Digitalization is not the same as innovation, but digitalization can be an important factor that will inflame innovation. Many innovations resulted from digitalization through enabling both more effective business processes and launching new products, services, and business models. Therefore, we bring you today a blogpost about digital transformation.
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The development of technology is moving at a pace unprecedented to previous ages, new technology permeates every industry and every consumer household in this digital age. It is a well-known story by now, adapt or perish as new technology ventures join the fray, making old giants obsolete even faster than their disruptors stock prices rise. What can companies do to survive in this harsh new reality? The answer is simple: if you cannot beat them, join them.
But, how exactly can established firms deal with this new age of disruption? Where do they begin? Well, thankfully there are some suggestions in the scientific literature, and it involves developing dynamic capabilities and more accurately digital capabilities.
“Ordinary capabilities are about doing things right; dynamic capabilities are about doing the right things” – Teece and Leih (2016)
What is digital transformation?
Digital transformation entails the use of new technology to enable major business improvements. In most cases that translates into transforming the current business to remain relevant or creating entirely new ventures. In practice, this ranges in scope from a transformation of the business model to adopting a new collaborative approach and to eventually reinventing an entire organizational culture (Warner & Wäger, 2019). It can simply be thought of as the explore part of the well-known concept of the explore and exploit dilemma with emphasis on exploring for digital solutions and integration.
But why should well established companies care about being capable of employing new technology? Well, for one, it is theorized that the nature of digital technology potentially makes any advantages incumbent firms have over small disruptors obsolete. This means even large established organizations are vulnerable to being replaced by novel and extremely fast-growing companies. This is particularly true for companies that have grown into large static, ultimately effective and streamlined, but inflexible systems. This static nature also applies to their identity and culture, which is tied to how things are currently done and can become just as static and ingrained to the current business model. Digitalization also often means more options and more integrated and holistic experiences for the customers, increasing the importance of the customer experience, more so than ever before. This means that acquiring the capabilities to digitally transform is essential to not being left behind due not being dynamic enough (Warner & Wäger, 2019).
This post will outline the study Warner & Wäger (2019) did on digital transformation and how organizations develop digital capabilities to allow them to digitally transform and present their subsequent model.
They found that there are three main capabilities:
- Digital sensing capabilities
- Digital seizing capabilities and,
- Digital transformation capabilities
Let us explore each aspect from their study:
Digital sensing involves something Warner & Wäger (2019) calls digital scouting, digital scenario planning and digital mindset crafting. It is all about, well, sensing any external factors, trends or forces that could disrupt the organization. It means turning on the radar, reading the weather forecast and getting out the binoculars to see if there are any icebergs in the water, observe what your opponents are doing, and to figure out if you must alter the course of your corporate ship.
Digital Scouting is all about the organization’s capability to spot tech trends, trends among the customers and trends among the competition. It could mean having entire teams dedicated to discovering and reporting new possibilities and spotting trends, and even placing them in interesting geographical locations, like clusters or hubs. The Norwegian Bank DNBs intrapreneur division, NewTechLab, is a good example of this practice, as they have established a small firm in Silicon Valley to scout out new technology and possibilities (Giske, 2021).
Scenario planning is all about analyzing and using the information gathered from the digital scouting. Specifically, this means to develop several future scenarios which one can interpret and in turn can use to develop strategies to each scenario.
The digital mindset crafting involves having a long-term digital mindset and entrepreneurial vision ingrained in the organizational culture. This is important in being able to generate the scenarios and must be promoted throughout the organization.
Digital seizing involves rapid prototyping, balancing digital portfolios and strategic agility. It means to investigate and test out the risks and rewards of different digital possibilities and be able to get the resources where they are needed when they are needed.
Rapid prototyping means making a minimum viable product and testing it out. This could be using a digital innovation lab and maybe employing a lean start-up methodology, which means experimenting, testing, and iterating. This is all about trying new solutions on a small scale before implementing them on a larger scale.
Balancing the digital portfolios means to scale up the new business model, but not at the expense of the other and to do it in an appropriate manner, which does not disturb the existing activities too much. This also entails considering both internal and external options when thinking about scaling up the new solutions.
Strategic agility is all about being able to reallocate resources and accepting any redirections and changes. This is easier when using scenario planning as opposed to a static and set-in-stone long-term plan. It also involves pacing strategic responses and realizing that projects move forward in leaps, and often fail without the failure of a project being seen as failure in being dynamic.
Digital transformation involves navigating innovation ecosystems, redesigning internal structures, and improving digital maturity of the employees. It is all about getting these newly discovered opportunities integrated into the business model or even transforming the business model to fit these new opportunities.
Navigating innovation ecosystems means joining digital ecosystems, interacting with external partners, and exploiting new eco-system capabilities all to gain insights and get customer feedback, but also scout out new trends and essential partnerships.
Redesigning internal structures is essential to put in place the systems needed to truly be capable of realizing the previous steps. This means the actual digitalization of the business model, essentially moving things online or applying software and sensors to processes and so on, whatever the newfound solution was. It could also include potentially hiring a chief digital officer and designing more team-based structures that will lay the foundation for more innovation in the future and the implementation.
Improving digital maturity is all about mapping out the digital maturity of the workforce and improving their digital capabilities. The organization probably needs to recruit external digital natives but also leverage the existing digital knowledge inside the firm. This step also includes the potentially essential process of getting people to see through the lens of digitalization to discover new possibilities and insights, basically improving their digital maturity, changing how they fundamentally view their jobs.
Contextual factors are everything surrounding the digitization process and digitalization ability that have an impact on it like external triggers, internal enablers, and internal barriers.
External triggers are, for example, disruptive digital competitors, change in consumer behaviors or disruptive technologies. These triggers are what motivates the organization to build digital capabilities in the first place. New triggers are also always appearing and hopefully get caught by the digital scouting abilities so that one can alter and iterate the product or process thereafter or start an entirely new product or process.
Internal enablers are factors that enable the digital transformation and are essential for the process to work optimally. Cross-functional teams bring diverse ideas and knowledge from all over the organization, essential to capturing the best ideas and get input on implementation from all departments. There must also be support in the upper echelons of the organization to get funding and resources where they are needed. Decisions also need to be taken fast enough for the process and product to get going before it is already obsolete or not novel anymore.
Internal barriers are factors that hinders the digital transformation and makes it more difficult. Rigid strategic planning is one of them, essentially setting processes in stone, without the possibility of altering it toward current trends and iterations of a product or process, as opposed to fast decision making and scenario planning. High level of hierarchy also makes the process and decision making slow and hinders ideas to flow from all levels of the organization. Resistance to change in any levels of the organization will also slow down the process or make it impossible to realize any changes essential to acquiring the digital capabilities.
Summary and endnote
All in all, Warner & Wäger (2019) outline how organizations develop dynamic capabilities for digital transformation. Their model has three capabilities: sensing capabilities, seizing capabilities and digital transformational capabilities. Sensing is all about the discovery of trends and technology while seizing it is about adopting tech or trends into viable business ideas. Transformational capabilities entail the actual transformation to accommodate the discovered changes. There are also several internal enablers and external barriers to enable or hinder the process.
While Warner & Wäger (2019) outline general elements in the digitization process that can be used and followed instructively, they also note that every digitalization process will be unique for all organizations. They also point out the fact that historical cultural values should not necessarily be replaced but brought along into the future of the organization, refreshed for a new age.
In general, it is difficult to balance exploration and exploitation and to be doing both effectively at the same time, as they both essential, but require different focus. This framework however might give an idea of how to approach the adaption of the digital age for your company.
The author of the text is Stian Kjelstrup Jacobsen. Stian is Innovation intern at Vinco Innovation. You can get in touch with him at firstname.lastname@example.org.
Giske, av M. E. (2021). DNB kåret til Norges nest mest innovative bedrift . DNB Nyheter.
Retrieved September 9, 2021, from https://www.dnb.no/dnbnyheter/no/samfunn/dnb-karet-til-norges-nest-mest-innovative-bedrift
Teece, D., Peteraf, M., & Leih, S. (2016). Dynamic Capabilities and Organizational Agility: Risk, Uncertainty, and Strategy in the Innovation Economy. California Management Review, 58(4), 13–35.
Warner, K. S. R., & Wäger, M. (2018). Building dynamic capabilities for digital transformation: An ongoing process of strategic renewal. Long Range Planning.