The topic about digital transformation appears in many articles, researches, news, and other media. What is digital transformation exactly? Is it some sort of trend for companies? Well, digital transformation is not a trend, it’s rather a requirement for companies to keep up with the increasingly competitive market. Huge number of executives misunderstand the term ‘digital transformation’ with upgrading their computing infrastructure. But, digital transformation is much more than just a computing infrastructure; it’s a combination of cultural, operational, and organizational change in a company through a smart integration of advanced technology. Digital transformation leverages technology to create new value to stakeholders such as investors, employees, and most importantly customers.
What initiates the need of digital transformation? The increase of digital technologies is significantly reshaping industries, a big number of companies are utilizing digital technology to capture the benefits of implementing digital technology such as faster execution and cheaper cost. The rest of the companies then followed the steps of adopting advanced digital technology to reap the benefits, this created a movement based on the need to keep up with the competitors. In a McKinsey Global Survey on digital transformation, more than 8 in 10 respondents stated that they have undertaken digital transformation efforts in the past five years.
There’s a concrete and real impact of infusing digital technologies to businesses, this is why companies are competing against each other to unlock their maximum potential with the use of digital technologies. A digital transformation strategy focused on creating opportunities by fully leveraging a company's capabilities. Digital transformation is not as simple as it seems, the number of organizations that failed to digitally transform themselves is shocking, according to DX Journal, 70% of companies failed their digital transformation strategy.
Why is it so hard to successfully adopt digital transformation? One of the main reasons is because digital transformation is hard to measure, the impact will not be visible immediately, this is why leaders are struggling to navigate their way during digital transformation whether they are implementing the right strategy or not. This article will explain about 5 common issues that cause digital transformation failure according to McKinsey. With the hope of less failure of digital transformation in the future and we’re all able to learn from the mistakes, awaken the sense of urgency to do even better.
1.Misunderstanding the term ‘digital transformation’
As I stated above, According to McKinsey research, many leaders still perceive digital transformation as upgrading their IT infrastructure, and a small number of leaders refer to digital transformation as digital marketing through owning a website or application to facilitate customers with an online platform. These are not entirely wrong, in fact it’s a part of digital transformation, however, only few leaders have a more broad and holistic view of digital transformation. The lack of understanding a clear definition of digital transformation leads to inaccurate implementation of digital strategy to the business. It’s crucial to have a clear understanding of the digital transformation concept before any leaders initiate the investment on digital transformation.
2.Not understanding the economic of digital
Traditional principle of economics is oftentimes not the same as the reality of economics in the digital era. One of the basic concepts in microeconomics was economic rent - profit is earned in excess of a company’s cost of capital. New digital business model is disrupting the market as they are able to capture the excess by offering cheaper prices with more value to customers. This is really scary for large companies that have been around for decades, this is why companies are trying to adopt similar digital technologies to be able to compete.
The economy of digital is entirely different from the traditional ones, in order to compete with these new digital firms that are disturbing the layout of the business, companies need to understand what makes the economy digital. A good example of this disruption is like Uber being the largest taxi company but owning no vehicles and AirBnB being the largest accommodation provider without owning any accommodation.
Digital is also driving winner-takes-all economies. The profit is no longer distributed evenly across businesses, just like how Amazon’s market capitalization towers far above any other retailers and how Apple regularly captures over 90% of smartphone industry profit. A small number of winners are typically in either high tech or media industry, they are doing better in the digital era than they were before. It’s wrong to assume that in the digital economy, market share will remain stable, that profitable niche will remain defendable, and it’s possible to maintain leadership by outgrowing traditional rivals rather than zeroing in digital models.
3.Not Overlooking Ecosystem
Understanding new economic rules in the digital era will help you and your business to move forward, but only so far. Industries will soon be an ecosystem,platforms that initially allow digital players to enter easily across industries and sectors and disturbing traditional models with its familiar lines of sight. For instance, Amazon is expanding its ecosystem, it’s just not merely an online retail store, but they also have AWS (Amazon Web Services) as an expansion to the IT industry. Digital players have blur boundaries while traditional players focus in one industry. Can you imagine how powerful a competitor that offers the largest level of inventory, fastest delivery time, greater customer service, and lower cost, all at the same time?.
In a world of ecosystems, as the industry’s boundaries are getting more and more blur, business strategy needs a broader frame of reference. It’s true that to be able to operate across industries or sectors is not easy and nearly impossible for the majority of companies, but take in mind that digital platforms are fast rewiring even physical markets, thus it’s crucial to redefine how traditional companies need to respond.
4.Over Focusing on the usual suspect
Most companies will be focusing on main digital leaders and see them as the main threat. Over focusing on main digital players is perilous, because incumbent too is shaking up digitative dynamics. Digitizing incumbents is dangerous too, that it’s also crucial to pay attention to small digital players as they are totally capable of disrupting the status quo. In many industries, especially banking and insurance, once the incumbents really get going, that’s when the wheels come off. McKinsey research confirms that bold incumbents own 20% of share on average in the digitizing market. There’s a saying that goes like this, keep your friends close but your enemy closer. In order to develop the right digital business strategy, companies need to analyze and assess carefully who are their competitors.
5.Missing the variety of digital disruption
For the majority of organizations, the pace of digital disruption is uneven, they can’t just walk away from its existing business. There’s an urgency to innovate and develop new business models to keep up with the competition. For those companies that’s been faced with rapid and massive disruption needs to make a bold move, like those companies in the retail or media industry. Other companies in other industries are experiencing variants of speed and scale of disruption, companies need to respond and act accordingly. In short, Companies need to develop their strategy based on their degree of change and pace of change in order to successfully digitally transform themselves.
Digital transformation has become one of the most important requirements for companies to be able to stay relevant and compete in the market. Since there’s a huge number of companies who failed to digitally transform their organizations, it’s important to fully understand why those companies failed to do so in the first place and hopefully learn something from it. The majority of companies fail due to inability to understand the concept of digital transformation in a more holistic way, not understanding the new rules and economy in today’s digital era, ignoring the reality of new ecosystem, over analysing and focusing on only the main the digital players that it lack visibility on the small digital players who are just as dangerous, and last but not least, failed to apply accurate strategy as the result of missing the variety of digital disruption.
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