Four Essential Components of Digital Transformation

22

By James Anderson, Partner, Bain & Company, London and Tom De Waele, Managing Partner, Bain & Company Middle East

James Anderson, Partner, Bain & Company, London

Companies responding to digital disruption inevitably focus on speed first. They make changes quickly where it matters most—launching apps, forming agile squads, deploying new analytics, and testing innovative digital business models. The primary objective is to stay one step ahead of the change. Yet after an initial phase of success, these promising digital transformation initiatives too often lose momentum. On the way to scale and lasting impact, they run aground on legacy issues such as aging technology infrastructure, mismatched operating models, old ways of working, or cultures resistant to change. This shows up in our annual survey of more than 1,200 business leaders around the world.

Three years ago, when we asked respondents to prioritize what it takes to establish digital leadership, their answers boiled down to making faster decisions and executing quickly to create differentiated offerings. Today, there is a growing realization that speed on its own isn’t enough. While moving quickly to differentiate remains essential, capturing the full value of digital transformation involves scaling a company’s best initiatives across the organization for broad impact. That typically requires retooling the technology architecture while also building digital fluency and capabilities throughout the organization.

The advantage that digital disrupters have over incumbent companies is that they were built for purpose. Not only is their underlying tech infrastructure tailored specifically to their digital ambition but so is the way they operate, how they make decisions, and the way they use technology in their everyday approach to business.

Competing in a digital world ultimately means transforming both hard capabilities (the tech stack) and soft capabilities (the operating model) to create a business environment in which change can take root at scale and strategy is fully enabled by digital technology. Yet that presents a fundamental risk: How do you avoid disrupting your business just when you can least afford it?

Leadership teams undertaking digital transformation are starting to figure that out. Companies have enough experience at this point that they are seeing creative ways to build new bridges to the future without creating traffic jams in the legacy business. Looking at the most effective efforts, we’ve identified four patterns of digital transformation that allow companies to rebuild and compete at the same time.

  1. Laying down the digital foundations

The first pattern involves companies that are under pressure to develop new digital capabilities and are essentially starting from scratch. The threat is clear and evolving steadily but has yet to produce a burning platform for change. Many industrial companies find themselves in this situation.

Large manufacturers, for instance, have long used technologies such as robotics to automate and optimize the production process. But the industrial application of data and analytics is evolving into a new basis of competition. Companies are using advanced analytics and predictive models to improve everything from supply chain management to maintenance and service. Implementing a new digital infrastructure requires an entirely new set of foundational capabilities, particularly around sensors and analytics used to collect and interpret relevant information across the company.

  1. Integrating a fragmented digital landscape

Companies that fall into this next pattern suffer from digital fragmentation—that is, they have no shortage of digital projects bubbling up across the company, but they lack the ability to prioritize the most promising initiatives and scale them across the organization.

This is common among global consumer goods companies with legacy IT systems that vary from one geography or function to another. While they may be doing lots of innovative things locally to serve customers, mismatched technology makes it difficult for the entire company to learn from those ideas and deploy them.

  1. Digital transformation front to back

The third pattern also confronts the legacy conundrum in the core business, but the problem in this case is different. Rather than a fragmented IT architecture, these companies have years of accumulated systems that were built on top of each other as the business evolved. The resulting tangle of tech infrastructure ends up being inefficient and inflexible, slowing down the company’s reaction time.

  1. Launching a new digital attacker

Sometimes, the magnitude and pace of disruption in an industry require more change than an incumbent company can support. Its size, complexity, or resistance to change might prevent it from moving fast enough to remain competitive. Increasingly, the answer is to launch an entirely new business to attack opportunities that the core business cannot. This can be a bold bet that involves substantial risk. But it’s probably no riskier than hunkering down behind the moat and hoping that incremental improvement will be enough to fend off insurgent competitors.

A digital attacker is both an offensive and a defensive bet. On offense, it allows companies to enter a new market with a tailored, lightweight solution that is free of legacy baggage. On defense, it gives the company a fresh value proposition to attract new customers within its existing market—for instance, aiming at millennials, students, and young professionals to build the customer base of the future.

Finding your way to boldness

These four patterns, of course, can’t capture the myriad risks and challenges companies face as they contemplate how best to transform themselves to compete in a digital world. They are meant as broad archetypes that highlight the interplay of practical realities that any transformation journey entails, especially during a time of accelerated disruption. They encourage corporate leaders to consider two critical factors.

  • What is the nature and immediacy of the digital disruption our industry is likely to face?
  • What must change within our technology stack and operating model to enable the company to move fast enough to keep pace?

We find that there’s a tendency to underestimate on both scores: Disruption is probably happening faster than you think, and the challenge of transforming a company to remain competitive is probably harder than you expect. That tendency too often leads to incrementalism or a strategy of launching small digital initiatives that ultimately fail to move the needle.

The companies that fall into our four patterns recognize that any successful digital transformation depends on a balancing act—namely, the ability to scale meaningful change without disrupting the core. Every company finds its own path, but all winning digital transformations share one thing in common: a willingness to be bold.