budget cycles, don't move fast enough to keep up with changing customer demands and behaviour.

As a result, digital transformations are significantly harder to pull off than conventional change programmes. Bain & Company recently surveyed about 1,000 companies worldwide to gauge their level of digital readiness. After comparing financial results for five categories of companies based on their degree of digital sophistication, we found that revenues for the digital leaders grew 14 per cent over the past three years, more than doubling the performance of the digital laggards in their industries. Profitability followed a similar pattern. Yet while the payoff from digital transformation can be impressively high, the success rate is regrettably low. In our survey, just 5 per cent of companies involved in digital transformation efforts reported that they had achieved or exceeded the expectations they had set for themselves, versus a success rate of 12 per cent for conventional transformations found in an earlier survey.

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Making the transition to digital 2.0 or 3.0 requires systematically examining and adjusting each element of the operating model - the blueprint for how resources are organised and operated to get critical work done. You can do that by answering five tough questions.

When should we integrate digital?

Some companies spread digital processes throughout their organisations from the start. Others have created a standalone unit first to get it up and running. A middle ground that creates a digital centre of excellence while also building some digital capabilities in business units or functions may be appropriate for other companies. To determine which structure suits their circumstances, executives should consider several dimensions:

  • Level of disruptions: Firms facing a high degree of disruption tend to react too slowly if they entrust digital efforts to existing business units. That's why ABB, an industrial equipment and services company, had a digital team develop its Ability platform, while the business units provided the intelligence embedded within the platform.
  • The level of digital maturity: The earlier a company is in its evolution, the more likely it is to need some separation and autonomy for digital. The requisite skills are often distinct in digital, so when bringing in new talent such as data science experts, it's better to initially cluster them in a centralised group. More digitally mature companies, by contrast, generally should have more integrated digital operations.
  • The culture's openness to change: A relatively open culture can more easily pursue an integrated approach. Companies with a more resistant or slow culture will probably fare better with a separate unit or at least a central unit complementing the business units to ensure progress.

Who makes decisions?

Digital usually alters decision rights. The corporate centre, for instance, might take on activities that used to be done in a distributed fashion. At Media Saturn, Europe's largest electronics retailer, store managers for the banners MediaMarkt and Saturn traditionally were quite entrepreneurial, making choices about pricing and assortment for their stores. After the company launched its e-commerce platform, it became clear that the banners needed more consistency of pricing and assortment across channels.

Media Saturn decided on a greater role in those areas for the centre, in order to harness the big data and advanced analytics for predicting which products will sell best in each channel. Store managers now can offer different pricing to move certain products - but only lower pricing than online. And they must carry a core assortment of products, though they can adjust the mix outside that core. Their role has evolved to focus more on creating a great customer experience.

In other cases, digital might move activities in the opposite direction, enabling more decentralisation, within guardrails, than has been possible in the past. In almost all cases, though, the chief digital officer plays a role in setting the digital vision, keeping tabs on digital activities across the company and in some cases taking decisions on whether and how much to invest.

Can we tame the multiheaded Hydra?

Orchestrating and steering various digital actions effectively across the organisation may require adjustments to governance. A digital council composed of business unit heads and key functional heads can serve as the forum for debate and consensus, and resolve questions of how to pay for digital innovations.

One supplier of agricultural commodities developed a mobile application for its field sales force in one line of business. It then added features that made it useful for field forces in other crops. As the company keeps adding features to make the app relevant to more products, it has been charging an internal licensing fee, as it would to pay an external software-as-a-service vendor. That ran into resistance from some executives of the business units, who run their own P&Ls. The company's dilemma: Charging an internal licence fee could slow the rate of adoption, but without a fee, who would pay for the innovation? A senior executive team decided that the app is strategically important and therefore should be centrally funded.

Where should we double down?

Expanding the digital arsenal inevitably entails identifying which new capabilities the company needs and which existing capabilities require an upgrade. The key decisions companies wrestle with here are how to source these capabilities and whether to build them in house at all.

Sometimes companies need to retrain existing employees, as when their roles still require many of the existing skills but now need to add new digital variants. Other companies will acquire a stake in a startup as a means of getting access to staff with new skills. And some choose to develop capabilities through partnerships with digital specialists, in order to take advantage of other firms' expertise and investments in assets such as cloud infrastructure, which are hard to build internally.

Will our old dogs learn new tricks?

Companies that outperform along economic dimensions say that new ways of working are the most important element of their success in digital endeavours, a recent survey by Bain reports. Ways of working should support faster cycle times for projects, greater connectedness among different functions and units, and more external engagement with customers and partners.

Involving the heads of business units early on will help to ensure strong sponsorship for an accelerated process. The supplier of agricultural commodities mentioned earlier has successfully run a number of digital pilot projects, but when it came time to scale up the projects, some got delayed inside the business units - often for good reasons. For a new digital inventory tracking system that would replace manual entry of bags of one commodity, the warehouse operating teams had many ideas to improve the system. Cost-conscious managers also balked at paying for a high-end handheld scanner when a cheaper one would do. The company learned that involving the head of a business unit from the start, so that he or she can socialise the initiative with the operating team, helps to hash out the operational details faster and more efficiently.

The relentless rise of digital technology brooks no delay for companies that lag or for leaders seeking to keep their edge. Innovation happens so quickly that the ability of the organisation to formulate, implement and scale up a strategy has become more important than the exact strategy chosen at any single point in time. Answering these five questions about the operating model serves as a useful guide for executives to make smart digital investments - and get them to stick.

  • The writers are partners with Bain & Company, based in Amsterdam and Singapore, respectively.