Despite a great deal of lip service to digital transformation, the effect of all these great words on most companies is this: not much.
Digital transformation halts, or fails, for many reasons—but most often it’s because minor changes at the surface level do nothing to affect the fundamental operations of a company. Appointing a Chief Digital Officer, with no budget and no clear mandate, is not digital transformation. Increasing the social media marketing budget is not digital transformation. Even building an app is not digital transformation. Many established organizations hope that they can stay competitive making only minor tweaks—when these new disruptors have a different approach to everything.
Real digital transformation requires transformation at a deeper level—transformation of the leadership team’s core beliefs. Changes at the surface create small, local differences. Changes of belief percolate throughout an organization. This is why most digital transformations are a lot of talk, a little action, and very little real effect.
Every industry is built around some traditional assumptions, behaviors, and beliefs about how to create value (whether that means revenues, profits, or investor returns). In manufacturing, leaders invest in plant, property, and equipment and carefully manage production and inventory. In consulting, leaders invest in hiring and training people and then carefully track how they use their time. In retailing, leaders worry about customer retention and dollar per square foot. And for the leaders of digital networks, like Visa, the NYSE, Uber and Facebook, the focus is on the number of members in the network and their interactions.
These beliefs about value and how to create it drive the strategies that leaders deploy, the people they hire (and their competencies), and most importantly, the measurement systems that they use to gauge performance and guide decision-making. In most industries, the core beliefs are unassailable cannon—until the day that a venture-backed startup comes along to upend them. Today, the list of disruptive new entrants is expanding and the primary differentiator is clear: they bring new mental models to existing industries and create new business models that customers and investors love.
Jeffrey Immelt, CEO of GE, started off 2016 by saying: “We can’t be an industrial company anymore. We need to be more like Oracle. We need to be more like Microsoft.” In order to get there, he plans to “evolve our business model accordingly.” Immelt notes that success requires GE’s willingness to change on many levels—from recruiting, to customer management, to technology.
Immelt is talking about deep, fundamental changes, not superficial adjustments. GE, like the majority of other organizations in the market, has a strong and lengthy history focused on making, distributing and selling things—from jet or railroad engines, to kitchen appliances, and even wind turbines. But in a world that is transitioning from physical to the digital and from firm to network, maintaining this traditional focus is a sure-fire strategy for failure. The ability to adapt is more important today than it ever has been.
So how do you evolve an outdated business model to one that offers better revenue growth, greater profit margins, and lower cost? Start with yourself. Changing your mental model is a prerequisite for changing your business model. We have seen incumbents play catch up in the digital age—even incumbents with decade-long legacies in asset-heavy business models. But doing so requires leaders and organizations to upend their core beliefs. The process usually looks something like this:
- Identify how your core beliefs manifest themselves in your business. Consider your guiding principles, time and capital allocation patterns, and the key metrics that you track. For the leader of an asset building company, most of these dimensions would revolve around the efficient production and management of physical goods.
- Uncover the core beliefs that motivate these behaviors. This step usually takes some ongoing reflection, and industry best practices likely influence your thinking. Focus on your beliefs about assets, value creation, and business model. For example, a core belief could be, “Physical assets are durable and reliable; people are volatile and risky.”
- Invert your core beliefs and consider the implications. For example, in response to the belief about physical assets above, one could think, “Physical assets are actually riskier than other assets.” Find an inversion that resonates with you—one that you think might actually be true—and consider how this new belief would change your behavior.
- Extrapolate what implications these new core beliefs would have on strategy, capital allocation and key metrics. Reflect on whether others in your industry are operating under these different core beliefs, and how they might lead to disruption. Consider the implications these beliefs would have for your customers, employees, suppliers, and investors.
- Act on your new beliefs and share them with your peers. Consciously change your actions until new habits form—particularly with capital allocation, but also more broadly with items like hiring, training, and KPIs.
The key step is inversion—taking on new thoughts and beliefs that will likely conflict with those traditional in your industry and business. Changing mental model is the important first step. The next is to actually allocate capital differently. Under Immelt, GE decide to make rather than buy, and develop the needed capability in-house. For many organizations, an acquisition or partnership can help turn new beliefs into reality.
General Motors’ leaders decided at the beginning of 2016 that they want to be part of the changing business model landscape in transportation—and industry rapidly transforming with ridesharing and autonomous cars. Mr. Ammann, its president said, “We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50” and they clearly want to be part of it. GM announced in early 2016 that it was going to invest $500 million in Lyft, a riding sharing, digital network of riders and drivers, as part of Lyft’s latest $1 billion venture financing round.
Lyft represent an entirely new business model for car usage. As Lyft’s president said, “We strongly believe that autonomous vehicle go-to-market strategy is through a network, not through individual car ownership.” GM is taking on its assumptions about the car industry and betting some of its capital on a new future.
It’s clear that both GE and GM are committing to a new future, and one that will require new business models. What about you and your organization? Are you willing to examine your underlying beliefs? Are you willing to understand and invest in the technology that supports new and more scalable business models? And, are you willing to collaborate and share value with the networks around you? If not, take the time to review our research and ask yourself, how long do I have before network orchestration infiltrates my markets? We think the answer is self-evident. It’s time to stop talking and start doing.