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Is Digital Transformation Hype or Reality? - Part 1 of 4

Digital Transformation

"Digital transformation is like teenage sex, everyone talks about it, but nobody has done it!"

I think the big idea is still hyping, but great digital technologies, which could enable digital transformations are readily available today. There is a need to separate hype from reality and emotional enthusiasm from substantiated facts.

In this article I will shed some light into the digital business transformation by asking 4 key questions:

  1. Why do we need to innovate by transforming our business at all?

  2. Where (in which areas) does it make most sense to start the transformation process?

  3. Which technologies are most promising for effective transformation (low hanging fruits: quick wins with low risk)?

  4. How to implement digital business transformation?

Why do we need to innovate by transforming our business at all?

Globalization and digitization open up new opportunities to innovate, differentiate and grow the business. At the same time they are responsible for alarming competition from new entrants we never considered before. These are new players outside our traditional geographical and industry markets with completely new business models (blue oceans).

Pro transformation

These global digital innovators and disruptors - like the well-known AirBnB & Uber or the less known ticksa (digital marketplace ecosystem) and ibiola (peer-to-peer car sharing platform) - are first movers stealing customers from traditional businesses.

They are seen as indirect competitors because they offer substitutes rather than comparable products & services, e.g. instead of offering cars to be owned or rented, they facilitate cars to be shared!

Because enabling digital technologies are readily available and a few pioneers started disrupting traditional business models, my preliminary conclusion would be that we need to adapt & transform digitally to react to the threat of new digital competitors and fight back using the same weapons.

Contra transformation

Some sceptics might argue that these trends will soon dissolve and disappear as abruptly as they emerged. The reason is that people get tired and overwhelmed by the change in behavior and lifestyle these technologies imply or the increased risks they bring along. RIM, the inventor of Blackberry went from No.1 in mobile mail to irrelevant in a short time span. MySpace disintegrated and vanished in no time and there are unsubstantiated mentions that teenagers are turning their back on Facebook & Co. So why react so quickly & answer the digital transformation call, instead of adopting a more relaxed wait-and-see attitude? Maybe it is only a passing fashion trend?

Regulation is also contributing to this skepticism by suffocating rapid diffusion of digital innovation. The new EU directive on data privacy for example makes life for smaller digital businesses extremely difficult, as it imposes a lot of compliance constraints and horrendous fines of up to 20 million Euros or 4% of worldwide revenues for breaches.

Digitization also brings along challenging IT security risks such as service disruption, cyber-attacks or virus & worm epidemics. A recent study by Gartner predicts that

“By 2020, 60% of digital businesses will suffer major service failures due to the inability of IT security teams to manage digital risks”

Compounded with the fact that small businesses even lack IT security teams, this threat should be taken seriously.

Another study performed by the Center for European Economic Research and Prognos shows that the innovation ratio (measured as the number of companies which had product or process innovations in the last 3 years) among German small & medium businesses (SMB), plummeted from 56% in 1999 to 37% in 2016. This is very discouraging as SMBs are considered the motor of every economy. Reasons for this could be the unwillingness of SMBs to embrace digital transformation and/or the fear of the risks associated with innovations.

These innovation risks can be categorized into 4 groups:

  1. Technical realization risks (is it feasible or doable?)

  2. External risks (political, economic, social, environmental, legal)

  3. Financial risks associated with the investments & cash-flow needed to build and market the innovative solution

  4. Market success risks. This represents the biggest uncertainty and can be further subdivided into two areas:

  • Is the solution desirable enough to sell enough quantities at a price customers are willing to pay?

  • Do the marketing strategy and the sales process allow to reach the target group customers economically?

… and still make enough profits (viability) to yield a good return on investments?

The Paradox

This paradox of “Innovate & accept the risks - or not innovate & avoid risks” is what we know in psychology as cognitive dissonance. Humans tend to solve such dissonance by either changing their behavior (not innovate) or by changing their attitude (maybe it’s not so risky after all). But does it have to be as black & white?

The Solution

This brought me to challenge the paradox and ask the question whether there is a way to innovate with minimal risk, despite that innovation rewards and risks usually go hand in hand.

As I am a right-brainer specializing in business development, innovation and internationalization for SMBs & startups, I teamed up with a colleague of mine, Dr. Barbara Streimelweger, a left-brainer dealing with larger enterprises. Barbara is specialist in Risk Management, Process Management and Project Management. Our common objective was to build a holistic model allowing SMBs and larger companies to innovate like startups, whilst at the same time embrace & mitigate risks. We wanted to use the innovative agile techniques & processes and align them with the sound & proven business management practices.

We found out that in order to solve the paradox, one needs to:

  • Instill a corporate culture tolerating failures and encouraging recursive (iterative) experimentation & learning. In short a culture of innovation

  • Implement a dual operating system (as depicted by John P. Kotter in his HBR article Accelerate and used by leading innovative companies such as Greiner) in organization, processes and roles: one system for creativity, empowerment & experimentation in parallel to the existing system for standardization, regulation & control

  • Identify, assess and prioritize not only existing risks (pre-innovation) but also new innovation-implied risks and solve the resulting feedback regulation loop by minimizing the total risk impact, whilst maximizing the innovation rewards

So we came up with the Minimal Risk Innovation model (MRI), which consists of:

  • An initial audit to assess the digital maturity

  • A canvas tool covering 4 dimensions: Globalization, Regulation and Digitization external forces as well as Innovation, an internal force (GRID)

  • It further includes a control circuit algorithm to balance or equalize innovation rewards with the inherent Innovation implied risks and costs

During a 30-day program we craft a minimal risk innovation strategy and advice and coach medium & large companies on how to use innovation techniques & processes, whilst minimizing risks.

Conclusion (of part 1)

Who or what is forcing or motivating us to transform digitally and why aren’t we all doing it?

Are these the new digital competitors? Are these the new digital technologies, which will make current technologies obsolete, or which can give us tremendous capabilities to innovate and create a competitive advantage? Are these our customers, the new generation digital consumers, who expect different ways of interacting with products and companies and expect superior experience, which can only be realized by digital transformation?

Technology innovators (or Digital Masters as Cap Gemini Consulting calls them) pioneering and disrupting some industries are considered as the main driver for us to ride the wave of the digital transformation (reactive me-too motive).

The pro-active motivation for digital innovation to guarantee growth & differentiation, is being quenched by challenging or uncertain regulations and associated risks. This mainly affects risk-averse SMBs, but also rigid and sluggish large enterprises, who's industries have not yet been disrupted.

So my final conclusion is, yes you should dare to innovate in order to survive, but also to secure a competitive advantage in the new digital era. At the same time you should not bury your head in the sand when it comes to risks, but rather take a responsible Minimal Risk Innovation approach.

In part 2, I will try answering the question of which areas make most sense to start the transformation process. So watch out for blog updates by simply following me on twitter...

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