How should reinventing your business work in the digital age?

Article by McKinsey & Company:Peter Dahlstrm, Liz Ericson, Somesh Khanna, Jrgen Meffert, compiled by Sims Line

When Madonna was warmly embraced in the early 1980s, there wasn't any reason to doubt that she had an extra 15 minutes of fame. But three decades since the release of her debut album, she's managed to maintain a favorable media image. Her secret? "Madonna is the perfect example of reinvention." Says famed talent scout Janice Dickinson. And Madonna's sixth concert is aptly titled "Reinvention."

Madonna may seem an unlikely touchstone for modern business; but her ability to adapt to new trends offers an important lesson for companies struggling with the digital revolution. In the digital age, change trumps stagnation. Companies must be open to radical change and find new and important sources of sustainable revenue.

Adapting or building new businesses outside of the core business can provide real benefits, and in many cases is a critical first step in digital transformation. But if these initiatives don't trigger deeper changes in the core business and fail to do what it takes to reconstruct a true model of corporate profitability, the benefits may be too short-lived and insignificant to help the business move forward at a steady pace.

Simply putting an existing product line on an e-commerce site or digitizing the customer experience is not a digital makeover; reinvention is a rethinking of the business itself. Companies need to ask fundamental questions such as, "Are we a manufacturer, or are we a company that enables our customers to perform tasks using our devices anytime, anywhere?" If it's the latter, then logistics and service operations may become more important than the factory, and Netflix's evolution from a DVD renter to its current role as an entertainment content provider is a well-known example of continuous change.

The word "reinvention" implies enough commitment. We know from our Digital Quotient research that digital success requires investments of sufficient scale to be closely aligned with strategy. At the same time, digital leaders need to be able to take high risks and make bold decisions. But organizations don't have to wait long to realize these benefits, as we've found that 60 to 80 percent of overall improvement goals can be achieved in three years, while laying the foundation for future growth.

It's worth emphasizing that not all of the fundamental changes required by digital innovation require a "complete and total" approach. For example, an engine parts company will still make engine parts after a digital transformation, but it may do so in a more agile and analytical way, or the company may be able to leverage existing assets to open up new lines of business. Apple has accomplished a reinvention from computer maker to music and lifestyle brand through its iPhone and iTunes ecosystem, but it also continues to make production computers. john Deere has created a range of online services for farmers, while also continuing to sell tractors and farm equipment.

Transformation encompasses many elements, from redesigning the end-to-end journey and embedding process analytics in the development of technology platforms, and they require a myriad of capabilities, from artificial intelligence and agile operations to databases, and from cloud architecture to new talent. Many of the elements have been extensively described, each of which can require significant execution time. However, the integrated view that is often overlooked is how an organization sets the right expectations, builds the right elements of transformation, and conducts the change journey in a systematic and comprehensive way.

What the "core" is and why it needs to change

"Think of your core muscles as the link at the center of the chain that connects your upper and lower body." This quote comes from a Harvard Medical School guide on how to stay in shape. The authors define the core as the central muscle that helps the body maintain its strength, balance and overall health.

That's the essence of what we're talking about when we talk about changing the core of a business - the set of functions that allow the entire business to run efficiently. At the heart of a company is a strategic value proposition enabled by people, processes and technology*** together. These elements are intrinsic, and any transformation that doesn't address them will ultimately fail because the legacy organization will inevitably pull it back to its old path.

Value proposition: any digital transformation must address the value that the company delivers to its customers, whether existing or new, through its products or services. This needs to be based on a clear strategy that expresses the creation, transfer or destruction of value. The key to obtaining this is to identify and evaluate the most important existing assets and to understand what customers actually want. Practicing this can be quite challenging, for example, Amazon originally provided value not by selling books online, but by providing convenience and a wealth of choices that had never existed before, and understanding the true source of its value has allowed Amazon to expand beyond books.

Talent: Of course, talent is important, but reinvention is not just about hiring a chief transformation officer or a few designers, it should be based on a clear understanding of the skills needed at all levels of the business. It requires investment in building relevant digital capabilities that are adapted to the strategy and keep pace with changes in the way customers think and buy. At the same time recruitment should be targeted and linked to the ability to actually drive financial performance.

Making talent flourish requires digitally driven cultures, such as customer-centric and project-based, with a bias toward speed and continuous learning. In fact, cultural and organizational problems can lead to up to 85 percent waste. Ensuring a new culture requires reformulating programs that reward and encourage new behaviors, such as performance management, promotion criteria and incentive systems.

Processes: Redefining the mechanisms for making decisions and accomplishing tasks is what makes the digital machine work. For example, digitizing or automating supply chains, information-intensive processes, and building new capabilities such as robotic process automation or advanced analytics can quickly increase the speed at which a business runs and reduce costs by up to 90 percent.

One trap is to focus on simplifying existing digital processes rather than really rethinking how to change them. Often the most effective way to address this is to identify the customer journeys that are most important to the business and then map the touchpoints, processes and functionality needed to deliver them, regardless of what already exists. Re-engineering processes requires establishing governance and decision-making authority to provide clarity and accountability, and embedding advanced analytics, automation and machine learning capabilities.

Technology: while digital innovation is more than just a technology overhaul, technology is also critical. Leaders need to ensure that every investment in information systems responds to a clear and strong business need, and that there is no 'technology for technology's sake'. They need to be clear about how best to work within the ecosystem of partners and vendors, evaluate which systems to keep, and make critical decisions about how to help legacy technologies work in the digital world.

Rebranding requires a proven systems approach

Because of its complexity, most rebrands don't meet their original objectives. In our experience, leveraging digital for full value requires a carefully coordinated approach with four "Ds": discovering your digital goals (based on your own values), designing a customer experience journey designed to be profitable, enabling change through a partner ecosystem, and mitigating risk through thoughtful path design.

While these practices may seem self-evident, most companies fail to fully deliver in their execution. There are many reasons for this, but the most common is that the business does not have enough of either the required capabilities or the four "Ds" to drive a transformation program. A company may invest tens of millions of dollars to "discover" important insights, but if the "delivery" strategy is inadequate, those insights are meaningless.

Discovery: Shaping digital goals

At this stage, companies clearly identify where value is being created and destroyed as the basis for a clear business strategy. This involves analyzing their business, departments, customer behavioral trends, and economics to identify and quantify threats and opportunities, and the scanning of these digital opportunities should be sequenced by short- and long-term value.

At the same time, companies need to conduct an in-depth analysis of their digital capabilities and resources, and the ability to build a foundation for other key processes and activities, such as IT modularization and agile technology platforms, is particularly important. And regarding the leadership level, our research shows that mid-level management talent is key to a company's digital success.

After understanding the business, companies decide on their strategic goals, whether it's to reorganize their existing business or to undertake some more radical activities, such as entering new markets or innovating their business models. They developed a detailed roadmap to address capability gaps, recruit, develop, motivate and retain the necessary talent, with the goal of developing a business case for change based on facts.

Design: creating breakthrough experiences

In reality, acting with digital goals in mind can be daunting. We've found that the most successful companies focus first on the customer journeys that matter most, and then design and build differentiated customer experiences from there. These companies define each journey through design thinking and skills, especially pain points and potential missed touchpoints. The change team can then prototype new interfaces as they go along. At this stage, companies must avoid getting bogged down in endless planning, and instead build prototypes quickly to turn concepts into the smallest viable product that can be brought to market, tested, and iterated on before scaling.

This phase also includes establishing rapid delivery methods and IT infrastructure, combining legacy systems with microservices, and modular plug-and-play elements. While agile IT systems have become the standard, more digital businesses are embracing DevOps (integrated development and operations teams) and continuous delivery so that software can be quickly developed, tested and deployed to consumers and end users.

On the organizational side, cross-functional collaboration, rapid decision-making and iterative development fluidity mean that companies should focus on teamwork enablers. This includes effective metrics and scorecards to assess digital performance and incentive structures that drive the right behaviors, mindset and results.

The CDO of a multinational pharmaceutical company addressed this issue by creating a "digital council" dedicated to restructuring the organization to enable transformational change across all lines of business. The program is credited with boosting sales by 12 percent.

Delivery: Build a network of partners that can rapidly scale your ambitions

The speed and scale required to realize innovation increasingly requires an ecosystem of external teams, partners, suppliers and customers. In practice, this means partnering with platformers, deliverers, and others who can quickly provide specific skills and capabilities.

This reality makes managing ecosystems an important capability, especially understanding how to find and increase matches. For example, one national publisher created a marketplace for its technology and a range of retailers by partnering with a telecom company to create a digital offer, an approach that allowed it to penetrate the marketplace quickly and increase revenues by 78 percent in one year.

As companies drive digital transformation across their organizations, the critical role of experienced change managers comes into focus. These leaders not only act as "air traffic controllers" in many ways, but also have the business authority and skills to solve real business problems. They must accelerate change and drive accountability across the business. Change leaders will oversee the entire enterprise, testing opportunities in areas such as organizational structure, data governance, talent acquisition, performance management, and IT systems, and making decisions that balance efficiency and speed to achieve goals.

The "Agile Coach" is an example of this role. This person is a strong communicator and influencer, can develop and roll out plans to support agile processes across the organization, and can implement KPIs and metrics to track progress.

Risk mitigation: Structuring processes to minimize risk

One of the most common reasons for digital change failures is that the organization gets "change fatigue" and funding starts to dry up. To mitigate this risk, the focus is on winning quickly, not only to create growth momentum, but also to save costs that can be reinvested in the next round of transformation. For example, one global e-tailer focused on quick wins (such as increasing conversion rates) and generated $350 million in new revenue in just five months, funding more change and delivering tangible results that further fueled change fatigue.

Technology risks, especially cybersecurity, will also attract more attention as companies increasingly digitize their operations and processes. Organizations can mitigate these risks by automating software testing, building systems that can be controlled to fail in minutes, and creating environments that can be fixed without putting critical parts of the business at risk. Senior executives especially need to focus on the structural and organizational issues - from establishing cybersecurity for all business functions to changing user behavior - that impede the ability to manage cyber risk.