Digital transformation strategy can lead you to the Innovation theatre
I have witnessed a lot of digital transformation projects in many companies. Most of this projects have been delivered by solid consulting houses. All was done and described correct. The question is why corporates digital transformations fail so often, actually in more than 70–90% of cases? This article is my thinking towards this fact.
Imagine you work for a company, which decided to start a digital transformation. First thing is to rewrite a strategy, since digital strategy will be a part of it. Which is right. How one can do it? In general what I write in the article below can be applied for the complete Strategy and not necessarily covers only Digital strategy. One of the ways to write a good Strategy is called “Playing to win”.
Update: I recently found a nice paper from HBR, which coincides a lot, with what I written here (found this paper after wrote my one): https://hbr.org/2019/10/why-companies-do-innovation-theater-instead-of-actual-innovation
Digital transformation. Playing to win.
When I worked in Deloitte, in Management Consulting, I became familiar with many different approaches how to write company Strategy. One of the most convincing ways to do that was the concept called “Playing to win”. This book perfectly describes how different strategy elements work together. Basically, to make it really short, the Strategy of the firm consists of five basic blocks. Firm Ambition, Where to play, How to win, Capabilities and Management Systems. Each block is addressed in a recurrent manner to be aligned with the previous ones. Making choices and aligning these choices one another — that is the real exercise of a real strategy team.
The complexity of the scheme above is in the recurrence. E.g. the deeper you go in your “Playing to win” Strategy, you may find there are no Capabilities to compete with your competitors, or no Management tools to support the “How to win”. So the exercise is a pure madness which only “real believers” can afford, but, if managed and done properly, is logically perfect document in all senses and meanings. Now imagine all done and designed, Strategy is accepted by the board, CEO and CFO are appointed, compensations defined, Risk level is defined and managed by the Board. Paradise in terms governance. Then execution of the new digital transformation strategy starts.
Learning 1. Good Strategy — is the document, working recurrently for all five elements. No capabilities — no ambition, no management tools — no competitive advantages etc. These are connected things.
Next step is start building new products and launch sales.
Companies can use different approaches to launch new products and services to deliver the goals of the digital strategy. One can start an accelerator / venture studio / garage and many other formations. I will not stop at this point, since there are tons of materials which describe how this can be done. Imagine, we have one of these above. This new structure starts building new products and services. Time to sell these new products and services.
Company hires / retrains Sales people because it needs to deliver sales targets written in the Digital strategy. Basically, there is a new strategy, which has some revenue targets at different markets and sales department together with marketing department need to know how to achieve that, assuming operations will manage.The tricky part is that there are two cohorts of sales: lucky by definition and unlucky by definition. First, sell existing commodity products to existing customers (products from the “old strategy”), in case sales people capabilities are good and management systems, including incentives, are aligned, everything works perfect. The problem is always with the second cohort of sales people. Those, who need to sell new (innovative) products to existing or new customers. These guys are always in a trouble.
Learning 2. There are no good sales people, which would agree to be in the second cohort. Good sales people always agree to work only if there is a clear product — market fit.
Do not believe sales people, which do not know what is the product they are going to sell or the market to serve. Good sales guys are good because they know a priori, what is going to be their sales bonus at the year end. Nothing else. Innovations are required by sales people only in case these innovations are so strongly required by the market that having them allows to get tangible USP. If not, then you can put your innovation back to the place it has originated from. All you need to know on sales. But the story does not end at this point, unfortunately. The learning number 3.
Learning 3. Good sales people need only those innovations, which enrich existing products and provide existing customers with some USP,competitors do not have. Only bad sales would agree to sell unknown products to unknown customers.
Making it simple, sales people consider innovations in a very narrow angle of value. Only those innovations are relevant, which allow sales people to keep themselves being relevant within their traditional markets. These kind of innovations are traditionally done within engineering departments of companies and have nothing to do with newly created structures to enforce digital transformation. The products of these newly created structures start being irrelevant for company business. Let’s try to see why this happens?
Ansoff matrix. Where to play.
The biggest step in corporate strategies have been done by Igor Ansoff in early 60s. Basically, he cracked the problems off digital transformation strategies before they even started. The matrix is as easy as it appears. First, one serves existing clients (EC) with existing products (EP) which forms a (EPEC) quadrant.
Then one can go either new products existing clients (NPEC) — product innovation strategy or existing products new clients (EPNC) which would be market development strategy. One cannot go New products New clients (NPNC) because this is a Game change transformation which big companies normally cannot afford, a total diversification. That is why meaningful digital transformations focus either with new products or new clients. Nevertheless, some strategies may consider moving into a NPNC from EPEC. This is done through iterative moves across vertical and horizontal elements within the Ansoff matrix, basically through a step like function. An approximation of that would be the diagonal. That is how company can move from EPEC to NPNC.
Now comes our story back. Our sales people would willingly try to develop new markets to try to sell existing products more. The reason is obvious — they know what they sell and they think it would be easy to sell more if there is a good and clear marketing strategy. With new products and services its different. Sales people do not understand these products, these products are new, so most probably are not yet even a commodity products. This makes sales people to not like these products, since the outcome from the sales perspective is unclear. Thus sales people converge back to EPEC quadrant of the Ansoff matrix.
Existing clients existing markets (EPEC) is a place, where good sales people converge to, since there they have minimum error of failure and the whole strategy in fact turns towards this place of Ansoff matrix. This is driven by sales people being, actually, good in what they do. The learning I made here:
Learning 4. Do not force your good sales to sell unknown new digital products and services even to the existing clients — they will turn into bad sales, you will start loosing sales on both markets, EPEC and NPEC. The only way for sales people to move is into the EPNC.
Implicit wrong business incentives lead to innovation failure.
By approaching new clients the company will start getting new requests, requests which come from the new clients, since they are out fo the traditional sales comfort zone (EPEC). If these requests are big enough in number the company needs to manage to collect these requests (process to be build) and bring them into the newly created innovation structures, like accelerators / venture studios so that they can work with these requests and try to do customer development together with sales and try to build new products from there. They should not invent their own ideas of these products, in fact, this needs to come from sales, which start feeling new requests from new clients. This all makes the transformation process a very complicated thing. Initiated by management, impulse needs to go into the marketing, forcing sales people to expand to new markets and gather the new requests arising within these markets and bring these new request to accelerators and venture studios which have to come up with these new products. Only this way sales people will be able to integrate these newly created products into their daily sales processes.
If these connections are broken and each department starts fighting for its KPIs, sales people fight for sales volumes, innovation departments fight for number of patents, accelerators and venture studios fight for number of exits, everything goes into a chaotic mode, where the only winner is existing company business. And the argument it finally provides — you see we are the only ones who work and this is the end of your digital transformation which is quite often referred as culture failure, which is in fact not at all.
Nevertheless, you can always observe some business departments, which are ready to believe in the digital transformation from day one, while the connections, mentioned above are broken.
Quite often I observed, that departments which perform worse are easily accepting the change, since they have nothing to loose or the market is already too weak. The communication is of course different, normally they would say that they extremely believe in your digital transformation and it is already does not make sense to develop existing market. And that brings learning 5:
Learning 5. Only those teams / companies actively look for new products and new markets (innovations) from the day one, if they already feel or predict significant decline in their domain market (EPEC).
P.S. Exclusion from this rule happens if connections are not broken. In this case the department can be considered as a highly innovative one and has an intrinsic motivation to innovate.
This is kind of a change, where this is the only way to survive. Such teams / groups or even companies try to jump from EPEC to any other quadrant since EPEC does not exist anymore. This makes the probability of success for them equal to any accelerator. That is why they easily “make friends” with your accelerators, appear to be the biggest fans of digital transformation and start generating use cases. This often creates an “innovation theatre” for top management, because company starts to build many use cases for innovative ideas, which in fact worthless and will fail with 98% probability. This moment being missed, may cost organisation its future and turn the whole “good company” into a “bad company”. One needs to carefully observe this and try to avoid it. And this generates one more learning:
Learning 6. Do not allow innovation centers, like accelerators or venture studios to start looking for ideas across the entire organisation and accelerate these. Ideas need to be developed in customer development cycles.
In order to have a balanced digital transformation strategy, one needs to keep the connections mentioned above valid and exclude “innovation theater” by digital transformation project design. This requires certain processes to be engineered, e.g. collaboration with sales people by developing of a new marketing strategy and in case management want to enforce the shifts, one of the possible tools would be artificial limitation of the growth within the EPEC quadrant. That would give stimulus for the organisation to innovate. Otherwise current business success, paired with not the best digital transformation execution, may lead to controversial results.
Therefore, the sign of companies, which want to move really fast with their digital transformation plans is the artificial limitation of its ability to grow in its domain market (EPEC).
Learning 7. One of the signs, company takes innovations demand seriously would be limiting its own in its domain markets (EPEC) in case of the currently growing business.
Conclusion. How to win.
- Digital transformation strategy needs to be aligned with main strategy and marketing strategies; Use “Playing to win” recursively to align these documents, tough, but necessary;
- Sales people are the most important part of the digital transformation, if they will not buy in to the story, the digital transformation strategy will most probably fail;
- The digital strategy only works EPEC → EPNC →NPEC →NPNC; (the reason why NPEC at step 2 does not work is because your existing clients you served for many years do not always see you as a supplier of new products and might not share their demands with your sales people, while new clients are not limited to such thinking and ask for new products and services, creating your sales people a demand pipeline);
- There needs to be a process, which allows sales people to collect insights from the new clients and bring these insights into the accelerators / venture studios (call it Customer development Process);
- Accelerators / Venture studios can only generate ideas of future products and services within the Customer development process with sales people;
- Do not allow accelerators to generate ideas on their own, also track carefully who brings ideas in, if this is done not through the frames of the Customer development process, stop these ideas, avoid “innovation theatres” (read my article about “Succeeding with Corporate Accelerator needs you to change one thing — stop asking for the ideas!” for more details);
