Leading digital transformation: what you must know

It’s hard to escape talk of digital transformation right now, but you might still be left wondering what exactly it is – other than a buzzword – and how it applies to you. Let’s start with the basics: digital transformation is not just about your IT systems, and it’s definitely not just about sexy tech companies. Manufacturing and commodities are equally able to capitalise on the potential of digital to improve everything they do.

One of the examples I teach on the Leading Digital Transformation programme at London Business School is Enel, the Italian electricity supplier. Within a traditional industry their digital transformation has made them the leading utility company in Europe. They looked at all of their different activities: how they transact with their customers, using smart meters, changing the billing process. Enel created “digital twins”, digital models of their factories that enable them to try out new technologies to make them more efficient before putting them in place in the physical infrastructure. They use virtual reality and augmented reality to help their technicians do maintenance. They have broken up their central IT function and put it into the different divisions to make them more responsive to customer needs.

Beyond this, they are now looking at their business model so they will be at the forefront of the change: at present they generate power and that power is then distributed; in the future, as we potentially have electric generation in our homes from solar power, contributing to the grid. Enel also looked at how they worked inside the company – they were very hierarchical and now using agile methods they are working out how to make the decision-making more intuitive and bottom-up.

What can business leaders learn from pioneers like Enel, and what principles apply across the board? I suggest you keep these five points in mind:

It is your job to lead the transformation

This is very much your problem – it is not something the Chief Information Officer (CIO) or Chief Digital Officer (CDO) can do for you. To be a top executive you need to own this. Every company needs to think about digital transformation, even if they’re not a tech company, because it can transform everything from creating better products to making processes more efficient to boosting customer experience. Your starting point has to be an end-to-end approach. You can’t just delegate your digital marketing strategy, for example: you don’t need to become an expert but you do need to get a couple of levels deeper to understand some of the tech – what does search engine optimisation actually look like, what might ChatGPT offer?

You don’t have to jump in feet-first

Every generation of technology gets faster and better – just look at the media industry, newspapers, education, music. But digital transformation can take many decades, and the urgency varies between industries. History is littered with executives saying, “I need to act quickly.” Famously, Time Warner merged with AOL as an early move into digital technology and lost tens of billions in shareholder value because they bought in at an inflated price. Rupert Murdoch bought Delphi (one of the early internet service providers) in 1993 and wrote it off a few years later, likewise MySpace in 2005. Be both paranoid and pragmatic – the risks of moving too quickly are as great as the risks of moving too late. Ignore the need to transform at your peril but don’t make decisions too hastily. Very few companies have got it wrong by taking a measured approach.

Digital is not a panacea

Digital can help you do better the things you are already doing or should be doing anyway. From customer service to the way you make money, digital technology does open up new possibilities for doing things differently but some of the basic truths remain unchanged. For example, the basics of being a book publisher – being able to spot exciting new authors and thinking of how to position their books for a mass audience – haven’t changed at all. What has changed dramatically is the distribution to market and the way in which a company like Penguin Random House can retain some bargaining power against the giant that is Amazon. The strategy has not changed, a publisher still sources high-quality content, but the rest has had to be completely re-thought.

This isn’t something you’ll do once

Tech keeps adapting and you will have to continually evolve as well. Crucially, you need an enterprise mindset, looking for opportunities across your entire organisation. How are you using cloud infrastructure, and what are your mission-critical databases? Take a step back: you need a strategic view. Put all your ad-hoc, piecemeal developments on hold while you focus on getting the foundations right. Adopt a corporate mindset and to consider what your customer stands to gain. Iterative development is crucial here. You will have to experiment with new business models, some of which won’t work.

As a leader you must manage expectations

As with any change programme, the necessity is never as obvious to other people as you’d like to think. People will inevitably ask, “Have we finished transforming now? Are we there yet?” And the answer will always be “No, and don’t expect it to get quiet any time soon”. You need at least a five-year view and you need to get your stakeholders to understand things will get worse before they get better. The challenge you face is that the speed at which users change their behaviours and new entrants come in is completely out of your control. You are not in control of your industry’s destiny.

Incumbents take heart

Finally, some reasons for optimism. It’s easy to get the impression that the Big Tech companies are taking over everywhere – but in fact there are sectors such as professional services that remain largely untouched, and may continue to be so. And as I’ve argued elsewhere, the established players are now very much fighting back. The Nokia and Blockbuster stories – where the incumbents got killed off – are dramatic, but they are the exceptions.

For the last 15 years we’ve lived in an era of free money where private equity investors were looking for anything exciting that might give them a return, because money made no return in the bank. So we saw many startup companies coming into industries with no requirement that they make money at all. Using our industry as an example, a lot of edtech companies were ridiculously overvalued on the stock market. They were competing in the same market as us, but eventually they floundered because of their high customer acquisition costs.

It’s also worth noting that you don’t need to be at the centre of your ecosystem, or to control it. In the autonomous driving sector, for example, the only company that’s really making money at the moment is Mobileye, an Israeli company owned by Intel. Mobileye makes the smart cameras that go on your windscreen, along with the software that analyses location data. If you have a really good product you have bargaining power and can make a fortune.

Incumbents can take heart from knowing that others are reasserting their strengths and power, falling back on their timeless capabilities and purpose, future-proofing themselves and finding new customers.