Image Credit: Pan Yunbo
Several companies are embarking on the journey of digitalization to future-proof their businesses. The pandemic accelerated this process furthermore as customers, workers, and markets started to adopt and embrace digital transformation.
The article – ‘Digital Transformation as Disruptive Strategy’ by Ashish Sinha, Kiran Pedada, Anish Purkayastha, Rajendra Srivastava, and Sandeep Balani talks about the impact of digital transformation on a company’s revenue and shareholder value.
Digital Transformation starts with the adoption of emerging technologies, but only when it leads to value creation in terms of revenue, shareholder value, and customer satisfaction, does it add meaning to the process. To be able to monetize digital transformation, companies need to work at the intersection of business models and technology interfaces to innovate the existing models.
The article classifies firms into four quadrants based on their business models and interactions with technology. In the top left quadrant are the firms which lag in the journey of digital transformation and are labeled as an incumbent, and coming a full circle, the bottom right quadrant is the opposite where companies such as Uber, Airbnb, Facebook, etc. are placed, who have been using digital transformation to create competitive advantage and made exponential growth in market capitalization. Despite the accelerated adoption of digital technologies, research has shown that over 70% of all digital transformations fail. Moreover, it has been reported that only 10% of firms see significant financial gains from this transformation. The authors argue that successful digital transformation requires an organization to possess the right capabilities.
The article suggests that an organization can be described as a bundle of its assets and capabilities. Specifically, the article identifies a set of four capabilities: 1) Data Related, 2) Model Building, 3) Managerial, and 4) Market Based Capabilities (MBA) for successful digital transformation. The underlying concept is that by using organizational assets and market capabilities, as an organization creates a competitive advantage, cash flows start to increase thus increasing the shareholder value.
To test the assumptions, a regression analysis was run, first, MBA capabilities on preparedness and managerial capabilities, and then competitive advantage in preparedness, managerial capabilities, and MBA capabilities. The results showed that to leverage competitive advantage, organizations not only need to focus on data, modeling, and managerial capabilities but also on an explicit strategy of creating value for their customers. So, to sum up, the three suggested focus areas for executives trying to lead their organizations into digital transformation are:
1. Focus on customer-centricity: Firms such as Microsoft, Target, Apple, etc., prospered in the Pandemic times owing to their customer-centered strategies. Firms that better understand the needs of existing customers as well as emerging customers get a competitive advantage over others.
2. Identify ways to use digital technology to create, deliver and appropriate value differently from the competitors: The next step to understanding the needs of the customers is to create and innovate business models to serve those needs. Apart from building a sustained competitive advantage, this leads to increased cash flows and shareholder value.
3. Leveraging data and emerging technology to create entry barriers for competition: by creating entry barriers not only does a firm increases its customer retention, but also customer acquisition. Amazon for example has been using data and AI to build customer loyalty which rewards the firm in terms of a higher wallet share and shareholder value, and entry barriers for competitors thereby decreasing the cost of customer acquisition and retention.
In a nutshell, to digitally transform their organizations successfully, companies must identify ways by which they can use digital technology to create, deliver, ad appropriate value differently from their competitors to cater to the needs of existing or unserved customers.