Directors and executives could be forgiven for feeling like digital transformation has materialized out of thin air to attack their business models and markets. For most sectors, “digital” has historically been confined to tactical efforts across websites, mobility, social media, and e-commerce. Digital efforts were important to marketing execution but certainly did not inform overall business model strategy, much less determine which companies won, lost, or failed to survive. And while everyone is familiar with the global Internet giants that have emerged over the past two decades to dominate markets and stock indices, until recently digital disruption had not yet penetrated beyond the traditional realms of media, content, and e-commerce.
The massive competitive challenges witnessed in these early domains have now arrived in every other sector. Billboards lining airport corridors proclaim the urgency for companies to digitally transform. Corporations are funding incubators, venture funds, and innovation programs, and are facing the task of shaping the future of work. Many consulting firms and agencies make claims to broader digital transformation expertise, regardless of their historic core capabilities.
It is easy for leaders to get lost amidst the clamor. What follows is an account of the past, present, and the possible future of digital business risks and strategy that could help your board discuss digital business model risk and winning strategies.
Tracing the Origins
Along with my co-author, I presented the foundations of digital transformation and the strategic and financial performance considerations in a previous article. To begin to grasp how digital transformation impacts value creation, and to build on the concepts outlined below, I suggest starting there. The basic competitive dynamics across all past and emerging digitization phases reinforce the business model risk that directors and executives should understand as digital disruption changes their sectors.
The graphic below describes the primary phases of digitization over the past two decades and the emerging waves.
Click the graph to enlarge in a new window.
A pattern emerges across the phases. First, a primary enabling technology emerges, targeting specific product and service domains within a selection of target sectors. As these products and services are digitized, leading companies within these target sectors bring to market entirely new business models based on the primary enabling technology of the phase. These companies bring new value propositions to market and rewrite the rules of competition in the sector. For example, Google reinvented advertising, Amazon.com reinvented retail, Uber and other ride-sharing companies are reinventing transportation, and Social Finance (SoFi) is reinventing loans. Existing companies in these target sectors that fail to evolve their business models lose market share or cease to exist, while new, dominant-phase leaders emerge.
This dynamic has been consistent across the first three digitization phases, resulting in massive disruption across the target sectors as well as a recalibration of the world’s most valuable companies list—despite the relatively small number of target sectors initially involved. Currently, the dominant digitization phase is driven by Internet of Things (IoT) and smart products technologies, with implications for all machines, all physical products and the companies that design, manufacture, sell, and operate them.
Artificial intelligence (AI) and machine learning technologies are also in broad, albeit early, deployment with implications for every sector of the economy, including forming the foundational elements of continued robotics and digitized biology and chemistry.
This is an admittedly simplified picture. Primary enabling technologies do not evolve in isolation from earlier phases, and the phases themselves do not end. For example, more and more content continues to be digitized (from newspapers to videos to augmented or virtual reality), while the scope of digital services continues to expand (from basic e-commerce to mobile payments to blockchains) and AI is reinventing all previous primary enabling technologies. Furthermore, leadership in one stage of digitization does not guarantee continued leadership as the cycle continues. Yahoo! was among the major winners of the original content digitization phase but failed to evolve, while Google, which emerged during the same phase, has consistently grown in line with emerging technologies. Meanwhile, General Electric Co. and General Motors Co. are bucking the trend of established companies falling to digital upstarts to assume leadership in the industrial IoT and automotive markets.
While it is helpful to understand the enabling digital technologies, it is primarily beneficial for directors at companies of all types to seek to understand the implications of these technologies on the products, industries, and business models of their companies, and ensure that their CEOs have a sound strategy to address these considerations.
Every sector is now in the crosshairs of digitization. Many business leaders not operating in the initial target industries, however, have never been trained on how to think about digital transformation strategically. So long as a company was not in a target sector of digitization, it was sufficient to deploy point solutions related to the primary enabling technology of each phase, such as websites, mobile applications, e-commerce offerings, and a social media presence—and, indeed, it has always been important for companies to keep up with these tactics. Directors and the C-suite should understand, however, that this approach is not sufficient when it is their own sectors that are the primary focus of digitization.
Ryan McManus is senior vice president of partnerships and corporate development for EVRYTHNG, the IoT Smart Products platform company and serves on the board of Nortech Systems, the advisory board of Carlabs AI, and two advisory boards with the Aspen Institute. He is the founder of Accenture’s Digital Business Strategy and Transformation practice, has served an advisor to Fortune 100 companies, and is the author of numerous articles on digital transformation and corporate strategy. Ryan earned his MBA from the University of Chicago Booth School of Business.
Want to hear more from Ryan? Attend his session at the 2017 Global Board Leaders’ Summit. Learn more and register here.
The rapid pace of technological advancements is causing tectonic shifts in the business risk landscape. Social media and artificial intelligence (AI) in particular are causing directors to reconsider how they think and talk about risk. Consequently, these topics were the focus of the first part of a roundtable discussion on the next generation of risk hosted by EisnerAmper LLP and the National Association of Corporate Directors (NACD) in New York last week.
There is an abundance of examples of companies that sustained severe reputational damage after being caught in the center of a social media storm. Most recently, credit reporting company Equifax made headlines after the company disclosed that it was the subject of a major data breach that compromised the information of roughly half of the U.S. population. The company’s offering of free credit monitoring to affected customers only made matters worse: several print and digital news outlets, including The New York Times, analyzed the terms of the offer, which suggested that by signing up for the service, a person relinquished his or her right to take legal action against Equifax. While the company later changed the legal language in another effort to assuage public concern, reestablishing its trustworthiness may be more of an uphill battle.
“Some of these things would have always been in the news, but the amount of time and the quickness with which news reaches an audience is unbelievable,” EisnerAmper Audit Partner Steven Kreit observed. “Boards need to make sure there’s a social media strategy throughout the company. Boards need to ask management what it has planned for and make sure they can react to those issues as they come up. It’s also important to have policies around social media. What is the CEO allowed to say? Are they allowed to have personal accounts and use that to disseminate company information?”
When attendees were asked if they knew their company’s social media policy backwards and forwards, few indicated that they did—but there was some debate as to how necessary this is. “I don’t think it’s appropriate for a board member to know the details of what the policy is,” one director opined. “What the board needs to know is that there’s a policy and that employees know what they can and cannot say about the company.”
Kreit agreed. “You don’t want to get too far into the weeds,” he said, “but a CEO may react to something in the middle of the night and that response may harm the company. And board members need to make sure the company doesn’t get hurt.”
While most of the discussion focused on preparing for the worst, one attendee observed that a company response plan that is effectively used to respond to negative feedback on social media can not only curb a damaging situation, but help to restore trust in the company.
Discussion then turned to AI. Here, some companies are ahead of the curve in applying technology that has the power to parse through massive amounts of data to make a determination about something. Take for example, IBM’s Watson, the supercomputer that famously competed on the game show Jeopardy!, facial recognition software and self-driving cars. Here, the risk is that AI is advancing so rapidly as a disruptor across nearly every industry. If a company isn’t paying attention now, the competition will leave it in the dust later. But AI is a broad subject area and identifying the elements that are most relevant to a board agenda—namely the risks—can initially seem daunting.
“These are conversations I rarely hear discussed around the boardroom table,” Kreit remarked. “And these are risks that keep changing.”
“An interesting exercise is to look at risk factors in public disclosures,” one attendee said. “We look at competitors and it’s easy to see what risks they are identifying in the same industry.”
“In the conversations I’ve had, it isn’t so much about whether the machine will do its own thing and crush humans as much as asking what fundamental technology are we not using to help us be more competitive and customer-focused,” one attendee offered. “The other thing is, technologists sometimes rely too much on technology. At some point, a human being has to put subjectivity in the mix to make sure the automated methodology you employed doesn’t come back and bite you. This conversation comes through the CISO [chief information security officer] on my board as well as the CTO [chief technology officer] together.” Another director remarked that these discussions take place on the audit committee level.
“It’s important to not think about technology and risk without it being an integral part of the strategy discussion,” another director piped in. “If it isn’t, I think it becomes an academic conversation and you’re walking ahead with one eye open and one eye closed.”
To this end, and in closing this portion of the roundtable, another attendee remarked on how board composition it critical in positioning the board to oversee this issue in the years ahead. “If you don’t have enough forward-looking people with experience from other industries, you’re doomed. Look at who you’re working with and have some sense of what you are [as an organization], what you want to be, and how you’re going to get there.”
Next week, the NACD Board Leaders’ Blog will feature roundtable discussion highlights that explore geopolitical and regulatory risks.
Organizations face a radically shifting context for the workplace that includes cognitive technology, intelligent automation, and machine learning. These technologies are disrupting and threatening many companies across many industries. As a result, organization designs and business models are being updated to defend existing market position and proactively seek the new opportunities that “digital” can offer.
Mercer’s 2017 Talent Trends study found that 97 percent of executives say that becoming a digital organization is important to their future, with 77 percent stating that their company is on a digital journey already. However, as few as 8 percent of CEOs believe their organizations are as digital (or even anywhere near as digital) as they must be to ward off emerging competitors.
This same study also uncovered striking discord between the digital strategy and people strategy. While most CEOs are focused on designing a more digital and agile organization to compete for the future, only 15 percent of human resource (HR) departments have organization and job design as key elements of their people strategy. Only 37 percent of HR respondents have change management on their radar screen. The risks created by this disconnect are significant. Without a culture open to change and a workforce willing and able to adopt new technologies, digital change efforts will rarely be as impactful as they need to be.
The Board’s Role in Elevating the Digital and People Agenda
Boards are custodians of organization strategy. They also play a key role in overseeing the talent strategies required to execute and deliver on business objectives. By reviewing the organization’s talent strategy through the lens of digital disruption, directors can help uncover risks and ensure better alignment between their companies’ digital and people agendas that will be necessary for future success.
Here are five sets of questions to get started.
1. Does the executive team possess digital competence and diversity? Digital strategy should be born from the vision of the CEO and executive team. In combination, does the executive team have the digital competence to appropriately prioritize and drive development of transformational digital strategy? Will they think beyond technology to people capabilities and a culture of agility? And, beyond digital capabilities, is there enough diversity to help foresee the range of potential future business scenarios and support the creativity and agility that will be needed to adapt to changing business circumstances?
2. Do our succession planning and leadership development goals emphasize the capabilities needed in a more digital world? Organizations need to revisit their leadership development programs because the competencies that have reliably predicted leadership potential and success in the past, even just yesterday, are not the same as those needed for tomorrow. Are leaders self-aware such that they are not blindsided by emerging risks? Are leaders sufficiently curious to sense more than the obvious trends that will impact business success? Are leaders creative and entrepreneurial enough to create advantage from new technologies and business design possibilities?
3. Is there a balance between the company’s strategy to build talent and buy? Many organizations have a bias to build talent from within, particularly as they plan their succession pipeline for the executive team. However, buying digital experience (within or outside the organization’s industry) is a much quicker way of building digital competence and diversity of thought. Is there a discipline of building executive “succession slates” that includes curating external candidates who offer capabilities different from those gained through internal experience?
4. Has the workforce plan considered the impact of digital disruption on jobs?
In The Future of Jobs report, the World Economic Forum projected that 35 percent of core skills will change between 2015 and 2020. Current jobs will require a different skillset in a few years; skills instability will be high in all industries regardless of employment outlook; and, if current roles are already difficult to recruit for, it certainly won’t get easier as demand for new skills emerges. Does the organization have a workforce plan that forecasts which skills will be needed in the future and which will be less in demand? Is there a talent plan that aligns with this changing pattern of skill demand? And is there transparency with the workforce, so that those whose jobs are most at risk of disruption are able to take proactive steps to build a skillset that will be relevant tomorrow?
5. What thought has been given to employer brand and the company’s role in society? Digital disruption goes hand-in-hand with job disruption. It is likely that tomorrow’s business models will require a smaller core workforce and that digital technology will destroy more jobs than it creates. It is likely that unemployment and underemployment will rise. How will the organization maintain an attractive employer brand and contribute to the health and welfare of broader society? What plans, tools, and programs does the organization have in place to manage the transition of all members of its workforce (executive and non-executive) who will not be able to adjust to the workforce of the future?
Without a robust people agenda, an organization’s transformation efforts to address the challenge of digital disruption will struggle. By applying a digital mindset to the talent strategy and asking questions like those above, directors can play an important role in ensuring the alignment between people and digital strategy, and better position the organization for success.
Ilya Bonic is president of Mercer’s Career business.