How to understand your digital transformation

While a few companies, the digital giants, are gaining a lot from digital, many large companies are investing heavily in digital, recruiting IT specialists and spending on digital technology, including artificial intelligence, cloud computing, learning automatic and algorithmic decision making. however, obtaining disappointing returns.

What companies need to realize is that digital transformation is only partially about technology. Equally important is the fundamental change in the way the company is managed.

Industrial Age Management

Let’s first take a look back in the history of management. Towards the end of the 20th century, business thinking tended to converge on a generic “right way to run an organization”. This thought comprised a set of internally centered ideas beginning including the goal of making money for the company and its shareholders; hierarchical work structures with individuals reporting to managers; and the key indicators are short-term earnings and the current stock price.

These principles were supported by processesincluded leadership that was from the top down; strategy that was retrospective and defensive; innovation that protected the existing business; Sales that induced customers to buy; HOUR that it controlled the workers as company resources; operations that met production targets at a lower cost; a budget process that was a battle for resources between the silos; Y compensation where earnings mostly went to the top.

Each of these processes had its own set of rules and sub-processes, supporting both the core principles and the other processes, and managed by people who specialized in the process and built their careers within that role.

Although there were exceptions, most of the great successful companies of the 20th century worked this way. And many still are. That’s what most business schools teach, and many still teach. In 1997, the Business Roundtable endorsed it. Many people in large companies continue to believe that this is “the right way to run an organization.”

This set of ideas can become so deeply embedded in systems, habits, attitudes and assumptions that they are almost invisible to those inside the company. It’s “the way we do things here.” Quiet acceptance and support of running the company in this way can almost become a condition of membership in the company.

This way of running an organization did not have a specific name. It is mostly known simply as “management”. It was assumed, and often still is, that it was the only coherent and internally consistent way to run an organization. Let’s call this way of running an organization “industrial age management,” as shown below in Figures 1 and 3.

Therefore, it can be useful to see an organization as a kind of complex adaptive system, that is, “a system that is complex in the sense that it is a dynamic network of interactions, but the behavior of the whole may not be predictable according to with the behavior of the components. . It is adaptive in the sense that individual and collective behavior mutates and self-organizes in correspondence with the micro-event or set of events that initiates the change.

A company’s principles and processes work together like the human body’s immune system, viewing industrial-age processes and practices as anomalies to be resisted and eliminated.

Managing the digital age is different

Although industrial-age management was financially successful in the 20th century, and still is today for many large companies, in the first two decades of the 21st century, the context changed and another way of managing began to emerge. At first, little serious attention was paid to it. Relevant firms were seen as anomalies or mocked for having a name like a fruit.

However, beginning in 2011, the financial world began to recognize that companies managed in this different way were becoming more financially successful than companies managed with the industrial age.

As the new way became increasingly financially successful, it began a decade-long process of research into what exactly this different way of running an organization was. How did it relate to industrial-age management? That investigation is still ongoing, but the main elements are becoming increasingly clear.

Over time, it has become increasingly apparent that the most successful companies have a different set of beginning that include the objective of co-creating value for customers, a complementary business model that generates profit as a result; team up Y network structures. the indicator wrench is the long-term growth of market capitalization.

It also emerged that these principles are supported by processes which are quite different from those of industrial age management. Leadership now it happens at all levels, not just at the top; strategy it is dynamic, interactive, value creator; innovation improve existing business Y create new businesses; Sales now it’s about making a difference for customers and users; HOUR it is about attracting and enabling talent; operations it’s about exceeding expectations results at lower cost; budget it is driven by strategy; compensation it is increasingly based on the value created. (See Figures 2 and Figure 3)

While no single company observes all of these principles and processes in every detail, the convergence toward this pattern among digital winners is striking.

Because companies run in the new way have surpassed industrial-age companies in their core value (making money), the new way of running a business has been seen as an irresistible evolution of industrial-age management. industrial.

“Transforming the organization to reap the benefits promised by advanced digital technologies,” write London Business School professor Julian Birkinshaw and colleagues. “It is no longer a question of ‘if’ or ‘when’, it is a question of ‘how’”.

Needless to say, people who had dedicated their careers and lives to industrial-age management were unhappy with these developments and vigorously denigrated the new form. For Industrial Age management practitioners and theorists, an alternative to Industrial Age management was almost a logical impossibility.

Two types of management

So, in 2022, we now have two strikingly different ways of running a corporation in a coherent and internally consistent way: industrial-age management and digital-age management.

We can also see that the principles and processes in the two management systems are polar opposites of each other.

The key challenge in transforming an industrial-age company into a digital-age organization is convincing tens, or even hundreds, of thousands of employees that “the way we do things around here” must change almost every day. important aspects.

Given that many of those who have to change their views are highly educated and experienced executives who have been very successful operating in industrial-age mode for decades, it is not surprising that most large companies experience difficulty making the transition. . Some even wonder if transformation is possible.

In Part 2 of this article, I will examine the main paths that successful transformations have followed.

In Part 3, I will examine ways to diagnose progress in completing the transformation journey.