The new age disrupters have achieved success without traditional assets and by leveraging digital technologies to identify underserved consumer demand and underutilized supply, remove intermediaries, and deliver new user experiences. It’s been estimated that one-third of the top 20 firms in industry segments will be disrupted by new competitors within five years, according to IDC Futurescape: Worldside CIO Agenda 2016 Predictions.
At a recent conference, I met a few of my friends who are CFOs and CIOs of large, established companies. Our discussion centered on how industry boundaries are being redrawn, and there was a healthy debate about what an incumbent company should do in response. While some CIOs recognized the need for incumbents to respond, other CIOs suggested the way forward was through acquisition of these young upstarts. The CFOs were concerned about destruction of shareholder value in an incumbent company when digital startups are acquired at very high price-earnings ratios and revenue multiples. The question that everyone left the conference with was, “what should established companies do to defend themselves against disrupters without compromising shareholder value, in both the short and long term?”
To tackle the problem at hand, the first step is to understand the differences and correlations among three concepts that are often interchangeably used today: digital strategy, digitization of processes, and digital transformation.
Digital strategy is often best addressed as part of an overall business strategy and is a business answer to a digital question, says Gartner fellow Dave Aron in his blog on The Difference Between IT Strategy and Digital Strategy. It is about making choices, allocating resources, and building execution systems by applying new digital technologies and capabilities to the business. Digital strategy is formulated while keeping in mind the industry forces at play, the company’s position in the industry, and how it wants to differentiate itself.
A good example of change in strategy is that of Houghton Mifflin Harcourt, a publishing company with 160 years of history, which invested in resources and systems that enabled it to become a content distribution and delivery company. Another organization, Asian Paints, invested in an advanced system that integrated across the enterprise to derive insight from customer data and enabled it to reach its target consumer and influence their interior design decisions.
Digitization of processes
Digitization of processes is leveraging technology to unlock productivity or expedite time to value of current business processes. This can involve a single department or across the organization. For example, Ichiban Crop Science automated its finance processes to make faster business decisions, and SAP implemented the Concur travel-expense management system to reduce the pain of submitting paper-based expense claims. These projects can be come out of departmental needs or as part of the overall organization’s digital transformation.
Digital transformation aims to bring change inside the organization as well as across the extended supply chain, which can involve people, processes, organization structure, and metrics. While it is often triggered in response to a digital strategy, transformation can also be undertaken to improve efficiency and agility for a line of business.
Upon independence from parent company Holcim, Siam City Cement revamped its processes and embarked on digital transformation to respond faster to its customers, a process which touched its employees, customers, partners, and maintenance operations. Another example is OC Tanner, which transformed its manufacturing process to become a high-tech company.
A well-executed digital transformation aligned with digital strategy and supported by digitized processes provides best results for established organizations. Apart from this, departmental digitization projects provide ROI at department level and also help reduce inefficiency.
CIO: trusted partner for digital
The role of CIO in an established company is that of a partner in implementing the digital strategy, a champion of digital transformation, and a supporter of departmental initiatives that deliver maximum results. As digitization continues to go mainstream, CIOs will be challenged more than ever to have an agile IT landscape that can handle ever-increasing amounts of data and provide real time insights to business. Rather than waiting for the digital strategy to be formalized and playing catch-up games, CIOs need to make this a priority. An aging and complex IT landscape will begin to fail the CIO, requiring applications to be renewed to deliver the “Digital Core.”
When incumbents succeed in pursuing digital, they stand to leverage their expertise, scale, and resources to fundamentally change the environment of the industry and deliver value to their stakeholders. This illustrates that going digital can be both a defense as well as a growth strategy!