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Digital Transformation - Management Dilemma

14 Nov 2018

Digital Transformation

In digital economy, organisations and leaderships are faced with the challenge of dealing with digital disruption.

With media hype playing at full volume, many long-standing and established organisations, that were not founded on the basis of digital disruption, can only see the dark clouds looming ahead. Leadership and boards of these organisations struggle, sometimes, to positively see their capabilities whilst critically evaluating their strategy and underlying operating models. Market leaders need not be powerless victims of digital disruption.

So, what are the options for these long established organisations? Doing nothing is no longer an option as it is a countdown to being buried in the history books. Growth through adjacent markets is a possible option provided one could spot it and have the capabilities and skills to do it. Successfully re-positioning the core of one’s existing business is another option that board and leadership teams may look at exploring. But for the bravest, who are looking at enduring disruption by using it as an opportunity, the best and most challenging option is finding new ways of solving different problem. Some of us may think that this is weird. After all, disruption is a start-up game. Right? Not any more!

Let us examine these options and see what leadership themes and organisational capabilities are required for these models as a common thread, if any, and what we can learn from organisations that have taken these journeys?

Growth through adjacent markets carries much lower risk and leverages a number of existing capabilities to an organisation’s advantage. Nike does it again and again by leveraging its capabilities in the footwear market to start with. It has successfully exercised adjacent market options multiple times. One of the most striking ones was its entry into one of the most brutal and demanding sports market of golf. It entered by starting a golf footwear range and established a leading position. Then it launched a clothing line endorsed by Tiger Woods, whose $100 million deal in 1996 gave Nike the visibility it needed to get traction in golf apparel and accessories. Nike then started feeding higher margin equipment like golf clubs and drivers. Finally leveraging its global supply and distribution chain, Nike expanded internationally beyond the U.S. market. Amazon also did this successfully and multiple times, first by leveraging its vast network of over 100 fulfillment centres and then by building to an enormous scale with its own data centres combined with world class operating capability. Amazon then used this capability to open Amazon Web Services as a standalone cloud computing service whose success story is very well known to all of us. The key thing for us, is to look at all of these to identify what are the common threads around the repeat performance of these organisations in adjacent markets?

Successfully re-positioning the core of existing business options is all about changing the how? The fundamental problem solved by these organisations does not change. However, the way in which they solved the problem changes, upending respective industry’s economic model and rearranging the competition landscape. A recent example of this is the ReachNow arm of BMW, which first started a car sharing service in select cities in the US and then launched its ride-hailing service in Seattle in early summer this year. Only time will tell whether this is an iterative transformation initiative of BMW, which will be scalable, or one of the many initiatives that fail early to build the foundation of a successful transformation strategy. Back home, a successful SME business example is of Brompton Bicycle. It launched its e-Bikes in 2017 after successfully mastering the scalability and international distribution challenge for a British SME business. When I met Brompton’s CEO Will Butler-Adams early summer this year, he explained to me that Brompton is not a bike company, it is a flexible transport solution provider addressing the huge urban mobility challenges of the 21st century. Empowered with that vision Brompton launched its bike hire scheme Brompton Bike Hire in 2011, which is funded differently from the core business. It now has 40 docks across the UK.  The company employs 230 people (up from 25 in 2002) and has increased its turnover from £1.7 million in 2008 to £32.7 million in 2017. Brompton exports over 70% of its production to international markets. Will states proudly that his goal is not to protect shareholder value, but to protect customer experience. There are many successful large global corporate examples like Adobe, Netflix etc. in this space. This option may look a very simple change to many of us but when we dig deeper, the problem is far more complex than many of us think. Over a period of time, companies develop rules, norms and metrics designed to perpetuate how they create, capture and deliver value. These underlying systems which, when organised into institutional routines become impervious to change, pose the biggest challenge to the leadership driving transformation. The key for leadership is to execute aggressively against these odds.

When it comes to finding a new way to solve a different problem, the leadership execution strategy takes a different dimension. Now both What and How are changing and hence it is important to follow a more prudent path to commercialisation. Leaders do it best by taking more of an iterative, test-and-learn approach. In its fight with retailers like Walmart and Barnes and Noble, Amazon had a different challenge – fighting with established players who were slow to change and not at the cutting edge of technological innovation. With the launch of Amazon Web Services, it entered a competitive landscape where many of its competitors were fast moving entrants. To beat them at their own game was a very different kind of leadership challenge. Existing Amazon capabilities did provide some sound elements but were by no means complete and sufficient. Acquisition of these capabilities from outside and seamlessly integrating them, while perfecting the model, tests the leadership. Balancing the current bread and butter with a future growth engine could be daunting. Successful leaders achieve a fine balance of outsiders and insider veterans in their leadership teams. Outsiders push them in a new direction and veterans help them negotiate bilateral relationship between the moving core and the bright future. Balance is the key trait. If there are too many outsiders, a leader will struggle to successfully interface with the core of the business. Too many insider veterans may result in just playing politics rather than moving ideas forward. Although early days, an example of British business taking this rewarding but risky route is Dyson’s strategy to move into manufacturing of electric cars. Apple has also taken this route time and again to deliver its insular approach to innovation.

So, what is the common thread between these models of transformation? Capability and leadership focus are the key common themes. Ability to exploit the current, acquire and integrate diverse capabilities and relentless pursuit of a clear thought out vision are few of the most common themes underlying these success stories. Disruption is not the monopoly of start-ups. Long standing running businesses can successfully triumph over new digital disrupters with the right leadership and a supporting social and political environment.

Tesla is in the news regularly for its inefficiency to manage its supply chain and deliver scalability for its innovation. Imagine a world where an Audi or Jaguar could shore up their electric vehicle innovation with razor sharp supply and distribution chain management capabilities. The bigger question to ask is will globalisation thrive despite unpredictable political uncertainty and turmoil? I wish I had an answer!

Raj Singh
IoD Berkshire Chairman

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