Digital transformation: 5 ways organizations fail

After years of work on digital transformation, executives face a grim reality: Just 5 percent of digital transformations achieve or exceed expectations, according to Bain research. What are they doing wrong? Based on our research, organizations fail on five fundamental factors:

1. You focus on disruptors rather than disruption

Almost two decades ago, the music industry threw its considerable weight at upstart music service Napster, and succeeded in shutting it down. It subsequently went back to the good-old-days of selling CDs for 20 Euros a pop, when buyers really only wanted 1 or 2 songs from the album. We all know what happened next: Apple appeared from outside the industry to capture the lion’s share of the value.

What the music industry had failed to understand was that Napster had unleashed a key disruption – the disaggregation of songs from albums. By focusing on the disruptor (Napster), the industry incumbents took their eyes off the disruption (content disaggregation).

This mistake is being repeated today. Netflix didn’t kill Blockbuster – late fees and limited selection did. Uber didn’t kill taxis – inconvenient access and bad service did. Airbnb isn’t killing hotels – high costs and impersonal experiences are. You need to take the time to fully understand the disruptions occurring in your industry, and not get too hung up on the disruptors.

2. You build a digital strategy

On the surface, there isn’t anything wrong with building a digital strategy. In reality, it can be extremely dangerous for two reasons. First, a digital strategy typically places too much attention on ‘digital’ as the objective, so that the main beneficiaries become consultants and technology vendors. Digital strategies often divert attention away from more important goals, such as reduced costs, higher revenues, increased customer satisfaction, and other measures of performance.

Second, pursuing a digital strategy means that you have two strategies – one digital and one organizational. At best this is confusing, at worst, it is value destroying. Separate strategies inevitably lead to overlap and conflict.

A much better approach would be to consider how digital tools and technologies can support a single organizational strategy, or better still, help existing strategy adapt to changing conditions.

[ Read our related article, Digital transformation: Are your people just paying lip service? ]

3. You pay too much attention to digital disruption

Yes, digital disruption exists, but it is not the only form of disruption out there. Plenty of disruption continues to come from traditional sources, like political, economic, and social shifts. This year, the DBT Center at IMD launched a project to take a data-driven approach to measuring disruption across industries. We examined a number of industry indicators, including change in profit, revenue, and share price, industry concentration ratios, and venture capital funding. Our objective was to see what the data could tell us about disruption.

What we found was surprising. Yes, there was disruption in digitally heavy industries, like telecommunications, media, retail, and financial services. Yet, the industry that had seen the most disruption over the past seven years was, wait for it, the energy industry, followed by technology products and services, and then transportation and logistics.

From a management standpoint, it doesn’t matter what form the disruption comes in. The impact is similar. So, while leaders still need to keep a keen eye on digital disruption, this does not mean they can overlook more traditional forms of disruption.

4. You focus on digitizing silos

We often hear that an organization is ‘digitizing its supply chain’ or its ‘marketing’ or whatever. These projects to digitize silos normally end in disappointment for a couple of reasons. First, like the proverbial ‘paving the cow paths,’ taking something that is analog and simply making it digital often perpetuates existing issues. Digital transformation is a good opportunity to review, revisit, and redesign existing ways of doing things.

Second, silos are often part of the problem, not the solution. Digital tools and technologies can and should work across silos. Indeed, we have found over and over again that successful transformation requires a cross-functional approach. For example, ecommerce requires a tight integration between communications, IT, marketing, and logistics, all of which necessitates some degree of digitization.

5. You pursue agility without knowing what it means

‘Agility’ is a problematic word. It has so many definitions and interpretations that it becomes impossible to implement. Ask 10 people ‘what is agility?’ and you are likely to get at least ten answers. Probably the most well-defined use of agility relates to agile ways of working, like scrum, Kanban, and the like.

However, this view of agility is too narrow for most companies. While agile working methods may contribute to more innovative ideas and quicker project completions, it is not the solution to organizational agility, which is the ultimate goal for most companies. In a world that is changing rapidly and unpredictably, organizational agility is paramount.

Based on our research, organizational agility is not a single thing, but made up of three distinct capabilities, each of which is critical.

1. Hyper-awareness: An advanced sensing capability to really understand what’s going on externally (for example, new competitors, technology or business models); and internally (what exactly is happening inside your organization).
2. Informed decision-making: Making decisions based on the evidence – most companies are not as good at this as they think they are.
3. Fast execution: Putting those decisions into action quickly. This then creates new information that feeds hyperawareness.

To summarize, we hear a lot of executives tell us that they want to ‘become a digital business’. This is almost certainly not the case. Instead, what they really should be focusing on is improving their performance by digitizing and transforming their existing business. In other words, to become a better, more agile version of themselves through digital.

[ You might be running toward digital change too quickly. Read The digital transformation trap: Don't ignore the marathon for the sprints. ]