Leading Digital- Turning technology into business transformation” by George Westerman, Andrew McAfee and Didier Bonnet. Harvard Business Review Press, 2014 How are Digital technologies transforming businesses? What are the key

differences between the leaders and the laggards when it comes to the deployment

of digital technologies? What does it take to achieve digital mastery? How can we

help our clients to become true digital Masters?

The answers to these questions can be found in an insightful book, “Leading Digital-

Turning technology into business transformation” by George Westerman, Andrew

McAfee of MIT and Didier Bonnet of Capgemini. The book draws heavily from some

in-depth research done over a long period of time and covering hundreds of

companies across the world. Details of this research and most of the case studies

featured in the book can be obtained from the Capgemini website.

A video interview with the authors, containing some of the key concepts covered

in the book can be accessed here:

https://www.capgemini-consulting.com/leadingdigital

Understanding digital mastery

Digital Masters seem to share some key attributes.

Digital Masters use digital technologies much better than their peers.

Digital Masters reap the benefits of digital technologies both in customer

interactions and internal operations.

Digital Masters are substantially more profitable compared to their peers.

Digital Masters generate more revenues from their assets.

The key insight from the book is that Digital Masters surpass their peers on two

critical dimensions:

o Digital capabilities- The what of technology. Digital Masters know how

to use technology to get closer to customers, empower their

employees and transform internal processes.

o Leadership capabilities- The how of change. Digital Masters know how

to drive transformation through top down leadership. Leaders of these

companies articulate the vision for change, identify critical initiatives

and ensure that employee activities and behaviors are aligned with the

change.

Four levels of digital mastery

Beginners: These companies are at the start of the digital journey. They pursue a

wait and see strategy. As a result, they have only basic digital capabilities. On an

average, they lag behind their peers by 4% when it comes to revenue productivity

of their people and physical assets and 24% on profitability measures.

Fashionistas: These companies dabble in new technologies. But without strong

leadership and governance, they are unable to leverage their digital investments

effectively. Fashionistas have 6% more revenue productivity than industry

peers but lag behind by 11% on profitability measures.

Conservatives: Despite having good digital leadership capabilities, they fail to

become true Digital Masters because of their cautious approach. The fear of

making mistakes makes these companies focused more on rules rather than

making progress. Conservatives are 10% behind their peers when it comes to

revenue productivity but 9% ahead when it comes to profitability.

Digital Masters: These companies have great clarity about how and where to invest

in digital technologies. Their leaders also have the ability to articulate a digital

vision and drive the organization towards achieving this vision. Strong leadership

capabilities make new digital initiatives easier and less risky and such initiatives

generate revenues and cash faster. Digital Masters lead their industry peers by 26%

when it comes to profitability and 9% when it comes to revenue productivity.

Source: The Digital Advantage, Point of view paper published by Capgemini and

MIT

Digital mastery varies across industries

Not all industries are at the same level of digital maturity. For example, the Tech

industry (Google, Amazon, Apple, etc) has many Digital Masters while in

Manufacturing, many companies are beginners. But the key point to note is that in

many industries, 25% of all large firms are already Digital Masters. And in every

industry, there is at least one company which can be called a Digital Master. The

message from the authors is that companies which are not Digital Masters have no

option but to move fast. Otherwise, they will become irrelevant.

Source: The Digital Advantage, Point of view paper published by Capgemini and

MIT

Digital capabilities

Digital capabilities fall into 3 buckets:

Customer experience

Operational Processes

Business Models

Customer experience

Transforming the customer experience forms the core of digital transformation.

Digital technologies help transform customer experience in multiple ways:

Social media enables companies to hear the voice of customers far more

clearly than in the past by using focus groups and customer surveys.

Mobile computing enables companies to engage with customers on the

move.

Geolocalisation makes it possible to interact with customers based on their

physical location.

Analytics helps in making better use of data to provide highly personalized

customer experiences.

Digital Masters transform their customer experience through a combination of 4

related interventions:

They invest more effort and time in understanding customer

behavior and design the customer experience from the customer’s

perspective. The Digital Masters observe how customers behave

before, during and after interactions with the company. They make a

sincere effort to understand the pain points of customers and try to

alleviate them. They figure out what part of the customer experience

can be digitally enhanced. And they also have a good idea of what kind

of customers are likely to engage digitally with them. Burberry, the

apparel retailer, for example understood that high net worth

millennial customers in emerging markets would need a different

digital experience than traditional customers.

They use digital channels to improve customer reach and

engagement. The Digital Masters know how to leverage digital

technologies to get closer to their customers. Starbucks for example

has taken its loyalty program digital with a mobile app. Digital Masters

also optimize the marketing mix to give an added impetus to the digital

initiatives. Both Procter & Gamble and Burberry have reallocated a

major portion of their advertising budget from traditional to digital

media.

They make good use of customer data and have a scientific approach

to decision making based on analytics. Digital Masters understand the

importance of harnessing the huge volumes of structured and

unstructured data coming from customer usage and social media.

They integrate this data to make better decisions and increase the

quality of the personalized experience. Capital One for example uses

both internal and external data to effectively segment the market for

credit cards. The company has granular insights into individual

customer preferences.

They know how to use digital technologies in combination with their

valuable existing assets. The Starbucks Digital network offers

customers access to premium digital content like New York Times and

The Economist. Burberry has used digital technology to bring its brand

to life in its stores. This includes the music/ rich video content on giant

internal and external screens and iPads carried by sales associates that

provide information about the entire global collection.

Operational Processes

Better operations can create competitive advantage through superior productivity,

efficiency and agility. Streamlined operations also provide the backbone for better

customer experience. Because operational capabilities are less visible to outsiders,

they are not easy to replicate.

Chile’s Codelco is the world’s largest copper manufacturer. A few years back, the

leadership realized that mining was a dirty, labor intensive and dangerous process.

In the absence of up to date information, coordination of operations was also

proving to be difficult. To address the challenges of better coordination, mining

productivity, worker safety and environmental protection, the leadership decided

to use digital technologies to transform Codelco’s operations. They revamped their

information systems to get a comprehensive real time view of operations and used

automation to dramatically reduce the need for labor. Thanks to all these efforts,

Codelco has been moving towards an intelligent mining model, where no miner

may ever need to work in a dangerous underground mine again. Mines which are

free from people are cheaper and faster to design and build, giving Codelco, a

tremendous competitive advantage. Codelco is also encouraging workers to

innovate. When a new innovation is introduced in a mine, Codelco publicizes the

innovation across the company. Thanks to digital transformation, Codelco has

substantially improved operational efficiency and safety and extended the life of

older mines.

Transformation of operations does not happen overnight. The Digital Masters know

that transformation requires good data available in real time to the people and

machines that need it. So they often start by overhauling legacy systems to provide

a unified view of processes and data. Digital Masters also go beyond simple process

improvements and leverage digital technologies to rethink the way they do

business and also challenge traditional assumptions.

Standardization has often been equated with deskilling of employees. But digital

technologies can be used to achieve standardization while simultaneously

empowering people. Thus Asian Paints has standardized the process of taking

orders using a call center and ERP system while empowering sale people who used

to do this job earlier to become great relationship managers. In online pharmacies,

automated production lines can do much of the routine work such as putting pills

in bottles. This empowers pharmacists to do more fulfilling tasks.

In many areas, automation is well suited to applications that require control. But

automated controls can also reduce innovation. Digital technologies can be used

to impose controls without stifling innovation. Seven Eleven Japan’s information

and process platform connects every store to headquarters and distribution

centers in real time. Store managers know in real time what is selling and what is

not and can adjust orders suitably. The tightly controlled processes impose

discipline but also allow store managers to develop their own hypotheses and test

them through controlled experiments. Those experiments facilitate various kinds

of innovation.

Digital technologies are facilitating tight synchronization/orchestration of

complex processes even while giving more freedom to employees. In the past,

tighter synchronization would have required tying people to the places and the

methods that did the orchestration. ERP was one of the early attempts at

orchestration but it probably imposed tight discipline on the way people

operated. Now mobile and collaboration technologies are removing constraints

which previously existed. People can work from where they want and

communicate freely using social media, without in any way diluting the

orchestration. Air France for example has digitized most reference and flight

documentation. With an app made available on iPad, pilots can access the

company’s online scheduling platform and documents from anywhere in the world.

Elearning modules enable pilots to complete their training whenever and wherever

they prefer. Thus digital enablement has given pilots a lot of flexibility but without

compromising orchestration in any way.

Business Models

Digital technologies are driving business model innovation in different ways:

Reinventing industries involves a substantial reshaping of an industry structure.

Uber and Airbnb are good examples. The reinvention of industries is often a

platform play. Platforms connect different kinds of market participants and

facilitate various forms of interaction and transactions. Using platforms, firms can

leverage assets they do not own. They can reconfigure their value chain using

strategies such as crowdsourcing. This is where the concept of the sharing economy

becomes relevant. Instead of a few large companies creating dedicated specialized

assets, platforms facilitate connections between customers and people who may

want to share their assets for a small period of time. Car sharing, vacation rentals,

hotel accommodation are some of the industries where platforms are facilitating

the reinvention of industries. Facing a disruptive threat from tech startups, the

incumbents have started responding in various ways. In 2013, Marriott in

collaboration with mobile and web app company, LiquidSpace started renting

spaces in its hotels on demand. Essentially, Marriott questioned the assumption

that one had to be a hotel guest to use its facilities.

Substitution involves replacing existing products and services by new digital

formats. In some cases, the product or service being provided by incumbent players

can be easily substituted by digital technology. In such cases, there is no alternative

to cannibalization of one's existing revenue streams. The education business is

clearly going in this direction. Many pen and paper examinations are going digital

as indeed are text books.

New digital businesses involve the creation of new products and services that

generate additional revenues. Nike+ is a good example. This includes multiple

connected components: a shoe, sensor, internet platform, a device such as iPhone,

GPS watch or Fuel Band. The Fuel Band can track a person throughout the day,

giving her updates on how many calories she has burnt. Runners can share their

performance online with their friends on Twitter or Facebook. They can also get

training support from a digital coach.

Reconfiguration involves recombining products, services and data to change the

way a firm operates. Using technology to connect all the company’s products,

services and information in a different way can build stickiness with customers and

increase the switching costs. For example, many insurance companies are trying

to connect with customers directly without having to depend on agents. More

generally, the recurring theme in many industries is a shift from B-B to B-C revenue

models.

Value proposition involves using new digital capabilities to target unmet needs for

existing or new customers. This may involve combining products and services in

innovative ways, making better use of analytics or repackaging the offering. Tokio

Marine Holdings for example has leveraged mobile and location based technologies

to target customers for specific, one time lifestyle situations. The company has

developed an app that can provide an insurance policy on the spot for skiing, golf

and travel related insurance. Tokio Marine has also launched One Day Auto

Insurance that can be purchased on mobile phones. This kind of insurance enables

consumers to insure a vehicle for a short duration such as when they borrow a

vehicle from a friend or a family member for a couple of days.

Companies should always be on the lookout for business model innovation. A

gradual decline in traditional revenue streams, margin erosion due to

commoditization, lowering of entry barriers, new competitors emerging from

unexpected places and cheaper digital substitutes are signs that the existing

business model may be under threat. Companies can react to the disruptive threat

either by defending or by going on the attack. A defensive posture means the

company makes efforts to slow down the decline of the existing business model.

Playing offence means proactively reshaping the business model by substituting

traditional products with digital offerings.

Leadership Capabilities

Digital Masters demonstrate their leadership capabilities in 4 ways:

They develop a transformative vision of how their company will operate and

be different in the digital world.

They engage with employees to make the digital vision a reality.

They put in place a governance model to ensure that the different digital

initiatives are aligned with the vision and move the company in the right

direction.

They foster strong relationships between the IT organization and the

business units.

Crafting the digital vision

The top leaders in Digital Masters create a compelling vision of the future and

communicate it throughout the company. A digital vision usually takes one of three

perspectives: reimagining the customer experience, reengineering operational

processes or combining the two to envision business models. Changing a part of

the business is not enough to get full benefits. Silos must be broken and the whole

organization aligned with the vision. Only the top leaders are in a position to do

this.

While crafting the vision, the company needs to identify its strategic assets. The

new vision must build on the company’s existing strengths. Strategic assets may

include stores, manufacturing facilities, design expertise, brand, client

relationships, culture and data. For an asset to be truly strategic, it should be

valuable, rare, inimitable and non-substitutable.

The vision should be transformative, not incremental. Digital Masters have the

vision to transform themselves into digital butterflies and not just fast moving

caterpillars. Transformative visions can be demonstrated in 3 ways:

The firm could substitute new technology as an alternative or replacement

for substantially the same function that the company already performs. For

example, existing applications could be enabled on smart phones.

Extension would significantly improve the performance or functionality of

the product or process but without radically changing it. For example, field

sales staff can submit reports and access information without having to visit

their offices physically.

Transformation involves a fundamental redefinition of process or product

through technology. For example, Asian Paints has used embedded devices

and analytics to create highly automated factories, which deliver

phenomenally higher levels of efficiency, quality and environmental

sustainability.

A great vision includes both intent and outcomes. Intent is a picture of what needs

to change. Outcome is a measurable benefit to the company, customers and

employees. Take the case of Pages Jaunes, the French Yellow Pages company. The

CEO articulated the vision of connecting small and medium businesses with their

customers. But not through thick paper directories. He shared examples of the kind

of digital services the company would provide. He announced that the company

would earn 75% of its revenues from digital services within 5 years. Thanks to this

vision, people got a clear set of guidelines to envision new ways of working.

The vision should be flexible and evolve over time. There should be a clear direction

to employees while giving them the flexibility to innovate and build on it. Asian

paints for example has led three successive waves of digital transformation.

Initially, the company focused on standardization and industrialization of

operations. The firm implemented an ERP system and streamlined the supply

chain. This enterprise-wide platform facilitated further improvements in sales and

customer processes. This also helped free up capital and facilitate global expansion

through acquisitions in emerging markets. Then the company attempted

to become a customer centric organization. Asian Paints centralized its order-

taking process within a single call center. This change helped further improve

operational efficiencies and transformed the way salespeople interacted with

retailers. With their time freed up from routine order collection, the sales team was

able to focus on building stronger relationships with customers. To enable better

interaction between the sales people and dealers, the company provided

salespeople with vital customer data in the field using mobile devices. And in the

third phase, Asian Paints gave a thrust to automation. Fully automated plants led

to better quality and less waste, a critical success factor in an industry where raw

materials make up 60% of total costs. Asian Paints is now trying to ride a fourth

wave, namely to use structured and unstructured data to further improve customer

engagement and employee collaboration.

To take another example, the vision of Progressive, the much admired insurance

company has evolved from making smarter decisions based on available data about

customers to gathering data about actual driving behavior using telematics.

Engaging the organization at scale

Digital transformation is major change management exercise and can only be

achieved by engaging employees at all levels, across the organization. Digital tools

increase transparency in the organization but they can also create pockets of

resistance to change. People may perceive increased transparency as a threat to

their autonomy or their role. This resistance has to be managed carefully. At the

same time, there are many people wanting to jump in and contribute to digital

initiatives. Their energy should be channelized meaningfully.

The Digital Masters do three things to engage the entire organization.

They use digital technologies to wire the organization so that everyone’s

voice is heard.

They actively engage online conversations so that there is a vibrant dialogue

and there is an opportunity for everyone to play a role in advancing the

vision.

The Digital Masters also know how to crowd source and get people involved,

thereby avoiding the need to get a buy in after designing the solution.

Some companies go a step further and even engage external partners and

customers in an open innovation process. P&G’s Connect and Develop portal is a

good example. The portal encourages customers, suppliers, competitors, scientists

and entrepreneurs to submit ideas. P&G looks for ideas not only in product

development but even in areas like trademarks, packaging, engineering, business

services and design.

Governing the transformation

Some people may ignore the vision. Others may have bought into the vision but

may move in their own direction. This is where digital governance comes in. Digital

Masters are far more clear, compared to their peers when deciding what initiatives

to pursue and in steering these initiatives to success. Governance helps to move

people in the right direction and manages the risks involved

effectively. Governance is also important for addressing problems such as security,

regulatory compliance and legacy system integration.

Governance essentially focuses on two broad themes:

Coordination: Prioritizing, synchronizing and aligning initiatives across the

enterprise.

Sharing: Using common capabilities and resources in the form of people,

technology and data across the enterprise.

Coordination and sharing are not easy in large organizations. Many managers look

at coordination as time wasted on unwanted meetings and restrictions on

operational autonomy. And sharing resources makes people dependent on the

cooperation of others who are not directly within their control. But the real

benefits of digital transformation can really be achieved only through coordination

and sharing of resources across silos.

The priorities would vary from organization to organization. Highly decentralized

companies may need strong central governance to ensure sharing and

coordination. But local innovation might flourish on its own. In centralized

organizations, coordination and sharing may be more natural. But some impetus

may have to be provided to foster innovation and transformation of processes.

Various forms of governance structures/ mechanisms are available.

Shared Digital units are essentially Centers of Excellence. The role and size

of the units may vary but the goal is to drive synergy across the firm. Some

units help BUs to run digital initiatives while others actually manage all the

digital initiatives in the firm. Digital units typically create shared

infrastructure like unified customer databases, enterprise wireless platform,

advanced analytics teams and innovation labs.

Some companies have Chief Digital officers. Their job is to frame the digital

vision, energize the company around digital possibilities, coordinate digital

activities, reimagine products and processes for the digital age and provide

tools and resources. Some CDOs frame the vision and coordinate digital

initiatives while others are more powerful and actually drive transformation.

Building technology leadership capabilities

The Digital Masters encourage a strong relationship between their IT department

and business units. And this relationship plays a crucial role in driving change in

their internal platforms and digital skills. The essence of Technology leadership is

merging the skills and perspectives of business and IT leaders so they can partner

effectively while driving transformation. Together, they can conduct experiments,

launch new capabilities and transform outdated platforms more effectively than

other companies.

In Digital Masters, we do not see the phenomenon of business executives bypassing

IT and moving forward with their digital agenda on their own. IT and business

executives have deep trust and respect for each other. More often than not, this

trust is the result of the IT organization establishing a strong reputation for

delivering services reliably, economically and of very high quality. It is also about

the IT department making the effort to articulate how it delivers value for money.

A related point is the willingness of IT and business leaders to come together while

making investment decisions and assessing the returns delivered by the

project. Thanks to the strong relationship, customer and product knowledge,

technical knowledge, organizational change capabilities and IT capabilities all come

together in the true spirit of collaboration.

One practical approach which many organizations are taking when it comes to

implementing digital initiatives goes by the name of Dual Speed IT. One part of the

IT Unit continues to support traditional IT needs. Another takes on the challenge of

managing digital initiatives. Digital projects typically tend to move fast and are

based on test and learn strategies and a spirit of experimentation. Traditional

projects in contrast depend on clear designs and well-structured project plans.

Digital Masters pay a lot more attention to their digital platforms. Well-structured

digital platforms are indeed the foundation for new digital business models such as

Airbnb. Digital Masters score 17% higher when it comes to integrated views of

operational performance, 25% better when it comes to integrated views of

customer data and 26% better when it comes to product or service performance.

Leaders can shape the platform. They can “kill weeds” and move the platform in

the right direction. In 2002, Jeff Bezos, CEO of Amazon issued a clear directive that

anyone who would not follow clearly laid down design rules would be fired. That

is how the company’s culture of standardization evolved as did the platform. At

Intel, those projects that build on the company’s architectural standards are more

likely to be funded than those which do not.

A playbook for digital transformation

What are the steps involved in digital transformation? At the end of the book, the

authors provide a playbook for digital transformation.

Framing the digital challenge

The main reason for the decline of once successful companies is the failure on the

part of leadership to sense the need to change. Instead of going on the attack, they

drift along and adopt reactive strategies. Leaders have to build awareness around

the opportunities and threats created by digital transformation. It is also important

to define the starting point. This calls for a realistic self-assessment of digital

maturity and what strategic assets are available that can help the company during

digital transformation. It is also important to create a shared vision so that all the

top leaders speak the same language. Senior leaders should not only show a sense

of urgency for the digital transformation but also be able to articulate with ease

what the digital future looks like through words and specific goals.

Focusing the investment

Leaders must translate their vision into strategic goals. The goals should not be

expressed just in terms of financials but also in terms of customer experience,

operations and organizational capabilities. The transformation priorities must be

converted into a roadmap of initial activities. The roadmap should be expressed

not as a set of technology projects but as a set of business outcomes. Governance

mechanisms must be put in place to steer the initiatives in the right direction. It is

also important to build a balanced portfolio of digital investments along with the

funding mechanisms. An agile approach makes sense. It is important to create

prototypes, keep experimenting, evaluate the results and incorporate the results

into the evolving roadmap. Success in digital reformation is as much about what a

company does not do as what it does.

Mobilizing the organization

Digital transformation involves large scale change. A company can succeed only

when leaders win the trust of employees, engage them and mobilize them into

action. Leaders must market the benefits of the digital transformation clearly to

the organization. This is the “What is in it for me question?” For example, digital

technologies can make work easier, faster and more fulfilling for employees.

(People who have attended the Welch Way program would relate to this very well.)

Sufficient momentum must be built by involving the employees in various ways

including crowdsourcing/ co creating solutions. Digital champions must be

identified and their enthusiasm should be properly leveraged. Quick wins are a

good way to motivate the believers and silence the cynics. The wins should be

celebrated in a visible manner. And last but not the least, it is important to facilitate

a cultural shift by using digital technologies to change the way people work and

collaborate.

Sustaining the digital transformation

It is important to have a plan to raise the level of digital competence in the

organization. There should be a well-designed digital platform in place. The

relationships between IT and Business should be transparent and cordial.

Incentives, and rewards must be aligned with the transformation objectives. There

should also be a process in place to measure and monitor the progress of digital

transformation.

Concluding notes

Digital technologies have taken off in the past few years. But the real impact of

digital technologies on business is still ahead of us. The proliferation of data and

the availability of analytics tools will facilitate smarter business decisions. At the

same time, new exciting technologies are emerging rapidly. Additive

manufacturing, also called 3D printing, will enable companies to print parts just as

it is easy to print documents today. Already 3D printing is being used for

prototyping and small production runs of specialized parts. Augmented reality will

enable customers to experience a product or service like never before. Augmented

reality holds tremendous potential for improving the pre purchase experience of

customers as also the efficiency of operations. Augmented reality is fusing the

digital and analog worlds. Meanwhile, wearable technology is meshing real time

monitoring and feedback technology with design and mobility. Wearable items can

track anything from sleep patterns to heart rhythms. If engineers and technicians

use wearable technology, it would make operations far more efficient. Wearable

technology, by studying the behavior of customers, also has the potential to

generate new sources of growth.

Our computing abilities have come a long way in the past 5 decades. The 1971 Intel

microprocessor 4004 measuring 12 square mm contained 2300 transistors. The Sky

lake chips which Intel makes today measure about 120 sq mm but contain probably

more than 5 billion transistors. There is no doubt that Moore’s law is slowly

reaching the limit. The performance of chips will not double every two years as in

the past. This is mainly because the ability to cram more transistors in the same

amount of space is now limited. But more radical approaches to computing will

improve our ability to crunch data faster and more efficiently. One approach is to

harness the principles of quantum mechanics. Another is to emulate the human

brain which is far more energy efficient compared to any computer. These new

approaches by enabling us to handle, manipulate and make sense of large volumes

of data even more easily, will give digital technologies that much more power.

Truly, we are headed for exciting times.

Source: The Digital Advantage, Point of view paper published by Capgemini and

MIT