Digital Transformation or Digital Destruction?
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Transcript: English(auto-generated)
00:18
Good afternoon, everybody. Thanks for being here.
00:21
That's actually my first talk that doesn't involve any science fiction, unfortunately. But I still have some nice pictures. So I will talk about digital transformation or maybe digital destruction. And thank you. And this has been a buzzword for a few years right now.
00:44
And so I would like to tell you what I understand as digital transformation. As you know, the internet has already transformed a number of industries from the ground up. From putting travel agents out of the job basically
01:01
overnight, it went to disrupt media industry, like music, newspaper, TV, and retail. And currently, banking, insurance, hospitality, automotive and logistics are witnessing also competition from new entrants to the market.
01:22
And tech companies like Google, Facebook, and Apple, and also different startups actually don't give a shit about traditional industry boundaries. And they just do the things they think should be done. So when you look, for example, at WhatsApp, which basically has stolen like $30 billion
01:42
of messaging revenues from the telcos within just five years and with 50 employees, then Google, Facebook, and Apple that already have banking licenses and are disrupting the whole financial industry from the ground up.
02:01
Uber, with over $60 billion in valuation in just six years, is rethinking the whole concept of mobility and car ownership. And Google, that is focusing on autonomous vehicles, are slowly trying to replace human drivers, which has, again, groundbreaking consequences for automotive
02:22
and insurance sector. And the insurance industry, again, is threatened also by Google, Apple, Fitbit, and so on. All the companies are building platforms for health data with health kits and tracking devices.
02:41
Hotels face competition from Airbnb on the one hand. On the other hand, they are trying to use or have to use this platform to fill their empty rooms. And they are doing it at a lower revenue share than charged by Booking.com and Expedia. And that's just a snapshot of the fundamental changes
03:01
each industry will be facing in the next 5 to 10 years. And it's estimated that within this time frame, within the next 10 years, 30% of today's major companies will not exist anymore. So the mastering of the transformation will be an adapt or die moment for most businesses.
03:26
There are pretty interesting statistics about this. Companies which master digital transformation, like I would call them digital experts, they gain 26% more profit than the industry leverage.
03:41
On the other hand, the companies are called digital rookies, which didn't really adapt yet. They, again, have less than 24% profit. than the industry average. So is it possible, or what's the way,
04:03
especially for big companies like the incumbents, to come here instead of there, instead of being basically removed from the market in the next 10 years? According to Forrester research, 74% of the business executives
04:22
say that their company has a digital strategy, which you might think that's pretty good. But on the other hand, when you look at the 15% who believe that their companies actually have the skills and capabilities to execute on that strategy. For example, according to our own research,
04:42
to our digital maturity assessment, only 16% of the companies have a C-level person who is actually responsible for the digitalization. And it's like for many years, for most of these companies, digital was kind of an addition to the business
05:02
as usual, and almost perceived like many of the existing marketing channels. And it's still like a lot of companies, it's still like this that digital is kind of a subordinate of either IT or marketing. And depending on which side is winning,
05:23
you're going in the other way or the other. So what I experience working with major companies is that when they are going digital, it means especially tools, that we have the newest systems, that we have the newest software,
05:40
and state of the art IT infrastructure, and so on. And I experienced kind of a strange situation a few weeks ago when I was working with a major German company, and they had a kickoff phase in their digital think tank or their digital innovation lab. And then I asked them about the expectation
06:02
for the kickoff phase, and they said, yeah, we have to write requirements. I was like, what kind of requirements, for what? I don't even know what are you going to do, what are your goals? And then the answer was, yeah, but that's not that important. The important is like the backend and the algorithm,
06:21
because they are the difficult part. And then a designer can just paint it nicely, and then everybody will know how to use it. And when I hear something like this, I just actually want to shoot myself. And unfortunately, it happens. And I don't want to say, it's definitely a lot like that,
06:44
that they perceive technology as not important. But the point is that technology is becoming a commodity. It's like energy, it's just there. When you look at the major companies like Google, Facebook, IBM, Microsoft, Amazon, they already
07:02
provide their newest technological developments via API for everyone to use. So there is basically no advantage for a big company over a small one in just using this newest technological advantage. So what is the advantage?
07:20
Like how can you build up this competitive advantage? So for me, the first step for the company to becoming a digital expert is to recognize that digital is more than apps or social media or Google AdWords and the newest IT architecture,
07:41
and that it's actually not about having a digital strategy, but instead of having the whole business strategy, which is ready for digital age, where the products, where the business operation, sales, and especially customers are fundamentally digital.
08:06
So as Steve Jobs once said, we have to start with customer experience, and then we can work back toward the technology. And this meeting of needs and expectations of these digital customers is becoming harder and harder
08:24
as the expectations on the technology have changed. And let's just look again at these examples. For example, Uber doesn't even have cars, and it's like the biggest taxi company currently in the world. And they also don't really have like a crazy rocket
08:44
science technology. Where they compete is where the users are. They compete basically on customer experience. And the same for Airbnb. The world's largest accommodation provider is a platform. They don't have any real estate, and they compete again on customer experience.
09:04
Number 26, which might not be the biggest bank yet, but who knows, they don't really have like core banking technology. They're also based on the APIs, and they're competing on customer experience by making banking kind of less boring than it usually is.
09:23
And there are more examples. Like Whiting Scales, for example, which can sell their scales like at the price of five times the usual waiting systems are just because they don't make it about weight. They make it about fitness.
09:40
And the same for Nike, which actually doesn't sell shoes. Of course they sell shoes, but they don't sell shoes. They say they sell fitness and so on. So they all compete on customer experience. And I didn't choose these examples because they have like particularly nice interfaces. It's not about nice interfaces.
10:01
It's because the whole expectations toward technology have changed. Technology is everywhere. These are images from the Pope election 2005 and 2013, and you pretty much can see the difference there. There is some one early mover in the corner who is trying to make a picture with this phone.
10:21
So now it's different. Like artificial intelligence is making machines smarter and more useful, and increasing memory and processor capacity, capacity, capacity, sorry, and enables processing more data faster and faster. And this have an impact on customer experience
10:42
because technology is so cheap that it can be actually in every product. Every product can be equipped with sensor and with internet connection. From toothbrush, for example, to K chains, shoes, shirts, thermostats, traffic lights, and so on.
11:03
And it's pretty obvious that in this case, the technology is not the experience. It's just a normal experience, and I don't even, as a user, I don't even think about it as containing technology. And customer experience now go way beyond the ease of use.
11:23
It's expected to be a mobile, social, functional companion in our daily life. So we expected to kind of seamlessly integrate into our daily routines, and not only do what we expected to do, but to do even more, to anticipate our actions,
11:43
to provide more and more convenience and proactive experiences. And 89% of the companies seem to see it this way. And they said that 2016, they plan to compete mainly on the customer experience.
12:04
But what's interesting about this is that only 24% of the companies say that they develop their digital products in a customer-centric way. So I don't know how these two metrics actually fit together.
12:21
And 32% say that they actually don't really involve customers, or just test shortly before launch, which for me actually means the same as not involving them at all. But what was most interesting for me, that actually 34% involve their customers
12:42
by conducting focus groups. And really focus groups, I mean, that's basically the perfect way of inventing faster horses when someone else is inventing a car. Or to say it like in a more placative way,
13:01
to invent new innovative inks, new innovative home printer solutions, and innovative photo paper when someone else is inventing GoPro. So, and 10 years later, you know what happened? Kodak went bankrupt, and GoPro was preparing for a $3 billion IPO.
13:24
So the group of people sitting around the table and talking is not the way of developing innovative ideas. Because innovation comes from recognizing unmet needs,
13:40
and designing a way to fill it. But most people don't know what they're missing. And the only thing they can tell you is, okay, we need a more innovative ink, and we need a faster printer. But nobody in a focus group would tell you that he or she wants to use a GoPro because they didn't know that something like this even existed.
14:03
And also like when you're conducting focus groups, you're actually making like very risky assumptions. Because you assume that people are rational, and that basically their shopping decisions are not based on emotions, but purely rationality.
14:22
That they don't lie, and that they don't tell things that they are not influenced by peer pressure. And all these things actually are happening in the focus groups. So just please don't do it. Every time someone is doing focus groups, one designer dies, I think.
14:43
And here again, Steve Jobs, not because I'm such a Apple fan girl, but he happens to have some cool quotes. People just don't know what they want until you show it to them. And that's why the digital experts
15:01
involve the customers very early in the process, and not by asking what they want, but by showing them something, by identifying their needs first, and then letting them actually test the prototypes and products regularly. And not only this,
15:21
but also capturing and evaluating usage and satisfaction data and making decisions based on them. But it's also maybe pretty obvious, but it's not that easy to implement in a typically hierarchical organization.
15:42
It's very hot in here, sorry. So what Seth Godin once said, I think he pretty hit it on the nail, and he said that great projects or big projects start feeling like buildings. They are architects, materials, staff,
16:01
rigid timelines, permits, engineers, and structure. So it pretty sounds like most of the corporate companies. But in fact, how we should see digital products is that they are gardens, that they are tended, they shift, and they grow,
16:21
and they endure over time, they gain personality and reflect their environments. And most of the companies look very much like buildings, so the question is, is there a possibility for them to somehow transform into gardens? According to our research, almost 80% of the companies
16:41
rely on traditional corporate hierarchy. And even if there are some small interdisciplinary, independent teams in these companies, they are working on topics beyond the core business, and they basically have no decision-making power. And this hierarchical organization,
17:01
it works pretty well in the 20th century, but it doesn't really go hand-in-hand with the characteristic of digital business, because of two things particularly. Hierarchical organization doesn't really,
17:22
they struggle, they kind of struggle with two main things, which are risk-taking and velocity. So first, the velocity. Digital transformation requires very quick adjustments and close cooperation with an interdisciplinary team, because there is no time,
17:41
you don't have two years to actually launch every change you want to launch. And so the people who work with these projects on a daily basis, they have to have the possibility of actually really making decisions beyond where are we going to go to launch today, but actually have real ownership of the product or project
18:03
and including the decision on how and when and what actually to launch. Because otherwise it goes through dozens of steering committees, and probably some of you know it, like it becomes really difficult to achieve progress because while management is too busy
18:23
and not involved enough to take this decision, people who are actually working on the project are waiting and they're losing the precious time. And also other things happen, that there is like, that the green light actually never comes
18:41
because the management or the people who have to take the decision don't actually understand the implications of the decision because they are not involved deeply enough into this process. And the other reason why the green light doesn't come
19:01
or why it takes so long for the green light to come is because of the other challenge, the risk taking. The corporate organization, or most of the corporate organizations don't really support risk taking,
19:21
which is actually very fundamental to learning and to innovation. And this risk adversity is quite obvious when you look at the numbers. So about 85% of the companies,
19:41
in about 85% of the companies, failure is actually not an option. And it demonstrates in two ways. When I first looked at the statistics and I saw, okay, in 15% just of the major companies, failure and risk taking are not welcomed and have a negative impact on the career.
20:01
But the other number and the other 70% are even worse because 70% of the respondents say that the official policy encourages failure and risk taking because most of the management understood that it's actually pretty cool to say this. But they are not measured
20:21
and still have negative consequences for the risk taker. So while many companies try to increase their efforts of creating environments for creativity and so on and doing design thinking and all this stuff, which I don't say it's not necessary,
20:40
but I think it doesn't help when you miss this one point. And just to demonstrate it, there is quite an interesting example I like very much from the book Art and Fear, which shows pretty much why speed and risk taking are integral for innovation. And in this book there is a ceramics professor
21:03
who at the beginning of the class of the semester divides the class into two groups. And the one group is called the quantity group and their goal is to create as many pods as possible. They will be judged only on the quantity.
21:21
So if you have 50 kilograms of pods, you will get an A, 40 and B and so on. And the other group, the quality group, they just have to prepare one pod, but it has to be a perfect pod to get an A. So guess what happened at the end of the semester?
21:40
The best quality pods came from the quantity group as they started working just from the beginning and they learned from their mistakes, so the pods became better and better and better. And the other group was busy, like almost all the semester, was busy talking about the theory of perfection and how to create a perfect pod
22:03
and the philosophy of a perfect pod and that's what they got at the end. And don't tell me it doesn't look like some projects we see in the companies. So basically while digital rookies
22:21
focus their energy on working on the theories of perfection and trying to launch finish perfect mature product and so on with the whole set of features, what digital experts are doing, they're focusing on prototypes and products and they can test from the very minimal product
22:40
through all these iterations and they can improve and learn from. And I know myself and especially as I'm launching a new company now, it's very difficult to show to the people something which is not really perfect in your opinion. It's very hard to launch an MVP.
23:01
It's very hard to say like, okay, it's good enough, just launch it, don't waste any more time on perfection. But I think it's the right way to do this because otherwise how can you decide if you don't have any opinion from the market? But it's not like most of the companies are doing this.
23:22
There are just 11% of the big companies who actually regularly launch and evaluate MVPs. And what I heard from 60% of the companies, they don't launch MVPs because their products are not suitable for this approach.
23:41
So I would say they better make this approach suitable because great innovation is not born. It doesn't come out of the neat and beautiful business plan. It's rather a result of trial and error. And especially when we're innovating,
24:00
we're always dealing with fundamentally uncertain topic. And our initial assumptions are very, very likely to be wrong. So the best way is to find it out very early so we can learn from this failure.
24:20
And yeah, creating prototypes, MVPs, and testing it with user is actually a perfect way to do this. So for me, the digital transformation requires closer than ever ties between all these aspects like customer experience, processes,
24:41
business model technology. And the thing which puts it all together is the corporate culture. I don't think that you can really achieve digital transformation without focus on the corporate culture because to master digital transformation,
25:01
we need a lean, iterative, customer-centric approach, especially in an environment that encourages risk-taking and enables real product ownership. And while different skunk works and idea labs and incubators and so on are a good point to start,
25:22
I think for it really to work, it needs to be consequently demanded from the top-level management and incorporated through whole company, through whole organization. Thank you.
25:45
So thank you very much. We have five minutes left. So if you have some question, you might answer it. So I could have spoken a little slower here, yeah? Anyway, who has some questions on the topic?
26:02
Here, this side. Hi, my name is Boris. I think I used to be an early adopter. Well, today, I hate MVPs a lot because the constant trial and error experience
26:24
for me as a consumer made me not trust any company anymore that says we have the cool stuff. Come on and try it and give us your feedback. So I think if companies really value the customer,
26:41
they should stop throwing MVPs on the market. That's one way of saying it. It depends on how you see an MVP, you know? Do you see it like, I would rather see it like a minimum lovable experience, so to say, you know?
27:01
Because you can do an MVP in a very, very different way, you know? You know, there's like this typical example of a evolution of an MVP to the car. And you know, I don't know how to describe it with words, whatever. So basically, I can understand the frustration,
27:24
and especially if you consider yourself an early adopter. But the question is what kind of need you can fulfill? Like that's for me the question of an MVP. It's not like throwing something unprepared on someone. It's rather like focusing on one basic need
27:44
you can fulfill and doing it right. But, and it doesn't need, usually it doesn't need two years to do this, you know? But maybe this first iteration still doesn't have like all the 27 features you would need
28:00
at some point of time. Maybe you just, at the beginning, you need something which is simpler. But I think in my opinion, very much depends on how you do this MVP. And I can understand your user perspective or frustration, of course. Okay, some more questions?
28:22
If not, I thank you, and I thank the audience. Oh, pardon, there is one. Hi, I'm Christine. Do you have any experience with digital transformation in institutions, public administration, and what would your recommendation be?
28:43
I don't like to give like, you know, recommendation without knowing anything about the situation because like every organization is so much different. But in my experience is that it's usually even worse. Then, or for me it was even more difficult to work with public organizations than with the companies
29:04
because especially, are we talking about like government organizations, something like this? You know, there are companies which are actually not earning money, so they are not making business decisions, so to say. So the risk-taking culture,
29:22
I think it's even less existent there, which also comes like with the type of people usually working in these organizations. But I think like for such organizations, they are the same important aspects as for the companies. I will still say like for a government organization
29:42
especially, the customer experience is extremely important, especially, you know, from the accessibility point of view and so on, there are so many different customers, actually, the government is serving. So that's still the point and also like velocity and risk-taking still kind of
30:01
have to be in place there, but I can imagine that it's even more difficult than in a usual company. Okay, time is over. Thank you very much. And I wish you a nice further afternoon and some good Q notes.