If you want to build a company that lasts, the infinite loop of transformation is not an option, it’s a strategic imperative. The world is changing faster than ever and companies must embrace perpetual transformations to play the infinite game of business in today’s increasingly complex and volatile context. In the past, a transformation effort was seen as a radical solution to address broad, systemic problems. But today, most successful companies are retooling themselves even when they dominate a billion-dollar value game market. Every successful company knows that innovation and perpetual transformation using cutting-edge technology must be at the core of their organizations.
Apple is a prime example of such kind of mindset that embodies the leap from 10% (linear improvement) to 10X (exponential improvement). Consider that in 2012, 80% of Apple’s revenues came from products and services less than 4 years old. Within 10 years of launching the iPhone in 2007, they had grown revenue 10X from $24 billion to nearly $240 billion. 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.
This kind of epic stories are an inspiration for others. For the past several years, digital transformation has been a constant strategic topic in the business community. However, not all transformation stories are having a happy ending. 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. For example, according to a study carried out by Accenture, only 22 percent of industrial companies researched achieved a return on their digital investments that exceeded their expectations.
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 transformations fail because companies just slap technology onto an existing business, instead of completely reinventing it and create a new value game. You don’t have to accept your current value game and transform it accordingly. Turning digital technology into an opportunity will require each company to define a digital transformation strategy tailored to its own value drivers. Now more than ever, a successful strategy will often mean departing from a company’s traditional markets and its business as usual. A successful digital transformation means to create a new value game that is singular, scalable and sustainable.
Companies are facing the challenges of understanding how the digital revolution will affect their business and of mastering their own digital transformation. Most companies expect an exponential impact of transformation (10 times better), but instead they just achieve a mere linear improvement at most (10 percent better). So what differentiates linear and exponential transformation? Put simply, linear transformation happens within existing business model. Exponential transformation changes the business in itself, creating a new value game.
Digitalization of current value games is a linear transformation that improve the company ability to operate as it already does today. In this context, digital technology is simply helping companies do better what they are already doing, without changing how they essentially create value to customers. If you are a retailer, you can sell your goods through ecommerce; if you are a bank, you can improve the banking experience through new digital services and channels; if you are car manufacturer, you can move farther towards process automation. The result is percentual improvements in the P&L, but the business’s basic unit of economics remains the same.
Creation of new values games is an exponential transformation that fundamentally change an organization’s business model, shifting to new ways of creating, delivering and capturing value. For example, Tesla has brought exponential transformation to both the automotive and energy industries, by accelerating the world’s transition to sustainable transport and energy. Tesla is creating a new value game based on an interconnected system of software, cars, energy devices and electric infrastructure. While the incumbent automotive firms have focused on producing better cars more cheaply (linear transformation), Tesla bring exponential transformation and change the underlying economic model.
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.
Digitalization must truly change the trajectory of the company to thrive over the long run. Such recognition of the challenge is a first step for business 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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