What strategies and organizations are needed for digital transformation? (Part 2)

The following article comes from the CEIBS Business Review (CEIBS), written by Shi Weilei, Ding Chunchun, and Phil He.

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In the first part, we introduced the theoretical framework of digital transformation strategy and the necessary conditions for transformation. The necessary conditions for digital transformation mainly include technological change, organization and environment. In the following part, we will introduce the internal mechanism of digital transformation, the results, and the digital ecological structure.

The internal mechanism of digital transformation

The internal mechanism of digital transformation refers to the structural relationship and operation mode among its various elements. The structure and function of an organism and their interrelationships, i.e. input and output variables, are usually linked by mechanism. In our research, we found that companies use two main categories of mechanisms to conceive and implement digital transformation: innovation and integration.

Innovation mechanisms involve creating new resources, processes and capabilities for the organization, while integration mechanisms involve integrating and aligning these resources, processes and capabilities with existing ones.

Digital transformation also brings about many challenges, such as the entry of new competitors, the blurring of market boundaries and the emergence of new business models. In this environment, competitive advantage is temporary and fleeting. Therefore, managers must focus on constantly renewing rather than protecting their sources of competitive advantage.

Innovation Mechanism of digital Transformation: Strategy and Operation

The innovation mechanism of digital transformation is embodied in two aspects: strategy and operation. In terms of strategy, digital business strategy is not an upgrade of traditional IT strategy but a new strategic mode integrating IT strategy and business strategy. In terms of operations, the novelty of digital transformation strategy is mainly reflected in digital platform functions and digital innovation.

IT strategy usually focuses on IT management within the enterprise and has little impact on driving business development innovation. This limits the product-centric and customer-centric opportunities offered by new digital technologies that often cross company boundaries. At the strategic level, the digital transformation emphasizes going beyond the conventional view, viewing IT strategy as a function within the company, and recognizing the ubiquity of digital resources in other functional areas such as operations, procurement, supply chain and marketing. At the same time, the digital transformation is consistent with the resource-based strategic perspective in top-level design.

With increasingly complex operational priorities and strategic orientation embedded, organizations must develop and utilize digital capabilities, mainly involving online information, big data analytics, and digital platform capabilities. Building these technologies internally and aiming to create digital innovations, including developing new products, processes or business models, which are critical at the strategic and operational level. It also includes human-computer interaction as a core activity, creating value-added and sustainable synergies between humans and technology.

Integration mechanism of digital transformation

The novelty of the digital transformation integration mechanism is embodied in three aspects: unlocking organization, technological flexibility and TMT coordination. Unlocking organization requires enterprises to develop dynamic capabilities and enhance organizational learning capabilities so that organizations as an organism can develop and enhance their new capabilities. Technological flexibility can be achieved through enhanced collaboration and agile enterprise architecture, which is the future digital integration brought about by new technologies and can help enterprise managers have more flexibility in making critical decisions; TMT collaboration requires cross-functional cooperation and a mature coordination mechanism to give full play to the integrated development capabilities of media, technology and communication and help the digital transformation process become smoother and more operational.

The result of digital transformation

The results of digital transformation usually fall into three categories: new business model, change of organizational structure and change of business model.

New business models usually consist of three：

Firstly, the mode of the buyout is transformed into the mode of the lease. Used to be a sales terminal. The new business model, however, is to rent and pay according to how long or how much you use it. A typical example is cloud-based software systems, where payments change from buyout fees to annual rental fees. Another case is NextEV's battery rental model, in which users can rent batteries by paying a certain fee every month.

Secondly, the product-centric shift to customer-centric. Nowadays, with the popularity of digital tools, enterprises have more ways to understand customers' real needs and customize different products for different customers.

Thirdly, change from an "object" model to a service model. From selling physical goods to selling services. Compared with physical objects, service is a more sustainable process. In the service process, customers' actual use experience is collected for improvement and optimization to improve customer satisfaction.

What is the impact of digitization on the organization of enterprises? This can be broken down into two questions: First, is the traditional hierarchical organizational structure still appropriate for the current digital age? What needs to change? Second, what is the most appropriate organizational structure in the current era?

To answer these two questions, the core consideration is that the market in the digital age changes rapidly, new products and business models emerge endlessly, and various new technologies bring a lot of changes to the working and living modes of consumers and customers.

Are companies agile enough to adapt quickly to these changes, sense and seize opportunities, stay in the market, and even take advantage of these opportunities for rapid growth? So, judging whether an organization is fit for the digital age depends on whether decisions are made quickly enough. Most traditional organizational structures, however, are not very good at this point.

Who should make the decision? Should it be the leadership level or the most experienced front-line staff? In the digital age, companies must have flat management, make decisions quickly and enlarge the decision-making power of front-line employees. The market and customers transform fast, new things emerge in an endless stream, and the lengthy decision-making process will make the development of the company lag behind the market. Enterprises that are successful in digital transformation strategy usually have the following characteristics.

Accelerate decision-making organizationally

Reduce the number of people involved in decisions. Give more responsibility to all employees, whether their organization is simple or complex, to manage themselves and generate more creative ideas and ideas.

From the hierarchical system to a cooperative system

The traditional hierarchical decision-making process is usually top-down. Still, the cooperative system's new "leaderless management mode" enables enterprises to give more autonomy to employees, stimulate their creativity, conduct self-management, and enable all employees to assume the leadership role. Its ultimate purpose is to help enterprises adapt to the market faster, focus more on undertaking tasks, and be problem-solving-oriented to improve enterprise work efficiency.

At the same time, digitization makes the business transformation of enterprises. The main links for a typical manufacturing enterprise are R&D, IT, manufacturing, logistics, marketing, sales, after-sales, human resources, procurement and finance. In most enterprises, the following business changes will occur.

One is to adopt the R&D product development model, from the traditional dependence on the process to becoming more dependent on software. Many people can be called software engineers. Products are more flexible, and products may need to be provided in different forms. Now the product form can be changed through software settings or upgrades. Enterprises pay more attention to continuous quality management after the product is put on the market through collecting data and feedback, continuous iteration, improvement, and optimization, to adapt to more and more use scenarios.

The second is the market and sales model. Compared with the traditional way, digitization produces a new customer relationship. The product becomes an intermediary and carrier of continuous customer service rather than a sales terminal. As a dialogue window between the company and customers, the product can more accurately understand customers' needs, which functions of the product they like or dislike and make more advanced customization of the product. At the same time, more appropriate and complex pricing strategies can be developed based on more accurate customer portraits and customer positioning.

The third is the change of manufacturing mode. The enterprise focuses on building smart factory 4.0, emphasizing modular assembly, reconstructing assembly process and continuous product operation.

Fourth is the change of logistics mode. Enterprises focus on intelligent logistics, making the whole process more transparent and efficient.

Digital ecological structure

A flourishing ecosystem is one in which all participants are satisfied with their location (i.e., one that reaches Pareto equilibrium, at least temporarily). Therefore, coordination involves compatible incentives and motivations and raises the problem of consistent interpretation of activity configuration for customs.

The defining attribute of the partnership mechanism is that they are the participants on which the value proposition depends, whether or not they have a direct connection to the focus firm. The key to digital transformation is to establish a set of the digital ecosystem, which organically connects the necessary conditions, mechanisms and results of transformation to remain invincible in the competition.

Need more help? Check out the Zentao blog. They have more articles on properly running a business, software management, building cross-functional teams, and so much more.

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Author bio :

CEIBS Business Review: Founded in 2008, CEIBS Business Review is an institutional media brand deeply engaged in mainstream business management innovation. From the three dimensions of strategy, organization and talent, we are committed to becoming the "thinking spark" and "decision-making reference" for millions of professional elites and accompanying the long-term progress of managers of large enterprises in China.