The digital era is characterized by constant change, rapidly evolving technologies, and innovative startups, which all threaten established organizations. A recent study by McKinsey shows the average lifespan of companies listed in Standard & Poor’s 500 has shrunk from 61 years in 1958 to less than 18 years today. These radically reduced lifespans highlight how long-term survival hinges on an organization’s ability to adapt.
The force at play in today’s digital era is called creative destruction, a term coined by economist Joseph Schumpeter to describe the process whereby innovation and technological advancements disrupt established industries and business models. In our competitive environment, producers generate ideas that advance technologies, redesign existing products and processes, and introduce new products. Competition leads to overall economic growth and improved products at lower costs, which benefits the standard of living of consumers, but poses a significant risk to incumbent organizations.
An excellent example of the risk this imposes is Kodak film, which was a leader in film photography but couldn’t adapt its business model to embrace digital pictures. This was ironic as a Kodak engineer invented the first digital camera in 1975, but management viewed digital photography as an evil juggernaut that would kill the company’s chemical-based film business that had fueled its sales and profits for decades.
As film sales began to decline in 2001, the company aggressively entered the digital camera market, experiencing initial success. However, this success decreased as dedicated digital cameras were gradually displaced by cameras in mobile devices. The company’s finances and stock value continued to decline, which led it to file for Chapter 11 bankruptcy in 2012.
Kodak’s example illustrates the importance of embracing digital transformation and preparing for eventual business model disruption.
A Continuous Journey
Importantly, digital transformation can’t be viewed as an end point. Because it’s difficult to predict how advancements in technology and other external forces will shape the business landscape in the short and long term, it’s essential to view digital transformation as a continuous journey. It requires adopting a culture of innovation that includes a willingness to cannibalize one’s own successes to catch the next wave.
How do incumbents position themselves for this continuous journey?
One key is in organizational agility, which is the ability to quickly reconfigure strategy, structure, processes, people, and technology toward value-creating and value-protecting opportunities.
Many incumbent organizations suffer from inefficiencies related to their size. They can involve having large administrative bureaucracies, complex and fragile IT infrastructure, massive data environments, extensive vendor relationships, and stringent regulatory oversight. Some of these inefficiencies may be an unavoidable factor of size, while much of this complexity is due to past decisions in which the need for business expediency prevented optimal design. As a result, it created organizational silos, redundant systems, and other complications that hinder change. Any transformation becomes time-consuming and expensive, or worse, runs into resistance as teams undermine efforts in order to protect their turf.
This is analogous to a large ship trying to turn around in a narrow river — the size and complexity prevents nimbleness.
Understanding Operational Excellence
To drive greater agility, organizations need to embrace an operational excellence program. Operational excellence focuses on efficient utilization of resources and elimination of waste in how the organization operates. This goes beyond optimizing individual or core processes, but aggressively scrutinizes all resources to identify their contribution to the organization’s mission. Implementing an operational excellence program is essential to becoming a lean organization that can quickly respond when the circumstances mandate.
A critical enabler for these programs is creating transparency into how the organization operates. This transparency includes details on executed processes, how they are performed, the resources utilized, real-time performance information, and precise ownership. The result is a comprehensive view that empowers innovators at all levels to optimize the environment.
Many organizations address this challenge by establishing an operational intelligence platform, housing data crucial for identifying inefficiencies, opportunities, and threats. A notable example is FedEx’s DataWorks platform, which serves as a centralized hub seamlessly integrating data from across the global network. Their platform meticulously tracks every aspect of a package’s journey, even incorporating external factors like weather. The result is an optimized supply chain process, allowing FedEx to deliver exceptional customer service while maintaining operational efficiency.
To be successful, these platforms need a complete accurate model of the operating environment in order to put the data sources into the proper business context. The best approach to accomplishing this is to inventory every process that your organization performs and use it as an index for the Operational Intelligence information.
Building a process capability through a process center of excellence (COE) that captures, integrates, and refines business processes, is crucial for creating and maintaining this comprehensive information repository. This will require an organizational investment and commitment. However, the benefits in terms of driving operational efficiency and organizational agility will position the organization for success in this continuous journey. It will allow it to respond quickly to the next business model disruption that will inevitably come, far outweighing the initial investment.
By focusing on processes, organizations can navigate the ever-evolving challenges of the digital age, ensuring longevity and sustained success in a competitive landscape.
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