The strategic path to digital transformation

The music industry is probably the best-known example of the consequences of putting off a digital transformation for too long. Napster launched online in 1999 and used peer-to-peer technology to overturn the music industry’s old, central distribution model. The music labels took action against the resulting copyright infringements, however they did not initially engage with the potential of digital music distribution – and the lost revenue. By contrast, the IT company Apple found a way to take advantage of the new possibilities: the iTunes software and the corresponding hardware, the iPod. Meanwhile, the music industry generates about a third of its sales via digital channels. This trend is growing and the CD is increasingly becoming a niche product. Thus the music market has been turned upside down within 15 years: There are new distribution channels, new revenue sources and new players who are taking over the customer interface and thereby gaining significant market power.

The example shows that the digital transition affects all of the different areas of a business. This does not make it any easier to approach the digital transformation in a systematic way. In his latest book, “Digitale Transformation strategisch steuern” [Strategic Management of the Digital Transformation], Thomas Hess from LMU Munich provides a helpful guide.

The first step is to work out a transformation strategy. This has three functions:

• It describes which changes are necessary in the value creation and management structure,
• specifies how digital technologies are to be managed and
• takes into account the urgency and financial scope.

As a holistic approach, it essentially combines an IT strategy and a business strategy. It can be used to coordinate and prioritize transformation efforts across all areas of the company. It is important to incorporate the following four aspects into the transformation strategy:

• the use of technologies,
• structural changes to value creation,
• structural changes to the organization, and
• financial aspects.

The digital transformation is, of course, inextricable from the emergence of digital technologies. Therefore, the first strategic aspect deals with the use of these technologies. It describes the strategic role of IT and the company’s technological aspirations, as well as answering the following questions in particular: Which developments are key for the company and should be monitored? What ambitions does it have for the use of digital technologies – does it seek to become a leader in technology, or is it sufficient to use standard applications? What adjustments need to be made to the IT landscape?

If a business pursues new digital activities, these usually differ from the old core business. Transformation strategies thus have an impact on a company’s value creation chain. Therefore, the digital transformation of products and services can enable – or demand – different forms of monetization as well as an expansion of business areas. The central question of this aspect is: Which offers of processes will the business use to generate revenue in the future?

New technologies and forms of value creation also require structural, possibly even cultural adjustments within the business. Who is responsible for the digital transformation, where will the digital activities be located within the company, how can digital capabilities be bundled and expanded? Depending on the extent of the changes due to digitization, it may make sense to integrate new activities and processes into existing structures or to create a separate digital unit.

Of course, these changes can only be successfully implemented if the financial scope of the project is taken into account. Businesses should therefore carry out their digital transformation also and especially during periods of growth. This is because sufficient financial resources make it possible to quickly and comprehensively advance digitization while remaining functional. If there is a slump in the core business, the resources for implementing digital projects become limited. Therefore companies must ask themselves what implications the digital transition has on their outcome and what investment resources are available for the digital transformation.

Products, processes and business models, potentially as well as the IT structure, organizational structure, culture, and existing capabilities must be adapted in order to implement the digitization strategy.

There are essentially two variations of the strategy process: The strategy can be initiated by top management (top-down) or come from the organization (bottom-up). But in practice, elements from both approaches should work hand in hand. For one thing, this is due to the fact that digitization strategies are difficult to plan centrally, because, as described, they affect the entire organization. On the other hand, an entirely bottom-up approach is not sufficient, as overarching objectives and priorities cannot be set. A good rule of thumb is that bottom-up approaches are more likely to produce continual, step-by-step developments, whereas fundamentally new approaches should be initiated from the top down. If the approaches work in synergy, the company will move towards digitization together.

For more information, see:
Hess, Thomas: “Digitale Transformation strategisch steuern. Vom Zufallstreffer zum systematischen Vorgehen” [Strategic Management of the Digital Transformation. From Stroke of Luck to Systematic Process], Springer Fachmedien, Wiesbaden 2019, 216 pages, 24.99 euro.

Author: Editorial team Future. Customer.
Image: undrey – AdobeStock