There Are Four Paths To Digital Transformation, Each With Its Own Challenges

There Are Four Paths To Digital Transformation, Each With Its Own Challenges

OCTOBER 18

How many ways are there to achieve digital transformation? There is actually no single path. Every organization has its mix of functions that can and should be digitized, from call centers to field forces to e-commerce to factory floors. If you look at 1,000 companies, you will find 2,000 approaches. A group of MIT researchers, however, has done just that, and has managed to narrow down all these approaches to four clear-cut pathways. The paths pursued depend on corporate culture, internal limitations, and even the fears of business leaders themselves.

The four pathways were identified and explored by Stephanie Woerner, Peter Weill, and Ina Sebastian, all with MIT, in their latest collaboration, Future Ready: The Four Pathways to Capturing Digital Value, are based upon several years’ worth of data from more than 1,000 companies—including BBVA, CEMEX, DBS, Fidelity, Maersk, and others. While most companies will opt to follow one particular pathway, some may even follow multiple paths, the co-authors state.

Here are the four routes to the digital realm identified:

Pathway 1: Digitize first, then worry about customer experience. Woerner and her co-authors call this approach “industrialization” — start off by employing a brute-force process to begin overturning everything across the enterprise to digital. Firms choose this pathway when their customer experience is already good enough to hold competitors at bay, they point out. The goal is to begin “radically simplifying operations by focusing on what the firm is best at, and turning them into digital services.” Build digital operational strength first and then “use that strength to rapidly innovate and delight customers,” Woerner and her co-authors advise.

Companies following the industrialization path should break it down into two phases, the co-authors advise: “building platform capabilities and then exploiting those capabilities with rapid innovation.” They caution, however, that “building the capabilities takes time, and if the firm is well behind in customer experience, they often can’t afford [industrialization] alone.” They also advise beginning the rapid innovation phase as soon as possible, ideally before ending the building platforms phase. This will reduce the time your firm spends in the digitization desert and speed up value creation.”

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Pathway 2: First, worry about the customers, then digitize. This is the path taken by companies whose customer service is underperforming, or if there are competitors bearing down on them. This path also has two phases: taking measures to amplify the customer’s voice inside the organization, then followed by building digital platforms. “Multidisciplinary teams from all over the firm innovate using digital technologies, better data, and new ways of working to engage and delight customers. But all of this innovation doesn’t address the underlying complexity of the product offerings and systems, and this usually makes it worse, driving up the cost to the customer. Also, this pathway is hard, in the beginning, on other parts of the enterprise.”

Pathway 3: Alternate between digitization and customer experience in “stair-step” style. Firms that need to improve both their customer experience and operational efficiency may opt for this route. This “stair-step” approach is partly driven by a perception that the digital revolution may pass them by. “This pathway is the most popular because it makes perfect sense to many firms to deliver smaller but tangible improvements,” Woerner and her co-authors point out.

At the same time, they caution, firms that go this route “have a surprisingly higher risk with a slightly lower-than-average financial performance.” The organization, they advise, “must be disciplined in scoping shorter digital initiatives, completing them, and then sustaining the value creation of each initiative on the stair steps so those benefits can be passed on to the next digital imitative.”

Pathway 4: Forget fussing with redirecting the business, just create a whole new digital-native business unit: This is an option that established companies may pursue, as their corporate culture may be too rigid to support digital growth. “This pathway is more than just an innovation project, it’s a substantial investment in how the firm will make money in the future,” Woerner and her co-authors point out. It enables the development of a digital-native enterprise from day one. Ultimately, as the separate unit gains traction in the market, it will be reunited with the mothership.

Ideally, they add, even with these separate new ventures, the main company will also follow elements of the other three pathways described above. ”for instance, an insurance firm could industrialize their core business, automating claims and improving the customer experience. At the same time, the firm can also create a unit with a new ecosystem business model to become a go-to destination for home security and integrate their insurance products and security products.”

Organizations that are successfully moving forward with their transformation efforts have several things in common, the co-authors found. They “develop a coach-and-communicate orientation” rather than command-and-control hierarchies; they focus on cross-product integration and customer experience; and they do their best to promote innovation at all levels.

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