Leading the Digital Transformation

Some researchers[1] argue that the world has entered the second phase of the digital era. Just like previous technological revolutions in history, such as the steam engine or electricity, the impact of technology comes in two waves. In the first wave, the new technology (in our case today, computer-based information systems) is deployed to automate existing methods of work, without much change in the latter. There are clear economic benefits to such automation, but rather limited in comparison to what comes next. In the second wave, the technology inspires entirely new ways of organizing, fueling even greater acceleration in productivity and value creation.

Since the mid-1990s, the world is witnessing unprecedented innovation, not only in technological capability, but, more importantly, in business models, consumer expectations and social behaviors. From the sharing economy (services like airbnb.com), to instant word of mouth through social media, to consumer appetite for unique and personalized products and services, the global economy is changing faster than any other time in living memory. This is the second wave of the digital era.

Now we have a better grasp of the digital enterprise: it is the company that has evolved and adapted to the economic and technological reality of the second wave of the digital era. Leaders face the responsibility and the challenge to navigate their organizations through those uncharted waters of the digital transformation.

CapGemini Consulting and the MIT[2] have shown that so-called “Digital Masters” are on average 26% more profitable than their industry peers. Researchers define digital mastery in two dimensions. First, “digital capabilities” signify an understanding of the technological opportunities and the use of tools as drivers of business change. Second, “leadership capabilities” signify the vision, impetus and agility to stay ahead of the curve by enabling and supporting organizational change. Digital Masters score high on both dimensions.

Interestingly, a focus on digital capabilities supports higher revenue per employee and fixed asset turnover. However, it is the leadership capabilities that convert this revenue potential into sustained profitability. Any competitive advantage from technology investment is short-lived unless accompanied by deep transformation in strategies, products or processes.

The task for senior executives involves, on one hand, articulating a compelling vision for harnessing technology and the laws of the digital economy. Building and sustaining change-readiness across silos and across boundaries is an essential enabler in this process. On the other hand, leaders are tasked with revisiting their company’s business model, customer experience and core operations in light of the technological capabilities available now and in the near future. In other words, if a swarm of young startups out there are bent on disrupting your industry, what weaknesses and opportunities will they target?

Although such a top-down approach in necessary in order to overcome the inertia of the silos and other fiefdoms common in established organizations, it is equally important to motivate and nurture an open, collaborative culture that will drive bottom-up innovation and risk taking. The younger generations of digital natives and smart creatives[3] are those who are, quite literally, building the future. They are repelled by bureaucracy, power distance and entitlement; they thrive in autonomy, meritocracy and dense networks of peers.

All the above is quite a challenge for any organization and its leaders. However, if it is true that we live in an era of fast-paced change, those who do not adapt face a real risk of extinction.

[1] Erik Brynjolfssona and Andrew McAfee, The Second Machine Age, W.W.Norton & Co, 2014.

[2] George Westerman, Didier Bonnet and Andrew McAfee, Leading Digital, Harvard Business School Press, 2014.

[3] Eric Schmidt and Jonathan Rosenberg, How Google Works, Grand Central Publishing, 2014.