“Digital transformation” is overused, overhyped, and open to broad interpretation. Is transformation still relevant in a post-COVID world? I believe it is but only when mixed with a healthy dose of pragmatic digital modernization. Which strategy — modernize or transform — will depend on your firm’s digital maturity and economic situation. My last post highlights the need for firms in survival mode to focus digital strategy on pragmatic modernization. But what about firms looking beyond the global pandemic? Growth-mode digital strategy must combine digital modernization with digital transformation to accelerate growth.
Didn’t We Already Do Digital Transformation? The short answer is no. While many companies have modernized their existing business model, few have transformed. Digital transformation is fundamentally about changing the operating model of the business. Transformation happens only when a firm begins to use software to create sustainable differential customer value. In effect, the business evolves into a hybrid technology company –or a digital business. Such hybrid digital businesses create significant revenue from technology. They deliver value to customers using traditional products combined with modern software and technology capabilities. The evolution from a traditional nontech business into a technology company that also sells nontech products is digital transformation. Netflix evolved from a traditional video rental business, mailing DVDs to customers, into a hybrid digital business. This hybrid business mailed DVDs and streamed digital content. The by-mail business now operates under the DVD.com brand, while Netflix now executes a fully digital business model. Digital transformation is much harder to achieve than digital business modernization. That’s because transformation requires fundamental changes in the business culture, operating model, and product. But in making the transition, companies are better positioned to take advantage of emerging technologies to build customer value — and revenue growth (as we showed in this report). Tesla is a technology company that uses electric vehicles to deliver outcomes to customers. Tesla builds vehicles around technology platforms to help customers reduce their dependence on oil — an outcome of enormous value to many Tesla customers. Using frequent over-the-air software updates, Tesla continuously refines the value each customer derives from their Tesla experience. By contrast, most other vehicle manufacturers engineer vehicles and add technology as a bolt-on.
But transforming an established traditional company is hard because the company has already achieved a level of success as a nontech company. This is especially true in large companies with many years of expertise in building traditional products. GE’s former CEO, Jeff Immelt, discovered just how hard it is to transform a large business. So most large companies undertake more surgical transformations by building their technology capabilities inside business units or even startups. In developing a data-fueled digital agribusiness, DuPont Pioneer first developed in-house data science capabilities in its Corteva Agriscience division. As the company learned how to develop and deliver data-as-a-service capabilities, it acquired an emerging tech startup in the same space: Granular. DuPont Pioneer moved the data-as-a-service capabilities into the new Granular brand and continues to grow this digital business. Modernize And Transform To Accelerate Growth Right now, companies must focus on modernizing their core digital capabilities to seamlessly sell, engage, and support customers on digital channels. This is table stakes. And there are very good services firms able to help clients accelerate this modernization. Once the modernization basics are in place — and implemented in a way to support continuous evolution — then companies can turn investments toward building new digital products. This is where they need to develop new business capabilities around software, technology, and digital product management, an area of rich research across both Forrester and SiriusDecisions. The good news is there are also services firms with capabilities to help build new digital products. Over the next 12 months, I’m focusing much of my research on digital product development — the underpinnings of real digital business transformation. I’m researching best practices in establishing transformational capabilities around digital product management and examining the technologies that digital product managers use most effectively to deliver revenue-generating digital products. This post was written by VP, Principal Analyst Nigel Fenwick, and it originally appeared here.