Rationally, every executive, manager and employee understands that the company they work for has to remain in touch with market realities and act accordingly. The constant stream of companies struggling with strategic, earnings, liquidity or even a “Chapter 11” crisis is therefore counter intuitive at first sight.
However, even at personal level, one can observe something similar. The more ordinary the skill set of the employee, the more likely the job can be automated. Despite the widespread public attention for this trend, many employees still lack a sense of urgency. It is part of human nature to think bad things only happen to others (I). Market and technology shifts don’t affect them or the company they work for.
Until, eventually, the pink slip arrives. Then the need to change is no longer an abstraction.
When a company or individual hits the proverbial wall, radical change is required. This type of change is infrequent, disruptive, forced and of strategic importance.
When the company or individual remains aligned with its external environment, change can be incremental. Incremental change is continuous, focused on improvements, bottom-up and emergent.
The second key ingredient to surf the digital wave instead of being drowned by it is adopting an end-to-end approach. Numerous companies, including retail giant Walmart, initially underestimated the impact of the internet and mobile on their business model. It is more than adding a web shop module to the existing website.
In other words, incremental change should not be confused with isolated point initiatives. This important point is covered in the McKinsey article ‘Modernizing IT for a digital era’.
“Historically, companies have favored an incremental approach to modernizing IT—that is, addressing the most immediate points of pain and then subsequent issues as they occur. However, the threat of digital disruption is creating an urgent need for companies to modernize IT systems end to end, with the big picture in mind.
End-to-end modernization, or a holistic approach to tackling system upgrades, completely redefines how a company thinks about IT. Under this approach, the technology organization is no longer just a shared service; IT becomes a critical part of the company’s DNA, and IT leaders become trusted partners, not just service providers.”
However, the article still treats the business and IT as two separate domains, whereby IT leaders are responsible for technology. In reality, the business and IT domains increasingly converge or even fuse, reflected by the skill set and leadership style of the executives. No longer ‘we’ and ‘them’.
Change as one team
Companies are quickly learning that digitalization requires the business and IT to adopt a joint end-to-end change program. The McKinsey article touches upon the point by calling IT a critical part of the company’s DNA, but comes short of identifying the true key success factor of strategic change in a digital era: recognizing and acting on the interdependence between business and IT.
Notes and references
(I) This behavior is known as optimism bias, unrealistic optimism or comparative optimism.
(II) Please note that one person may perceive a specific change as incremental while the same change is perceived as radical by another.
The environment in which we live and work today is more uncertain and complex than ever before in history. To survive, let alone thrive, the leadership team has to boost its capability to sense and act on both foreseen and unforeseen events quickly and decisively.
According to McGrath the downfall of Sony, BlackBerry, Blockbuster, Circuit City and even the New York Stock Exchange can be attributed to failing to sense and act on both foreseen and unforeseen events quickly and decisively.
“Their downfall is a predictable outcome of practices that are designed around the concept of sustainable competitive advantage. The fundamental problem is that deeply ingrained structures and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.”
Of the 500 largest companies in 1957, less than eighty were still part of the S&P 500 forty years later. Some were taken over but most shrunk or simply went bankrupt.
Even today, Facebook, Twitter, LinkedIn and other young multibillion companies are not exempted from these economic forces. Yahoo was one of the pioneers that turned the internet into a billion-dollar business. Today it is struggling to find its mojo back.
Facebook had attracted a huge teen following, an important demographic group for marketeers, at its inception. However, privacy concerns in combination with Mom, Dad, Aunt Edna, Uncle Jim and the rest of the uncool lot joining Facebook is affecting engagement with this age group. Consequently, they move on to apps like WhatsApp, Snapchat or others to communicate with their peers. For now, between today and a couple of years from now, a startup introduces a new value proposition, starting a new cycle.
Technology is therefore both a key enabler of new business models and at the same time a major source of strategic risk.
Data follows a similar path. The continued miniaturization of sensors, CPU’s and other components turns ‘dumb’ products into ‘smart’ ones. This too is a potential source of billions in revenue for both IT service providers and the companies using their solutions. Downsides include bankruptcy for companies ignoring the Internet of Things and Big Data all together, and waste for companies unable to effectively realize the potential value represented by these buzzwords.
Combine data with advanced algorithms and you have a tool to automate knowledge-intensive work, create robots maintaining other robots and autonomous driving trucks, cars and airplanes. However, until Artificial Intelligence (AI) becomes mature enough to dynamically solve myriad situations, both foreseen and unforeseen, weaknesses in either data set or algorithm could result in dramatic distortions in the value chain or a car ending up in the ditch.
Budget is only part of the solution
It is important to note that the changing role of technology does not equal asking the CFO to double the IT budget or adopt every new technology entering the market.
The success of Apple’s iPad doesn’t come from any introduction of a new disruptive technology. It is a winner because Apple combined easy-access to a wide variety of books, music, games and movies with a good looking, high quality device. Additionally, the iPad actually provided so much more functionality than the average e-reader that it created a new market. Consumers did not know they had the need until Apple launched the product.
As a result, the iPad sold more than 3 million units in its first 80 days, making it fastest selling electronic device at the time. Number two, at a considerable distance, was the DVD player with 350,000 units in its first year.
The creation of new (uncontested) market spaces as a means to break away from traditional competition models is described by Kim and Mauborgne in their book Blue Ocean Strategy. They argue that the traditional fighting for competitive advantage, battling over market share, and struggling for differentiation, has resulted in a bloody “Red Ocean” of rivals fighting over a shrinking profit pool. The authors argue that tomorrow’s leading companies will succeed not by competing head-to-head with competitors, but by fulfilling a new demand in an uncontested market space, creating a “blue ocean.” Oceans that will in most cases be full of technology and data.
The need for technology and business departments to act fast and decisive is amplified by the infusion of information technology into our day-to-day lives. Today, some 450 million people have internet on their mobile phone and with 4 billion people using mobile phones, and that number is expected to grow fast. We can consume information 24 hours a day, purchase a book at 3 am and read a memo from a colleague at the breakfast table. Information technology is not only changing business models, but also the way we spend our free time (e.g. checking our Facebook account, playing mobile games).
Technology overcomes many boundaries, enabling companies to tap into new markets and enriching the private lives of billions of people. We are part of a global eco-system, with all its opportunities and challenges. To thrive as a company in this world, companies need to invest in the capabilities reflected by the six principles introduced as part of the Digital Manifesto.
Biological ecosystems consist of multiple interdependent species that need each other in order to survive. Species use natural selection mechanisms to adapt themselves to their environment and the most successful ones produce more offspring. Kelly’s book “Out of control” uses beehives, the economy, intelligence and evolution as examples of systems where the sum of parts create more than all the individual parts (e.g. one bee, company or brain cell) can. Especially his nine ‘incubation’ principles are worth a look when faced by uncertain and complex needs and wants from internal and external customers. Another interesting article with the same topic is The Biology of Corporate Survival from Reeves, Levin and Ueda. They point out that:
“Business environments are more diverse, dynamic, and interconnected than ever—and far less predictable. Yet many firms still pursue classic approaches to strategy that were designed for more-stable times, emphasizing analysis and planning focused on maximizing short-term performance rather than long-term robustness.”
The article provides business and IT leaders with several strategic pointers to improve the alignment between external environment and the company.
Kelly, K., Out of Control the New Biology of Machines, Social Systems and the Economic World, 2008.
Reeves, M., Levin, S., Ueda, D., The Biology of Corporate Survival, Harvard Business Review, January-February 2016.