Every successful company knows that innovation and perpetual transformation using cutting-edge technology must be at the core of their organizations. Today, plenty of cash is flowing into digital transformation initiatives for wide-ranging aims. Companies across the economy are using digital technologies and trying to make an exponential leap in growth, profitability and return. But reimagining the way of doing business at scale is easier said than done. In fact, the academic research is really clear that when corporations launch transformations, roughly 70 percent fail.
The root causes of those failures are quite straightforward. During over two decades as a strategic consultant, I have studied why business transformations go off the rails. And I’ve found there’s one main factor that commonly crops up regularly: most companies are merely focused only on transforming their legacy business to compete better rather than on creating new, uncontested value games. Therefore, successful digital transformation isn’t just about slapping digital technology onto the existing value game, but completely reinventing it.
Apple is a prime example of such kind of successful transformation. Within 10 years of launching the iPhone in 2007, they had grown revenue 10X from $24 billion to nearly $240 billion, and 80% of Apple’s revenues came from products less than 4 years old. As a great Value Hacker, Apple is a massive transformative purpose-driven firm that leverages new technologies to shape, scale and dominate new billion-dollar games in the digital era.
You don’t have to accept your current value game and transform it accordingly. A successful digital transformation means to create a new value game that is singular, scalable and sustainable.
Singularity @ Value Creation
When I talk with business leaders about what they mean by digital, some view it as the upgraded term for what IT department does. Others focus on digital marketing or ecommerce. But very few have a bold, holistic view of what digital really means. Digital means improving people’s lives. Whether you are launching a startup or transforming an existing company, nothing beats the value game of creating a singular experience that hugely improves the way millions of people live and work, and eventually becomes part of their daily habits and lifestyle. This transformative purpose is the key ingredient behind most successful companies.
Nike doesn’t stand for shoes, it stands for sport performance and wellness, by bringing inspiration and innovation to every athlete in the world. It all began in May 2006, when Nike announced a partnership with Apple called Nike+. Despite having already had its ecommerce running since the turn of the last century, it was only in 2006 that the idea of building stronger connections with customers, and also between them, began to take off, mainly due to the Nike+ program, launched even before the first iPhone. Basically, Nike+ connected the user’s sneakers with his or her iPod, making it possible to track running distance, time, pace and calories burned. In addition, since its inception, Nike+ allowed users to share and compare personal activity with a global community, encouraging them to run smarter. Ten years later, Nike+ turned into a very versatile ‘wellness assistant’ for all sorts of users to get expert advice from the world’s greatest athletes, make product reservations and enjoy a high personalized shopping experience both online and in physical stores.
Scalability @ Value Delivery
One of the mistakes many executives make is to view digital technologies as a plug-and-play solution, with immediate impact. Deciding to get a few projects up and running, they begin investing millions in new technology and new capabilities. Some of the pilots manage to eke out small gains in pockets of organizations in the form of an MVP (Minimum Viable Product). But then months or years pass without bringing the big returns the company expected. Organizations struggle to scale from the pilots to company-wide programs, and tap the full value of digital at scale.
To truly achieve scalability, organizations need to remove those operational constraints that limit the growth of the business without adding extra resources. Technology scales fast, people don’t. Successful transformations blend human and technological capabilities. Since a significant number of scalability issues arise simply because of human limitations, symbiotic relationships between people and technology can lead to profound shifts in the way that work is done.
Some companies have begun to do this. At Amazon, almost all business processes are heavily augmented, or even operated, by machines, many of which will be running AI algorithms. On the front-end, machine learning powers Amazon recommendation engine and Alexa virtual assistant. On the back-end, mobile autobots manage warehouses and stay Amazon a step ahead of its rivals by providing the ability to offer guaranteed one-day and two-day delivery for a wide range of goods.
Sustainability @ Value Capture
And, last but not least, most digital transformations fail because a massive misunderstanding about the economics of the digital era. Many business executives grew up in a world in which they had to make trade-offs between growth and profitability. In his landmark 1996 article on business strategy, Michael Porter stated that “Among all other influences, the desire to grow has perhaps the most perverse effect on strategy. Trade-offs and limits appear to constrain growth.”
But in the digital economy, things are radically different. Growth is now correlated with profitability and increasing returns to scale, as opposed to what existed in the traditional strategy and economic playbooks. Ever wondered how companies like Alibaba, Amazon, Apple, Google, Facebook or WeChat grow so fast and are so cost effective? The secret behind such amazing economics is something called a ‘flywheel’. If you have a flywheel in your value game you will enjoy exponential revenue growth, low marginal costs, increasing returns to scale, and massive cash-flow generation.
Let’s think about Google’s flywheel. For every new information indexed by Google’s algorithm, the search engine lists more precise results. The more precise results, the better the experience is for a user coming on and searching. And the better that experience is, the more people come, and the more often they visit. And then, the more people that come and the more often they visit, the more brands come and pay for advertising solutions because there’s more of a market there. And then, the wider the indexed information, the more frequently people use the search engine. And then, because Google has so many economies of scale, its operating model benefit from lower marginal costs.
The duality of every transformation
Death and birth exists in every transformation. Every company faces a dual challenge, which involves exploiting current value games and exploring new ones. Companies operate in unpredictable but malleable environments that change quickly over time. In this context, no value game can grow and be profitable indefinitely. The payoff from growth and return is cash that should not be reinvested in that game when growth and return rates slow significantly.
In this sense, organizational ambidexterity refers to the ability of an organization to both explore and exploit. For that matter, firms are required to manage the duality of every transformation by optimizing free cash-flows between different value games with different growth rates and return levels. Low-growth, low-return games are often found in the incubation stage, and require a lot of cash to grow. High-growth, high-return games are unique species with the capacity for generating cash on a large scale.
Ambidexterity is hard to achieve. Historically, only a small minority of firms consistently outperformed their peers in both turbulent and stable periods, one measure of ambidexterity, because ambidexterity requires combining ways of thinking and acting that can be diametrically opposed. But ambidexterity is valuable, too. Companies are valued most highly when they are truly ambidextrous to fusing exploration and exploitation by self-tuning cash-flows in infinite loops of investment, growth, profitability and return.
Digital transformation has now gone mainstream, and could be considered to be the CEO’s new strategic agenda. However, this sense of urgency among executives rarely reaches the strategic level needed to hack the exponential value of digital technologies. Business leaders must banish terms like ‘taking our business to the cloud’ or ‘leveraging the Internet of Things’ to describe digital transformation.
Digital transformation must truly change the trajectory of the company to thrive over the long run. Such recognition of the challenge is a first step for leaders. The next one is to develop a strategy that responds. While that’s the topic for my last book, Value Hacking, I hope it’s clear, from this article of the reasons of why many digital transformations are failing today. In short, digital means shaping, scaling and dominating new value games, rather than competing better in the current game. It’s about deliberately choosing to create something truly singular, scalable and sustainable.
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The full-stack strategic framework to shape, scale and dominate your own billion-dollar game in the digital era