To write a post on a trending topic, one would typically start with a definition, but in this case, “Digital Transformation” means different things to different people. From the Bennet Frank survey, CIOs’ Perspectives on Digital Transformations, industry analysts, and our own client engagements, we have heard the term used to describe anything from consolidating ERP systems to accepting bitcoin payments. You could attend an IT conference and listen to three Digital Transformation sessions that give contradictory advice. Practitioners in the trenches can easily get confused and overwhelmed.
So let’s break down the key components of a Digital Transformation into a systematic approach to help you focus your efforts and align expectations with top management.
The Future is Digital
Digital Transformation is a strategic investment. It pursues a near-future vision wherein most business operates digitally. My view is that within 10 years, 90% of business transactions will be conducted digitally between digital parties for a digital product or service. Regardless of our value judgment, it’s unavoidable.
Therefore most organizations depend on some sort of Digital Transformation to fulfill their strategy and mission. Unfortunately, “What is your strategy?” is often a tricky question to answer. An organization’s strategy may be unclear, poorly communicated, or frequently changing—the strategy du jour might be dictated by whatever consulting firm was last hired by top management.
3 Types of Strategies
It’s a bit easier to consider a strategy type, and usually just as effective for honing in on transformational goals. There are three basic types of organizational strategies:
- Product or Service Leadership: You release new products or services at a regular cadence and sell them at a premium.
- Customer Intimacy: Your customers buy from you because they love the experience.
- Operational Excellence: You sell products similar to everyone else but “faster, better, cheaper.”
No organization fits neatly into one strategy type. Most combine elements of two or three types, with one type that’s prevalent. For example, our firm is mostly pursuing Customer Intimacy. We definitely innovate, although not enough to be called service leaders. We are competitively priced and provide management consulting services similar to many other management consulting firms. But customers hire us because they “love” our consultants and what they do.
3 Types of Digital initiatives
Fundamentally, digital initiatives are either internal-facing or customer-facing, and if they are customer-facing they are either driving or keeping up with disruption.
Internal initiatives are not sexy. Some organizations consider upgrading to Office 365 a Digital Transformation initiative, i.e. the collaboration and automation features available in Office 365 enable productivity improvements. Internal initiatives are usually focused on efficiency, productivity, seamlessness, and cost optimization. They take an existing cumbersome process and remove waste, manual effort, and variance without fundamentally changing the output.
Some customer-facing digital initiatives aim to be disruptive to the marketplace. Disruption-oriented programs operate through trials and errors, failing fast, and learning faster. They are suited for an organization with a high appetite for risk.
On the other hand, some customer-facing digital initiatives aim to mitigate loss of market share by implementing what has already been proven to work by the competition. They are relatively easier to define and execute, and time to market is essential.
The Strategy x Initiative Matrix
If we cross the three types of corporate strategies with the three types of digital initiatives, it becomes apparent to see how a Digital Transformation could inform specific mandates across an IT organization.
Strategy Type: Product/Service Leadership
The goals of various digital initiatives in a Product/Service Leadership organization are:
- Internal Initiatives: Improve operational effectiveness
- Disruptive Initiatives: Apply emerging technologies to new use cases
- Competitive Initiatives: Adopt technologies used by market disruptors
For Product/Service Leaders, one might assume the entire organization must be 100% dedicated to marketplace disruption. However, when the company’s future is dependent on creating a superior product, responsibility for disruption usually lies squarely in the hands of an R&D or product development team.
Take an offline example: A cannabis grower needs to move fast in a booming industry, secure market share, and lead the way, but there is little opportunity to digitally transform the product. The Digital Transformation opportunity is to automate operations to ensure customer orders are fulfilled seamlessly and efficiently.
If the product or service is digital, there are more opportunities for shared goals and active collaborations between IT and product development. Nonetheless, it’s important to clearly define roles and responsibilities if more than one department runs digital projects. When an R&D group acts as the lead digital accelerator for the organization, it would be IT’s role to support R&D. In fact, a fast-moving, market-defining organization often struggles to allocate time and resources to fine-tune operations, creating many opportunities for internal initiatives.
Strategy Type: Customer Intimacy
To exceed customer expectations, a digital program starts and ends with the customer experience (CX). Customers today expect fully integrated functions and features with their buying and consumption experience. Organizations pursuing customer intimacy as their strategy set the following objectives for their digital initiatives:
- Internal Initiatives: Create a seamless experience for customers
- Disruptive Initiatives: Dazzle customers with technology-enabled features
- Competitive Initiatives: Select and deploy digital features consistent with the brand
An established insurance company considered high-quality customer service as its key competitive advantage. Online insurance providers recently disrupted the marketplace and set new table stakes for what comprises a baseline customer experience, including various online communication and transaction channels. As a result, the organization’s Digital Transformation consisted of enabling online and mobile features that would meet and exceed customers’ new service expectations.
Strategy Type: Operational Excellence
Organizations on an operational excellence journey clearly understand the value in improving ops through internal initiatives. And yet there are ways digital initiatives can do more than simply minding the shop:
- Internal Initiatives: Reduce costs, optimize productivity
- Disruptive Initiatives: Experiment with customer-facing digital add-ons, upsells, or bells and whistles for the standard product or service.
- Competitive Initiatives: Implement digital features now expected as table stakes
Pizza Hut is squarely in the operational excellence race with other pizza delivery services. (They are not vying for product excellence, in my assessment!) The Pizza Hut mobile app has a bells-and-whistles feature that allows customers to visualize the status of their order. This frill doesn’t reinvent the service, but it certainly made a difference for consumers.
Define Your Digital Program
If you are pondering how to nail down a clear direction for your organization’s Digital Transformation, we recommend using this 3×3 framework to drive buy-in and ideation.
First, to agree on the strategy type. It is far less painful than agreeing on the whole strategy, yet provides directional alignment among program managers, stakeholders, and sponsors.
Second, prioritize your organization’s needs. If your industry is being disrupted, you need to keep up—focus on staying competitive. If your executive team has an appetite for risk, look to become the disruptor. Finally, if the highest risk is in IT or business operations, internal initiatives advance a Digital Transformation just as well.