Jan 27 2015

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Q&A on Digital Transformation

QA2With any innovation cycle, there will always be variances in adoption rates. Commonly referred to as the “early adopters,” this group is eager to learn what is new, try it and then communicate their findings. At the other end of the spectrum are the “laggards,” who really are not interested in change, and will defer or avoid it at all costs.

A digital transformation is now underway, which is impacting the way we live our lives, engage socially, listen to our music and make our products. Some industrial companies have embraced this technology as an opportunity for competitive advantage – others believe that new digital technologies are best suited to consumer-oriented companies.

I had an opportunity to discuss this topic with Peter Conway, Principal at Strategy& (formerly Booz & Company). Here are the questions and answers from that interaction:

GB: Peter, how would you gauge the level of maturity of digital transformation amongst industrial companies? What level of adoption would you say we are at?

PC: “Industrial companies” is a very broad category. To keep it simple, let’s define the space as firms which define themselves as “industrial” – while noting that the most quintessential “digital” firms – E.g., Amazon – now derive a lot of value by their back-office – which in some cases looks like a distribution firm like we’d see across industrials. Based on that definition, the level of adoption varies, by both sub-industry and of course firm by firm as well.

That said, I would say that we are at a “3” on a scale of 1 to 10, with “1” being defined as a company which is completely disinterested in the potential of DIGITAL – writ large – and 10 being a firm where every member of the team thinks “what could I do with digital technologies to make this product, process, or customer interaction better?” By every member of the team, I mean the CEO implementing a new ERP, the Director of Manufacturing testing “Internet of Things” applications across her factory floor, and the new team member in marketing intuiting and developing a new customer interface that drives more orders.

GB: Given this level of adoption, what would you say are the reasons for these organizations to have not invested as much in transforming their operations to being more digital?

PC: Costs of “cutting-edge digital platforms” – be they ERP, Internet of Things, web tools, etc. are not where they need to be, particularly for small businesses – but this will change, either because small firms are acquired and transformed by their buyers, who can afford the cutting edge, or because costs will fall through innovation driven, in part, by small manufacturing firms themselves. More importantly, however, perceptions are not where they need to be. That Dir. of MFG I mentioned earlier is under a lot of day-to-day, traditional pressures – safety, production volumes, and quality – all of which can be handled in the old ways. It takes clear effort by a firm’s leadership to attract and retain the type of talent that can do their 9-5 job by 3PM so that they can be an agent of digital change the last 20% of the day. Most critically, to make the often many successive leaps – some large, some small – to “digital” requires that several challenging things all be true at the same time. Each person be aware of numerous technologies that could help him or her in the myriad daily tasks, recognize the cost benefit tradeoff of each, and based on those results, create a prioritized detailed roadmap to re-conceive and re-conform the organization as a whole … one deliberate step at a time.

This is why transformations, digital or otherwise, are extremely difficult to get right. Those who know the old technologies, processes, and customs are rarely well-versed in new methods, what those methods might cost vis-à-vis their benefits, how they impact other stakeholders within the organization (e.g. IT, HR, Finance) Those who could help lay out the case for change and drive the organization – consultants, internal cross-functional teams, etc. – need to be both visionary and capable of weighing subtle trade-offs and coming up with a workable answer; this is a pair of skills that rarely occur together in nature. Finally, in general, those members of the team who might naturally be called upon to most seamlessly imagine the digital future of their current industrial home are those with the least formal experience and decision rights – the young. While there are certainly interesting examples of youth-led skunkworks tasked by top management to drive radical change – Iacocca’s team at Chrysler in early ’80, Toyota’s e-commerce team in 1996, because of the organizational headwinds such teams face, their success is often limited.

GB: What would you say are the most compelling reasons why an industrial company might invest in transforming their operations to be more digital?

PC: Companies MUST go digital to survive. What that means differs by firm, in the products and culture unique to it, by market, in the strategies and tactics of both its producers and buyers in which that firm competes.

This shift to a more digital-centric model is irreversible and inevitable and will result in significant disruption to traditional industrial markets and companies. A number of companies now offer proprietary digital platforms to their customers. These systems can take huge amounts of data that are thrown off by, say, a dual-cycle gas turbine, and then aggregate and translate it into the key performance metrics on the operations of the system that their customers need to maximize performance of that very complex, very expensive piece of machinery.

Another example is Tesla, which is upending the automotive market in many ways. Tesla’s cars are on the forefront of the industry in how they receive data from their maker, and act on that instruction, upgrading entertainment, engine, and safety capabilities in real time. For example, E.g. Tesla pushed a safety software update to raise all Model S cars 1″ on highways – something no other automaker can do yet. This saves them the cost of bringing all the cars into the dealer for the update, and saves their customers the time required to make the trip into the dealership. It’s a virtuous cycle of cost reduction and customer satisfaction.

GB: How much of this transformation can be attributed to internal pressures (i.e. cost cutting, process improvement, etc.) vs. external pressures (i.e. customer expectations, feature sets of new products, etc.)?

PC: The truth is that both are powerful drivers.

On the internal side, look at the cost reductions, in multiple areas, that can be achieved with the move to cloud computing.

Yet the product front – a type of external focus – is replete with examples of digital-driven innovation. “Nest” home thermostats, Fitbit and other health applications are already in the market. Emerging systems for setting insurance rates based on health and driving behavior, potential connected-car traffic management systems give indications of how world-changing this will be – and industrial companies will be delivering the devices and infrastructure that makes it all possible.

GB: What are the key benefits industrial companies should be focusing on when evaluating an investment in digital transformation? In other words, where is the big ROI for such a decision?

PC: Executives should focus on how a digital transformation will position their firm to compete in the market. Does this initiative yield an outcome that is necessary to keep you ahead of the competition – or, from being left behind? There are analogues to this in ERP implementations, for example. Historically, those were expensive and hard to justify on an ROI basis – because what is the ROI of good information on your business? But it still made sense to do it, because once a business reaches a certain scale, you need to invest to stay on top of the information you need to run that business.

Digital is similar. Long-term, you are focusing on profits. In the shorter term, you are focusing on increasing the collection, distribution, and use of data to drive better decisions for your customers or your own firm. On the potential for integrated solutions that include hardware and software components to drive higher bundled margins. On boosting efficiency and cutting costs by getting to know customers more intimately by providing new digital services experiences to delight them.

GB: Lastly, what are some of the hidden benefits that manufacturers might not be fully considering when evaluating this decision to transform their operations to be more digitally-focused?

PC: The greatest hidden benefit is that your company will be empowered by the realization that it can draw on “an expert at every desk.” How so? Because every white-collar worker is now a digital firm of sorts. S/he must decide whether they can afford the latest technology – “do I get the new iPhone (thanks to BYOD) or should I hold off another year until the company will pay for it and save the cost? Do I buy a smaller car and spend the extra on a home video meeting set-up (thanks to work from home)? That would allow me to visit my six sites across the US to a greater degree than I can from the two “boots on the ground” visits my budget will allow me.”


Gordon can be found on Google+

Permanent link to this article: http://www.apriso.com/blog/2015/01/qa-on-digital-transformation/

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