The benefit of spending a lot of time on airplanes is that you get time to think. As I work with quite a few companies and the topic of digitalization comes up on a regular basis, I thought I’d reflect a bit on the role of digitalization and the disruption that it causes in industry.
The first thing to realize is that digitalization offers great opportunities, but also severe risks for companies. The Fortune 500 presents an illustrative example of this: the average tenure of a company on the Fortune 500 list is, according to recent research, now reduced to 10 years (from 95 years when the list was first assembled). One of the key reasons for companies to fall off the list is that they fail to build new core capabilities and stay in their comfort zone of technologies and capabilities that made these companies successful in the past. If we look at the technology and capability that currently is disrupting companies and industries, of course it is digitalization.
Just to be clear on definitions, digitalization is concerned with using software and data to offer significantly improved products, pure software products as well as digital and data-driven services. The intent is, obviously, to create new revenue opportunities as well as replace traditional business models with new business models.
In my experience, most of the companies that I have the opportunity to observe in different ways are fundamentally missing the boat and are at significant risk of disruption due to digitalization; hence the title of this article. Although there are, of course, several causes for this, there are at least four patterns that seem to be recurring.
First, the vast majority of companies have no or very limited software skills in their senior leadership. Many leaders have grown up inside the company through traditional technology paths, such as mechanical or electrical engineering, and are firmly stuck in an “atoms-centric” world view. Alternatively, leaders have a financial or management background without any fundamental product and technology understanding. Management by numbers is a very effective model when you’re in a stable, mature and slowly evolving industry, but it is destructive during times of transformation because the need for change will not show in the numbers until it too late by far. Change is based on a core belief that the envisioned future in inevitable or at least that the current model is obsolete and needs to change. No spreadsheet will ever indicate the need for change.
Second, in some ways a derivative of the first pattern, most companies are incapable of “ambidexterity”. Building the capability to deliver on today’s challenges while also preparing for the future needs of the company is extremely hard to do. This requires sacrificing resources that could be used to deliver on today’s revenue generators and have these people spend time on topics that might become relevant at some point in the future, but whether these benefits will come to pass if viewed as highly uncertain. Most managers prefer certain short term smaller success over uncertain, long term success of uncertain magnitude. Although the organizations tend to talk about preparing for the future, in reality this “vision” is never translated into an actionable strategy and tends the “die a death of a thousand cuts”.
Third, the most surprising pattern that I see if that many leaders believe that digitalization is an R&D problem that only affects the software R&D unit. For some reason, it is more convenient to believe that today’s business models, products and business ecosystem will stay the same and just be slightly adapted because of software and data. The problem is of course that nothing could be further from the truth. Digitalization allows for business models that are fundamentally different from today and digitalization starts with understanding the business implications, both in terms of opportunities and risks. Failing to recognize this is a recipe for disaster.
Fourth, many companies justify their lack of initiative by referring to the lack of desire for change from their most valuable customers. When reflecting on this, it is obvious that your most valuable customers are no more eager to change than what you are as they are on top of their industry and digitalization is as much a risk to them as it is to your company. The danger is of course that an entire business ecosystem is replaced by a new one and that entire value networks get disrupted. Waiting for customers to change first is comfortable and allows you to deliver on yet another quarter, but obviously is mismanagement from a longevity perspective.
Concluding, my current observations of many of the companies that I spend time with have led to my prediction that most of these companies will be disrupted and killed by digitalization. If you are interested in avoiding that fate, my recommendations are fourfold. (1) Get software expertise in your senior leadership and board as soon as possible and listen. The world is changing rapidly and all your experience, collected over the last decades, is a liability rather than an asset. (2) Preparing for the future does not happen just by saying it. Put systems in place that ensure that sufficient resources are allocated into exploring opportunities created by digitalization and make sure that the success metrics are different from the mature legacy businesses. (3) Involve all functions in the company in the work around digitalization and embrace the uncertainty that comes with radical innovations. (4) Focus on your fringe customers and experiment with these customers at the edges of your business around new opportunities and innovations enabled by digitalization. Most companies will be killed by the digitalization transformation and the odds are stacked against most companies. However, it’s still better to go down fighting than as a victim and, who knows, you might come out victorious!