PNR Paper

Options for Formulating a Digital Transformation Strategy

Options for Formulating a Digital Transformation Strategy by Hess, T.; Matt, C.; Benlian, A.; Wiesbock, F. (2016) — MIS Quarterly Executive, Vol. 15, №2 pp.103–119

Executive Summary

In this paper, the authors argue that to remain competitive, businesses must “formulate and execute strategies that embrace the implications of digital transformation and drive better operational performance.” As we see in our day to day at PNR and as the authors rightly point out, this is not an easy task and many organizations are unable to keep pace with the digital reality. Based on how three German media companies successfully approached digital transformation, this paper presents a framework and provide strategic questions to help handle the opportunities and risks of digital transformation.

Defining Digital Transformation

Digital Transformation is probably one of the most used buzzwords in management consulting right now. Without defining what a term means it’s hard to know what it entails and how it will impact the business. The authors define digital transformation as “the changes digital technologies can bring about in a company’s business model, which result in changed products or organizational structures or in the automation of processes” with the main benefits of increasing productivity and innovations while also reducing costs.

Building Blocks of Digital Transformation

Some people argue that a digital strategy should be part of a firm’s IT strategy. As the authors argue, “the accumulated knowledge from previous research and best practice on IT strategies cannot be simply transferred to digital transformation on strategies.” At PNR, the angle we usually take is to integrate the digital strategy in the business strategy with the goal of not having the technology in isolation of the business strategy.

However, for most companies, this is not an easy task because of the interactions between many different components of the business. Changes in culture, leadership, processes, products, organizational structures are always fraught with resistance and require a clear agenda to help align everyone on the coordination, prioritization and implementation efforts of a firm’s transformation efforts.

In their Digital Transformation Framework (DTF), the authors structure the digital transformation strategy around four key dimensions:

  1. Technology: Reflects a firm’s approach and capability to explore and exploit new digital technologies.
  2. Changes in Value Creation: Reflects the influence of digital transformation on a firm’s value creation.
  3. Structural: Modifications in organizational structures, processes and skill sets that are necessary to cope with and exploit new technologies.
  4. Financial: Firm’s need for action in response to a struggling core business as well as its ability to finance a digital transformation strategy endeavour.

Guidelines for Formulating a Digital Transformation Strategy

Technology Dimension

1. Strategic Role of IT — IT as an Enabler or Supporter
Enabler: Is IT an enabler of new business opportunities.

Supporter: Is IT a way of supporting business changes.

2. Technological Ambition — Firm’s Approach to New Digital Technologies: Innovator, Early Adopter or Follower
Conservative (Follower): Firms adopt established and widely used technology solutions.

Moderate (Early Adopter): Firms deploy technology solutions at the early stages of their development.

Aggressive (Innovator): Firms create and introduce new technology solutions.

Changes in Value Creation Dimension

3. Degree of Digital Diversification — How “Digital” Is Your Interface to the Customer
Either emphasis on stability of the core businesses or diversify the traditional businesses and actively leverage the possibilities offered by digital technologies. It will also depend on the opportunities, the resources of the firms and on the risk appetite of the top management.

For media companies the choices are: electronic sales channels, cross-media, enriched media, content platforms and extended business.

4. Revenue Creation — How You Will Create Revenue from Future Business Operations
The revenue creation is highly dependent on the individual firm and the context they are in.

One example that I like is the Adobe transition from a licence model to a SaaS model. In 20112, Adobe changed their own business model from packaged software to subscription. It’s a rare transition, but one that has paid off for Adobe: the stock is now around $127 per share and was around $30 at the beginning of 2012.

For media companies four options are available: paid content, a freemium model, advertising and complementary products (selling products on e-commerce is a frequent example).

5. Future Main Business Scope — Focused or Not
The business scope is highly dependent on the individual firm and the context they are in. For example, in the case of General Electric which sold off most parts of GE Capital and decided to focus on the Industrial Internet)questions could have been: Do we sell all assets of GE financials, do we spin it off or do we keep some assets like GE Healthcare Equipment Finance. In the end, they sold most of the assets to focus on their core business.

For media companies the choice is either: content creation, content aggregation, content distribution, management of content platforms, etc.

Changes in Structural Changes Dimension

6. Responsibility for Digital Transformation Strategy — Who Is in Charge: Group CEO, CEO of Business Unit, Group CDO/CTO, Group CIO/COO
The ideal situation is when the CEO of the group or business unit is in charge.

If the transformation is focused on internal business processes, the CIO/COO can lead.

If the transformation is focused on the interface with customers (external business processes), the CDO/CTO can lead in collaboration with the CIO/COO.

7. Organizational Positioning of New Activities — Integrated Operations into Existing Structures or Create Separate Entities
The usual structure is firm that integrate the new digital operations into their current structure. However, if there is a big culture clash or a dramatic change in business models, firms can create a separate business unit or a newly formed subsidiary,

8. Focus of Operational Changes — Products & Services, Business Processes or Skills
Business Processes: Operational changes internally at the business processes.

Products & Services: Operational changes externally at the customer interface.

Skills: Operational changes may occur because of the new skill sets needed.

9. Building of Competencies — How Do You Plan to Acquire Competencies: Internally, Partnerships, Company Takeovers or External Sourcing
Internally:
Firms can restructure the organization and/or train existing resources and/or hire new resources.

Partnerships: Firms can partner with other firms and share resources/capabilities.

Company Takeovers: More popular in the US, firms can acquire companies for their capabilities (acqui-hire). Yahoo was well known for doing this kind of acquisition in their shift to mobile.

External Sourcing: Firms can hire consulting firms like us or outsourcing firms for their digital capabilities.

Usually firms will couple these techniques either by training/shifting resources internally coupled with partnerships/acqui-hires and/or external sourcing.

Financial Dimension

10. Financial Pressure on Core Business — Low, Medium, High
Depending on the level of competitiveness of the business and on the willingness of the management to take risk, this will impact if they decide to participate in digital transformation or not.

In our practice we have seen more business where the financial pressure on the core business was high. I have read cases such as the previously mentioned Adobe or GE where the pressure was low to medium, but management was willing to take risks and change the model, push to digitize the business model further.

11. Financing of New Digital Activities — Internal or External
Digital transformation can be costly: spending on new capabilities, training and/or restructuring the existing resources, changing the culture, etc. Firms that are already financially struggling will find their options limited and the business model might not evolve fast enough to sustain the business. The optimal situation is when you can finance the transformation internally and that your business model/revenue streams can evolve fast enough.