Digital Transformation – The re-alignment of, or new investment in, technology and business models to more effectively engage consumers or employees, digitally
We are in the process of building a global digital infrastructure that quantifies, connects, analyzes and maps the physical and social world we live in. This has already had massive impact on the way we live and work, and it will continue to do so, in ways which are impossible to predict or imagine.
If you work in a company that was imagined, designed and created before this digital infrastructure was developed, there is no question that your business will be impacted. If it hasn’t happened yet, it is simply a matter of time.
This digital transformation is a global phenomenon that is affecting every individual, and every business, on the planet. Everything that can be digital, will be digital. That means every bit of information your company owns, processes or touches. There is no product or service you provide that won’t be affected. The question is, what does it mean to you, and what should you be doing about it?
When technology advances, strategies and business models shift. It’s not simply a matter of taking what you do today and “making it digital.” That’s the difference between translation and transformation. Your products and services don’t need to be “translated” into the digital world. They must be transformed.
Take Kodak, for example. As long as there have been photographs, people have used them to store and share memories of people and events. That hasn’t changed since Eastman Kodak was founded by George Eastman in 1888.
But when technology advances, strategies and business models shift. Kodak was at the leading edge of the research that doomed its own business model. In 1975, Kodak invented the digital camera (although it was kept secret at the time). Kodak engineers even predicted, with startling accuracy, when the digital camera would become a ubiquitous consumer technology. So Kodak had a major advantage over every other company in the world. They were able to predict the death of film and they had about a 15-year head start over everyone else.
Unfortunately, the business of film was so profitable, and the reluctance (or fear) of disrupting its own business was so great, that Kodak had difficulty focusing on anything else.
In 2010, two software engineers, Kevin Systrom and Mike Krieger, founded a company called Instagram, which they sold to Facebook two years later for approximately $1 billion.
When technology advances, strategies and business models shift.
Let’s take another example, Nokia, who commanded 40 percent of the mobile phone market as recently as 2007. Nokia was the clear and unequivocal market leader at that time. People were talking on phones in 2007 and they are still doing that today. But what happened? The phone became a mobile computer, a platform for digital services. And in a digital world, a phone is only as good as the digital services you can get on that phone. So Nokia, who used to compete only with other phone manufacturers, suddenly found itself in competition with computer manufacturers, who already had a strongly-developed ecosystem, strong relationships with application developers, and a compelling business model to offer them. Nokia was unable to make the leap from phone maker to computer maker.
When technology advances, strategies and business models shift.
It doesn’t matter what you make or what service you provide. If it’s a product, it will more and more come to resemble a computer. If it’s a service, it will increasingly become a digital service.
The shift doesn’t happen everywhere all at once. It’s happened with music and books, it’s happening with phones, TV and film, the hospitality and transportation industry, it is just starting to happen with cars, it will soon be happening in health care and other systems that tend to resist change because of bureaucracy and legal regulation.
So what can you do? How can you avoid being the next Kodak or the next Nokia?
You need to take a different approach to innovation.
How do you manage your innovation initiatives?
Many companies use something called an innovation funnel.
The idea of the funnel is that you solicit ideas from all over the company, and sometimes even from outside the company. Ideas come in at the top of the funnel and you have several gates that they have to go through, and they get funded at varying levels as they pass the criteria at each gate. If you do it right, the theory is that the best ideas come out and these are the ones that we implement.
The problem with the funnel approach is that nobody puts ideas in at the top. Nothing comes in. Why? Because people look at that funnel and what they see is a sophisticated machine for killing their ideas. The design of the funnel does not encourage people to generate ideas, because basically it’s a suggestion box with a shredder inside. It’s an idea killer. It doesn’t excite people. It doesn’t encourage creativity.
People think: I'm going to have to write a business plan. I'm going to have to do a bunch of market research. I'm going to have to make a lot of spreadsheets and projections. And this is on top of my regular job. Only to have my idea most probably killed in the end. You are saying to people “We welcome your ideas” but what people are thinking is “You don't really welcome my ideas. You welcome my ideas so you can kill them.”
So what happens? Nothing comes into the top of the funnel, and the funnel manager goes, “Why? Why is nobody giving me their ideas?” This is why it's a problem. Because if anyone really has an idea, what are they going to do? They are going to leave, because in most cases, it’s actually easier to do your innovation out in the world today, even with no funding, than it is to do it inside a modern industrial company.
So what's an alternative to the funnel? Connected companies, like Amazon and Google, do it differently. They create a level playing field where anyone in the company can generate ideas and they actually are allowed to spend time working on them, without having to prove anything. They are trusted to innovate.
At Google they call it 20 percent time. For one day a week, or the equivalent, you get the opportunity to play with your ideas. This kind of approach has to be supported by a culture where people actually really do have passion, energy and things they want to do. And it has to be recognized and supported throughout the organization as something that’s important.
If you want to do this, efficiency has to take a hit. You can't optimize everything for efficiency and also do experiments. You just can't. Experiments by their very nature are inefficient, because you don’t really know what you’re doing. If you know in advance what the outcome will be, by definition it’s not an experiment.
This approach is less like a funnel and more like a terraced garden. It’s actually similar to a funnel, in a way, but it’s flipped.
Think of it this way. You've got to make space for these ideas to start.
There's no learning in the funnel approach. You don't learn much from making a business plan. You learn when you do experiments, when you put things into the world and start interacting with customers. You learn when you do things. What do you learn from making a business plan? Business plans are science fiction.
As a leader you have to make space for these experiments to happen.
And some of these experiments – maybe even a lot of them – will yield interesting results.
And you want to have a way to distribute budget and resources to the most promising experiments.
So you set a certain percentage of the budgets throughout the organization, and you say, this money is for funding promising experiments. You can't spend it on operations or improving efficiency. You have to spend it on new ideas that you think are promising. That’s the second level in the terraced garden.
Layer one gives everybody a little bit of elbow room to innovate and experiment. Layer two offers a way for management to pick the plants that look the most interesting and give them a little bit of care and feeding. It might be that you just give someone some extra time.
Then third and fourth layers are where the most promising ideas, the ones that might be worth making big bets on, emerge. You might have a few of these that you think might actually generate the next major stage of growth for the company.
The good thing is that these big bets are all based on things that are already working. This is how venture capitalists invest. They usually don't invest in a really good business plan, because people who make good business plans often don't make good entrepreneurs. People who make good entrepreneurs are people who are out there doing things already.
Amazon's recommendation engine started out as a little weed at the bottom of the garden. Gmail at Google started out as a small 20-percent-time project, somebody was doing it in their spare time.
Venture capitalists invest in companies that already working. They may not be profitable yet, but they have customers, they have promise, they have figured something out, they have learned something. This is also how companies like Google and Amazon do it.
They don't invest in business plans. They don't say it's got to be a billion dollar opportunity or it's not worth or time. They say, let’s try it. Get out there and try things with customers because the billion dollar opportunity may start as a $10,000 opportunity. It may start small.
What are Google’s big bets right now? Google Glass. The self-driving car.
What are the big bets for Amazon? Kindle. Kindle's a big bet. There are lots of dollars going into that one. Amazon web services: the project that says, we're going to take our own infrastructure and we're going to sell it. Even to competitors. We'll sell to anybody.
What are some of the experiments that failed? Amazon tried auctions. And it seems to make sense. “eBay does it. We've got a big audience. We can try it.” They tried it. They tried and they failed.
But what really happened with Amazon auctions? They learned. They realized something about their customers. Amazon is very customer focused. They realized that their customers don't want to wait. They don't want to wait a week to see if they bought something. Amazon customers want it now.
One of the interesting experiments is something called “unique phrases inside this book.” Someone had a hypothesis: “I think some books have not just unique words but unique phrases. If a phrase shows up in one book, you might want to know other books that have that phrase in it. It might be interesting.” Someone's working on that as a little experiment.
What happens if that experiment fails? Those people don't get fired. They are extremely valuable because of what they have learned. They find other teams. They get recruited. Think of a swarm of startups where people are recruiting each other all the time. It's like Silicon Valley inside of Amazon.
This kind of change is not simple or easy. But it’s clear that the future will not be simply more of the past. It will require bold thinking, creativity, and a new approach to innovation. Innovation can’t be the job of an R&D department. It has to be everyone’s job. And if you’re in senior management, it’s your job to create the conditions that will make innovation possible.
You can hear more from Dave on how to transform your business to digital in our Digital Business Thought Leaders webcast "The Digital Experience: A Connected Company’s Sixth Sense".