Digital transformation is a hot topic--but what exactly is it and what does it mean for companies? In this course, we talk about digital transformation in two ways. First we discuss the pace of change and the imperative it creates for businesses. Next we provide the context for this transformation and what it takes to win in the digital age. Then we walk through BCG's proprietary framework, which helps you identify key areas to digitize, including strategy, core processes, and technology. By the end of this course, you'll be able to: --describe the underlying economics of innovation, technology, and market disruptions --weigh the pros and cons of current digital technologies driving advancement --utilize BCG's digital transformation framework as a ""how-to"" for digitizing your organization
Strategy Driven by Digital
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Digital Transformation
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Your Path to Digital Transformation
During Week 4 we tackle the "how" of digital transformation. We approach this challenge using BCG's proprietary framework, which provides a practical strategic model for moving from a legacy to a digitized business. We'll explain the framework's fundamental duality and the different enablers of digital transformation.
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Michael LenoxSenior Associate Dean and Chief Strategy Officer
Darden School of Business
Amane DannouniPrincipal at Boston Consulting Group, Singapore
Sonja RuegerProject Leader, Boston Consulting Group
Ching Fong OngSenior Partner and Managing Director, Boston Consulting Group
Technology has definitely changed business strategy.
We have seen in Module One,
how digital technology has completely
deconstructed the business architecture of many industries.
Mike has also described, in Module Two,
how it has enabled newcomers to disrupt established market leaders.
You can certainly infer from the previous module,
Module Three, that this trend is likely to continue for a while.
As a consequence, businesses find it
harder and harder to build their strategy in such new environments.
The traditional sources of competitive advantage are becoming fragile.
For example, what we call positional advantage.
The advantage that you have by being
the share leader of your market is not sustainable anymore.
Today, only seven percent of companies that
are market share leaders are also profit share leaders,
down from 25 percent in the 1960s.
This raises a legitimate question about what
does it mean to do strategy in the digital age?
Some business leaders have, at some point,
even suggest that that strategy is dead.
Let me be clear first.
Strategy is not dead.
It was not dead when Netflix made the decision to reallocate
resources to a nascent distribution channel in the early 2000s and it is
definitely not dead today when taxi companies are attempting to ship
their business model under the pressure of Uber, Lyft, or Grab.
What is dead, however,
is the one-size-fits-all approach to strategy if that was ever useful.
What is the right approach to strategy in a world of digital disruption?
My colleague, Martin Reeves,
and his team have done extensive research to characterize
different approaches to strategy in their book Your Strategy Needs A Strategy.
Let's start by looking at the classical approach first,
the one many of us have learned in business school.
This is where the strategists would start by analyzing his business environment,
his starting, and target position, the gap between the two.
Then, he would plan how to bridge that gap with
a sequence of programs, initiatives, actions.
Next, he would go into execution mode,
reallocating resources and controlling the outcomes versus competition.
In reality, this approach
works in business environments that are satisfying two conditions.
They are highly predictable and non-malleable.
Predictability means that, by having
enough understanding of the different market variables,
you can know with certainty how the market will evolve in the future.
This is why planning makes sense.
The lack of malleability, on the other hand,
means that you can only influence your own business trajectory.
Not other players.
Definitely not your competitors against whom you are racing.
Although market satisfying those two conditions are becoming rare, they do exist.
The candy industry is an example.
For decades, players like MARS have emphasized
planning and efficiency and a very stable, and predictable environments.
Unfortunately, I see many business or government leaders still thinking
their strategy through the classical lens Independently from the environment.
Why is that? Partly because sometimes
leaders fail to fully grasp the level of uncertainty in their industries.
This is especially true when technology-led disruptions are in play.
You remember from Module One,
how we tend to always underestimate
the exponential progress and think of it as linear and slow.
This is the same phenomenon.
The reality today is that fewer environments
remain purely classical so we need to expand,
what Martin and his colleagues call our strategy palette.
This strategy palette describes the other approaches to
strategy beyond classical in environments that are unpredictable,
or malleable, or both.
Let's take a market where unpredictability becomes high but still,
with a low level of malleability.
Here, long term planning doesn't work anymore
and the strategists need to have a more adaptive approach.
An approach with constant goal refinements
much shorter iteration cycles based on experimentation.
Basically, a trial and error approach.
When a new idea or new product new business model doesn't work, stop it quickly.
When it does, scale it up,
and then go to the next idea. T.
Telenor, a Norwegian telco, as an example,
funds innovations through a similar logic
before integrating them back to the broader business.
The company closely manages it's experimentation engine
with measured measures such as cost for experimentation,
time to market, percentage of sales coming from new products, etc.
This is how you should act when technological evolutions are not predictable.
Your experiment with different variations,
select the useful one,
scale it up, and repeat.
On the opposite side,
in environments that are predictable and malleable,
a different approach is needed.
These are often markets at early stages of
their maturity where existing value proposition is weak,
where you have very little competition, and limited regulation.
In this malleable environment,
a single offer can change the status quo by bringing a bold vision at the right moment.
As a result, create the future with some degree of predictability.
This is what we call a visionary strategy.
A visionary strategy takes effort,
resources, and a lot of persistence.
Effort first, to see what others have
missed an unmet customer need that nobody has addressed,
or the opportunity to disrupt an existing process with new technology.
That it takes resources to build those products or services.
As the vision is,
by definition, starting in the early stages of the adoption cycle,
you will need to fund the business for
some time before it reaches the economically viable stage.
Lastly, it needs persistence waiting for the inflection point.
UPS, the package delivery company, for example,
anticipated already in 1994 a change in the industry towards
e-commerce parcel delivery and spotted
the opportunity of becoming the enabler for global e-commerce.
They needed to be persistent and,
for quite some time,
they invested one billion dollars per year in
their required IT system until their persistence finally paid off.
In 2000, UPS had 60 percent market share of the total US e-commerce shipping market.
We are left with a fourth type of environment,
both unpredictable and malleable.
With the evolution of digital technology,
we will probably see more of those.
Think blockchain for money transfer for example or
artificial intelligence for managing customer interactions.
The difference with the visionary environment is that
a single player won't be able to control all the environments and stir it predictively.
This is where companies need a shaping strategy.
A strategy where they work with a whole ecosystem of suppliers,
customers, competitors, policy makers,
to gradually build the vision.
This is what Apple did with its iPhone ecosystem,
or Google with its Android equivalent.
We have also described in module three,
the challenges facing blockchain or AI startups.
Those are typically challenges that they should tackle by engaging their ecosystem,
orchestrating it to sustain
their competitive advantage and evolve in their role depending on how the ecosystem,
as a whole, reacts.
Let me give you a non-digital example of how this could look like.
Novo Nordisk, a pharmaceutical company,
entered China in the early 1990s,
when diabetes awareness and prevalence were low.
However, with more than 80 million Chinese
expected to suffer from the chronic disease by 2025,
Novo saw an unexploded opportunity to shape the industry.
Novo shaping strategy begun with
establishing partnerships with the Chinese Ministry of Health,
and the World Diabetes Foundation,
and investing heavily in physicians' education
about the diabetes threat, and potential treatments.
By 2010, there was a strong community of physicians,
and patients, who saw Novo's commitment over the years.
Novo ended up with about 60 percent of the diabetes health care market in China.
In addition to those four approaches to strategy,
there is a fifth and last one.
The renewal strategy.
It is needed in harsh environments.
When a company suffers from severe underperformance in growth, margin,
or free cash flow in a way that even threatens its survival.
This is typically what incumbents will go
through an additional disruption like what Mike has described in Module Two.
This is Nokia versus Apple,
few years ago or the taxi companies versus Uber in many cities today.
Here, a renewal strategy requires the company to proceed in two steps;
conserve resources to ensure its survival,
and then, choose a new approach to rejuvenate growth.
This can sometimes mean abandoning the core business and going to somewhere
less crowded.
One approach does not fit all.
A company needs to carefully monitor its business environment,
and choose the right approach to craft its strategy.
To be accurate, it needs to choose the right combination of approaches because
any given company is likely to operate in
different environments with different business lines geographies products.
For example, if I am using the stacked terminology from Module One,
a company can run a legacy infrastructure business in the classical environments.
Together, with an asset light platform business
in the shaping, or visionary environments.
This is also dramatically change over time.
A legacy infrastructure business can be shaken by a substitution technology.
Like, what banks face with blockchain today.
This can create uncertainty on customer response,
on transaction risk, on regulation.
So, instead of a classical strategy,
you need to switch to an adaptive,
maybe even a shaping strategy.
The role of a business leader is to recognize
which combination of environments he is operating
in and orchestrate different approaches simultaneously.
Were referred to this ability as strategic ambidexterity.
This is, of course,
not an easy thing to achieve especially in large scale organizations;
but I will discuss later in one of the videos,
how this links to exploration vs
exploitation dilemma that Mike has introduced in Module Two.
Let me first summarize the most important takeaways from this video.
The classical linear approach to strategy.
Although, still relevant in some cases is not
sufficient anymore to guarantee a sustainable competitive advantage.
Businesses need to adopt new approaches depending on the level of uncertainty,
or malleability of their environments;
adaptive, visionary, shaping, or renewal strategies.
Business leaders need to permanently choose
the combination of approaches their businesses need and run them simultaneously.
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