Digital Transformation of Industries – Guest post by Eric Gervet

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Over the last two decades digital technologies have manifested themselves as an extremely powerful combination of mutually reinforcing, exponential drivers of fundamental change.

At first this change took the form of exciting new channels to markets, a step change in our ability to exchange information, and an important source of efficiency. It is now clear, however, that digital technologies will transform almost every aspect of doing business, from redefining markets, putting customers in charge, disruptively innovating on every aspect of value delivery, making an entire range of new business models possible, and blurring industry boundaries. On top of that, digital technologies deeply transform the way we organize human activity and can put our knowledge and expertise to work, not just locally, but on a global scale.

From an industry and business perspective there are a number of dynamics that are of particular importance in this culmination of industry change driven by digital technologies:

Overload of opportunity

The combination of digital technologies creates a plethora of opportunities not only for doing things fundamentally better, faster, and cheaper, but also to redefine markets, customers, products and services, value chains, and business models. This comes with highly challenging consequences. Many companies are so busy dealing with the fall out, that they no longer have the organizational headroom to properly strategize the wealth of opportunities. As a result, many have become reactive to the digital technologies that have driven the change coming their way.

The risks and opportunities resulting from digital technologies have proven difficult to strategize mainly for two reasons:

  1. Most digital technologies related drivers of change can be observed to have exponential growth behaviors, as characterized by Moore’s Law and the network effect. This quickly goes beyond the limits of our imagination. We might envision what 50% more functionality could mean for us, but we have real problems envisioning what something will look like, or what it can do, if it has 5,000% times more functionality. This is further complicated by the fact that most digital technologies related drivers of change never act alone. Most of them strengthen and feed off each other in major ways. This makes that digital technologies play out in closely knit systems of drivers exponential change that are even harder to fathom than understanding the impact of a single individual driver of change.
  2. The overload of opportunity is a strong incentive for businesses to simply get going. Even without properly strategizing the way forward, there are so many opportunities that ensure benefits are certain to accrue, regardless of the direction taken. Competitor dynamics however, can quickly turn such pursuit of new opportunities into a frenzied effort just to stay competitive: whenever a competitor enjoys success in capitalizing on digital technologies in a specific way, others will have to add it to their to-do list to stay competitive. This can quickly lead to a situation in which companies are overly busy and captured in the here and now.

Customers are in the driver seat

If companies would do a Porter Five-Forces analyses today, most would find the results to be extremely predictable and remarkably similar for many different industries – at least in terms of their insights and implications.

For a start, almost all will be characterized by a truly massive shift in power towards customers. Their bargaining power has enjoyed a phenomenal boost, as digital technologies have enabled greater market transparency and accessibility. Customers are expecting – and are increasingly getting used to – an unlimited choice, getting more than they asked for, whenever, and wherever they want, for less than they paid before. This has triggered an almost universal drive to make organizations customer centric, to engineer the most enticing customer experiences and offer the most optimal sales processes – anything less would be a disappointment to customers.

Customer bargaining power is only half the story however.

Some of the other forces have gone through metamorphic change as well. The same technological trends that fuel the transparency for customers has also provided the basis for all sorts of dis- and re-intermediation at various points in the value chain, dissolving industry and business boundaries in the process. Technology has exponentially driven innovation opportunities, triggering the redefinition of products and services and the reconfiguration of entire value chains, routinely leading to new entrants and substitutes, networked business models, and eco-systems of business activities creating value for customers. Together with increasingly global markets, this has taken industry rivalry to its highest point yet.

All these dynamics create a double-edged sword. On the one hand, there has never been more opportunity to innovate and opportunities to take businesses to the next level, but at the same time, never has there been more need to do so just to stay competitive and to stay aligned with fast growing expectations from customers.

Unknown and disparate outcomes

Given this overload of opportunities and the relative difficulty in strategizing on which opportunities to pursue in hopes of capturing values, there is a clear incentive for businesses to simply get started. Many companies – both incumbents and startups – do so in a variety of ways, such as experimenting with digital ways of working, developing digitally enabled processes, launching new (digital) businesses, adapting business models, acquiring new capabilities through M&A, etc.

Such activities can be of crucial importance to put organizations on learning trajectories and provide them with the necessary transformational experiences that help it get their mind around new business paradigms. Experimentation with new concepts and pursuing new opportunities also helps companies take advantage of the potential created by digital technologies.

From a company perspective, without an overall strategy guiding these efforts, there is no reassurance that such digital exploration reinforces itself (or even that counterproductive efforts are avoided), nor is there any guarantee that the results are optimally relevant for the companies going forward.

As a result, there are substantial impacts on the value chains, activities, knowledge and people inside organizations that are left facing the digital dilemma. On one side of the spectrum, incumbents face a variety of threats and in some cases even the chance of outright substitution, while on the other, many start-ups explore new territories only to run into the end of their funding.

A much discussed logical response to such unknown and disparate outcomes is to become more agile and responsive so that companies can take greater advantage of the impact of digital technologies than competitors. In fact, agility is now commonly seen as a decisive factor for securing future success. Organizational agility is of course always a worthy goal to pursue, but it is not a true substitute for the strategy that allows for proactively making decisions crucial to charting the path to superior performance going forward.

Reclaiming control

There is now widespread recognition that going forward, most industries and businesses will go through sweeping metamorphoses. Many leading companies are already putting themselves though wholesale digital transformation. In doing so, companies can draw on the learning of almost two decades of digital technologies driven disruptive innovation and experimentation to help them capitalize on what digital technologies can offer to them and avoid becoming irrelevant in the digital onslaught.

The impact of digital technologies, however, is not confined to single companies; not only does it extends across company boundaries, blurring industry definitions and spurring growth in newly established business ecosystems, but in doing so has profound economic, social, and public effects. This puts a premium on being able to proactively deal with the opportunities and risks brought about by digital technologies.

Eric Gervet, @ericgervet
Head of San Francisco Office of AT Kearney,
Global Head of the Digital Practice at AT Kearney

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