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THE NEW LEADERSHIP

IMPERATIVE:
Embracing Digital
Transformation
Digital transformation is possible for every organization.
And it’s becoming more necessary by the day.
by Maxwell Wessel

DIGITAL TRANSFORMATION IS A HUGE BUZZWORD these days — but the place is very different from the way we talked about digital trans-
fact is, it’s not a new topic. More than 30 years ago, Harvard Busi- formation over the last 30 years.
ness School Professor Michael Porter wrote about how informa- In this article I will discuss three key aspects of digital trans-
tion technology (IT) would transform competitive advantage. formation: What used to matter; what matters today; and the key
Professor Porter saw what was happening with the democratiza- challenges organizations face.
tion of IT, and predicted that this new ‘IT layer’ of every orga-
nization would transform business, enabling information flow to What Used to Matter?
scale in ways that were not possible before. To describe what used to matter, I will use a simple example:
Professor Porter was right: Thanks to technology, today’s Soap — the prototypical product of the industrial process. At
companies can reach around the globe to find customers in new the turn of the 20th century, Procter & Gamble was building
markets, and IT has become the ‘binding glue’ underpinning all a massive business — and it was not based on technological
sorts of traditional-style industrial growth. innovation. Sure, Ivory was ‘the soap that floats’; but the most
However, when we talk about digital transformation today, interesting thing P&G did was to master a set of functions that
there is much more to the story. Today, we have Amazon, the were largely unavailable to the average company at the time: It
biggest retailer by market capitalization, with only a handful of mastered the sourcing of supply to scale; distribution across the
experimental stores; Uber, the biggest livery service in the world nation and ultimately the globe; and, most importantly, the pro-
by fleet and by countries reached, with no vehicle ownership; and cess by which a company can market to and create a customer
Airbnb, the biggest hospitality service by number of locations, base from a distance.
with no owned properties. Clearly, the way companies are em- When P&G first tackled the art of print advertising, there
bracing digital to create business models and attack the market- was no precedent for a company to reach around the world to

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Today you can rent scale from anyone, but you can’t
rent terabites of data from your competitor’s server.

create a critical mass of customers. Prior to that, people had transformation. The point is not that data is valuable in and of
to visit their local general store and have a piece of soap carved itself. The only people who profit from telling you that are those
from a massive bar for individual use. P&G succeeded due to its who sell data storage infrastructure. Data is specifically valu-
mastery of process at scale — something that had never before able today because it has three very interesting properties that
been achieved. lend themselves to competition — and enable textbook cases
When the DuPont company came along, it too was able to of disruption:
manage a conglomerate of organizations, primarily because it
developed metrics to allow for the remote audit of its processes. DATA IS SCALABLE. Data is infinitely scalable, with little to no
At the turn of the 20th century, the best companies in the world marginal cost. Typically, when I ask an audience if Uber is a
competed with the knowledge of what would allow them to per- Big Data business, everyone raises their hand. It seems so obvi-
form — even when their managers weren’t around. IT-driven ous; however, I would argue that Uber is a small data company,
metrics allowed for that, and it was transformational. and here’s why: When I wanted a taxi, I used to have to raise my
In short, the 20th century was all about industrial scale. That hand and wait for a taxi driver to see that hand. In order for that
is what mattered, and great global businesses were built on the system to work, you needed thousands of taxi drivers, driving
back of a mastery of those processes. around the city looking at the sidewalks, processing reams of
How times have changed. Just look at a company like Bor- visual data in a parallel computing system that is known as the
ders — an example of a business that had a perfect mastery of brain. We basically had thousands of brains computing huge
industrial scale, Borders had retail locations across the country; amounts of data to identify whether someone’s hand was risen.
a keen understanding of how to price and manage its inventory; Today, I can send one signal, and that signal says, ‘I am
and relationships with distributors and logistics companies that looking for a ride, and I am in this location’. That is a far small-
allowed it to actually move physical materials like no one else in er piece of data, and the fact that it is captured digitally allows
the industry. But none of that stopped Amazon from up-ending Uber to replicate it at no cost to thousands of drivers around
its business. a city. Because data is scalable at no cost, we are seeing this
Put simply, all of the things that allowed companies to build throughout the new digital economy: Companies taking ad-
massive, valuable industrial-scale businesses in the 20th cen- vantage of the fact that they can get a signal and they can scale
tury are now ‘for rent’. Apple is the largest consumer electron- that signal very easily. Basically, data’s scalability allows a busi-
ics company in the world. Theoretically, as such, it should have ness like Uber to create a new operating model — and also en-
some manufacturing scale to provide the types of returns and ables it to improve very rapidly.
scale advantages that people coveted throughout the 20th cen-
tury. Instead what does Apple do? It rents manufacturing capac- DATA IS REINFORCEABLE. The second thing about data is that it
ity from Foxconn. gets better over time. Think about the Netflix recommenda-
The fact is, if we can rent scale from Foxconn, communi- tion engine. Initially, those recommendations weren’t very
cation infrastructure from Trillium, computing capacity from good, but today, I’d argue that Netflix understands the type of
Amazon and logistics capacity from FedEx or UPS — we have ef- content that I want. It has figured out how to decompose the
fectively decomposed what it means to be an industrial business. recommendations algorithms based on time of day and what
I’m looking for, because over time, it’s been watching how
What Matters Now? I behave.
So, what matters today? The answer, I would argue, is data. In Netflix’s early days, every time I rated a movie that I had
IBM has a tagline, ‘Data is the new oil’ — meaning that the sub- viewed, it observed my behaviour and the algorithm reinforced
stance by which we powered industrial change will power digital itself over time. This feedback loop and the value it creates is

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fundamental today. While I can replicate my competitor’s in- fits a new or emerging market segment that is not being served
dustrial scale, I cannot replicate the data they have collected, by existing incumbents in the industry.
or the time they’ve had to reinforce what they’ve built. Data Today, we are seeing information-based disruption. When
being reinforceable allows for cheap products to replace con- data is your core asset, change happens more rapidly. That’s be-
cierge services. I can walk into a Neiman Marcus or a Saks cause, once a company like Netflix has the information it requires
and get recommendations from a highly paid individual who to build a good recommendation algorithm, it actually gets better
has experience in the fashion industry; or, I can go to Stitch at doing lots of other things, too.
Fix and get the same types of recommendation with no mar- When Netflix acquired the rights to produce House of Cards,
ginal costs. At first, that recommendation algorithm will not be it was thanks to its recommendation algorithm. By monitoring
nearly as good as what comes out of Saks, but the fact that it and creating profiles for it users, the company understood what
reinforces itself over time — improving very rapidly — allows it types of content were in high demand (and what was in low de-
to be disruptive. mand.) Political thriller content, it turned out, was in high de-
mand, and the platform offered low amounts of such content.
DATA IS DEFENSIBLE. Today, you can rent scale from anyone, but Netflix used the same information — data that was re-enforce-
you can’t rent (or steal) terabites of data from your competitor’s able, scalable and defensible — that had previously allowed it to
server. In the past, if you hired an engineer from a competing provide concierge-like service to its users to create original con-
organization, they would bring with them an understanding of tent that was in extraordinarily high demand.
‘trade secrets’. Part of the reason that we have Silicon Valley Companies that behave like this — that harness data, build
today is that there were no enforceable non-compete clauses, network effect, leverage the scalable nature of those assets and
freeing people to move from one organization to another and reinforce their data over time — can rocket forward in their abil-
bring best practices for building a Big Data infrastructure into ity to disrupt. And, when an incumbent business embraces them,
an upstart like Facebook. that business can rocket forward, too.
When you’re talking about assembling technological in- Even if we accept that all of this is true — that what matters
frastructure, that is doable; but when you’re talking about, say, today is the ability to harness data to create feedback loops that
building an AI system that differentiates between a good rout- reinforce your competitive advantage — there are still many com-
ing of ‘how to drop somebody off at the edge of the city’ and plexities involved in making this transformation. Following are
a bad routing that wastes 15 minutes, a particular individual’s some of the key challenges organizations face.
understanding of infrastructure no longer plays a role. It’s the
data itself that allows Uber to coordinate its transactions so CHALLENGE #1: ACCEPTING THAT MANY PEOPLE NOW CONTROL
spectacularly, and you can’t simply hire someone out of Uber YOUR FATE
that has memorized the billions of records in a given city sys- If you are P&G, you have a reliance on other firms for distribution.
tem. As such, it becomes impossible to poach capabilities from CVS is a great, long-standing distribution partner, but it has very
competitors in the same way. different goals from P&G. If you’re the Dollar Shave Club —
which was recently purchased by Unilever to attack the Gillette
Information-Based Disruption business — you have a direct relationship with your customers.
The disruption enabled by data is a new form of disruption. We You can observe their behaviour, seeing when they order more,
used to talk about ‘low-end disruption’, whereby the disruptor when they drop off your platform, and how long it took from
is focused initially on serving the least profitable customer, who when the first time they logged on to when they made a purchase.
is happy with a ‘good enough’ product. We also used to talk You even know where they came from, prior to entering your
about ‘new-market disruption’, which occurs when a product virtual store.

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Once a company builds a good recommendation
algorithm, it actually gets better
at doing a lot of other things, too.

If you’re Gillette selling products through a CVS or a Safe- 1. ACCEPT REALITY. The starkest difference between the lead-
way, those retailers don’t necessarily have the same vested inter- ers who have been able to drive large-scale transformation
est in tracking that data for you. At the front entrance of the store, and those who have not, is that organizations that admit re-
imagine being asked by a store attendant whether you came from ality do better. They recognize that the things that made a
Whole Foods before walking in the door or if you came straight company great in the 20th century will not make a company
from home. CVS has a vested interest in making the in-store ex- great in the 21st century. If you believe that all the things that
perience as positive as possible. So, for many businesses today, the made you great are insurmountable, then you may very well
challenge is figuring out how to work within an ecosystem of distri- relegate yourself to being the next Borders, which continued
bution partners that don’t have the same incentives to collect the to build more stores as Amazon torpedoed the industry, be-
type of data that will allow you to transform your business. cause scale being proximate to customers was thought to be
the Holy Grail. But, when you can ship a book next day any-
CHALLENGE #2: VARYING INCENTIVES where in the country, the fact that a bookstore is half a mile
Even within your own organization, there are people with a vari- away from my house doesn’t matter. We all have admit to
ety of incentives. We recently had a guest in our class who runs a reality: The game has changed.
multi-hundred-thousand person organization, with a large number
of unionized employees. The fact is, these employees have very dif- 2. BE VERY CLEAR ABOUT WHAT YOU ARE OFFERING. Too often, we
ferent incentives when it comes to embracing digital transforma- fool ourselves into believing that the customer buys what
tion over the long term — especially with respect to the displace- we sell to them. But, as Harvard’s Ted Levitt has pointed
ment of jobs. Managing a variety of distribution partners, supply out, when a customer buys a quarter-inch drill, what they
partners and employees with varying incentives is a real challenge. are actually looking for is a quarter-inch hole — and if you
One thing we recommend is to clearly understand what your core lose track of that fact, you miss the point. Many of our or-
business is. Fundamentally, you need to understand what points of ganizations believe that customers care about performance
leverage you have: What you rely on, who your distribution partners the way we define performance. If that were true, then a
are, what their incentives are — and whether their businesses will company like Stitch Fix — which sends personalized boxes
be around in the future. of clothes to end-users — would not be growing at the rate at
which it is growing. Of course, it is not the same type of shop-
CHALLENGE #3: THE NEW COMPETITORS PLAY BY DIFFERENT RULES ping experience that you get when you go to a high-end re-
If you speak to anyone at General Motors, Ford or Daimler, they tailer like Neiman Marcus and ask for opinions; but, it turns
will tell you that ‘the future is electric’. Newcomer Tesla knows out that figuring out what looks good in different situations
that the future is electric, as well. But somehow, Tesla is allowed to can be achieved via an algorithm. If you really get to the core
make a 100 per cent bet on winning in 2025 or 2030. It’s allowed of what you do, it will be much easier to think about how data
to lose huge amounts of money today and raise capital from pub- can supplant those jobs.
lic markets in pursuit of its 2030 vision. Whereas, if you’ve been an
industrial business for 100 years, your shareholders will have very 3. ESTABLISH A NORTH STAR. GE’s Beth Comstock, who oversees
different expectations. Put simply, when your competitors play by GE Innovations, has recounted the story of a 2008 off-site
different rules, it makes it very difficult to manage change. in which former CEO Jeff Immelt forced his leaders to es-
tablish a vision for what would differentiate their business
How to Move Forward in the future. All of GE’s leaders agreed that 15 to 25 years in
Going forward, what is the best way to address all of this? Follow- the future, software-enabled industrial products were going
ing are five guiding principles. to be pervasive, because it made sense to collect data to

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predict breakdowns and optimize usage patterns using con- If Visa believes that e-commerce enabled payments are the
nective devices. And, once they had established a 15-to-25- future, it’s vital that part of the organization thinks about
year goal for the business, it became much easier for GE that all the time — even if it’s not necessarily the core of the
executives to discuss what they needed to be done in a three- business today.
to-five year timeline.
Anyone can argue about whether a change like electric 5. ENLARGE THE PIE. The good news is, digital is not a zero-sum
vehicle production in the automotive industry is going be game. The economy continues to grow globally, and if it
prevalent next year, a year after, or a year after that; but if no grows at three per cent, it will double in 20 years. Even if it
one can argue that 20 years from now, the industry will be grows at two per cent, it will double in 30 years. When you sit
reliant on electric vehicles, then the companies that will win down and strategize with your leadership team, you need to
20 years from now are those who lead boldly in that direc- focus on what you can do to enlarge the total pie available to
tion. Anything they do that sub-optimizes for that 20-year you. What new services could you add with digital? Which
vision will be counterproductive. If you have such a ‘North new user groups could you engage? Who was previously
star,’ you can execute and avoid making hazardous decisions priced out of the market that you can bring on board if you
at the expense of your long-term goals. have a simple, easy sales process through a digital channel?

4. BUILD NEW ORGANIZATIONS, METRICS AND PARTNERS. There are In closing


people who will not prosper in the new economy and part- By embracing the five principles outlined herein — accepting
ners — whether they be distribution vendors or suppliers — reality, being clear about what you do, establishing a North star,
who will have to be left behind. If you address the first three designing organizations to tackle new opportunities and focusing
considerations, it should become obvious which partners on enlarging the pie — digital transformation is possible for any
need to be left behind. This is important, because if you tie organization.
yourself to bringing a number of people with different incen- Embracing digital transformation has not been easy for any
tives along, it will become extraordinarily difficult to make of the firms that are now leading the way, but it has become nec-
the required changes. essary. Leaders who deny or ignore what is happening around
You will still have managers who are incentivized to op- them will not stop the market from following its course, and no
erate your core business, and shareholders who demand that amount of denial will keep the world from changing.
you do that job well. At the end of the day, your expansion
into new markets will be funded by the core business that
you’ve successfully executed. However, you need to recog-
nize that the leaders who are focusing on ROI today cannot
compete with competitors who play by very different rules.
The leaders who are great at running today’s businesses
will systematically deprioritize investments in the types
of things that will fend off the next Uber in your industry,
and as a result, you need new organizations and metrics to Maxwell Wessel is the General Manager at SAP.iO, a division
move ahead. of SAP that supports early-stage start-ups that will create value
for SAP customers. He is also a Venture Partner at NextGen
Visa did this quite well by splitting off the part of its Venture Partners and a lecturer at Stanford’s Graduate School
organization that was focused on building micro-services of Business. This article summarizes his recent HBR webinar,
and developer-focused solutions atop its payment platform. “Creating Value in a Digital Economy,” which can be viewed online.

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