Digital transformation is, in other words, an all-encompassing activity. Anything less ambitious is a signal to your employees, your competitors, and your customers that you are not embracing the future.
Digital attackers can swiftly build many of the traditional capabilities that took incumbents decades to acquire.
Viral and word-of-mouth marketing, for example, can create valuable brands quickly, and the cloud allows companies to acquire virtual global scale. Uber demonstrates just how rapidly these businesses can disrupt industries and generate value.
One of the most valuable exercises companies can complete is what we call a “digital disruption assessment.” It can provide the “Aha!” moment that shows how much of a company’s revenues and shareholder value is at risk.
This assessment is a business-by-business breakdown of what digital disruption could mean. It is the first of a four-step process of developing a digital strategy that comprises, in addition to the disruption assessment, an assessment of the digital potential for the company, an articulation of the company’s strategy and ambition, and a transformation plan.
Digital Disruption Assessment. This assessment is a broad five- to ten-year forecast of the industry and the company as digital disruption takes hold. The cornerstone is an estimate of revenues at risk. (See Exhibit 1.)
Other elements of the digital disruption assessment include:
- An assessment of the industry’s attractiveness as a target of digital disruption, determined on the basis of the relevance of AI, IoT, cybersecurity, and other digital trends
- A benchmark of the likely digital strategies of direct and adjacent competitors, including both incumbents and startups with global ambitions
- A map of customer needs and how well they are fulfilled
- A summary of the industry’s exposure to disruption and the company’s overall position
Assessment of the Digital Potential. If the first step is meant to appeal to fear, the second step is aimed at greed: What is the payoff of an end-to-end digital transformation of the value chain and the pursuit of disruptive business models?
An end-to-end digital transformation of the value chain can yield margin improvements of up to 25%—and in some cases even more.
Any comprehensive digital transformation needs to cover not just business units, but also functions, such as IT, HR, and procurement. Cloud-based services, for example, can help manage payroll, performance reviews, and purchasing at a lower cost and with less complexity than many legacy systems. By modernizing these functions through digital innovation, companies can turn them into sources of value rather than cost centers.
Companies should estimate the size of the prize of disruptive innovation. Organic growth can be the result of the following:
- Developing a new business model, as IBM is doing with its transition from a hardware company to a software and services company that is moving rapidly into cloud and cognitive computing
- Reimagining current business models, perhaps borrowing from the playbook of digital attackers, as HBO and CBS are doing with their streaming services
- Moving into adjacent businesses that have a heavy digital component, as Ericsson has done with its mobile-commerce platform that allows customers to transfer and spend money from their mobile devices
More and more, companies will need to acquire digital innovation from outside their organization through corporate venturing, M&A, and partnerships. The Walt Disney Company, for example, invested in Vice Media as a way to reach younger consumers. Google, with its acquisitions of Nest and Dropcam, entered the smart-home market. Facebook moved into the next generation of virtual reality through its acquisition of Oculus, and Vodafone, with its purchase of Cobra Automotive, expanded into connected cars.
Articulation of the Strategy and Ambition. Leaders need to articulate a compelling vision and strategy for the company’s digital future. This should include priorities, metrics, and organizational initiatives that will bring the strategy to life. The good news is that companies can rely on proven methodologies to reinvent themselves. In our work on more than 500 transformations, we have developed a simple but effective way to frame transformation based on three bedrocks:
- Funding the Journey. Launch short-term, no-regrets moves to establish momentum and to free up capital to fuel new growth engines.
- Winning in the Medium Term. Develop a portfolio, business model, and operating model to increase competitive advantage.
- Building the Right Team, Organization, and Culture. Set up the organization for sustainable high performance.
In BCG’s overall transformation framework, we call this set of activities “Build the Right Team, Organization, Technology, and Culture.” Given the subject matter of this report, to avoid redundancy, we are not talking about technology here.
These three components form the foundation of any transformation. (See Exhibit 2.) In digital transformations, they help ground what may be unfamiliar new challenges and opportunities in proven methodologies. Funding the journey, for example, shows the organization that its leaders are committed to making progress quickly and have a plan to pay for their long-range ambitions. Winning in the medium term demonstrates a commitment to ambitious but achievable goals that will put the company on a stronger footing within three to five years. Building the right team, organization, and culture is often the missing ingredient in transformations, especially digital ones. Digital transformation is about leadership and sociology—how people work together and behave—as much as it is about technology.
At the start, the development of a digital strategy—the four steps outlined above—dominates the company’s activity. But the focus quickly switches to funding the journey and winning in the medium term—steps that have relatively quick payoffs. Over time, building the right team, organization, and culture becomes the main activity, proving again that all transformations ultimately are about people, behavior, and leaders. (See Exhibit 3.)
George Westerman, Didier Bonnet, and Andrew McAfee, Leading Digital: Turning Technology into Business Transformation (Boston: Harvard Business Review Press, 2014).