In a brilliant new article, Columbia University strategic management scholar Rita McGrath explains why “You can’t avoid the digital dimension of your business, even if you want to.”
The need is becoming urgent. The gains from digital are well-known. Yet despite huge investments in digital transformations, most firms are disappointed with the benefits they are generating. This in turn is leading to a chorus of digital-deniers that maybe digital doesn’t matter after all. Thus:
· In November 2021, the Financial Times declared that no “dramatic change in the way management is organized” has materialized. “A manager from 2011, or 1991, or even, frankly, 1961” would still feel right at home in the office of 2021.
· In January 2022, Harvard Business Review declared that digital disruption is “less destructive than you might think” and designated “three digital myths”: that every sector is under threat, that disruption happens quickly and is accelerating, and that established firms are struggling to adapt. Many businesses were said to be doing well without digital.
· Now, we have Roger Martin’s book, A New Way To Think (HBRP, May 2022); here, we learn that “the new way to think” isn’t about digital: in all fourteen management dimensions that the book covers, the overwhelming focus is on physical products, not digital.
An antidote to this quaintly anachronistic thinking comes from Columbia business school professor Rita McGrath with her incisive article “You can’t avoid the digital dimension of your business, even if you wanted to.”
“Asking what your digital strategy is today,” says McGrath, “is a lot like asking what your electricity strategy was at the turn of the last century. Seems absurd. Yet both questions reflect how a shift in an underlying technology fundamentally changes what is possible.”
She explains how the electrification of factories became possible in the 1880s. Yet by 1900, less than 5% of factories had been converted to electricity. In part, that was because the shift from a giant steam engine with a crankshaft to many small electric machines required not only heavy investment but also re-thinking how a factory functioned. Eventually the change happened, but it took a long time. The marketplace forced the change. The old steam-driven factories couldn’t compete with the new electric factories.
“This story,” says McGrath, “is analogous to where we are with digital today—while companies that have embraced [digital] are reaping massive rewards, the vast majority [of firms] are still lumbering along with their equivalent of the steam engine.”
McGrath says that we need to understand “the revolutionary qualities of digital goods,” including:
· the ability to make “virtually unlimited perfect copies of the original.”
· “unlimited supply means your ability to extract a price for that good drops dramatically.”
· “value for the customer shifts from possessing the physical thing to doing something desirable with it.”
· the “ability to combine and recombine digital goods: is much easier.
· The “ease of experimentation is much greater: the costs and risk are much lower.”
Going digital means “that you have added a layer of information and connectivity to it.”
When firms take advantage of these capabilities, they can move more quickly, operate more efficiently, mobilize more resources, attract more talent, use it more effectively, win over customers more readily, and enjoy more elevated market capitalizations. Accordingly, the most successful exponents of digital management, have become the most valuable firms on the planet, while former giants, like IBM and GE, which continued with industrial-era thinking, went into steep decline.
Firms can look at digital either as an opportunity or a problem. They are much more likely to succeed, says McGrath, “if they take an opportunity lens to the digital revolution.“
“Newspapers, for instance, generally viewed the advent of digital as a threat, hived off their operations into a “digital division,” left their basic operations unchanged and were ultimately unsuccessful at holding back the digital tide.”
McGrath cites the success story of Domino’s Pizza. In 2009, the company began to aggressively invest in its digital strategy of “making ordering as easy as possible.” A key decision concerned digital architecture: to insist all franchise operators adopt a single data system. In many other companies, franchisees used their own systems, thereby undermining the potential of a digital architecture by segmenting data in separate systems. As a result at Domino’s, online sales grew from 20% in 2009 to 65% by 2018, and Domino’s became the world’s dominant pizza maker.
“Digital really is revolutionary,” says McGrath, “not evolutionary.” It means re-imagining how your business works. To read McGrath’s guidelines for developing a digital-friendly strategy, go here.
And read also:
Why Digital Transformations Are Failing
Six Steps CEOs Must Take To Save Their Digital Transformation