The seven decisions that matter in a digital transformation: A CEO’s guide to reinvention

Here is a brief excerpt from an article written by Peter Dahlström, Driek Desmet, and Marc Singer for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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A successful digital transformation requires making trade-off decisions. Here’s how successful CEOs guide their business’s reinvention.

Being the CEO of a large company facing digital disruption can seem like being a gambler at a roulette table. You know you need to place bets to win, but you have no idea where to put your chips.

Of course, digital transformations aren’t games of chance. But they do require big and bold commitments in the midst of uncertainty to reinvent the business rather than just improve it.

Many of the digital initiatives large incumbents have already tried to date have tended to operate at the margins of the business. Innovation labs or apps can be useful for learning and can even provide a boost to the company. Meanwhile, the legacy business remains in place, largely unperturbed.

Without a transformation of the core—the value proposition, people, processes, and technologies that are the lifeblood of the business—any digital initiative is likely to be a short-term fix. The legacy organization will inevitably exert a gravitational pull that drives a reversion to established practices. Reinvention of a business is, by its nature, bold. But it’s one thing to be bold; it’s another to be thoughtfully bold. A digital reinvention requires the CEO to make tough decisions, which involve hard trade-offs that it is tempting to ignore, defer, or rush into. Yet knowing which decisions to prioritize and how to implement them can make the difference between a successful transformation effort and one that struggles.

These decisions occur in the four phases of a successful digital transformation program:

o Discovering the ambition for the business based on where value is migrating
o Designing a transformation program that targets profitable customer journeys
o Delivering the change through an ecosystem of partners
o De-risking the transformation process to maximize the chances of success

In each of these areas, the CEO has a lot of things to do, from modeling new behavior to driving a change in culture to executing strategy. But this article focuses on some of the big decisions CEOs need to make, and how they can go about making them. Based on our experience with dozens of digital transformations, we believe these seven decisions are the most important ones.

[Here’s the first of the seven decisions.]

DISCOVER—Set the ambition for the business.

Decision 1: Where the business should go

Few decisions are more momentous than choosing the business direction. While the almost existential nature of this decision can seem overwhelming, most incumbents don’t have a choice, since they are already facing disruptions that can threaten their long-term viability.

Data and analysis, as well as a disciplined framework for thinking through options, provide a helpful structure for making the decision. As a starting point, we recommend a thoughtful review of the market and business based on those stalwarts of economic analysis, supply and demand. It’s important that any analysis be dynamic and forward-looking, based on an understanding of how digital technology could lead to changes in the future.

Almost every notable digital innovation we’ve seen has been based on using connectivity and data to transform the customer experience or to reshape products and services by allowing customers to interact with them in new ways. So that’s a good basis for thinking through the possibilities. Incumbents can also look to approaches used by digital innovators—both within and outside their sectors—to spur fresh thinking.

While analysis is crucial, it is no substitute for imagination. C. S. Lewis called imagination “the organ of meaning,” and CEOs need to tap into it. One approach might be to imagine how the industry would work if it were completely digitized. Often, a creative leap is needed to identify how the firm might serve customers in new ways across their entire journey. We have found 24-hour hackathons with senior leaders to be a very effective way to break through old thinking and encourage executives to adopt completely new ways of doing things.

GE is an example of an incumbent that envisioned how its industry would evolve and acted in response. CEO Jeff Immelt noted that “15 percent or 20 percent of the S&P 500 valuation is consumer Internet stocks that didn’t exist 15 or 20 years ago. The consumer companies got none of that … If you look out 10 or 15 years … that same value is going to be created in the industrial Internet.” Based on this insight, GE launched GE Digital, a software and analytics group that works closely with all the company’s business units, and Predix, a branded digital platform that invites developers to build new applications using GE data.

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Here is a direct link to the complete article.

Peter Dahlström and Driek Desmet, both based in London, and Marc Singer, based in San Francisco, are all senior partners and leaders of Digital McKinsey.

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