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
fact is, it’s not a new topic. More than 30 years ago, Harvard Busi-
ness School Professor Michael Porter wrote about how informa-
tion technology (IT) would transform competitive advantage.
Professor Porter saw what was happening with the democratiza-
tion of IT, and predicted that this new ‘IT layer’ of every orga-
nization would transform business, enabling information flow to
scale in ways that were not possible before.
Professor Porter was right: Thanks to technology, today’s
companies can reach around the globe to find customers in new
markets, and IT has become the ‘binding glue’ underpinning all
sorts of traditional-style industrial growth.
However, when we talk about digital transformation today,
there is much more to the story. Today, we have Amazon, the
biggest retailer by market capitalization, with only a handful of
experimental stores; Uber, the biggest livery service in the world
by fleet and by countries reached, with no vehicle ownership; and
Airbnb, the biggest hospitality service by number of locations,
with no owned properties. Clearly, the way companies are em-
bracing digital to create business models and attack the market-
place is very different from the way we talked about digital trans-
formation over the last 30 years.
In this article I will discuss three key aspects of digital trans-
formation: What used to matter; what matters today; and the key
challenges organizations face.
What Used to Matter?
To describe what used to matter, I will use a simple example:
Soap — the prototypical product of the industrial process. At
the turn of the 20th century, Procter & Gamble was building
a massive business — and it was not based on technological
innovation. Sure, Ivory was ‘the soap that floats’; but the most
interesting thing P&G did was to master a set of functions that
were largely unavailable to the average company at the time: It
mastered the sourcing of supply to scale; distribution across the
nation and ultimately the globe; and, most importantly, the pro-
cess by which a company can market to and create a customer
base from a distance.
When P&G first tackled the art of print advertising, there
was no precedent for a company to reach around the world to
rotmanmagazine.ca / 47
 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
to visit their local general store and have a piece of soap carved
from a massive bar for individual use. P&G succeeded due to its
mastery of process at scale — something that had never before
been achieved.
When the DuPont company came along, it too was able to
manage a conglomerate of organizations, primarily because it
developed metrics to allow for the remote audit of its processes.
At the turn of the 20th century, the best companies in the world
competed with the knowledge of what would allow them to per-
form — even when their managers weren’t around. IT-driven
metrics allowed for that, and it was transformational.
In short, the 20th century was all about industrial scale. That
is what mattered, and great global businesses were built on the
back of a mastery of those processes.
How times have changed. Just look at a company like Bor-
ders — an example of a business that had a perfect mastery of
industrial scale, Borders had retail locations across the country;
a keen understanding of how to price and manage its inventory;
and relationships with distributors and logistics companies that
allowed it to actually move physical materials like no one else in
the industry. But none of that stopped Amazon from up-ending
its business.
Put simply, all of the things that allowed companies to build
massive, valuable industrial-scale businesses in the 20th cen-
tury are now ‘for rent’. Apple is the largest consumer electron-
ics company in the world. Theoretically, as such, it should have
some manufacturing scale to provide the types of returns and
scale advantages that people coveted throughout the 20th cen-
tury. Instead what does Apple do? It rents manufacturing capac-
ity from Foxconn.
The fact is, if we can rent scale from Foxconn, communi-
cation infrastructure from Trillium, computing capacity from
Amazon and logistics capacity from FedEx or UPS — we have ef-
fectively decomposed what it means to be an industrial business.
What Matters Now?
So, what matters today? The answer, I would argue, is data.
IBM has a tagline, ‘Data is the new oil’ — meaning that the sub-
stance by which we powered industrial change will power digital
48 / Rotman Management Winter 2018
transformation. The point is not that data is valuable in and of
itself. The only people who profit from telling you that are those
who sell data storage infrastructure. Data is specifically valu-
able today because it has three very interesting properties that
lend themselves to competition — and enable textbook cases
of disruption:
DATA IS SCALABLE. Data is infinitely scalable, with little to no
marginal cost. Typically, when I ask an audience if Uber is a
Big Data business, everyone raises their hand. It seems so obvi-
ous; however, I would argue that Uber is a small data company,
and here’s why: When I wanted a taxi, I used to have to raise my
hand and wait for a taxi driver to see that hand. In order for that
system to work, you needed thousands of taxi drivers, driving
around the city looking at the sidewalks, processing reams of
visual data in a parallel computing system that is known as the
brain. We basically had thousands of brains computing huge
amounts of data to identify whether someone’s hand was risen.
Today, I can send one signal, and that signal says, ‘I am
looking for a ride, and I am in this location’. That is a far small-
er piece of data, and the fact that it is captured digitally allows
Uber to replicate it at no cost to thousands of drivers around
a city. Because data is scalable at no cost, we are seeing this
throughout the new digital economy: Companies taking ad-
vantage of the fact that they can get a signal and they can scale
that signal very easily. Basically, data’s scalability allows a busi-
ness like Uber to create a new operating model — and also en-
ables it to improve very rapidly.
DATA IS REINFORCEABLE. The second thing about data is that it
gets better over time. Think about the Netflix recommenda-
tion engine. Initially, those recommendations weren’t very
good, but today, I’d argue that Netflix understands the type of
content that I want. It has figured out how to decompose the
recommendations algorithms based on time of day and what
I’m looking for, because over time, it’s been watching how
I behave.
In Netflix’s early days, every time I rated a movie that I had
viewed, it observed my behaviour and the algorithm reinforced
itself over time. This feedback loop and the value it creates is
fundamental today. While I can replicate my competitor’s in-
dustrial scale, I cannot replicate the data they have collected,
or the time they’ve had to reinforce what they’ve built. Data
being reinforceable allows for cheap products to replace con-
cierge services. I can walk into a Neiman Marcus or a Saks
and get recommendations from a highly paid individual who
has experience in the fashion industry; or, I can go to Stitch
Fix and get the same types of recommendation with no mar-
ginal costs. At first, that recommendation algorithm will not be
nearly as good as what comes out of Saks, but the fact that it
reinforces itself over time — improving very rapidly — allows it
to be disruptive.
DATA IS DEFENSIBLE. Today, you can rent scale from anyone, but
you can’t rent (or steal) terabites of data from your competitor’s
server. In the past, if you hired an engineer from a competing
organization, they would bring with them an understanding of
‘trade secrets’. Part of the reason that we have Silicon Valley
today is that there were no enforceable non-compete clauses,
freeing people to move from one organization to another and
bring best practices for building a Big Data infrastructure into
an upstart like Facebook.
When you’re talking about assembling technological in-
frastructure, that is doable; but when you’re talking about, say,
building an AI system that differentiates between a good rout-
ing of ‘how to drop somebody off at the edge of the city’ and
a bad routing that wastes 15 minutes, a particular individual’s
understanding of infrastructure no longer plays a role. It’s the
data itself that allows Uber to coordinate its transactions so
spectacularly, and you can’t simply hire someone out of Uber
that has memorized the billions of records in a given city sys-
tem. As such, it becomes impossible to poach capabilities from
competitors in the same way.
Information-Based Disruption
The disruption enabled by data is a new form of disruption. We
used to talk about ‘low-end disruption’, whereby the disruptor
is focused initially on serving the least profitable customer, who
is happy with a ‘good enough’ product. We also used to talk
about ‘new-market disruption’, which occurs when a product
fits a new or emerging market segment that is not being served
by existing incumbents in the industry.
Today, we are seeing information-based disruption. When
data is your core asset, change happens more rapidly. That’s be-
cause, once a company like Netflix has the information it requires
to build a good recommendation algorithm, it actually gets better
at doing lots of other things, too.
When Netflix acquired the rights to produce House of Cards,
it was thanks to its recommendation algorithm. By monitoring
and creating profiles for it users, the company understood what
types of content were in high demand (and what was in low de-
mand.) Political thriller content, it turned out, was in high de-
mand, and the platform offered low amounts of such content.
Netflix used the same information — data that was re-enforce-
able, scalable and defensible — that had previously allowed it to
provide concierge-like service to its users to create original con-
tent that was in extraordinarily high demand.
Companies that behave like this — that harness data, build
network effect, leverage the scalable nature of those assets and
reinforce their data over time — can rocket forward in their abil-
ity to disrupt. And, when an incumbent business embraces them,
that business can rocket forward, too.
Even if we accept that all of this is true — that what matters
today is the ability to harness data to create feedback loops that
reinforce your competitive advantage — there are still many com-
plexities involved in making this transformation. Following are
some of the key challenges organizations face.
CHALLENGE #1: ACCEPTING THAT MANY PEOPLE NOW CONTROL
YOUR FATE
If you are P&G, you have a reliance on other firms for distribution.
CVS is a great, long-standing distribution partner, but it has very
different goals from P&G. If you’re the Dollar Shave Club —
which was recently purchased by Unilever to attack the Gillette
business — you have a direct relationship with your customers.
You can observe their behaviour, seeing when they order more,
when they drop off your platform, and how long it took from
when the first time they logged on to when they made a purchase.
You even know where they came from, prior to entering your
virtual store.
rotmanmagazine.ca / 49
 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-
way, those retailers don’t necessarily have the same vested inter-
est in tracking that data for you. At the front entrance of the store,
imagine being asked by a store attendant whether you came from
Whole Foods before walking in the door or if you came straight
from home. CVS has a vested interest in making the in-store ex-
perience as positive as possible. So, for many businesses today, the
challenge is figuring out how to work within an ecosystem of distri-
bution partners that don’t have the same incentives to collect the
type of data that will allow you to transform your business.
CHALLENGE #2: VARYING INCENTIVES
Even within your own organization, there are people with a vari-
ety of incentives. We recently had a guest in our class who runs a
multi-hundred-thousand person organization, with a large number
of unionized employees. The fact is, these employees have very dif-
ferent incentives when it comes to embracing digital transforma-
tion over the long term — especially with respect to the displace-
ment of jobs. Managing a variety of distribution partners, supply
partners and employees with varying incentives is a real challenge.
One thing we recommend is to clearly understand what your core
business is. Fundamentally, you need to understand what points of
leverage you have: What you rely on, who your distribution partners
are, what their incentives are — and whether their businesses will
be around in the future.
CHALLENGE #3: THE NEW COMPETITORS PLAY BY DIFFERENT RULES
If you speak to anyone at General Motors, Ford or Daimler, they
will tell you that ‘the future is electric’. Newcomer Tesla knows
that the future is electric, as well. But somehow, Tesla is allowed to
make a 100 per cent bet on winning in 2025 or 2030. It’s allowed
to lose huge amounts of money today and raise capital from pub-
lic markets in pursuit of its 2030 vision. Whereas, if you’ve been an
industrial business for 100 years, your shareholders will have very
different expectations. Put simply, when your competitors play by
different rules, it makes it very difficult to manage change.
How to Move Forward
Going forward, what is the best way to address all of this? Follow-
ing are five guiding principles.
50 / Rotman Management Winter 2018
1. ACCEPT REALITY. The starkest difference between the lead-
ers who have been able to drive large-scale transformation
and those who have not, is that organizations that admit re-
ality do better. They recognize that the things that made a
company great in the 20th century will not make a company
great in the 21st century. If you believe that all the things that
made you great are insurmountable, then you may very well
relegate yourself to being the next Borders, which continued
to build more stores as Amazon torpedoed the industry, be-
cause scale being proximate to customers was thought to be
the Holy Grail. But, when you can ship a book next day any-
where in the country, the fact that a bookstore is half a mile
away from my house doesn’t matter. We all have admit to
reality: The game has changed.
2. BE VERY CLEAR ABOUT WHAT YOU ARE OFFERING. Too often, we
fool ourselves into believing that the customer buys what
we sell to them. But, as Harvard’s Ted Levitt has pointed
out, when a customer buys a quarter-inch drill, what they
are actually looking for is a quarter-inch hole — and if you
lose track of that fact, you miss the point. Many of our or-
ganizations believe that customers care about performance
the way we define performance. If that were true, then a
company like Stitch Fix — which sends personalized boxes
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-
ping experience that you get when you go to a high-end re-
tailer like Neiman Marcus and ask for opinions; but, it turns
out that figuring out what looks good in different situations
can be achieved via an algorithm. If you really get to the core
of what you do, it will be much easier to think about how data
can supplant those jobs.
3. ESTABLISH A NORTH STAR. GE’s Beth Comstock, who oversees
GE Innovations, has recounted the story of a 2008 off-site
in which former CEO Jeff Immelt forced his leaders to es-
tablish a vision for what would differentiate their business
in the future. All of GE’s leaders agreed that 15 to 25 years in
the future, software-enabled industrial products were going
to be pervasive, because it made sense to collect data to
 predict breakdowns and optimize usage patterns using con-
nective devices. And, once they had established a 15-to-25-
year goal for the business, it became much easier for GE
executives to discuss what they needed to be done in a three-
to-five year timeline.
Anyone can argue about whether a change like electric
vehicle production in the automotive industry is going be
prevalent next year, a year after, or a year after that; but if no
one can argue that 20 years from now, the industry will be
reliant on electric vehicles, then the companies that will win
20 years from now are those who lead boldly in that direc-
tion. Anything they do that sub-optimizes for that 20-year
vision will be counterproductive. If you have such a ‘North
star,’ you can execute and avoid making hazardous decisions
at the expense of your long-term goals.
4. BUILD NEW ORGANIZATIONS, METRICS AND PARTNERS. There are
people who will not prosper in the new economy and part-
ners — whether they be distribution vendors or suppliers —
who will have to be left behind. If you address the first three
considerations, it should become obvious which partners
need to be left behind. This is important, because if you tie
yourself to bringing a number of people with different incen-
tives along, it will become extraordinarily difficult to make
the required changes.
You will still have managers who are incentivized to op-
erate your core business, and shareholders who demand that
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
move ahead.
Visa did this quite well by splitting off the part of its
organization that was focused on building micro-services
and developer-focused solutions atop its payment platform.
If Visa believes that e-commerce enabled payments are the
future, it’s vital that part of the organization thinks about
that all the time — even if it’s not necessarily the core of the
business today.
5. ENLARGE THE PIE. The good news is, digital is not a zero-sum
game. The economy continues to grow globally, and if it
grows at three per cent, it will double in 20 years. Even if it
grows at two per cent, it will double in 30 years. When you sit
down and strategize with your leadership team, you need to
focus on what you can do to enlarge the total pie available to
you. What new services could you add with digital? Which
new user groups could you engage? Who was previously
priced out of the market that you can bring on board if you
have a simple, easy sales process through a digital channel?
In closing
By embracing the five principles outlined herein — accepting
reality, being clear about what you do, establishing a North star,
designing organizations to tackle new opportunities and focusing
on enlarging the pie — digital transformation is possible for any
organization.
Embracing digital transformation has not been easy for any
of the firms that are now leading the way, but it has become nec-
essary. Leaders who deny or ignore what is happening around
them will not stop the market from following its course, and no
amount of denial will keep the world from changing.
Maxwell Wessel is the General Manager at SAP.iO, a division
of SAP that supports early-stage start-ups that will create value
for SAP customers. He is also a Venture Partner at NextGen
Venture Partners and a lecturer at Stanford’s Graduate School
of Business. This article summarizes his recent HBR webinar,
“Creating Value in a Digital Economy,” which can be viewed online.
rotmanmagazine.ca / 51
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