Digital transformation is still a blurry topic of varied definitions, diverse mindsets but a wealth of potential. We define digital transformation as organizational change by applying new digital technologies to enable innovation and next business models to gain or regain the competitive edge.
This view is very similar to how many small and midsize businesses perceive it – namely as a chance to adjust their processes and renew their customer experience. Some are even innovating their operating model or creating entirely new business models.
In a recent study “Digitizing IT: Catalysts for Growth,” The Economist Intelligence Unit (EIU) revealed that 63% of senior executives from companies with annual revenue between US$250 million and US$500 million consider digital transformation to be the highest or relatively high in strategic priority. Of the top digital initiatives undertaken in the last three years, three were customer- and market-focused:
- Addition of new customer-facing digital channels (61%)
- Launch of new products or services made possible by digital technology (63%)
- Promotion of digital collaboration among employees (57%)
- Prioritization of digital marketing over traditional forms (50%)
- Application of digital technology to improve internal operations (41%)
From a company-wide leadership perspective, 49% believe their IT department should lead (29%) – or, at least, take an active role (20%) – in managing business model change enabled by digital technology. Surprisingly, though, only 19% see management of business model change as the most critical success factor of their organization’s digital initiatives.
True digital transformation challenges the status quo
There are many cases of digitalization initiatives where existing processes are being digitized, but only few are adding game-changing customer value. In fact, only 17% of respondents surveyed in the EIU study consider their digital initiatives over the last three years to be highly effective. It appears that many small and midsize businesses make the mistake of just automating what they have instead of redefining current business processes – independently whether or not they are strategic for new revenue streams or will likely cease in a couple of years.
Good examples for midsize companies, which have effectively approached digitalization, are still relatively low in numbers. At a recent CIO Summit, I had an inspiring conversion with Peter Gantner, CIO of precision tool manufacturer MAPAL Group. MAPAL is one such hidden champion, which you find many across Germany. They are the leading supplier for the machining of cubic parts with 4,800 employees worldwide and a turnover of 540 million euro. Like many c-parts suppliers, two years ago, they recognized the challenge: how can they remain relevant in the long-term when the digital qualities of their products become increasingly important, at least as important as their physical qualities? Moreover, how to ensure the long-term continuance of the company?
That was the time, when MAPAL senior management took the decision to approach digital transformation holistically based on the three work-streams Digital Lean, Digital Twin, and Digital Services:
First, Digital Lean is geared towards efficiency gains due to digitalization and automation of internal processes. This work stream also includes all effort to secure interconnectedness and consistency of data for significant data throughput. Existing lean programs have been integrated into this work stream as well allowing high efficiency results.
Secondly, Digital Twin is about creating value-add and differentiation effectively. MAPAL created a digital twin of the real work piece, created and maintained like the real one. This means aggregating all relevant data for technical description, handling, commercial and life cycle data, to evolve MAPAL to a data content provider on top of their traditional hardware business. The digital twin is the heart of the companies’ digitalization program significantly improving the production process. If the machine knows the ideal cutting speed of a tool, the workflow can be optimized towards cutting performance. If the machine is aware of the cycles a tool has already performed, the remaining operating distance can be predicted. The digital twin becomes the prerequisite to meet the requirements of external partners and process contributors.
Thirdly, Digital Services focuses the development and implementation of new business services leveraging a platform business model. With the help of SAP’s HANA Cloud platform, MAPAL developed an open, cloud-based approach for the efficient handling of their tools and tool-related digital services by building on the vast and increasing amount of available master, process, and inventory data coming from every of their products. For example, the entire lifecycle of a fleet of tools can be tracked and optimized for performance via mobile devices allowing to regrind the tool at the appropriate point in time. Production site managers can analyze how the local production approach differs from other company sites globally and what can be learned from it, e.g. which cuts lead to the lower tool wear in China’s sites versus the ones in Brazil. As a result, best practices can be productized, shared and rolled-out across the globe –with real-time machine data.
Key findings of the MAPAL approach
There are many lessons we can learn from MAPAL’s digital transformation approach. First, technology investments should always enable the reimagination of business processes, operations, and business models. Second, strategies may call for better access to real-time, accurate insights; actionable decision-making; or streamlined processes; but ultimately, a scalable, reliable infrastructure is needed to power it all.
Digital transformation does not mean that a company must replace existing business operations entirely. Such a decision will only disrupt cash flow and upset customers. Instead, organizations must assess how emerging opportunities and risks can be addressed through agility, technology-driven intelligence, and ambitious innovation to pave the way to untapped incremental revenue streams and additional competitive advantage.
Based on my learnings from more than 150 CxO meetings on digital transformation per year, I can recognize a successful leadership pattern for small-medium companies with the ambition to remain (hidden) champions over the long term. Separating digital leaders from digital laggards is the combination of making a strategic bet and executing with determination.
The changing role of the CIO
These challenges posed by digital transformation are opening the door for IT leaders to prove what they have known all along: Technology is the enabler, not the motivator. Moreover, as executives scramble to meet the demands of an increasingly digital present and future, the CIO’s value becomes even more apparent. According to the EIU survey, 44% of respondents cite that the ideal role for IT is to help devise and implement a digital transformation strategy.
The sole purpose of IT can no longer reside in the development, implementation, and maintenance of technology. If so, the CIO and his team would last in a pure back office role while others take the lead for the companies’ digital journey. Nowadays every company literally becomes a software or technology company, ideally equipped with an elastic cloud infrastructure and innovative solutions on top of platforms. By combining so generated technology expertise with the business side of the executive table, CIOs can provide valuable insights and ideas that can enable the entire executive team map the best course for revenue generation and proactive, disruptive innovation.
IT leaders must embrace entrepreneurial and transformational leadership. By embracing this new, enriched role, CIOs have a unique reason to rise into prominence as they spearhead competitive innovation, create a unique value proposition for the brand, and set a clear road map that delivers the full promise of digital transformation.
This blog also appeared on D!gitalist.