Ready for digital transformation? Not until you’ve also transformed your business model

Many business leaders today are eager to embrace the concept of “digital transformation,” which gives data and technology a central player in business success. But enterprises that continue to rely on legacy business models will still fall behind, as more nimble competitors address critical shifts in customer behaviors and respond to market disruptions as opportunities. This article prescribes six best practices common to companies that have engineered successful business transformations.

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There is something alluring about the idea of “digital transformation,” a phrase that seemingly promises to magically morph any legacy company into a lean, technology-forward revenue machine. But there can be no true digital transformation without a well-defined business transformation strategy: The latter always informs the former.

If you’re not engaged in a strategic business transformation today, there’s a strong probability you will be soon. To illustrate the importance of developing an active transformation strategy, one needs to look no further that the accelerating rate of churn in the S&P 500. According to S&P analysts, a company on the Standard & Poor’s 500 index in 1964 could expect to remain listed for 33 years. By 2027 this shrinks to 12 years – meaning at the current churn rate only half of the companies in the index today will be there 10 years from now. A primary reason for this churn is the emergence of new hyper-growth billion-dollar innovators and disruptors – empowered by technology and data – that are quickly displacing traditional industrial leaders. But many traditional companies are fighting back by reimagining and reengineering their business models to innovate, compete and grow. Index “survivors” will be those companies who proactively tackle change head-on by boldly confronting disruption in their markets and embracing it as opportunity.

Of course, S&P 500 companies aren’t the only ones impacted by this dynamic. In businesses and markets of all sizes, the catalysts behind business transformation are the same: financial crisis (recession), slowing growth in existing products, disruptive competitors, changing customer preferences or a sizable market shift or megatrend.

No matter which factors are responsible, to remain relevant and growing in their markets, business leaders should adopt rigorous business model and market assessments as the underpinning of their strategic business transformation. These assessments should ideally consider: 1. Adapting the core business to their changing market in ways that extend its value and lifecycle; and 2. Building new products and services to that will drive new revenue outside of this core.

Six best practices

Executives will benefit from the following key practices to manage and frame their business transformation initiative:

  1. Align business transformation with digital transformation. Yes, digital transformation will ultimately play a critical role. But executives should be cautious about technology investments for “technology’s sake” that are not tightly aligned with achieving strategic business objectives. While the terms “business transformation” and “digital transformation” are often used interchangeably when the initiative involves a digital platform, it’s important to make sure business objectives are clearly defined before technology decisions are made.
  2. Find and solve your “existential” threats. Whether it’s declining core revenue due to structural market changes, disruptive technology or an innovative competitor taking market share, the magnitude of the threats addressed, and the opportunities pursued, must be significant, real and sustainable. It can be perilous to pivot too far from a core business that is experiencing a prolonged but recoverable cyclical downturn, for example. Similarly, new opportunities must be significant enough to “move the needle” meaningfully in growth for the long term, as oftentimes they must replace lost revenue from the legacy core business. Executives need to avoid expending time and energy chasing a good idea that is too small to deliver the revenue needed to support the organization’s ambitions and needs in the future.
  3. Communicate. Senior leadership must define and share the new vision and mission. A sweeping business transformation means employees and other stakeholders might soon not recognize the company they once knew. They need to know not only what they’re transforming to become, but also why. Management must be transparent about the threats and the risks of inaction, while painting a “higher-purpose” picture of what the company will look like following a well-executed plan. This will minimize resistance and build credibility with staff.
  4. Let go. Executives must be confident to move away from dependence on legacy businesses. Companies with established products and brands with a history of success often have difficulty parting with legacy businesses. But doing so is almost always a byproduct of effective change. As resources are reallocated to new opportunities and new higher-growth market segments and ventures, the legacy businesses are often left fighting over diminishing resources. Management needs to be clear about the transitional roles of these businesses and protect key employees who keep them optimized in transition.
  5. Leverage core competencies. Core businesses can serve as ideal transition points into new adjacent marketplaces that offer higher growth potential and more sustainable business models. This is attractive because organizations generally have the skill sets already in place to execute in the new markets. We see this with many business transformations, often those that move from product-oriented transactional revenue streams to service-oriented subscription and recurring revenue streams. Dell is a prime example, having transformed from a PC/Server company to a cloud-based storage solutions provider.
  6. Repeat. Nurture internal capabilities that will drive continuous innovation. Business transformation is an ongoing process, one of discovery, assessment, prioritization and execution that is repeated systematically in regular intervals and cycles. Speed and agility are achieved in the marketplace when every player in the organization has a growth mindset and is empowered in the process of driving innovation and change. Make sure the responsibility to innovate is not isolated with a select few, or an attribute of just one or two departments.

When you look at some of the more formidable business transformations that have occurred in the past five years,  it’s easy to identify how applying these key best practices, and others, has had impact on the outcomes. Technology companies are highly visible and get a lot of press on their successful “pivots” (Netflix, Microsoft, Alibaba, SAP, Cisco), but important transformations are occurring across all industrial and business sectors with astounding results (Pitney Bowes, Philips, Siemens, SONY, etc.). We’ll be examining these and similar business transformations in closer detail in future case studies.

Every organization has unique capabilities, marketplaces, competitors and opportunities for effective business transformation. We thrive on identifying and quantifying new opportunities and business models. Clients trust dPrism to apply this critical thinking, insight and process execution to their businesses to generate real results.