By Byeon Joon-young
All companies must prepare to “go digital.” Data about customers, competitors, suppliers, and employees are exploding. Ninety percent of all data were created in the past two years. By 2016, there will be 3 billion Internet users globally, and the Internet economy will reach $4.2 trillion in the G-20 nations.
No company or country can afford to ignore this phenomenon. The fact is that we have entered the “second half of the chessboard,” where the scale and speed of change are indelibly altering industry structures and the way that companies do business. Farsighted companies, even ones in traditional industries, can separate the signals from the noise and create new sources of advantage by going digital.
To build digital advantage, companies require a digital transformation. Most will need to improve their people, processes, and organizational structures and adapt them to the digital world. Given the rapid pace of change and the intensity of competition, they will need to move away from long-term planning cycles and toward adaptive strategy setting.
More fundamentally, companies need to understand and strengthen their “digital balance sheets.” In an increasingly digital world, companies need to build their digital assets and reduce digital liabilities, often organizational, that limit their ability to tap rich opportunities.
By understanding their digital balance sheets, executives will acquire a solid sense of what needs to be done. The following three levers will help companies build their digital equity.
First, take an adaptive approach to strategy. Strategy is necessarily specific to the individual company. There is no universal digital strategy for retailers, mining companies, utilities, and heavy-equipment manufacturers, but there is a better way to think about and create strategy in the digital age that applies to all companies. While the strategic concepts of scale, segmentation, and cost position remain valid, the traditional way of looking at those concepts is out of date.
Companies need to recognize the unpredictability of today’s environment and devise a strategic approach that values real-time data analysis and experimentation. They need to recognize relevant patterns in the data, leverage these insights to make operational interventions in real time, and continuously adjust and reinvent their business model. They also need to be able to quickly enter, scale up, or scale down new businesses in diverse industries when opportunities emerge or when experiments do not pan out.
Second, run forward and walk backward. To build equity on their digital balance sheets, most companies will need to run forward into the future while walking backward away from their traditional businesses. The transformations involved may take years, but senior leaders do not have the luxury of time to demonstrate results. They face pressure from their boards, their investors, and their employees to show tangible progress quickly. They also face pressure not only from disruptors but also from customers who, through the Internet, have the ability to tap into alternative suppliers.
Executives need to operate at two speeds, simultaneously managing their legacy businesses and building the foundations for the future in wholly new areas. One of the supreme challenges of digital transformation is achieving these two very different but complementary goals. Successfully running forward and walking backward requires hard choices, such as those involved in de-layering the organization. By flattening the pyramid of their legacy businesses, executives can improve speed, accountability, and decision making as required in the digital era.
Lastly, develop capabilities, an organization, and a culture aimed at building digital equity. Given the complete change in business model, skill sets, and risk profile that is required, digital transformations require focus, commitment, and engagement throughout the organization.
Leaders must change the mindset of the senior leadership team _ and possibly the composition of the team itself ― if they want to change the organization. It may also be necessary to establish partnerships, alliances, and collaborations with suppliers, customers, and even competitors. Leaders need to create a culture of experimentation so that employees feel comfortable rapidly testing ideas that challenge orthodox approaches to innovation.
Although many companies are still at the beginning of realizing the potential of the Internet, leading executives are already taking steps to build digital advantage. Companies need to start strengthening their digital assets.
Byeon Joon-young is a partner and managing director of The Boston Consulting Group.