Disruptive innovation has a clear impact on the half-life of companies’ business models. Protiviti’s Jim DeLoach continues a two-part series covering how industry disruption and digital transformation present a new frontier of opportunity and risk that is shaping – and speeding up – business model changes.
This article is the second of a two-part discussion regarding the strategic imperative of managing digital disruption. The initial installment of this conversation focused on three topics germane to this imperative: evaluating digital readiness, understanding what transformation entails and focusing on resiliency and agility. These three topics and the three we discuss below are key aspects to the digital readiness companies need as they focus on pivoting to a new normal in the COVID-19 crisis.
Keep an Eye on the Customer Experience and Competitive Advantage
From the perspective of executive management and the board, there is an important overriding question: How is the change the organization is undergoing, or expects to undergo, affecting the customer experience? Management and the board must work together to ascertain how the company can get, and stay, ahead of its customers and competitors.
This is not solely about technology; it is more about the business model. Technology is merely a tool or vehicle for achieving the company’s goals for delivering exceptional products and services to customers and establishing a sustainable competitive advantage. The real objective is world-class agility through getting close to the customer and enabling the organization to pivot in response to market developments and anticipated changes in customer demand ahead of the competition.
The ultimate question for executive teams and their boards is this: How can we know we have got our act together, have the right team and competencies in place and are taking the organization down the right path? When it comes to transformation, organizations have different levels of needs. But some things are fundamental. Among them is the need to know customers better, obtain more information about customers and have direct interactions with them. Once change initiatives are planned or underway, customer experience and satisfaction levels are critical areas the board must ensure that management watches proactively and continuously.
The Key Takeaway
A customer-centric approach to digital strategy breeds confidence that the organization is making the right moves. Success in executing on digital initiatives is about knowing the company’s limitations and avoiding procrastination on making the difficult decisions to address those limitations. A strong focus on the customer is a powerful driver for moving forward. For example, data strategy and legacy infrastructure issues (e.g., technical debt) are examples of difficult problems that are often ignored or set aside to address in the future, once “current and pressing” needs are met. But with a commitment to enhancing the customer experience and commanding customer loyalty, companies can overcome this inertia and do what it takes to remain competitive.
Ensure There is a Compelling Plan That Fits Market Realities
Executive management and the board need to have confidence that a viable plan is formulated for managing business disruption and transformation and that the plan is being executed effectively. This is not easy given the uncertainty in determining the appropriate technologies to embrace, new products and services to offer, third-party ecosystem supplier and distribution channel partners with which to engage and changes to make in the business. There is also the need to make decisions in a timely manner to position the organization as an early mover.
Transformation should never be attempted in a vacuum. Accordingly, executives and directors may want to bring in external consultants and experts who can offer a more impartial perspective and identify market opportunities and emerging risks to help frame the big picture. Given the stakes, senior management and the board should exercise a healthy skepticism and be ready and willing to push back on the assumptions underlying any proposed transformation plan. A healthy challenge culture and a robust process for testing and piloting the plan will only make it better.
Benchmarking information and data can provide insights to executive management and the board as to how the organization is doing. Considering the success of digital companies, it may make sense to ask provocative questions around what Amazon or Google would do with the information the organization has on its customers. Is the company leveraging its available data and information on customers and the market with the same rigor and sophistication as those organizations, which have grown exponentially over the past decade?
A formidable issue – or roadblock – for organizations is that often there are competing interests, both internal and external, for disruption and transformation. Delivering acceptable short-term financial results to shareholders remains a high priority even when the organization proceeds to transform itself. Accordingly, management faces a challenge where it cannot simply transform the company, digitally or otherwise, and sacrifice near-term profitability.
What can be frustrating to leaders of legacy companies is Wall Street’s historical tendency to treat digital-native companies with little or no profitability or positive cash flow leniently compared with established incumbents facing immutable expectations to sustain existing cash flow and earnings. This disparity makes a complex transformation process or multiple significant innovation initiatives especially difficult to carry out, as they often require investments of time and resources that could impact financial performance over the short term.
This apparent discriminatory market view handicaps legacy companies, as digital-native brands require less startup funding to grow fast and organically compared to, say, five or more years ago. Legacy incumbents may not be “Wall Street darlings,” but the reality they face is clear: They need to figure out how to walk the line between doing the things they’re good at and addressing the need to innovate, change and adapt, while also selling a compelling message to the Street.
The Key Takeaway
Under the auspices of the board, management must formulate a viable plan for managing business disruption and transformation and monitor progress in executing that plan. Protiviti’s Digital Maturity Assessment Model can help with this by clarifying the organization’s strengths and weaknesses so that management knows where to focus on its journey to digital maturity. Few organizations can effect change successfully if they do not have a mechanism for measuring and monitoring progress in addressing areas in need of improvement.
With respect to investor expectations, it is important that boards and their management teams look forward, not backward, as many companies have announced significant digital investments. With the world changing rapidly, sustaining the status quo presenting significant risk and digital investments needed to forge the way forward, it is important for executives and directors to take the long-term view in creating a platform for sustainable growth even at the risk of a short-term drop in share price. The alternative is a steady decline over time that management is powerless to correct.
Directors should be mindful that investor sentiment can shift quickly as digital capabilities become essential to compete. Our perspective is that there is increasingly an expectation that these types of investments are being made and, over time, investors will be looking for CEOs to articulate a compelling digital vision and plan. No one should be waiting until it’s too late to act.
Consider Human(e) Digital Transformation
Amid ongoing transformation and the rapid speed of innovation, senior executives and board members should have a high level of concern regarding the organization’s people — specifically, their potential dislocation and displacement. The predictions regarding job disruption vary but can range as high as 50 to 60 percent of employees being dislocated in some organizations due to digital transformation. If such predictions hold up, companies need to have a responsive human capital strategy. Granted, computers were thought to be something that would displace jobs, and this did not occur.
Further, there are arguments that today’s transformational efforts could result in the same outcome. However, many believe the digital transformation phenomenon underway now is not the same as the mere introduction of more computing power into the workplace. The scale is much larger and even more disruptive. While there likely will be growth in jobs resulting from digital transformation efforts, this growth is likely to take a longer time to develop.
The questions are daunting. How do companies reskill their people as part of digital transformation initiatives? More broadly, how does the corporate environment redeploy hundreds of thousands of workers displaced by new technologies and innovations? And even more broadly, how do the public sector and higher and secondary education partner with the private sector to deal with this oncoming social challenge?
The Key Takeaway
A clear and coherent strategy is needed to address worker dislocation and displacement. That is a critical issue which no one should take lightly. Unfortunately, the answers are elusive.
Questions for Senior Executives and Boards of Directors
Following are some suggested questions that senior executives and their boards may consider, based on the risks inherent in the entity’s operations:
- Do we have access to the expertise and experience needed to understand how digital disruption can affect the organization and its business model so that we can oversee the effectiveness of the digital thinking incorporated into the strategy-setting process and corporate culture?
- Do we understand where the organization stands and is headed on the digital maturity continuum? Is it a follower or a leader? If the company is a beginner or a skeptic, are we focused on advancing our digital maturity by identifying and acting upon the strengths and weaknesses across the business in the context of our digital vision, mission and strategy?
- Do we have a deep understanding of and are we immersed in digital business concepts, building digital ecosystems and the potential of digital hyperscaling platforms that are ready to facilitate growth? Are there barriers to innovation and digital transformation that exist within the organization that require the board’s and executive management’s attention from a change management standpoint? Are steps being taken to eliminate these barriers?
- Does the company have a digital transformation program in place that is well-defined and positioned to succeed?
- Is the program focused on changing the way that the organization acts and thinks, introducing a digital mindset across the organization? Or is it focused on introducing new technology into the organization to solve narrow problems?
- Are adequate resources allocated to support its execution?
- Is there a compelling customer-centric vision and an accompanying strategy driving it?
- Are there issues or weaknesses (e.g., data strategy and legacy infrastructure) holding the organization back? If so, is there a plan in place to address these matters?
- Is there timely decision-making within the organization on whether or how to embrace emerging technologies?
- Are executive management and the board satisfied that there are effective processes for challenging and vetting new ideas and “testing and learning” to ensure they will work?
- Do the C-suite and board agendas allocate time for discussing the company’s innovation strategy and culture and encouraging open discussion on direction and progress? Is this dialogue supported with appropriate innovation-specific metrics that tell the full story of how the strategy is performing, what the return on investment is and how effective the company’s innovation culture and capabilities have become?
- Do management and the board have access to enough intelligence to inform decision-makers as to the nature and extent of change that is occurring (e.g., changes in competitors, customers, suppliers, new technologies, regulators and other relevant external forces)? Is the velocity of the organization’s decision-making sufficient to manage the business at the speed of change?