Managing Digital Transformation

Understanding the Strategic Process

Andreas Hinterhuber, Tiziano Vescovi, Francesca Checchinato, Andreas Hinterhuber, Tiziano Vescovi, Francesca Checchinato

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000387841
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides practising executives and academics with the theories and best practices to plan and implement the digital transformation successfully. Key benefits:

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• an overview on how leading companies plan and implement digital transformation

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• interviews with chief executive officers and chief digital officers of leading companies – Bulgari, Deutsche Bahn, Henkel, Lanxess, L'Oréal, Unilever, Thales and others – explore lessons learnt and roadmaps to successful implementation

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• research and case studies on the digitalization of small and medium-sized companies

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• cutting-edge academic research on business models, organizational capabilities and performance implications of the digital transformation

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• tools and insights into how to overcome internal resistance, build digital capabilities, align the organization, develop the ecosystem and create customer value to implement digital strategies that increase profits

Managing Digital Transformation is unique in its approach, combining rigorous academic theory with practical insights and contributions from companies that are, according to leading academic thinkers, at the forefront of global best practice in the digital transformation. It is a recommended reading both for practitioners looking to implement digital strategies within their own organisations, as well as for academics and postgraduate students studying digital transformation, strategy and marketing.

Part 1

Introduction

Chapter 1

Digital transformation

An overview

Andreas Hinterhuber, Tiziano Vescovi and Francesca Checchinato

Digital transformation is “a process that aims to improve an entity by triggering significant changes to its properties through combinations of information, computing, communication, and connectivity technologies” (Vial, 2019, p. 121). Digital transformation is multidisciplinary by nature, pervasive, and growth-oriented (Verhoef et al., 2020). Recently, the topic has attracted substantial interest and, accordingly, comprehensive literature reviews (Verhoef et al., 2020; Vial, 2019).

Current research suggests that for most companies the digital transformation is not a question of if or when (Hess, Matt, Benlian, & Wiesböck, 2016): the digital transformation is given; key questions relate to how to develop and implement a digital transformation strategy.

And, yet it is precisely on the question of how that managers lack guidance (Hess et al., 2016). This is because a large part of the managerially relevant studies on the digital transformation have been produced by consulting companies or solution providers that are not without self-interest in their recommendations (Peter, Kraft, & Lindeque, 2020).

Digital transformation thus represents a substantial problem of practice: the overwhelming majority of companies is not ready for a digital future (Kane, Palmer, Phillips, & Kiron, 2015). There are, to be sure, several cases of companies that have successfully mastered the digital transformation: Adobe, Netflix, The New York Times will probably stand the test of time. The textbox illustrates pertinent aspects of the digital transformation of Adobe (Hinterhuber & Liozu, 2020).

The digital transformation of Adobe

Adobe, the US$11 billion software company, is an illuminating example of a successful digital transformation: In 2011, more than 80% of the company’s sales were product-based. In 2019, close to 90% of the company’s sales are digital subscriptions, i.e., usage rights. The move from products to digital subscriptions is driven both by a strong customer orientation – subscription sales allow immediate product updates, as opposed to product sales that are driven by release cycles – as well as by the objective to increase performance. Mark Garrett, CFO of Adobe, comments: “We were driving revenue growth by raising our average selling price—either through straight price increases or through moving people up the product ladder. That wasn’t a sustainable approach” (Sprague, 2015, pp. 1–2).

The digital transformation of Adobe is built on several elements that we highlight in this volume: (1) new organizational capabilities. Says Mark Garrett: “one of the most challenging aspects of the cloud transition [was] changing how we brought products to market. We had to educate and compensate the channel and our salesforce differently” (Sprague, 2015, p. 5). (2) business model innovation: digital transformation requires new business models, a transition from selling physical products to selling digital solutions. An important element in this process is internal and external analysis. Again, Mark Garett comments: “We spent hours knee-deep in Excel spreadsheets modeling this out. We literally covered the boardroom with pricing and unit models. Through this discussion, which took about a year, we saw that we could manage through it and that we, our customers, and our shareholders would come out on the other side much better off” (Sprague, 2015, p. 2). (3) customer value creation: the digital transformation is about creating meaningful customer experiences. Dan Cohen, VP of strategy of Adobe: the digital transformation allows “offering a broader and better value proposition,” “attracting new customers,” and a “better read of [customer] needs” enabled by closer relationships with customers (Sprague, 2015, p. 6).

In the context of the digital transformation, Adobe changed its capabilities, business model and improved the value delivered to customers (S. Gupta & Barley, 2015). The digital transformation is delivering tangible results: from 2011 to 2019 sales revenues more than doubled and operating margins increased from 26% to 29%.

Many other companies failed largely as a result of not getting the digital transformation right: Kodak and Blockbuster are trivial examples.

The point is: while many senior executives state that the digital transformation is critical for survival, only 3% of companies have actually completed organization-wide digital transformation efforts (Chanias, Myers, & Hess, 2019).

A key objective of this edited volume is to present scientifically grounded, practically relevant contributions on designing and implementing the digital transformation.

This book is thus intended as a guide that lays out how to transition from a largely pre-digital to a largely digital strategy, i.e., how to transition from marketing/selling physical products/services to conceiving and marketing digital products/services.

The structure of the book

“Part 1 Introduction” contains this introductory chapter, by Andreas Hinterhuber, Tiziano Vescovi, and Francesca Checchinato.

“Part 2 Digital transformation and organizational capabilities” contains several chapters that address the organizational capabilities needed in the context of the digital transformation.

In Chapter 2 “Understanding digital transformation: a review and a research agenda” Gregory Vial presents the definition of “digital transformation” outlined above. What makes the study of the digital transformation so fascinating and so important is the insight that it offers both game-changing opportunities as well as existential threats to businesses. The literature analyzed converges on the following topics: digital transformation changes the value delivery process, from products to services/solutions and from single actors to value networks/ecosystems. The digital transformation requires structural changes within organizations, typically the establishment of separate organizational units under the leadership of the chief digital officer (CDO) – a question that this book explores in Part 3. Digital transformation then requires a change in organizational culture and in organizational capabilities – several interviews with CDOs explore this question in this volume. Typical obstacles to the successful digital transformation are inertia or active resistance. Finally, benefits of the digital transformation are improvements in efficiency, innovation, and organizational performance.

In Chapter 3 “The three pillars of the digital transformation: improving the core, building new business models and developing digital capabilities” by Andreas Hinterhuber and Stefan Stroh highlights pillars of the digital transformation of Deutsche Bahn, Europe’s largest railway operator. Improving the core is about using digital technologies to improve value delivery. Building new business models is about building start-up businesses that able to compete with competitors that disrupt current business models: the willingness to cannibalize the core is a prerequisite (Kumar, Scheer, & Kotler, 2000). Developing digital capabilities is about data, IT infrastructure, innovation ecosystem, and new work styles. Stefan Stroh, CDO, also highlights obstacles to a successful digital transformation – with the difficulty in changing the culture of the organization featuring prominently. Metrics, according to this interview, are not different from metrics used to assess traditional initiatives – as the chapter by Gregory Vial also points out.

In Chapter 4 “Big data and analytics: opportunities and challenges for firm performance” Marisa Agostini analyzes challenges related to exploiting the opportunities offered by big data based on an extensive review of the literature. Three items three main items – people, culture, and technology – represent the main barriers (and the potential solutions) to required organizational changes. Marisa Agostini also highlights a growing gap between what is technologically possible and what is being implemented in organizations. This, of course, only increases the value of big data analytics capabilities (M. Gupta & George, 2016).

In Chapter 5 “Technology is just an enabler of digital transformation: The case of Unilever” Francesca Checchinato discusses the digital transformation process of Unilever, a leading company in the FMCG sector highlighting the main elements that drive to the success. A new business model based on a completely different organization, a clear vision and a strong support from CEO are some of the key elements of its digital transformation. Unilever offers training and learning programs to its employees to both improve their skills and coach them to better work on the new digital landscape. Without a new attitude and a cultural shift, digital technologies would just remain a tool without any value.

“Part 3 Digital transformation and business model innovation” contains several chapters highlighting the role of business models in the context of the digital transformation.

In Chapter 6 “Digital transformation and business models” Tiziano Vescovi analyzes the relationship between the digital transformation and the change of the business models, that is the influence of the digital technology adoption on the models of value creation of the company. In the chapter, four main aspects are highlighted: (a) different types of digital business models, (b) the main areas of business change induced by digitalization of the company, (c) difficulties and problems arose in changing the business model because of digital transformation, and (d) the pathway to a digital business model.

In Chapter 7 “From disruptively digital to proudly analog: a holistic typology of digital transformation strategies” Zeljko Tekic and Dmitry Koroteev provide a conceptual classification of digital transformation strategies in terms of two critical dimensions: usage of digital technologies and readiness of the business model for digital operation. The result is a typology of four generic digital transformation strategies that differ in target of transformation, leadership style, skills, and improvement tactics. The proposed framework – which is conceptual and thus needs empirical validation – defines digital transformation on a continuum with four typologies: (1) partial digitalization, (2) efficiency-driven digitalization, (3) business model-driven digitalization, and (4) disruptive digitalization. Digital transformation strategies are thus, in this view, driven by three distinct objectives: efficiency improvements, innovation, and disruption – with some companies largely unaffected by the digital transformation that will continue to operate mostly analogously.

In Chapter 8 “Digital transformation, the Holy Grail and the disruption of business models” Andreas Hinterhuber and Michael Nilles discuss the game-changing opportunities that the digital transformation opens to companies that embed a digital core into their business models. Michael Nilles, CDO of Henkel, one of the world’s largest consumer good companies sees digital transformation as the search for the Holy Grail: a force that is not easy to find, not easy t...