To compete against digitally savvy businesses, born-traditional companies built on Industrial Age principles and practices will have to make big changes. It won’t be easy, but taking a page from digital exemplars’ success playbook will help.
This article is part of our Born-Digital study, where AlixPartners set out to research born-digital companies' unique blend of strengths and challenges and identify the most pressing needs and areas of focus needed to sustain their success. See all the articles in our series here.
"In the digital era, what is your company? Ultimately, it’s your ideas. In legacy enterprises, the applications they built served tens of thousands of employees, whereas now you have to think that your application will serve millions of people quickly. This makes intellectual property critical.”
—C-suite executive, technology company
Everyone knows that born-digital companies are growing at a blistering pace compared with their born-traditional counterparts.
Born-digital businesses are both the protagonists and the disruptors in a diverse array of industries—and they’re making life simpler for customers by providing meticulously personalized offerings, delivering goods and services at unprecedented speeds, and presenting customized options like delivering to your door versus delivering you to their door.
For born-traditional companies, competing against their born-digital counterparts is no easy feat, and many are at risk of being displaced. In our experience, many born-traditional businesses have dragged their feet in responding not only to the threats posed by born-digital successes but also to the new opportunities these fast growing newcomers present.
Specifically, born-traditional firms have a valuable chance to learn from their digitally savvy counterparts on multiple fronts—like how to extract maximum business value from data, how to tailor their offerings to a customer’s every need, how to empower their employees to innovate, how to use digital technologies such as cloud computing, and how to rethink their organizational structures.
Indeed, findings from our recent survey show that born-traditional companies have lagged behind their born-digital counterparts in several respects, including how far along they are in digital transformation, where they focus their digital efforts, and how they use analytics.
Most of the born-digital companies in our study consider themselves digitally mature, whereas most of the born-traditional companies are still transforming.
ROYAL PHILIPS TRANSFORMS ITSELF INTO AN INTEGRATED HEALTHCARE SOLUTIONS PROVIDER
To succeed in the digital economy, Dutch multinational conglomerate Royal Philips redefined its value proposition to offer integrated healthcare solutions in the consumer, clinical, and hospital spaces. The effort required divestment of some product lines and expansion of others—along with a major digital transformation.
To digitally transform, Philips:
Beefed up its operational backbone to develop and support digital offerings, including creating a data platform providing access to enterprise customer and product master data
Experimented with digital technologies to enhance its product offerings; for example, developing apps that let consumers track results from using personal devices like sleep apnea masks
Created digital platforms providing repositories of reusable services for common needs, such as registering new devices, which helped accelerate delivery of new solutions
Redesigned key product development, marketing, and sales processes—such as involving healthcare organizations in co-creating new solutions
The time and energy invested in Philip’s digital transformation paid big dividends, including increases in share price as well as expanding revenues and EBITA for its HealthTech business.
Source: Ross, Jeanne W., Mocker, Martin, and van Zoelen, Edgar. “Architecting a Digital Transformation at Royal Philips,” MIT CISR Research Briefing, January 2018.
UNDERSTANDING WHAT’S BEHIND BORN-DIGITAL NIMBLENESS AND SPEED
Why are born-digital companies so much more nimble than born-traditional ones, and how do they manage to grow so quickly? In part, it’s because born-digital enterprises have less to lose than their born-traditional counterparts do. That is, they don’t have to destroy something to create something else. That’s why they can more easily move quickly and with less disruption.
For born-traditional companies willing to initiate major change, walking away from the winning formula that got them where they are today is difficult. Closing stores, shutting down factories, outsourcing functions, using analytics in new ways to get insights on pricing and promotion strategy—all such moves require painful choices and a willingness to destroy old ways of doing business. That’s especially upsetting and frightening for the people who created those old ways of doing things.
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BBVA'S USE OF DATA TO SHARPEN ITS COMPETITIVE EDGE
Madrid-based BBVA, a global financial group, set out to enhance its use of data to drive its competitiveness. The strategic pivot involved several steps.
- Taught employees throughout the company about why data-driven transformation was important and how it worked, including showing them how data science applications boosted sales and customer engagement
- Paired the data scientists with business unit heads to co-create operational improvements, such as delivering individualized product recommendations to branch managers on demand
- Converted the best new data-driven work practices into tools and techniques that could be reused across the company, including a customer analytics platform that let users throughout BBVA find data models and solutions to problems already solved
The new data and analytics subsidiary launched 40-plus data science projects for dozens of business units within BBVA, including a flagship commercial data product for point-of-sale customers that enabled merchant users in Spain to achieve margins 25% higher than their compatriots who weren’t using the application.
Source: Wixom, Barbara H. and Asadi Someh, Ida, “Accelerating Data-Driven Transformation at BBVA” MIT CISR Research Briefing, July 2018.
EMBRACING AN INNOVATION MINDSET—GIVING UP MANAGEMENT CONTROL
In taking a page from their born-digital counterparts’ playbook, born-traditional companies will have to make two especially daunting changes. First, they’ll have to adopt a new mindset—one characterized by rapid prototyping and experimentation. And second, they’ll have to let go of the centralized control and process management approach they’ve long used.
Industrial Era principles and practices have been honed across many decades—from the eighteenth century to today. Its defining characteristics include the achievement of economies of scale, the establishment of repeatable and predictable physical processes, and the use of centralized and hierarchical decision making. Some of the elements of that approach are still needed today to support operational efficiency—and born-digital companies can benefit from mastering them, too. But when it comes to the innovation and growth that born-digital businesses excel at, other elements of the Industrial Era approach have become increasingly out-of-date—and even harmful for traditional, born-traditional companies.
Modifying a born-traditional approach to business will require courage on the part of these companies. Understanding the journey one company followed demonstrates that it can be done.
AIRBUS INVESTS IN DIGITAL TRANSFORMATION WITH THE FUTURE IN MIND
European aerospace manufacturer Airbus remained committed to investing in digital transformation even as the COVID-19 pandemic led to order cancellations and delivery delays. Airbus had set out to put digital at the center of how aerospace products are designed, manufactured, and operated–with an eye toward reducing costs, accelerating time to market for its products and meeting its customers' expectations for quality, safety, and environmental performance.
To lay a foundation for success, the company:
- Maintained critical mid-term investments in digital design capabilities for next generation aircraft, even as the company faced a severe disruption in its markets with the impact of COVID on the aviation industry.
- Continued 'Industry 4.0' initiatives centered on advanced analytics to improve production efficiency for existing programs and support airlines with advanced fleet management and predictive maintenance solutions, while investing in artificial intelligence, and quantum technologies.
Airbus’ investment in digital has delivered impressive results. For instance, ongoing digitalization of the company’s entire manufacturing ecosystem enabled it to keep operating its production facilities and managing deliveries throughout the COVID-19 pandemic.
And savvy deployment of digital tools and technologies is supporting strategic projects–including the Future Combat Air System, the European defense technology initiative led by France, Germany, and Spain to develop sixth-generation fighter-jet technologies and fully automated remote air platforms. Future projects also include using digital to improve carbon-emission performance in Airbus’s next-generation hydrogen-powered aircraft as well as eVTOL air taxi vehicles.
Source: Bellamy III, Woodrow. “Airbus CEO Bets on Future Benefits of Digital Design Investments,” Aviation Today, 4 August 2020, www.aviationtoday.com.
To up their digital game, born-traditional companies will have to make major changes on multiple fronts—including their business and operating models, their organizational cultures, and their talent management approaches.
Companies that tackle those tasks now will stand the best chance of surviving the disruption that born-digital enterprises have introduced into the business environment.