Digital Transformation: Beating the Complacency Trap

Digital Transformation articles tell us about Amazon putting bricks-and-mortar bookstores out of business or about Netflix killing video rental stores. Big game-changing moves. But business moves can't all be game-changers. What should companies which aren't tech giants be aiming at with Digital Transformation?

What businesses should aim for is to become more adaptable so that they can avoid getting outpaced by a new competitor.

The point is to avoid ending up like the now departed bookstores or the video rental stores. The authors of The Technology Fallacy offer a succinct definition of what the goal of adaptability looks like - they call it Digital Maturity:

“Aligning an organisation’s people, culture, structure, and tasks to compete effectively by taking advantage of opportunities enabled by technological infrastructure, both inside and outside the organisation.”

Digital Transformation is, or should be, about reaching Digital Maturity. But what does Digital Maturity mean in detail? And why is it such a mammoth task that companies are spending huge sums on?

How Disruption Happens: The Complacency Trap

Why was Blockbuster video on the wrong side of history when Netflix came along? It’s not that Blockbuster didn’t have the opportunity to do what Netflix did. Blockbuster famously even declined on the chance to buy Netflix.

(Image from runningremote.com.)

Blockbuster underestimated the threat posed by video streaming. But this was more than just an isolated case of an error in judgement. It is an example of what is called 'The Complacency Trap'.

Companies tend to get large because their initial idea has proven successful. They find a market of customers and need to get big order to service more of that market. Most companies try to do this efficiently and so they keep operations focused around the core product. A specialised focus on the core idea/s of the company helps it maximise the competitive advantage. But specialisation also means that alternative paths become less visible to the company.

A classic Complacency Trap example is how Wal-Mart overtook Kmart to become the largest chain of low-cost retail stores. Kmart had operated on a model where stores largely sourced their own supplies and set their own prices. This was part of Kmart’s philosophy which prized the instincts of local store managers and allowed stores to be suited to their local markets. Wal-Mart radically changed this by creating linked chains of stores supplied by a shared network. That made it viable to open stores in areas of lower population density (since supply costs were shared across the network) and access new economies of scale.

“Kmart saw Wal-Mart like Goliath saw David - smaller and less experienced in the big leagues. But Wal-Mart’s advantages were not inherent in its history or size. They grew out of a subtle shift in how to think about discount retailing. Tradition saw discounting as tied to urban densities, whereas Sam Walton saw a way to build efficiency by embedding each store in a network of computing and logistics. Today we call this supply-chain management, but in 1984 it was an unexpected viewpoint.” Richard Rumelt, Good Strategy / Bad Strategy

Technology was certainly part of Wal-Mart’s success. But KMart could in principle have leveraged the same technology. They didn’t because KMart had become specialised towards a particular model of operating and that led them to underestimate the potential of alternative approaches.

The Complacency Trap is a key dynamic in business and is played out many times over many industries. Other classic examples are Kodak’s underestimation of digital photography or how Xerox underestimated small-scale printing technology. What is unusual about the current period in history is how much change is happening and how frequently - companies that enter the S&P 500 Index do not stay there as long as they used to (image from peerinsight).

Technology is becoming more widely available and advancing more rapidly. This is creating new business situations and new players are sometimes able to disrupt established markets very quickly. So how can companies become more adaptable and give themselves a better chance of surviving in times of change?

Culture, Priorities and the Complacency Trap

As a company becomes specialised around a particular operating model, its whole way of working becomes tailored to that approach. It will affect the way the company hires, the kinds of skills and perspectives that it sees as important, the way the organisation’s hierarchy is structured, the culture, the executive team and who it is that has most influence over the executive team. So the company self-selects for the skills and way of thinking that it prizes.

Becoming more adaptable has to mean widening perspectives. It may mean more training, bringing in more tech-savvy younger staff, hiring more wizz-kid engineers and looking at how much voice they have in the organisation. But the way in which perspectives are expanded might need a specific focus. It is not simply about fostering general creativity - the organisation needs to target the kinds of knowledge and skills it wants to grow its capabilities for. This is because organisations (and individuals) can struggle to learn new things that they don’t have adequate background for. Cohen and Levinthal call this Absorptive Capacity:

Ideas in nuclear physics are unlikely to be accessible to anyone who has not first studied foundational physics. This kind of learning barrier can apply in lots of ways. Some fields of knowledge are accessible at a basic level to the uninitiated but require deep background in order to apply them in new ways. Software engineering techniques are an example - more experienced developers able to do a wider range of more creative things using techniques that less experienced developers are aware of but aren't able to use so creatively.

The absorptive capacity of an organisation is not simply the sum of the knowledge of the individuals. An individual may arrive at a brilliant new insight and find themselves unable to convince others at the organisation of the insight’s value. For example, Xerox was a pioneer of early personal computer research and arrived at innovations such as GUIs and the mouse (images from wikipedia):

But Xerox shut down that line of work rather than put a focus on the computing market, missing a huge opportunity. Xerox had done some brilliant computing product R&D. But Xerox was a printer company, not a computing company, and never aligned enough around the venture to make it a commercial success.

Organisations with higher absorptive capacity will be better placed to spot new opportunities as they open up. But no organisation can master every skill and domain of knowledge. Companies need to be clear about their key domains of knowledge and what kinds of spaces to be watching for opportunities.

Each Company is Different

Not every organisation needs to become a tech company. Specific industries have their own opportunities and threats from technological change. 

Across many industries a key change is that consumer expectations for commercial interactions have been reshaped by digital media and e-commerce. People have grown accustomed to seeing searchable purchasing information clearly available to them, to being able to purchase with a click and to be managing future interactions through easy to use software. Not every industry has fully caught up to these expectations yet. That presents opportunities for those who can master it and risks for those who don’t master it faster enough.

In other industries there are anticipated technologies in development with great potential for change. For example, driverless technologies look set to revolutionise the car industry, according to the Boston Consulting Group.

It is not yet clear exactly how or who will be the main beneficiaries. 

Companies need to tailor their digital transformation priorities to their own situation. This could mean making a list of the key changes they see or anticipate, what the potential impacts of those changes are. Not every technological change can be relevant or concrete enough to justify dedicating an initiative to. Each company needs to choose which areas are most important to them and how to reorganise to be best positioned.

Digital Maturity

If Digital Transformation is about achieving Digital Maturity, it does not have to be a process of upheaval at every company. It can be a gradual process of evolution. It may involve running small pilot projects on particular concepts before working changes into the core business model. 

Becoming more responsive to changes in the business environment means becoming more experimental. Having a well-planned strategy and executing on it can be highly profitable but on its own it can also lead into the complacency trap. To avoid that trap, companies need to look at their situation, their organisational structure and culture and how they gather and respond to customer feedback. The Technology Fallacy depicts the interaction of these elements in the following organisation dynamics diagram (my rendition):

Culture, people and structure will be set up to facilitate work in accordance with a particular strategy. As the company learns more from its customers and as the commercial environment changes, that strategy may need to change also. If it does then this can mean changing the culture, people and structure to fit the new strategy and the new work that it entails. Change may not necessarily come all at once or in a wholesale way. And further change later might mean going through another rethink and more restructuring. Reaching digital maturity means always being on the lookout for the next cycle of change - creating room for experimentation and treating change itself as a normal part of the company’s operation. 

We can now better understand the definition of Digital Maturity offered at the beginning. Digital Maturity is:

“Aligning an organisation’s people, culture, structure, and tasks to compete effectively by taking advantage of opportunities enabled by technological infrastructure, both inside and outside the organisation.” Kane, Copulsky et al., The Technology Fallacy

Successful tech companies exhibit digital maturity. They each have a clear strategy with a core set of products and services. They also experiment and adjust to market conditions - they improve existing offerings, add new ones and retire old ones. Tech companies are able to do this faster because much of their operation is around software rather than physical structures and arrangements.

Digital maturity is this broad pattern of using technology to be more adaptive to opportunities and challenges. The pattern is broad and the particulars are unique to a particular company’s strategy and circumstances. This is part of what makes the challenge of Digital Transformation so difficult. Despite the hype, there’s no copy-paste formula for success. Each company must confront the difficult details of its situation.

Title Image by Dmitry Abramov from Pixabay.

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