In a complex world, digital disruption, AI, and creating a service economy are the keys to unlocking the future. Time to get new keys cut.
Earlier this month, global influencer, researcher and tech evangelist Ray Wang sat down with Tech.Revolution for a series of far-ranging interviews during a four-day sprint through the APAC region.
He touched on the reality of AI, discarded the myths around the new service economy, and moved beyond the hype associated with digital transformation.
In the first of these interviews he discusses digital transformation, makes some sharp observations about the lack of preparedness of many boards around the region, explains why organisations now need to flip their thinking, and shares insights about where to start first…
Tech.Rev: Ray, thank you for joining us at Tech.Revolution. Digital disruption: we know it’s everywhere, but is it hype, or is it real?
Ray Wang: Digital transformation is not overblown!
It’s very important, now more than ever. Let’s look at the stats on this: Since 2000, 52% of the companies in the Fortune 500 have merged, been acquired, gone bankrupt, or fallen off the list. That is a significant number. And in the S&P 500, the average age of a company is now trending to just 15 years old, and we think this will be as young as 12 by 2025. In 1958, when the S&P started, it used to be 60.
That is a remarkable amount of compression in the average age of a company. Companies that do not transform are going away.
What’s more, the transformation that’s happening is a shift in business models and a change in the way we engage with everyone – not just customers and partners, but stakeholders, employees, and even suppliers. That shift is happening right now.
TR: How do you see these changes taking shape inside real companies?
RW: Transformation is really about creating new business models that have not existed before.
These changes are happening because we are blending the lessons from different industries and applying them to others – and that changes the way we look at servicing our customers.
We talk about the shift of selling products to services, but we’re also seeing companies that sell services go to experiences, and companies that are building experiences going to outcomes. And ultimately, what we are delivering is what we call a brand promise.
A great example is when airlines buy jet engines: what they actually buy is engine uptime, not the machine on the wing. In fact, they don’t just pay for uptime, they pay for flight miles that actually occur. That’s an outcome, a very different experience from buying an engine, or even a service.
TR: So how do you describe where we are today? What kind of economy do we now operate in?
RW: We are in that midst of what we call a post-sale, on-demand, attention economy – with post-sale being everything that happens after the sale, on-demand being access, not ownership, attention economy meaning efficiency or capturing my attention.
Companies that have already made this transition are the ones that are innovating, that realize they are going to build new business models. These are organizations led by powerful leaders who understand that they have to make the shift – sometimes despite investor pressure.
TR: Are these the leaders of old, or are they a new breed?
RW: Great question: Traditionally, these leaders come from the ranks of chief digital officers, but what we’re actually seeing is a shift to what we call digitally-enabled CXOs. These are people inside organizations that know they need to create those new business models.
They include HR leaders who are hiring digital artisans, those that can balance right brain-left brain requirements.
CFOs that understand how to fund and create these new business models and then explain them so that investors are calm.
IT directors who understand how to build agile infrastructures, that know how to scale, and meet business requirements.
And we’re talking about CMOs and product managers who understand what products need to be built to support these new types of business models.
All of these digitally enabled CXOs are going to take off, even though we have chief digital officers today leading the charge.
The really important thing is that you won’t have success unless that digital DNA is built inside the organization’s leadership team.
TR: So how do leaders make that transition?
RW: To move from a traditional process-oriented managerial type to where we’re trying to go, we need a design thinking mindset.
Design thinking is a methodology where we unlock solutions to questions that have never been asked before – and those questions are really where that spark of innovation occurs.
Forget thinking outside the box: We are asking organizations to think with what we call a diversity of disciplines. If you can take an artist, an author, an architect, people with different backgrounds, and bring them together to solve an innovation problem, they will view the world differently. Those points of view, that ability to actually take that confluence of points of view, allow us to create new models.
You can’t succeed if you are using the existing processes. You can succeed if you are actually using and applying design thinking to unlock innovation.
TR: What might a new business model look like?
RW: Form must follow function.
You have to get the business model right, then you can apply the technologies.
You cannot solve this until you understand how you build growth.
Let’s take an example. Remember Maslow’s hierarchy of needs? You have that little thing where ego is at the top and safety and security are at the bottom.
In the corporate world there is a similar type of business hierarchy of needs. At the very bottom is regulatory compliance: Don’t get killed, don’t get sued, and don’t get fired.
The next level up is operational efficiency. For every dollar I invest, I’m going to save you two or three.
Next level up is revenue and growth. For every dollar I invest, I’m going to make four or five times that amount.
Then we have strategic differentiation, which is the business model transformation, the digital transformation we’re talking about.
At the highest level is brand. If your company was a person what would you be like? What is your mission?
Every corporation today, every organization, follows this business hierarchy of needs.
And if you follow that business hierarchy of needs, you will fail!
That is why those organizations in the Fortune and S&P lists I mentioned earlier have fallen off those lists.
You have to flip the pyramid if you want to succeed. Start by thinking about what your brand is about.
What is your mission? Why do you exist?
Then figure out what the business model is to support that.
From there you can figure out the products, the services, the insights, the experiences, and the outcomes, to drive that revenue.
What’s happening at the bottom of the old pyramid – at operational efficiency and regulatory compliance – automate the crap out of that! Put that into software, or AI, or outsource it.
You want your best people focused on the organization’s mission, and thinking about how they serve customers every day.
You can’t have transformation if you do not flip that pyramid.
TR: What part does disruption play in transformation?
RW: Digital disruption and digital transformation work hand in hand. Disruption allows organizations to consider how, if they were to start from scratch, they could take out the incumbent. The digital transformation is the process of actually getting there.
When people think about digital transformation, they do tend, often, to simply think they should open an office in Silicon Valley. That never works: The evolution and transformation that are taking place are part of everybody’s business. It should not be a separate group, a separate organization. We’re talking about life and death for organizations: The problems start when organizations try to contain innovation, or those units in the organization working on that innovation, and then fail to bring them back into the organization.
Success in organizations requires the business model to be thought through, the data to be captured, culture and leadership to occur, and a brand new business model to have been thought of. That’s where organizations are succeeding in digital transformation.
And if you don’t have those elements in place, you probably don’t have the ingredients for success.
TR: What about the element of personal risk? How should organizations manage this?
RW: Leaders have to provide a safe environment so that executives know that they can experiment, fail, and have an opportunity to reprove themselves. If you don’t put that cultural shift in there, you won’t have people taking the risks, because they will be worried.
Setting the tone is the most important thing a CEO can do, providing that leadership structure and the cover that’s required. CEOs also have to set the tone with the board and manage up, so that boards understand what actions have been taken, what the risks are going to be, and how they’re going to learn from those failures as well. That board level support is important. CEOs who don’t have that board level support typically do not make that transformation.
TR: There are many different types of digital transformation in the market: what are they, and how can the experiences of others inform organizations’ choices?
RW: We view the market in four types of categories.
The first are companies that look at transformational innovation versus incremental innovation. Those that are proactive are obviously market leaders. They typically innovate faster, and they’re not willing to settle for being second. They’re competitive. They don’t like to share. They believe they’re better than everyone else. They are, frankly, a little arrogant, but they have earned the right to be arrogant. They represent 5% of the world’s companies, they lead their industries, people admire what they do.
The second category are transformational but reactive. They have the capacity to catch up to those market leaders but they operate differently. They’re willing to co-innovate and co-create. They’re willing to share with other organizations and partner to be successful. These organizations are what we call fast followers. They are powerful because they build coalitions, and then take the industry to the next level. They represent 15% of the world’s companies.
The third category are cautious adopters – about 50% of all organizations. They’re the smartest people in the room. They’ve studied every issue. They know exactly what they would need to do – if only they could get started. The problem is they don’t have the guts to make that first move.
Finally, category four, the 30% of organizations we call laggards. Laggards don’t care. They’re like, ‘Hey, our margins are okay. We got two to three per cent growth every year, no one is coming after the space. Nothing is changing. We’ll keep things as status quo.’
Remember my earlier point – 52% of the Fortune 500 merged, acquired, gone bankrupt? That’s everyone from the cautious adopters to the laggards. That’s 80% of most companies. Just 5% – the market leaders, and 15% – the fast followers, win.
TR: What about those first steps in a digital transformation – what should they be?
RW: The first step for success in digital transformation is you need to re-educate your board.
I’m going to say it this way: most of your boards are dumb!
They don’t have any knowledge of what digital is, they don’t understand the risks that are required, they don’t have any context on how technology, and how new business models, come together.
Educate them. Show them what other people have done.
Second, hire digital artisans, the folks that can think differently, the folks that are not afraid to apply design thinking, so that they can innovate, and create, those new models.
Third, bring the organization together. Understand that you have different parts and different business models in your organization – the sustaining ops teams keep the lights on, the incremental innovation folks make things faster, better, and cheaper, and the transformational innovation folks who are crazy but who break the rules to change things in transformational ways.
And in practical terms, don’t wait for all the data to get started on your digital transformation effort: You have other areas – culture, business model design, and leadership – to address. Get that in place and then start asking the questions about what data you need – they determine the process, the flow, and the people you connect with.
If you’re waiting for perfect data, you will never get started.
If you need to start quickly (and I think you do!) start with going as a service. That gives you a place and pilot that you can kind of look at, succeed, understand what your team members have, and how they’re going to be successful.
Understand how your organization responds to change.
Once you have that in place, then you can start thinking and placing the foundation for digital transformation. Then you can start thinking about how to accelerate those efforts through AI.
R “Ray” Wang is the Principal Analyst, Founder, and Chairman of Silicon Valley based Constellation Research, Inc. He’s the author of the popular business strategy and technology blog “A Software Insider’s Point of View”, and of the best selling book Disrupting Digital Business, published by Harvard Business Review Press.