Achieving top performance in the digital era requires table stakes and a clear transformation choice
Every firm needs to take advantage of digital technologies to achieve superior performance.
To understand how to outperform we looked at the company capabilities that contributed to performance, both self-reported revenue growth and profit margin relative to competitors.
Working with Harvey Nash, we analysed data from over 3,600 companies and we found some important – and unexpected –results. All the results described below are statistically significant. All companies with superior performance had six foundational capabilities — we call these table stakes.
With those table stakes in place, companies could then choose one of two transformation paths.
One path to top performance, what we call ‘industrialisation’, involves steady incremental change over time, evolving existing products and services and gradually introducing new products and services.
The other path to top performance is ‘radical’ transformation, which involves moving to new ‘digitally enabled’ products and services and experimenting with new revenue models. Intriguingly,and somewhat controversially given the recent focus on digital transformation,both approaches produce similar performance results, with the radical approach having a 5 per cent higher performance.
Transformation like we documented at BBVA, DBS, KPN and Schneider Electric is designed to be disruptive – radically changing the ways of working and the use of technology to achieve superior results – as described in our recent book, What’s Your Digital Business Model?
These companies typically significantly change the decision rights and radically reorganise to get different outcomes. The companies that follow more of an industrialisation approach like Tetra Pak, UPS and Oerlikon focus on significantly improving in smaller increments every day over many years.
Top performers had stronger capabilities in six foundational capabilities needed for success in the digital economy.
These table stakes are:
- Collaboration that delivers business change
- Long-termmindset to technology implementation
- Digital technology that advances business strategy
- Effectively leveraging cloud technologies
- Maximising data use throughout the enterprise
- Customer trust built through superior service.
Just becoming strong in these foundational capabilities will involve some sweeping culture changes (helping people collaborate more effectively, make evidence based decisions and develop a customer service passion) and fostering an understanding of how technologies like cloud can help your company.
Top performers develop table stakes and choose a path
Industrialisation versus transformation
Building upon the table stakes, top-performing companies choose between the more incremental industrialisation or a more radical transformation. The driver of the choice was what the board and CEO expect.
With industrialisation, it’s stable and steady performance, continuous improvement, and careful management of cyber threats and other down-side risks.
Radical transformation results from expectations by the board and CEO of faster revenue growth, more value-generating innovation and changing business models, all enabled in part with stronger partnering – perhaps driven by a stronger perceived threat or opportunity from digitisation.
And the pathways to success are very different,particularly around technology spending and the major change mechanism. The firms on the radical transformation pathway invested heavily in technology as a mechanism for change, spending 70 per cent more on technology than industrialising companies as a percentage of revenue.
The major change mechanism top performers used was cross-functional teams,adopting agile or similar approaches.
Companies on this pathway must make it easy for people to find each other and collaborate, and to support that behaviour through tools, coaching and communication by leaders.
And the leadership is different too. The CIO is more strategic (more revenue-focused than order-taking) and is part of the executive committee. Prioritisation is also different,with the CEO prioritising projects that grow revenue rather than cut cost.
Top-performing companies following industrialisation spend much less on technology, with a mindset of automation rather than new customer offerings.
The key change mechanism was incrementally standardising and automating processes across the company,reducing cost and risk. Integrated silos, reusable modular components and consolidated data that can be extracted for decision-making are the results.
Change management involves identifying the one best way to do something and then governing to move everyone towards leveraging that one best way.
Enterprises have a choice about industrialisation versus transformation and it comes down to competitive positioning, strategic goals and appetite for risk.
Top performing companies undertaking transformation had 5 per cent better financial performance (revenue growth and profitability) and had better time-to-market,customer experience and business agility. But beware, both pathways have significant risk of poor performance.
Transformation and industrialisation companies had a 54 per cent and 60 per cent, respectively, chance of lower performance than peers right now. Whichever path you follow requires commitment and perseverance. As you think about achieving above-industry average performance, we have two questions for you.
1) Are you very effective at the six table stakes? And 2) Which path are you on — incremental industrialisation or radical transformation?
Your job as a leader is to make sure you pick the right path and the path is well understood and consistently followed across the company.
The worst case is not making a decision, flip-flopping from one path to the other, and never making much progress.