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Why Digital Transformation strategy should be holistic rather piecemeal?

Current Digital Transformation Strategy

Companies have started to focus on running Digital transformation strategy programs in order to improve their competitiveness and market share.
For a long time, most of these transformation programs – be it Digital or Business have focused on productivity improvements – This means taking a better, faster and cheaper approach to how companies work.
In order to improve profitability and margins, the above efforts can boost productivity, transparency, execution and pace of decision making.
At this age, this approach is no longer adequate and sufficient. Digitization and other advanced technologies have disrupted industry after industry, hence companies should not only transform for improving their margins but also to reimagine their current business models.
Companies can redefine their existing business models and improve their bottom line performance at the same time as both these approaches are not mutually exclusive.To achieve this, one requires understanding on where the value is shifting in each industry, identifying opportunities to create value and then taking actions to seize them.

Digital Transformation strategy should focus on redefining the business models and improving margins

  • Companies should focus on transformation initiatives that focus on organization’s performance and in redefining their business portfolio.
  • McKinsey in its book, Strategy beyond the Hockey stick describes the concept of Power curve in companies where it plots the economic profit of top 1000 companies globally. The economic profit is Total profit deducted from the cost of capital.
  • Companies that have the highest economic profit are the ones who were able to achieve high margins and at the same time redefined their business models to introduce new products/technology/capabilities.These companies were at the top end of the Power curve.
  • Successful companies demonstrate higher productivity improvements compared to its peers and at the same time are able to show differentiation by committing to innovation in products/services and business models.
  • These companies were active in resources reallocation where they were able to shift majority of its capital spending across new businesses and markets.They used Programmatic M&A deals to improve their performance by executing atleast one acquisition every year.They were able to invest high amount of capital on new investments, technologies, R&D initiatives and on innovation labs.
  • Companies that were able to make changes in their business portfolio by resorting to active resources reallocation, Programmatic M&A or capital investments were able to achieve higher success rate than companies looking only at performance improvements.

Effect of Industry growth on Digital transformation strategy

  • Industry growth has an effect on the performance of the companies operating in that sector.Companies face a tough headwinds operating in industries where the economic profit is declining. For these companies, improvements in productivity by focusing on cost cutting initiatives will not help them to come out of the slowdown.These companies need to focus on adding new business portfolios that can help it to diversify and focus on high growth initiatives or operate in high growth markets. They can achieve this by using the programmatic M&A approach.
  • For companies operating on industries where the average economic profit is high, the situation becomes different. For these companies, focusing on performance improvements itself will help them to achieve massive gains.As the industry itself is growing fast, the companies in this industry do not need to invest in capital expenditures unless these investments ensure a dramatic improvement in bottom line or in topline.At the same time, if companies focus on adding new business portfolios as well as improving their performance, it will push them to the top of the power curve.
  • The net takeaway is that companies are most successful in their Digital transformation initiatives, when they sequence their moves so that rapid lift of performance improvement provides confidence and leeway for big moves in M&A, capital investments and resources reallocation.When companies are not able to decide on the right business portfolio to compete, then performance improvements alone can help the company to compete until it comes up with a new portfolio strategy.

Assess the readiness of the Digital transformation strategy

Companies need to ask themselves the following questions to assess themselves on how far they have been successful in their Digital transformation initiatives.

Identify value creation opportunities in digital transformation strategy

To identify new business portfolios, companies need to identify value creation opportunities.Then one needs to identify its position in the market on how it can exploit the opportunities. Companies should be open to constantly change their portfolios depending on the structural attractiveness of the market.

Put your money where the digital transformation strategy is

Companies need to reallocate their resources towards high growth portfolios in order to achieve transformative change.

Cannibalize legacy businesses for new Digital models

As digital is disrupting the existing legacy businesses, companies need to decide if they are ready to cannibalize their profitable legacy businesses to move towards digital models.This involves taking a careful approach where legacy assets are managed for cash while digital businesses are nurtured for growth.

Conclusion

  • To be successful in Digital transformation strategy, firms should focus not only on performance improvements but also in redefining their business models to add new business portfolios and offerings.This will improve the topline and bottomline at the same time.
  • Transformative change requires commitment and gaining commitment requires a change story that everyone can embrace.


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