In this article by Rob Austin, Professor of Information Systems at Ivey Business School and Program Director for Innovating for Digital Transformation, he breaks down perceptions around digitalization, how digital companies differ from traditional businesses, and how established businesses must approach digital transformation as a process that includes evolving their business model in order to compete in a digital future.
Digital companies in today's business environment
In today’s business environment, a growing threat to established firms arises from companies that were born digital. These are relatively young companies. Several have only been around since the ’90s (Amazon, Google), a few since the ’80s or late 70s (Cisco, Apple). But many are really big now (hundreds of billions of USD in revenue). Sometimes we call them “tech companies” or “tech platforms.” They are also notable for having honed in on and mastered business models that leverage their ability to monetize data. And one thing about monetizing data is it gives you a voracious appetite for finding more and more data to monetize – a hunger tech companies often follow into traditional, established industries.
This is important to realize: These companies don’t strategize the same way that established firms do. They don’t stick to their core. Instead, they wander into other industries. If they haven’t already, they may wander into yours, eventually. And when they do, they may behave differently from a business model standpoint than the established incumbents, mainly because they’re there to find new data to monetize – not the same reason incumbents are in that business
If you don’t understand what these born-digital companies are doing, it can be quite perplexing. When I’ve taught custom programs on digital transformation for managers from established organizations, there comes a point in the learning process when participants experience a kind of aha! moment – I can see a light bulb coming on. That’s when they say things like, Wow, this is more of a threat than I thought. We really have to get on top of this.
Another remark I often hear in moments like this: this is not fair, they (tech companies) don’t have to play by the same rules we do. This is true, of course, because they are so good at monetizing data. They’re making money in an entirely different way than established firms, which means they don’t have to make as much money from traditional business. Apple can afford to offer better interest rates on their credit card than banks can, because they make so much money from the rest of their business. Google can give away functionality to acquire customers that established firms would have to make profits on to satisfy their shareholders.
In the aftermath of such realizations, the question quickly becomes: Can we get our own foothold in the digitalization economy if we’re an established firm? Can we benefit from adapting some of the traits of these digital businesses’ models?
I believe the answer to this is “yes,” but realize, this is about business models.
Approaching digitalization as an established organization – evolving the business as a whole
A lot of people, especially in established companies, mistakenly lean on the misperception that digitalization or digital transformation is about just doing the same old things faster and more efficiently with technology. But as tech companies show us, it’s about much more than that. Digital transformation, in its full-blown version, is about competing differently. It’s about implementing different kinds of business models, not just about automating so that you can do what you’ve always done faster, or more efficiently. A very real risk develops when people don’t have an accurate understanding of what digitalization is doing to business competition; they proceed to compete faster in the same way their organization always has and end up not being prepared for many emerging threats.
As an established organization, you can succeed in digital transformation. But it involves looking hard at your business model and seriously considering transforming it so that you’re creating business value in innovative ways – ways that might be quite different from how you’ve created value historically.
Every company needs to realize that business ecosystems in each industry are evolving. Tech startups are forming, reimagining the operations and delivery of those services, and creating, sometimes through partnerships, platform business models. For example, we see the so-called “fintechs” moving things in this direction.
As this happens, there’s going to be evolution, for incumbents, in who your partners are and, further, who your rivals are. Part of the big question facing incumbent leaders is: how do you influence the evolution of this ecosystem in a way that’s favorable to your company? How do you exert influence, noting that sometimes that doesn’t mean the same thing as control? A lot of big established firms are very comfortable with a history of being in control in a very serious way in their industry. But being able to evolve with digitalization may actually involve releasing some control and potentially being more cooperative with other players you’ve often bossed around. It might even involve more true partnering with people who you’ve historically considered rivals.
If you’re not thinking dynamically about transformation, you’re likely to rely on your traditional reflexes. What we see happening to organizations that operate like this is that they may be able to maintain control, but over a shrinking domain. By insisting on owning a big piece of the pie, they inadvertently cause the pie to contract, as others steal away with slices of the business. With an enlightened approach, there are lots of opportunities to continue to be a major player in a new and evolving ecosystem. But your ability to seize that opportunity is dependent on how well you understand the changes associated with digitalization and how willing you are to adapt – to come to terms with the changes that are happening. This might involve being okay with taking a smaller piece of a growing pie.
It’s the nature of human beings to like to take actions that they’ve succeeded with before. Established organizations are similar. When you have received a lot of positive reinforcement from prior successes, you tend to really believe in the traditional practices that have delivered that success. But the world changes. Wise leaders don’t let their wishful thinking limit their ability to foresee how those practices might not transfer into today’s or tomorrow’s business environment.
Communicating the need for digitalization within your organization
So, to repeat, digitalization isn’t about performing your current company operations faster, it's about influencing the evolution of your whole business ecosystem to a new equilibrium enabled by digital technology. This is not easy. Many transformation programs have failed. One thing you realize when you look at failed transformation efforts is that the failure wasn’t about the technology, but more about failures in decision-making and the execution. Did they give people enough training? Did they prepare people well enough for the change? Did they create a sense of urgency? Did they understand how hard it was going to be or did they make overly optimistic or self-flattering assumptions?
In my experience teaching about digital transformation, I often see the best response from leaders in middle management. They’ll recognize the reality of the upcoming threat, and start to ask an interesting question: how do I convince my senior leaders that this is a real threat? I’ve seen a trend where in some organizations, the middle levels understand the threat while senior leaders blissfully continue believing everything is business as usual. Mid-level leaders are placed in a situation where they need to navigate conversations around digital innovation to their teams as well as upward to senior leadership. It really comes down to having the ability to communicate what needs to be done to create new digital business models and to really emphasize the urgency of the need to transform the business to keep up and excel in the evolving environment.
That’s not to say that all leaders at the senior level are unaware of the risks and threats posed by sticking to the status quo. People in the organization, like the chief digital officer or the chief technology officer, may have a really good handle on this but are also facing the challenge of educating others about the digital disruption occurring in their industry and convincing other leaders, such as the CEO or CFO, that digital transformation is necessary to the organization’s long-term success. Those types of leaders have been around the block for a few times, and often are too reluctant to admit that business is transforming in any way that they haven't seen before.
For many, there is a healthy skepticism about whether business is truly changing. In my years as a professor, I’ve tried to convince many leaders that this change is coming. Some see it and build new successes upon their older ones. With AI and other digital technologies becoming even more integrated into our world, many have been forced to acknowledge that digitalization really is changing things fundamentally. When they start to get real insights into digitalization and how major the changes are in how we compete, they become convinced that they also need to transform and start to see paths to getting a foothold in the digitalization economy. But it’s never continuation along the same trajectory. It’s never the same old things faster and more efficiently, as much as we might wish for that.