The Digital Force Awakens (Part 1)

Bert Schulze

Business fundamentals for a transformation of the digital core

In many publications the digital transformation, IoT, and digitization is described as a technology-induced driver for change. Having worked in IT for many years, I strongly believe in the mechanics of business rather than technology as a driving force, and I was keen to prove that a company’s business perspective is leading these trends.

My hypothesis to be tested: Benchmarked with peers, enterprises that successfully digitize the core should enjoy improved profit levels, reduced time to market, or better value from IT investments. Successfully transforming means making use of the disruptive technologies and leveraging these to gain new market shares or innovate processes.

There are still many enterprises that do not see the value of the digital transformation, or that struggle to benefit from it (e.g. Capgemini Consulting, MIT Center for Digital Business). One reason is the productivity paradox (Earley, 2014), which refers to the lack of evidence to prove the increase of productivity by information technology.

I would like to share our findings and offer new value levers for a digitized core. This findings have been elaborated with @LJedele, in his bachelor thesis.

ModernDriversOfChange

The modern drivers of change

Our environment is changing at an unprecedented pace. Where past change has taken years, we now see it in months. The change comes constantly and in waves.

Fast innovators, hungry for success, disrupt established markets — not necessarily fueled with better products, but with better customer service strategies. Smart companies leapfrog industry borders and sell additional products and services into existing markets, leaving perplexed established market leaders behind. Many tech industry blue chips have fallen flat and became irrelevant in a single decade.

Many established companies have been truly entrepreneurs with tremendous achievements in their respective markets, performing phenomenally upon entering the market and holding great advantages over the competition … for a while.

Once companies become market leaders, a new dilemma arises: how to maintain their hard-won position. So they put themselves on the defensive. Many innovative companies become conservative the moment they become successful. This helps their business position, bu unfortunately, it also potentially signals the beginning of the end of their innovation-focused leadership.

Achieving success inevitably brings close chasers aiming to compete in the marketplace. They have the “eye of the tiger” and are hungering to take you down. With nothing to lose and streamlined to bite, competitors will gather to beat out the market leader, imitating and often improving in an effort to be better than the establishment.

With all this pressure, the market leader’s focus shifts from creating the next “big thing” to conserving existing markets. This shift may maximize return on investment, but in return it loses the creativity and “eye of the tiger” that had previously propelled them to success.

A clear recommendation: “Transform while you are in shape.”

The technology foundation is a catalyst for entire industries to undergo a significant transformation. With technology times are changing faster than ever, requiring companies and individuals to adapt.

This force, once awakened, challenges many traditional markets. Some technologies slowly undermine existing standards, as the Internet did with traditional media, while others, such as Uber, evolve from nothing into a business idea.

In both cases, however, big players were not prepared and now struggle to keep their territory.

Digitize the core

The ultimate goal for most companies is the “unit of one.” This is not only appealing for B2C, but also B2B2C companies, because the new expectations are changing entire markets as they work toward seamless, customer-focused,  fully individualized service. Custom-made is the new buzzword everybody is striving for.

WhyDigitizeTheCore

As customer segments are moving, companies see direct customer engagement as the first logical step and minimal viable product. The message is simple: In a fast-changing market, I want to be where my customers are. Apps have been built, along with a new Internet presence, online stores, new services, and cool gamification to win customers’ attention. This comprises the digital storefront, which includes features that aim to make buying more intuitive and user-friendly.

WhyDigitizeTheCore-Detail

But too often, the infrastructure under the surface cannot deliver on the promise of the digital storefront. The number of incoming orders rises and the size of each lot becomes smaller — a direct consequence of the unit of one. The average value per invoice decreases, while the number of invoices explodes. This dramatically increases the workload and puts the entire organizational infrastructure to the test. And many fail when the company’s infrastructure cannot keep up and the boundaries of the past lock systems down.

According to McKinsey, scattered information and data duplication create different versions of the truth, complicating decisions and making it difficult for enterprises to bring good ideas to market quickly and profitably. They then move on to business processes that have been built around long-running batch processes. In fact, according to the Boston Consulting Group, organizations can spend between 40% and 80% of their time on non-value-added activities, taking time and energy away from solving real business problems.

We have known about Big Data for years now. Ask yourself: How much have the workplaces of the average employee changed? I don’t think they have changed enough; in fact, I suspect many workplaces have not changed at all.

Value levers of a digitized core

Value levers of a digitized core have yet not been researched in the literature, and a definition could not be found. Therefore, existing concepts will be used to define the value levers. The term lever is used to refer to tools or resources within an organization, which can be used to improve business value (Rowsell-Jones, 2007). In connection to IT, the term value is commonly used to describe the positive impact of IT on the business outcome; it is called IT business value (Devaraj & Kohli, 2013). The digitized core value lever, therefore, refers to the performance impact of a digitized core.

Performance can be derived into two formulations. One is efficiency, which is also referred as “doing things right” (Drucker, 1966) — in other words, reduced costs or improved productivity to a given business process. Effectiveness, the second formulation, is defined as achieving objectives, which results in an advantage compared to peers (Barney, 1991). In contrast to efficiency, effectiveness can also be summarized as “doing the right thing.”

Literature has been divided on the question of whether implementing an organization-wide enterprise system improves or worsens the organization’s agility. One body of the literature argues that enterprise systems generate a new complexity by connecting different processes and parts of business (Rettig, 2007). The other side advocates that enterprise-wide IT systems enable organizations to quickly react and adapt to changes (Anderson, Banker, & Ravindran, 2003), thus proving positive impact on agility. More recent empirical research (Kharabe & Lyytinen, 2012) shows that the organizational agility is positively influenced by the assimilation of the system. Therefore, it is important for the digitized core to show a positive effect on agility, or at least not lower it. Thus agility has been elaborated as the third and last dimension.

In upcoming articles, I will offer insight into the three dimensions and the value levers behind them. Stay tuned for Part 2, where I’ll discuss the effect on companies’ performance. You can also follow me @BeSchulze, or leave a comment.

For more on how new technology is affecting business today, see 5 Digital Trends Changing Business And Enabling The Possible.


About Bert Schulze

Bert Schulze is VP Product Management & Co-Innovation SAP S/4HANA at SAP