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Digital transformation has evolved. Here’s what’s new

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In 10 years of researching digital transformation, MIT Sloan senior lecturer and collaborators have identified ways in which some companies are becoming “digital masters,” while others fall behind.

Leadership capability is the ability to envision and drive organizational change in systematic and profitable ways. Digital capability empowers organizations to not only enhance existing processes and products, but improve or even create new business models.

Companies that effectively harness and unite the two capabilities become “digital masters,” able to transform digital technology into a business advantage. In 2021, digital mastery is more important than ever because the risks of falling behind are increasing.

“In 10 years of research, we have seen digital transformation grow increasingly complex, with a new wave of technological and competitive possibilities arriving before many companies mastered the first,” write Westerman and collaborator Didier Bonnet, an affiliate professor at IMD Business School, in “The New Elements of Digital Transformation.”

The article, published by MIT Sloan Management Review, updates the authors’ landmark 2014 framework, “The Nine Elements of Digital Transformation.”

In a recent follow-up interview, Westerman said, “We took the opportunity to reflect on the last few years and assess how things may need to change.”

Strong leadership — vision, engagement, and governance — remains paramount. “The ability to envision and drive change is just as important as the ability to work with technology,” said Westerman, who is also a principal research scientist for workforce learning in MIT’s Abdul Latif Jameel World Education Lab. “If you don’t have both, you can’t succeed in this world.”

What has changed significantly are digital capabilities.

“What’s happening on the digital side is that technologies are advancing so quickly, especially the combination of technologies,” Westerman said.

Specifically, advances in technologies including the Internet of Things, artificial intelligence, virtual and augmented reality, and 5G have opened new avenues for value creation, he said.  Within the authors’ original framework, some factors have become more important while other, entirely new factors have emerged.

For example, customer experience has become a critical way for companies to differentiate themselves in their markets. It depends on an organization’s ability to not only gather, analyze, and integrate customer data, but also to use technologies like machine learning to personalize interaction in real time and help build an emotional connection with customers.

Meanwhile, a new factor — employee experience — is now as important as customer experience. Previously subsumed within the category of operations in the 2014 framework, employee experience today plays a major role in the success or failure of digital transformation.

“Employee pain points can be valuable cues on where you can improve the business,” Westerman said. “If you innovate the work experience, you make the whole company better, including the customer experience.”

The authors identify three components in transforming employee experience:

  • Augmentation: The use of technologies, such as robots and augmented reality, to enable people to supplement employee productivity and performance — helping people to work faster, smarter, and more safely.
  • Future-readying: New ways of training employees in new skills. The authors note the emergence of a new type of chief learning officer, called the transformer CLO, who revamps learning and development function to make it more strategic and agile. This ensures that workers have the knowledge and skills to use new technologies and continue driving the transformation.
  • Flexforcing: A more agile way to source talent by training employees in multiple skills and using more freelance workers and independent contractors. Flexforcing is doing for labor what cloud computing did for information technology, Westerman said. Companies are supplementing standard contracting and “gig” workforces by curating their own custom pools of contingent workers they know and trust, for example by encouraging former employees and retirees to return to fill temporary needs. “It’s a lot easier to bring back former employees than it is to train someone new,” he said.

Business model innovation

Another change has been how new technologies like sensors, the Internet of Things,  and machine learning enable organizations to improve operations, going beyond mere efficiency gains to enhance the customer experience or even enable new business models.

The elements of operational transformation are:

  • Core process automation — This enables new ways to operate, for example using autonomous vehicles and equipment to do work that is dangerous.
  • Connected and dynamic operations — Companies can now build systems of networked products, such as transport systems like elevators, so they can manage and optimize particular operations.
  • Data-driven decisions — By integrating real-time operational data and analytics, companies can make better operational and strategic decisions.

These technologies in turn lead to business model innovations such as multisided platforms, digital enhancements, and information-based service extensions.

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The belief that organizations must upend their existing, traditional business model and invent a new one based entirely on digital platforms, like Airbnb or Uber, is misguided, Westerman said. It’s not necessary, or even advisable in some instances, to emulate digital natives.

Companies can use digital technology to enhance and expand what they already do, creating new ways to serve their customers.

“There are huge opportunities to change your business model in ways that don’t involve completely reinventing your industry,” Westerman said.

For example, in addition to selling products, companies can offer subscriptions, or extend a product-sales model by adding data-based services. Michelin uses embedded sensors in tires to track vehicle use, and has turned that data into a service that helps customers manage entire fleets of vehicles.

“These approaches don’t involve disrupting your entire industry,” Westerman said. “They don’t depend on driving your competitors out of business. Rather, you’re giving customers better service and new ways to engage with existing products. That can be incredibly valuable.”

Even though recent events — specifically the global pandemic — pushed digital transformation to a higher priority for many leaders, they should take the long view, write Westerman and Bonnet, who is also executive vice president of Capgemini Invent. “They need to consider how digital technologies can be used not only to enhance their products and processes, but also to reinvent their businesses.”

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