Credit: Stepan Popov
Ideas Made to Matter
Digital transformation for family-owned companies
While family-run companies are often leading performers and innovators, they are also often slow to make big changes in their practices and organizations, according to MIT Sloan senior lecturer Digital transformation — a requirement to compete in today’s business environment — requires big changes in the organization to be done well.
Most family company leaders recognize that their businesses need to change to keep up, according to Davis’ recent research, but most also report that their companies and families aren’t ready to change. “In my view, if a company doesn’t say they’re very ready, they’re not ready enough,” said Davis, who leads the Future Family Enterprise executive program at MIT Sloan.
Davis recently joined director and principal research scientist at the MIT Center for Information Systems Research, for a webinar about how family firms can succeed at digital transformation.
Here are key takeaways from the session.
1. Prioritize efficiency, but don’t forget innovation.
Many people think that digital transformation merely involves automating business processes, digitizing work, and creating end-to-end processes. But future-ready companies have learned to simultaneously maximize efficiency while innovating and empowering people to experiment and create digital offerings that engage and delight customers.
“They’re actually simultaneously pulling out costs on one side and then they’re innovating on the other side,” said Woerner, co-author of “Future Ready: The Four Pathways to Capturing Digital Value.” “Future-ready companies deliver a great customer experience, and, really importantly, they’re modular and agile.”
Firms of all kinds should identify their crown jewels and turn them into modular, digitized services that can be repurposed. Woerner likened the process to building with Lego bricks, with reusable digital components that can click together across a variety of customer offerings.
“The more that you reuse, the more efficiencies you gain. And in some cases, you also give your customers more predictability,” she said.
2. Don’t create “silos and spaghetti.”
Too often, a company refines a product and processes, then creates another great idea — developing a new set of processes from scratch rather than adapting systems that have already proved successful.
Woerner calls this habit “silos and spaghetti.” This often happens to long-entrenched companies, such as family businesses, which become accustomed to a certain way of doing business.
“Eventually, you end up with a bunch of silos, typically around products or services, and then all of these point-to-point solutions. It looks like a plate of spaghetti,” she said.
Instead, Woerner said, companies should aim to identify the plug-and-play products and services that will enable them to perform each key task the best way possible.
3. Choose one of four pathways to digital transformation.
Woerner outlined four common paths companies — including family companies — take to experience digital transformation.
Pathway one involves transforming operations and industrializing first: cementing end-to-end processes and consolidating data, and doing away with legacy business practices. This boosts productivity, though often at the expense of initial customer engagement. Business unit leaders might panic, fearing a digitization desert. But once a solid platform is in place, they can innovate quickly.
Pathway two is often favored by companies that face competition and customer-retention challenges and thus choose to focus on customer experience first. Adding features and expanding channels benefits customers, but organizations need to make sure their processes and systems keep up.
Pathway three is an incremental transformation, toggling between operational efficiency and customer experience. For this to work, companies need a six-to-nine-month road map with clear companywide initiatives.
Pathway four involves spinning off a completely new company. Usually, this happens when an organization is mired in those silos and spaghetti and needs to start over. Challenges can arise, though, when an organization tries to integrate insights gained from the new company into the old one.
“What you don’t want to do is end up accidentally with two separate business units, each doing the same thing and creating more complexity,” Woerner said.
4. Create a digital thesis, and contemplate whether restructuring is necessary.
Who decides which pathway to take and how? Woerner cautioned against widespread reorganization before thoughtful deliberation.
“It’s better to start with identifying and getting the decision right first and then working on new ways of working in a platform mindset. Then, a little bit further on, start looking at where you need to reorganize or not,” she said.
Davis urged the owners of family companies to take ownership of these efforts. “Active owners who feel accountable to guide and support big changes their companies need to make [are] required for family companies to be successful,” he said.
For a digital transformation, leaders need to build what Woerner calls a digital thesis.
Questions to ask include: What are we trying to do? Why are we trying to do it? How are we going to do it? What kinds of investments in technology, in people, in learning, and in organizational change do we need to make?
“The development of active owners with the right kind of perspective is required now more than ever before for a family company to be successful,” Davis said.
5. Promote an agile board culture.
Davis underscored that future-ready companies have boards that engage with the owners and management to change the company, which is a departure from the past. “A good board is really important in these kinds of big change efforts,” he said.
“Good boards used to say, ‘Let’s pick the right leader. Let’s stand back, and we’re here if you need us.’ Today, boards are saying, ‘We’re engaged. We’re part of the dialogue. We’re going to help you create the kinds of changes needed to reflect the strategic direction that the owners agree we need in our company,’” he said.
Davis also emphasized that boards should work closely with management to build a change-ready culture — “one that is experimental, that tries things and injects lessons from experience into their future plans.”
In the end, trust is what holds everything together.
Davis and Woerner agreed that future-ready companies create high-trust cultures that make it possible to try new things, ask questions, and understand that technology isn’t a threat but a way to maximize efficiency and thoughtfulness.
“This requires a culture of growth, a culture of experimentation, a culture of learning,” Davis said.
Read next: 10 capabilities to accelerate digital transformation