From disrupted to disruptor: Reinventing your business by transforming the core
Companies
must be open to radical reinvention to find new, significant, and sustainable
sources of revenue.
When Madonna burst onto the scene in the early 1980s, there was little reason to
suspect that she’d have more than her allotted 15 minutes of fame. But in the
three decades since her debut album, she has managed to remain a media icon.
Her secret? “Madonna is the perfect
example of reinvention,” Janice Dickinson, renowned talent agent, has said.
Fittingly, the name of Madonna’s sixth concert tour was “Reinvention.”
Stay current on your favorite topics
Madonna may seem like an unlikely
touchstone for modern businesses, but her ability to adapt to new trends and
set some others offers a lesson for companies struggling with their own digital
revolutions. That’s because the digital age rewards change and punishes stasis.
Companies must be open to radical reinvention to find new, significant, and
sustainable sources of revenue. Incremental adjustments or building something
new outside of the core business can provide real benefits and, in many cases,
are a crucial first step for a digital transformation. But if these initiatives
don’t lead to more profound changes to the core business and avoid the real
work of rearchitecting how the business makes money, the benefits can be
fleeting and too insignificant to avert a steady march to oblivion.
Simply taking an existing product line and
putting it on an e-commerce site or digitizing a customer experience is not a
digital reinvention. Reinvention is a rethinking of the business itself.
Companies need to ask fundamental questions, such as, “Are we a manufacturer,
or are we a company that enables customers to perform tasks with our equipment
wherever and whenever they need to?” If it’s the latter, then logistics and
service operations may suddenly become more important than the factory line.
Netflix’s evolution from a company that rented DVDs to a company that streams
entertainment for a monthly subscription to one that now creates its own
content is a well-known example of continuous reinvention.
Reinvention, as the term implies, requires
a significant commitment. From our Digital Quotient® research, we know that
digital success requires not only that investment be aligned closely with
strategy but also that it be at sufficient scale. And digital leaders have a
high threshold for risk and are willing to make bold decisions.1But
companies don’t have to wait far in the future to realize those benefits. We’ve
found that 60 to 80 percent of total improvement targets can be achieved within
about three years while also laying the foundation for future growth.
For all the fundamental change that
digital reinvention demands, it’s worth emphasizing that it doesn’t call for a
“throw it all out” approach. An engine-parts company, for example, will still
likely make engine parts after a digital reinvention, but may do so in a way that’s
much more agile and analytically driven, or the company may open up new lines
of business by leveraging existing assets. Apple, with its move from computer
manufacturer to music and lifestyle brand through its iPhone and iTunes
ecosystem, reinvented itself—even as it continued to build computers. John
Deere created a whole series of online services for farmers even as it
continued to sell tractors and farm equipment.
There are many elements to a
transformation, from end-to-end journey redesign and embedding analytics into
processes to open tech platforms. They require a myriad of capabilities, from
artificial intelligence and agile operations to data lakes, cloud-based
infrastructure, and new talent. Many of these elements have been written about
extensively, and each can absorb a significant amount of executive time. What’s
often missing, however, is a comprehensive view of how an
organization sets the right ambition, how to architect the
right elements for the transformation, then how to
systematically and holistically undertake the change journey.
What
the ‘core’ is and why it needs to change
“Think of your core muscles as the sturdy
central link in a chain connecting your upper and lower body.” That was the
guidance from Harvard Medical School on how to stay in shape. The authors
defined the core as the central set of muscles that helps a body maintain its
power, balance, and overall health.
That’s the essence of what we mean when we
talk about changing the core of the business—the set of capabilities that
allows the entire business to run effectively. A company’s core is the value
proposition of its business grounded in strategy as enabled by its people,
processes, and technology. These elements are so intrinsic that any
transformation that doesn’t address them will ultimately underwhelm and fizzle
because the legacy organization will inevitably exert a gravitational pull back
to established practices.
Value proposition: Any digital reinvention must address the value the
company provides to customers (whether existing or new) through its products
and/or services. Inevitably this is based on a clear strategy that articulates
where value is being created, shifted, or destroyed. Crucial to getting this
right is identifying and evaluating existing assets that are most important and
understanding what customers actually want or need. This can be surprisingly
difficult to do in practice. The value that Amazon originally provided, for
example, wasn’t selling books online but rather providing convenience and unheard-of
selection. Understanding the real source of its value allowed Amazon to expand
exponentially beyond books.
People: Of course talent is important, but a reinvention
needs to involve more than just hiring a CDO or a few designers. Talent
priorities should be based on a clear understanding of the skills needed at all
levels of the business. This requires investing in building relevant digital
capabilities that fit with the strategy and keep pace with customers as they
change the way they consider and make purchases. At the same time, targeted
hiring should be tied to those capabilities that actually drive financial
performance.
Enabling that talent to thrive requires a
digital culture, i.e., one that is customer centric and project based, with a
bias for speed and continuous learning. In fact, cultural and organizational
issues can lead to the squandering of up to 85 percent of the value at stake.3Making
sure the new culture sticks requires rebuilding programs that reward and
encourage new behaviors, such as performance management, promotion criteria,
and incentive systems.
Processes: Rewiring the mechanisms for making decisions and
getting things done is what enables the digital machine to run. Digitizing or
automating supply chains and information-intensive processes as well as
building new capabilities like robotic process automation or advanced
analytics, for example, can rapidly increase the business’s clock speed and cut
costs by up to 90 percent.
One temptation is to focus on simply
digitizing existing processes rather than really rethinking them. Often, the
most productive way to tackle this issue is to identify the customer journeys
that matter most to the business and then map out the touchpoints, processes,
and capabilities required to deliver on them—without regard to what is already
in place. Rearchitecting processes requires establishing governance and
decision rights to provide clarity and accountability, as well as embedding
advanced analytics, automation, and machine-learning capabilities.
Technology: While digital reinvention is more than just a
technology overhaul, technology is crucial to it. Leaders need to ensure that
each IT investment responds to clear and robust business needs, and does not
devolve into “tech for tech’s sake.” They also need to identify how best to
work within an ecosystem of partners and vendors, and assess which legacy
systems to keep, which to mothball, and—critically—determine how to help legacy
technology work in a digital world.
Reinvention
requires a proven, systematic approach
Because of the complexity involved, most
reinventions fall short of their original goals. In our experience, extracting
the full value from digital requires a carefully coordinated approach across
four “Ds”: Discover what your digital ambition is (based on
where the value is); Design programs that target profitable
customer experience journeys; Deliver the change through an
ecosystem of partners; and De-risk the process by thoughtfully
sequencing steps.
While this approach may seem self-evident,
we find that most companies fall short in the execution. There are myriad
reasons for this, but the most common are that the business either underinvests
in the capabilities needed or doesn’t drive the transformation program
sufficiently across all four of the “Ds.” A company may invest tens of millions
of dollars to “Discover” great insights, for example, but if its “Deliver”
strategy is inadequate, those insights are for naught.
1.
Discover: Shape your digital ambition, strategy, and business case
In this phase, companies develop a clear
view of where value is being created and destroyed as the basis for a clear
business strategy. That requires an analysis of their business, sector,
customer-behavior trends, and the larger economy to identify and quantify both
threats and opportunities. These kinds of digital opportunity scans should be
sorted by short- and long-term pockets of value.
At the same time, companies need to engage
in a sober analysis of their own digital capabilities and resources.
Capabilities that build foundations for other key processes and activities
(e.g., modular IT and agile technology platforms) are particularly important.
And while leadership matters, our DQ™ research has shown that midlevel talent
is the most critical element for a company’s digital success.
With this understanding in hand, companies
then determine what their strategic ambition is, whether retooling the existing
business or something more radical, such as plunging into a new market or
innovating a business model. They develop a detailed road map for addressing
capability gaps, and recruiting, developing, incentivizing, and retaining the
necessary talent. The goal is to develop a tight business case for change based
on facts.
2.
Design: Create and prototype breakthrough experiences
Actually acting on a digital ambition can
be daunting. We have found that the most successful companies start by focusing
on the most important customer journeys, then work back from there to design
and build out breakthrough customer experiences. Using design thinking and
skills, these companies define each journey, looking especially for the pain
points and potential missed connections. The change team can then map out,
screen by screen, models for a new interface. In this phase, the company must
avoid getting caught in endless rounds of planning but instead rapidly build
prototypes, translating concepts into minimum viable products to test and
iterate in the market before scaling.
This phase also includes building out
rapid delivery approaches and an IT infrastructure that blends the legacy
systems with microservices and modular plug-and-play elements). While agile IT
has become standard, more digital businesses are embracing DevOps (integrated
development and operations teams) and continuous delivery so that software can
be developed, tested, and deployed quickly to consumers and end users.
On the organization side, the fluid nature
of cross-functional collaboration, rapid decision making, and iterative
development means that the business should focus on the enablers for this kind
of teamwork. These include effective metrics and scorecards to evaluate digital
performance and incentive structures to drive the right behaviors, mind-sets and
outcomes. The CDO at one multinational pharma company addressed this issue by
establishing a “digital council,” which was tasked specifically with breaking
down organizational silos to enable transformational change across all business
lines. The initiative was credited with significantly contributing to a 12
percent increase in sales.
3.
Deliver: Develop a network of partners who can rapidly scale your ambition
Getting the speed and scale necessary for
a reinvention increasingly requires an ecosystem of external teams, partners,
suppliers, and customers. In practice, this means working with a mix of
platform players, delivery specialists, and niche players. These are the
relationships that companies can call on to provide specific skills and
capabilities quickly.
This reality has made ecosystem management
an important competency, especially understanding how to find and plug into the
right mix of complementary capabilities. One national bookseller, for example,
built out a digital offer by partnering with a telecom company for its
technology and with a range of retailers to build up a marketplace. This
approach allowed it to rapidly hit the marketplace and increase revenue 78
percent in a year.
As companies push to scale their digital
reinvention throughout the organization, the crucial role of seasoned change
managers comes into focus. These leaders not only play “air traffic controller”
to the many moving parts, but also have the business credibility and skill to
solve real business problems. They must maintain an accelerated pace of change
and drive accountability across the business. The change leaders will look
across the entire enterprise, examining organizational structure, data
governance, talent recruitment, performance management, and IT systems for
areas of opportunity, making decisions that balance efficiency and speed with
outcome.
The “agility coach” is an example of this
type of role. This person has strong communications and influencing skills, can
create and roll out plans to support agile processes across the business, and
can put in place KPIs and metrics to track progress.
4.
De-risking: Structuring the process to minimize risk
One of the most common reasons digital
transformations fail is that the organization develops “change exhaustion” and
funds start to dry up. To mitigate this risk, it’s important to focus on quick
wins that not only build momentum but also generate cost savings that can be
reinvested in the next round of transformations. One global e-tailer, for
example, focused on quick wins (such as increasing conversion rates) and was
able to deliver $350 million in new revenue in just five months, which funded
further changes and provided tangible results to further excite the business
about the journey. This sequencing approach applies to tech as well. Many
companies choose to invest first in “horizontal” components, such as
business-process management (BPM) layers or central administration platforms
that can be shared across many initiatives, while balancing them with more
“visible” elements to provide the proof of concept.
Technology risks, especially cybersecurity,
will also require increased attention as companies digitize more operations and
processes. Organizations can mitigate these risks by automating tests on
software, establishing systems in which failures can be rolled back in minutes,
and establishing build environments in which fixes can be made without putting
significant parts of the business at risk. Senior leaders in particular need to
focus on the structural and organizational issues—from building cybersecurity
into all business functions to changing user behavior—that hamper the ability
to manage cyber risk.
One risk senior leaders often overlook is
losing ownership over sources of value. These might include the company’s data,
customer relationships, or other assets. Having a clear understanding of where
the value is coming from allows businesses to navigate ecosystem relationships
profitably. In evaluating which partners to work with, the bookseller mentioned
above, for example, declined to work with a storefront partner because it
feared losing its most valuable asset: its direct relationship with its
customers.
Companies can both rise and fall with astonishing speed
as new customer needs are uncovered and new ways of meeting them are developed.
We strongly believe that companies that are able to adapt, learn, and find new
solutions quickly can do more than just retain market position; they can
thrive, whatever disruptions come their way. As Madonna once said: “You have to
reinvent to stay in the game.”
By Peter Dahlström, Liz Ericson, Somesh Khanna, and Jürgen Meffert
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/from-disrupted-to-disruptor-reinventing-your-business-by-transforming-the-core?cid=reinventing-eml-alt-mip-mck-oth-1702
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