The early instances of the web—such as the home pages of Yahoo! and Netscape—consisted of mostly static pages and a read-only, passive user experience. In the early 2000s, the emergence of Web 2.0 brought usability improvements, user-generated data, web applications, and interaction through virtual communities, blogs, social networking, Wikipedia, YouTube, and other collaborative platforms.
The first years of the internet caused disruption in business, government, education—every aspect of our lives. Innovative companies streamlined processes, making them faster and more robust than their analog counterparts. Automated human resources and accounting systems meant employee services and payroll operated faster and with fewer errors. Companies interacted with customers according to rule-based insights from customer relationship management (CRM) systems.
Before the internet, booking a vacation required human travel agents and potentially days-long planning spent poring over itineraries. And travel itself involved the hassle of paper itineraries, tickets, and maps. Consider pre-internet retail: physical stores, paper coupons, mail-order catalogs, and 800 numbers. Or pre-internet banking: trips to the branch office, paper checks, and jars of change. Investors scanned newspaper stock columns, spent time at the local library, or contacted a company directly to have a copy of the latest financial report sent to them by mail.
With the internet, these industries reaped enormous productivity boosts, and winners and losers emerged. Travel can now be booked via an app, providing instant mobile passes and tickets. Hotels can be compared on social sites. And a new “gig economy” emerged with apps for hiring cars, renting rooms, taking tours, and more. Retail became virtually frictionless: a global marketplace for mass merchandise and artisan handcrafts, one-click purchasing, scan and buy, almost anything delivered, faster supply chains for faster trend-to-stores, customer service via Twitter. Many new brands have emerged, and many (both old and new) have disappeared, as companies experimented with e-commerce and digital transactions.
In all these cases, processes were streamlined, but not revolutionized: they were the same analog processes, duplicated in digital form. But these market disruptions nonetheless caused shifts among companies, organizations, and individual behavior.
The Impact of Two Waves
Most of these productivity advancements typically fell under the control of an organization’s traditional information technology (IT) function. They spurred productivity by using digital technologies to work more effectively and efficiently. They replaced human hours with computing seconds and dramatically streamlined the user experience across many industries. The 1990s through early 2000s saw the rise of the CIO as an important driver of innovation. Examples like Cisco’s quarterly Virtual Close7—where the company could close its books and provide performance results in near-real-time—meant significant agility and business intelligence.
Most organizations started by digitizing non-real-time (“carpeted office”) departments, where productivity gains were relatively low risk. Employee services such as HR were a relatively easy lift. Accounting was another early adopter, where decades of data processing underpinned the successive adoption of client-server applications, data center capabilities, and ultimately cloud solutions. Automation of customer-facing functions with CRM was another large step for organizations: internet sites enabled customers to research, buy, and access service via the web.
Some industries that rely heavily on information systems, such as finance, digitized core parts of their business early and rapidly, because the competitive advantages were extremely clear. For example, banks moved to high-speed trading where milliseconds could mean real money. They invested aggressively in data centers early on to provide speed and scale for bankers, along with flexibility and service for customers.
More recently, the chief marketing officer (CMO) has been frequently seen as the locus of digital transformation in many larger companies. A 2016 survey found that at 34 percent of large enterprises, ownership of digital transformation resided with the CMO.8 This is likely because other business operations, such as sales, HR, and finance, have already digitalized with tools like CRM and enterprise resource planning (ERP). Marketing was one of the last support functions to digitalize.
The productivity gains from each of these transitions were significant and measurable. Faster internal communications and improved decision-making, smoother supply chain operations, increased revenue, better customer service, and higher customer satisfaction were just some of the benefits companies reaped from the rise of Web 2.0 technologies.
The impact of both the internet and the wave of digitalization that preceded it was primarily to digitize existing competencies. They were simply outsourced to a new worker: computers. But neither wave fundamentally changed the processes being replaced. They were just that—replacements. Think of airlines digitizing reservations and tickets, banks providing electronic account information and services, and Walmart digitizing its supply chain.
Similar to Darwin’s finches, the first two waves of digital change gave industries new adaptations with which they could use existing resources more easily and effectively.
“Digitization was using digital tools to automate and improve the existing way of working without really altering it fundamentally or playing the new rules of the game,” says technology strategist and veteran industry analyst Dion Hinchcliffe. Digital transformation “is a more caterpillar-to-butterfly process, moving gracefully from one way of working to an entirely new one, replacing corporate body parts and ways of functioning completely in some cases to capture far more value than was possible using low-scale, low-leverage legacy business.”
Simply investing in technology to digitize existing functions and processes is not enough to truly transform a company or industry. It’s a necessary ingredient, but not sufficient. Digital transformation demands revolutionary changes to key competitive corporate processes.
Pharmacies are a good example: Walgreen’s and CVS have innovated with conveniences for customers to refill or check a prescription’s status using an app, or to order medications by email. But they could be disrupted by newcomers, as we saw in early 2018 when Amazon, Berkshire Hathaway, and JP Morgan announced their intent to enter the market. Stocks of existing health care companies dropped in response to the news.
Banks invest heavily in IT and have dramatically improved customer service with flexible capabilities and tailored offerings. But they too face competition from upstarts like Rocket Mortgage and LendingTree in the U.S. and companies like Ant Financial and Tencent in China.
The way to maintain leadership is to innovate. Charles Schwab president and CEO Walt Bettinger notes that “successful firms disrupt themselves.”9 One notable example is the e-payment system Zelle, from Early Warning Services, that is owned jointly by a group of banks including Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, US Bank, and Wells Fargo, among others. Zelle is an industry response to a surge of offerings from non-traditional entrants—including Venmo (owned by PayPal), Apple Pay, and Google Pay—into the $2 trillion global digital payments market. Since its launch in 2017, Zelle has surpassed Venmo as the leading U.S. digital payments processor by volume.10
Evolutionary Adaptation
Digital transformation is a disruptive evolution into an entirely new way of working and thinking. And this process could require a full transformation of corporate body parts for new ways of functioning. It is for this reason that we see so many legacy businesses failing and already becoming extinct. They find it difficult to engineer radical new processes because they rely so heavily on current ones.
And it is why digital transformation can be so frightening: Companies must shift their focus from what they know works and invest instead in alternatives they view as risky and unproven. Many companies simply refuse to believe they are facing a life-or-death situation. This is Clayton Christensen’s aptly named “Innovator’s Dilemma”: Companies fail to innovate, because it means changing the
focus from what’s working to something unproven and risky.
The threats emerge with the rise of companies using the newest tools, technologies, and processes, without the burdens of previous generations. Threats can also arrive via competitors with a clear vision and focus. Often this comes with founder-led organizations—Jeff Bezos at Amazon, Elon Musk at Tesla, Reed Hastings at Netflix, Jack Ma at Alibaba, and Brian Chesky at Airbnb, to name just a few. But a potential threat could also come from a CEO at a large, existing company, with the vision and support to make needed changes.
Larger, established companies tend to become risk-averse—why innovate when the current operations are doing so well? When Apple introduced the iPhone, it was dismissed by Nokia and RIM, among others.11 Apple was performing poorly at the time, spurring it to take chances. Nokia and RIM did not feel the need to innovate. Which company is thriving today? Think of Henry Ford’s horseless carriage. Think of Walmart eating Main Street. And now, Amazon is eating Walmart.
Recall how the Great Oxidation Event’s cyanobacteria and oxygen resulted in new processes of oxygenic respiration. Today, cloud computing, big data, IoT, and AI are coming together to form new processes, too. Every mass extinction is a new beginning. Changing a core competency means removing and revolutionizing key corporate body parts. That’s what digital transformation demands.
Companies that will survive through the era of digital transformation are those that recognize that survival is survival, regardless of how it happens; that environments change and resources fluctuate rapidly. If a company is reliant on a single resource, then it will not survive because it cannot see the great opportunity to revolutionize and breathe new life into its core abilities.
Digital Transformation Today
Today, digital transformation is everywhere. It’s one of the biggest buzzwords of the past few years. Google “digital transformation” and see how many results you get. (I just got 253 million.) “Top Ten Digital Transformation Trends” lists are abundant. In 2017 alone, over 20 digital transformation conferences were held, not including countless digital transformation roundtables, forums, and expos. Digital transformation is being talked about by everyone, including the C-suite, governments, policymakers, and academia.
Digital transformation goes by many different names. Perhaps the most familiar is “the fourth Industrial Revolution.” Past revolutions occurred when innovative technologies—the steam engine, electricity, computers, the internet—were adopted at scale and diffused throughout the ecosystem. We are approaching a similar tipping point—where cloud computing, big data, IoT, and AI are converging to drive network effects and create exponential change.12
Others refer to digital transformation as “the Second Machine Age.” MIT professors Erik Brynjolfsson and Andrew McAfee argue that the crux of this machine age is that computers—long good at following instructions—are now able to learn. Extensively predicted, this capability is going to have dramatic effects on the world. Computers will diagnose diseases, drive cars, anticipate disruptions in supply chains, take care of our elderly, speak to us—the list goes on and on, to things we haven’t even thought of yet. The first Industrial Revolution allowed humans to master mechanical power. In the last one, we harnessed electronic power. In the era of digital transformation, we will master mental power.13
This brings us back to punctuated equilibrium. As in evolutionary theory, periods of economic stability are suddenly disrupted with little forewarning, fundamentally changing the landscape. A significant difference with this wave is the speed with which it is happening. In 1958, the average tenure of companies in the S&P 500 was over 60 years. By 2012, it had fallen to under 20 years.14 Once iconic companies like Kodak, Radio Shack, GM, Toys R Us, Sears, and GE have been rapidly disrupted and pushed out of the S&P 500. Digital transformation will further accelerate the pace of disruption.
As a result of its disruptive force, digital transformation is rapidly becoming a focus in the corporate world—from the boardroom, to industry conferences, to annual reports. The Economist Intelligence Unit recently found that 40 percent of CEOs place digital transformation at the top of the boardroom agenda.15 But there is no uniform way in which CEOs are thinking about this.
Leaders who focus on digital transformation understand that to survive, their companies will have to go through a fundamental change. And they are being proactive about that change.
Take Ford’s CEO Jim Hackett, who recently announced, “Ford will prepare for disruption by becoming fit. There’s no doubt that we’ve entered this period of disruption, you all know that…. Disruption is often referred to, but is not easily understood. It’s like the thief in the night that you didn’t expect, but it can steal your livelihood. And it doesn’t wait for businesses to be in the best shape to deal with it either.”16
Or listen to Nike CEO Mark Parker: “Fueled by a transformation of our business, we are attacking growth opportunities through innovation, speed and digital to accelerate long-term, sustainable and profitable growth.”17
Revolutionaries exist in the public sector, too. The U.S. Department of Defense has invested tens of millions of dollars in its Defense Innovation Unit (DIU), an organization established under President Barack Obama to build ties with Silicon Valley and the commercial tech sector. DIU is set up to fund innovative startups with proprietary technologies: It funds transformation projects, like launching micro-satellites to provide real-time imagery of U.S. troops on the ground; developing self-healing software that uses AI to identify and fix code vulnerabilities; testing aircraft with AI-based simulations; using AI to manage inventory and supply chains; and applying AI to perform predictive maintenance on military aircraft, identifying failures before they happen.18
In Europe, ENGIE, a French electric utility company, has made digital transformation a key strategic priority, “convinced that a new industrial revolution driven by the worlds of energy and digital technology is now under way.”19 Under the bold leadership of CEO Isabelle Kocher, ENGIE has embarked on this effort across virtually every aspect of its operations and services: digitizing billing services and customer energy use self-management; analyzing energy efficiency savings through the use of smart sensors; optimizing energy generation from renewable sources; and establishing its Digital Factory to unite data scientists, developers, and business analysts to propagate digital transformation techniques across the enterprise.20 I’ll discuss ENGIE’s efforts in more detail in later chapters of this book.
But others take a narrower view—simply treating digital transformation as their company’s next IT investment, or the next wave of digitalization. For example, some senior executives view it only as a necessary shift in customer interaction. An IBM Research survey in early 2018 found that “68 percent of C-suite executives expect organizations to emphasize customer experience over products.” Asked which external forces will most impact them, C-suite executives listed changing customer preferences at the top.21 This narrow view is insufficient and dangerous.
Even more perilous, some CEOs simply don’t get it. While they may recognize what digital transformation is, they show no sense of urgency. One 2018 study noted that fully one-third of C-suite executives reported little or no impact from digital transformation in their industries, and almost half felt no urgency to evolve.22 They either don’t see the massive change hurtling toward them or don’t understand how quickly and overwhelmingly it will show up.
Some CEOs understandably see digital transformation as a fundamental risk to their companies. Size is not a guarantee of stability or longevity. If large companies don’t evolve, they can be replaced by smaller, nimbler upstarts. JP Morgan Chase CEO Jamie Dimon sounded an alarm in the company’s 2014 annual report: “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and—these entiti
es believe—effectively by using Big Data to enhance credit underwriting.”23 He is now breaking ground on a 1,000-employee Palo Alto campus to digitally transform fintech.
John Chambers, as he left his two-decades-long role as Cisco CEO and Chairman, delivered a keynote in which he presciently foretold: “Forty percent of businesses in this room, unfortunately, will not exist in a meaningful way in 10 years. If I’m not making you sweat, I should be.”24
The focus of this book is on established companies—industry incumbents that risk outright extinction if they do not transform. My purpose is to discuss how leading enterprises across industries can successfully understand the opportunity ahead and take advantage of the underpinning technologies—cloud computing, big data, IoT, and AI—to digitally transform at their core.
Geoffrey Moore’s model of “context” versus “core” in business helps illustrate why transformation at the core is important.25 Moore’s model describes the cycle of innovation as it relates to both vital and support processes of a company. “Core” is what creates differentiation in the marketplace and wins customers. “Context” consists of everything else—things like finance, sales, and marketing. No matter how well you do it or how many resources you put into context, it does not create a competitive advantage. Every company does it. According to Moore:
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