The Digital Age, enabled by the convergence of innovations in computing, telecommunication, and networking technologies, has the following major characteristics:
- All data is, or easily can be, digitized.
- Devices that capture, process, and store digital data are simultaneously cheaper, smaller, faster, and more powerful.
- Applications that automate tasks, processes, analytics, and decisions on digital devices are smarter, faster, cheaper and easier to use.
- The global communication network that connects people, devices, and other things with global data storage and analysis capability is fast, inexpensive, and has seemingly infinite bandwidth.
We can summarize the impact of the Digital Age on our work and personal lives in three outcomes:
- Continuous change in customers’ needs, priorities, and preferences.
- Global markets, customers, and competition: The pace of communication and the ability to analyze and share information globally across customers, organizations, and geographies means that new customer needs, new technologies, new products and services, and new competitors can appear at anytime from anywhere in the world.
- Ubiquitous innovation: In the Digital Age innovation is no longer just the responsibility of a few people in R&D or product development. Ubiquitous means that innovation is pervasive and expected to come from anywhere as people from multiple functions, organizations, markets, and geographies collaborate and co-create new processes, products, and services.
Five of the top 10 companies in the world, ranked by market capitalization — Apple, Microsoft, Alphabet (parent of Google), Amazon, and Facebook – have harnessed Digital Age innovations to produce enormous value for their stakeholders. Each has disrupted their business sector and dominated it, at least for now.
Research conducted by Westerman, Bonnet, and McAffee provides a clear answer to this question. They studied how 184 organizations from multiple industries are responding to the opportunities and challenges of the Digital Age innovations. They analyzed the organizations in 2 dimensions:
- Digital Capability: How much time and resources each of the 184 organizations is investing in developing new digital capability (selecting, implementing and using new digital tools).
- Leadership Capability: How much time and resources each organization is investing in understanding the leadership capability needed to lead in a Digital Age organization.
Using these two dimensions, they grouped the organizations into four groups as shown in below diagram. It is important to note that all the 184 companies studied use digital technologies. What makes the difference between the four groups is how each type of organization selects and implements their digital tools, and how effectively they use them to achieve their business goals.
Beginners: For Beginners, digital tools are managed by the IT department with little interaction with business strategy leaders. Digital tools including email, the internet, automated processes, web conferencing, data analysis and storage, and smartphones were used primarily to run their current business model more efficiently. Beginners have traditional leadership development programs but have not seriously considered what new leadership capabilities they need for success in the Digital Age.
Fashionistas are excited about new digital technologies and tools, and proudly announce their investments in the “latest and greatest” technologies. However, because they have not developed a digital strategy integrated with their business strategy, leadership capability or a digital governance model, they waste much of what they spend. They tend to invest at the business unit or functional level often selecting several versions of the same digital tools or platforms that duplicate each other with no coordinated approach to customer engagement. This practice presents a significant barrier to cross-organizational customer engagement, collaboration, and gaining customer insights.
Conservatives are the opposite of Fashionistas. They have developed new leadership capability and have integrated their digital strategy with their business strategy. They work to ensure the coordination of digital investments across the organization. They have a robust digital governance model, and they do not waste precious time effort and money with duplicate or poorly conceived digital investments. However, by taking a conservative approach, their decision making is often slow and risk-averse. Consequently, they often miss opportunities to be the first to introduce a disruptive technology or business model and typically do not make the progress they had planned.
Digital Masters first developed a new leadership capability which they then used to create and implement their digital strategy successfully. Because their digital strategy is an integral part of their business strategy, they invest in the Digital Age tools that will help them implement their business strategy. They also use digital tools effectively to experiment with new business models to engage their customers and other stakeholders more effectively for creating mutual value.
Once they categorized the 184 organizations selected for their research into one of the four categories, the researchers then compared the profit of the organizations in each category with the average profit of the firms larger than $500 million in annual revenue in their industry sector.
Study Results: Digital Masters significantly outperformed the other three groups
The difference in the financial performance of these four groups is remarkable and gives a clear answer to question “If Digital Age Processes and Tools are inexpensive, pervasive and available to nearly everyone globally, why are only a few organizations outperforming others in their sector?”
Insights from the study/research :
- Digital Masters significantly outperform the other three groups because they first develop the Leadership Capability needed to integrate their digital strategy with their business strategy. Then they select and implement digital tools solely to carry out clear business strategy goals. In August 2018, Digital Master Apple became the first publicly traded company to be valued at $1 trillion; and Amazon reached that milestone just one month later in September. The first two organizations to achieve $1 trillion in market capitalization were both Digital Masters!
- Starting with the right Leadership Capability produces better results than trying to build Digital Capability based solely on the “latest and greatest” digital tools available.
- The Conservatives who have developed robust Leadership Capabilities, even though they are lagging the Digital Masters because of their slower decision making, are still outperforming the Fashionistas by a whopping 20%.
- The Fashionistas who have invested aggressively in the latest and greatest Digital Capability without the benefit of new leadership capability still significantly outperform the Beginners, but underperform the Digital Masters by 37%.
- The only two groups that outperform the average profit of their sectors are the Digital Masters and the Conservatives who build Digital Age leadership capability before investing in building Digital Capability.
- If your organization is a Beginner, taking immediate action to build new leadership capability needed to develop a world-class Digital Capability is essential. If the Beginners don’t change, their days are numbered.
The research results also help to dispel two common misconceptions about Digital Age disruption. The first misconception is that the continuous introduction of new and innovative Digital Age tools is the sole driver of Digital Age disruption. As this research illustrates, the development of Digital Capability using digital tools is only one part of what is driving Digital Age disruption. Development of Digital Age Leadership Capability is an essential pre-requisite to select the right digital tools, and then to integrate and implement them as part of the business strategy for the highest impact Digital Capability.
The second misconception is that successful Digital Age disruption is achieved only by organizations who design and make digital tools. Nike, Amazon, and Burberry, have each disrupted their “non-tech” sectors and now lead their competitors. Although Amazon is now considered to be part of the technology sector because of its cloud services business, their initial disruption was in the retail sector. Any organization, in any sector, can harness the power of the Digital Age to innovate and disrupt their sector and generate new value for its stakeholders if they first focus on building the essential Leadership Capability needed to create a winning business strategy supported by effective Digital Capability.
In which category does your organisation fall into & why ? Do retrospect & let know your views in the comments below. Would be happy to learn from you & your thought process.