Are We in Good Shape for a Digital Transformation?

By Anand Swaminathan & Jürgen Meffert

Innovation cycles run ever faster – with each of us experiencing ever more discontinuity. Anand Swaminathan and Jürgen Meffert, Senior Partners at McKinsey and Company and authors of DIGITAL @ SCALE:  The Playbook You Need To Transform Your Company, discuss the markets and technology of the digital age, examining and putting forward proposals on what is needed to successfully negotiate the upheavals of the future.

 

Jürgen Meffert: Many people feel unsettled by the rapid pace of change brought about by digitisation. To overcome these anxieties, it helps to understand a little of the context. Ever since the days of Adam Smith, the frameworks in which businesses trade have continued to evolve. The economist Nikolai Kondratiev was the first to describe the long waves in economic life that followed technical innovation – from steam power and railways to the automobile and information technology. New technologies always drive innovation cycles – the only difference being that today, those cycles are ever shorter with each innovation being overtaken by the next at exponentially increasing speed. The early industrial landscape delighted in progress: it saw how each new technology further liberated the individual – from physical work, from restrictive working hours, and from danger. Living standards blossomed for millions of people and life expectancy rapidly increased. People in today’s industrial nations live to almost twice the age as their ancestors a hundred years ago.

Anand Swaminathan: What are the consequences? Whereas in the past, an innovation cycle would span a generation, it is by no means unusual today for a generation to experience several innovation cycles. Upheaval has become the norm – and the trend is rising.

Jürgen Meffert: I’ve experienced it at first hand when we launched the first word processing computer at Nixdorf, which was set to replace the trusty old typeball typewriter. Barely had it been launched, however, than it was rendered obsolete by the introduction of the personal computer. The rapid spread of the PC changed the rules, and established completely new price points. A computer for every home was born – and very quickly, we found ourselves in the next S curve. Since then, the pace of development has intensified even more dramatically, and I find myself wondering what this will mean for the managers of the future and their education.

Whereas in the past, an innovation cycle would span a generation, it is by no means unusual today for a generation to experience several innovation cycles.

Anand Swaminathan: Managers in existing companies like linear ways of thinking. But that didn’t go too well in the past: whenever a new S curve appeared, technology was the trigger, and the traditional managers found they weren’t up to the challenge. The protagonists of each of these technologies would ring in the changes, heralding the age of the new S curve. Innovation cycles accelerate and discontinuities follow each other in ever greater succession. This is something Joseph Schumpeter recognised almost one hundred years ago, describing it as “creative destruction” in his book Capitalism, Socialism and Democracy. Such accelerated innovation also has an impact on the length of office of business leaders. It’s been radically reduced. 35% of all CEOs in S&P 500 listed companies had been in office for ten or more years in 1984 – this figure had fallen to just 15% in 2000. In 2009, CEOs on average remained at the top for just six years – and the trend is falling.

Jürgen Meffert: And the demise of business leaders has also seen many previously leading companies become irrelevant. Again, we just have to take a look at the S&P 500: in 1958, the companies listed on the index had been there for an average of 61 years; by 1980, the average time on the list had fallen to 25 years, and in 2011, it was just 18 years. Big names like Kodak, Radio Shack, Sears, and even the New York Times dropped out of the index. Once again, we see accelerating trends. The risers and fallers overtake each other in the index with increasing frequency – thus proving Schumpeter’s dictum of creative destruction: the old gives way to the new, the improved. Companies that lack the ability to translate innovation into new products, and which are unable to extricate themselves from their old ways of business, so steeped in emotion and tradition, will have no long-term future, and will fall by the wayside. Those that want to remain at the top must carefully manage the moments they launch new technologies. The latest research is working on ways to determine the best time for market entry – on the one hand, to prevent competitors stealing a decisive lead, and on the other to ensure the new technology is launched when customers are ready for it, and when its benefits will trigger strong demand.

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Anand Swaminathan: What I like about the climbers in the digital world is just how resolute they are in placing the customers’ needs at the centre of their actions. Marketing is once again playing a key role.

Marketing was originally established as market-oriented company management: a holistic, strategic view of the market, the customer and customer benefits. Over time, marketing has branched into a whole range of different disciplines. A vast number of new tools and constructs have been developed in classic marketing, further driving fields of specialisation. The last ten years in particular have seen what was once an all-encompassing function become increasingly heterogeneous. As a result, marketing has now lost its importance as a management function, and in many cases, has been reduced to simple communication and other functional roles.

Jürgen Meffert: Thanks to digitisation, there’s now a lot to be said for a renaissance of marketing as part of market-focussed business leadership. Holistic customer-to-customer approaches are needed again. And big data and advanced analytics provide marketing with a new platform for truly data-driven decisions. Never before have we been able to ascertain so quickly and so precisely what the customer really wants – and doesn’t want.

Companies that lack the ability to translate innovation into new products, and which are unable to extricate themselves from their old ways of business, so steeped in emotion and tradition, will have no long-term future, and will fall by the wayside.

Anand Swaminathan: As division of labour and specialisation reach their limits in today’s organisations, we may see a renaissance of market-focussed business leadership as it was originally defined: that is, the need to understand the customer, their changing needs, and their journey across every touch point in the company. Today, this means quickly redeveloping products based on customer feedback and establishing agile methods throughout the organisation from development to production, and from sales to administration.

Jürgen Meffert: Managers and employees can expect a great many changes: cross-functional teams instead of hierarchical silos, digital technology driving change throughout the company at lightning pace, unprecedented volumes of data requiring intelligent analysis. How can we shape education and skills, and propel society into the new S curve to ensure that digitised enterprises are able to find the employees they need in the new digital age?

Anand Swaminathan: And which central elements of these digital companies will ultimately decide their success or failure? Isn’t that worth rolling up our sleeves to find out? Let’s draw on our collective experience and see if we can lay down some key proposals for the digital age.

Jürgen Meffert: So let’s start with the individual. My first proposal would be: Every person should learn at least the basic minimum in technical skills. It’s not such an absurd idea. Everyone today – whether young or old, well-educated or less well-educated – can use a smartphone. It’s up to schools to ensure that every child in the country learns basic technical skills. In the UK, for example, programming is already a mandatory subject – and that’s entirely feasible for us here in Germany too, to make sure as many children as possible are digitally literate. In the future, a basic understanding of digital technology will be regarded as important as reading, writing, and arithmetic – for everyone, not just for those who use it in their work.

Let’s start with the individual. My first proposal would be: Every person should learn at least the basic minimum in technical skills.

Anand Swaminathan: So now let’s move on to the customer. My second proposal: The customer must be at the heart of all considerations. The digital companies show us how it’s done successfully – Google with its ever improving search engine, Amazon with its personalised recommendations, and of course, Apple. With the iPod and iPhone, Steve Jobs satisfied latent customer desires that customers hadn’t even articulated yet. Steve Jobs realised that even among their tech-savvy customer base, there was a desire to connect with the products on an emotional level – hence the supremely cool designs of Apple products. They also established an international community of Apple users, and cultivated them on a massive scale. Those who used an Apple for work, study, or play felt part of a global avant-garde.

Jürgen Meffert: OK, well let’s stay with technology, and formulate our third proposal: Consistently use technology for the things that it does well. We humans should welcome robots and computers as liberators. People are designed to think, and be creative and empathetic. We can happily leave the heavy, physical work, the mundane, monotonous tasks, and anything to do with efficiency to robots and technology. We could let our talents flourish and focus on real added value – on what we humans do best.

Of course, it’s important that society also looks at the technological discontinuities constructively and positively, and comes to regard the digital innovations as a liberation rather than a threat. That doyen of economics, Schumpeter, described it as a matter of course in functioning competitive economies: as the old occupations and roles disappear, new, usually better, less hazardous, less taxing, and more interesting jobs emerge. Such retrospection shows that technical innovations have helped us and eased our workloads. They have given us longer, healthier lives and an unprecedented standard of living. It should also be remembered that neither the steam engine, the assembly line, nor the computer led to mass unemployment – the fears are overblown.

Anand Swaminathan: Where does progress come from? Time for our fourth proposal: Promote innovation through openness and open standards. The basic premise is simple: markets are always more innovative than any single business can ever be. Once again, the digital companies show us how open interfaces allow the brunt of innovation work to be transferred to external developers. The benchmark is set by the open development conferences of Apple, where thousands of external developers collaborate, sometimes for free. And customers also play an increasingly active role. In the past, businesses protected their technology and innovations; outsiders were to have no knowledge of them, let alone collaborate. Today, things have changed in many companies, and textbooks also take a different stance. Open standards are becoming increasingly important.

Jürgen Meffert: Which brings me on to proposal number five: Embrace change as something positive. It’s something that today’s society finds difficult as people instinctively strive to preserve the status quo for their own good – from where they live and how they work to the corporate landscape in general. I remember very clearly how, many years ago, Siemens dominated the global telecommunications market with its EWSD digital switching system. Then in the 1990s, at the very height of EWSD, a new technology concept entered the market – the router. Although Siemens also offered competitive products in the area, it was Cisco – at that time, just a start-up – that came to dominate the market as the Siemens hierarchy feared the cannibalisation of its market-leading EWSD product. So we should abide by the following maxim, at least where business is concerned: allow destruction, let control give way to openness, and be willing to allow cannibalisation—better that you do it rather than your competitors. It’s something that Volkswagen recognised early on. As part of its platform and multi-brand strategy, the company manages its product portfolio to optimise efficiency on the one hand, and to limit the bulk of cannibalisation to the confines of its own group on the other.

So we should abide by the following maxim, at least where business is concerned: allow destruction, let control give way to openness, and be willing to allow cannibalisation—better that you do it rather than your competitors.

Anand Swaminathan: Change must be mastered – but you have to practice. Which leads me to my sixth proposal: Train for the big disruptions. Someone that regularly tries out new things avoids decision patterns becoming embedded. If conditions change, an embedded/reflexive decision pattern may no longer be enough. Take driving on an icy road, for example: if you lose your grip, unlike on a dry road, you have to open the steering angle. By the same logic, when work starts becoming routine, it’s time to change. Job rotation – preferably every three to five years – maintains dynamism. Continuous training should be established as a fixed component of corporate policy. I never understand why employee representatives don’t argue more strongly for it – after all, it’s ultimately about improving people’s employability. Perhaps it’s even more important than seeking further reductions in working hours…

Jürgen Meffert: That’s a very good point. For my seventh proposal, cultivate networks for more ideas and creativity, we need to take a look inside the company. We’ve seen how hierarchies often stunt innovation and impede entrepreneurship. By restricting their horizons, businesses, schools, universities, and even countries lose sight of new developments. We can find them everywhere – in Israel, South Korea, Japan, Silicon Valley, MIT, our Max Planck Institutes, and in central research laboratories like Bell Labs in the past. That’s where we need to be – or at least have an ear. There are plenty of examples of how important such networks are, and how effective they can be in many areas. A large network helped a friend of mine who recently became seriously ill. Within a very short space of time, the world’s two leading experts had been identified, and were able to help – one in New York, and one in Switzerland.

Another example is what’s currently happening in software development. Software code is shared and published in open communities such as GitHub, where anyone can use it. Any software developer can upload his software elements and access other libraries – ushering in a completely new S curve of productivity in the area.

Anand Swaminathan: My eighth proposal represents a true revolution in business: Competence over hierarchy. What do I mean by that? Regardless of age, academic qualifications, or position in the company, one thing is true: you are what you know, not what titles you carry. Which demands a completely new paradigm in management: the obligation to dissent. Take the example of universities: until just a few years ago, the obligation to dissent was unthinkable. Hierarchy was important – the professors saw themselves as the holders of power rather than holders of an academic chair. Strict guidelines governed dissertations; there was no room for discussion. These days, professors are often evaluated by their students – the relationships have completely reversed.

Jürgen Meffert: Which brings me to my ninth proposal – you’ll like it: Education and further training should be like a playlist. A playlist on Tidal or Spotify is first and foremost personal – it’s tailored to me. It reflects what I like and what’s relevant to me. It contains the latest music, of course, but also classic hits and new artists – ones that match my music profile. Because I listen to different music today than a year ago, it always has to be updated. It also needs to be maintained and used over a lifetime.

Such a concept means a revolution for every educational establishment, whether at elementary school level or post-doctorate level. Too often, their curricula are retrospective in nature – too many classics and not enough new hits or new entries. Typically old-fashioned. Too few students have their fingers on the pulse. More contemporariness, and more individual playlists are needed. A new job profile will emerge like that of a DJ, who constantly delivers a tailored blend of classic hits, up-to-date chart music, and promising newcomers – and the mix has to fit the profile. Lifelong learning also applies to business: as part of a dual system, trainers need to adjust their training courses to mirror the latest changes – both in terms of form and content. This way, companies can remain young and “steer the curve” – switching from a linear to an exponential mindset. It’s an attractive and valuable model, and feasible for every individual, regardless of biological age.

Anand Swaminathan: And so to my tenth proposal: Prevent thought silos. I would be in favour of first providing young people with broader training – a kind of General Studies. Specialisation should only come later, once the individual has developed holistic business judgment. As such, job profiles should be less specific – because without interdisciplinary thinking and team skills, today’s businesses will fail. Employees should have an end-to-end understanding of customers. The super-specialised tasks can be left to the IBM Watsons and Google DeepMinds of this world.

When I look around, I see that technological innovations have contributed to a sustained easing of workloads, which in turn has led to an increased quality of life and greater life expectancy for many. However, I also see that new technologies always lead to greater uncertainty. Do I know what this innovation really means? Will it create or destroy jobs? What will happen to me? Will I still be needed? Innovations demand a completely new quality of trust – and that has to be earned first. That’s where management plays a new and crucial role – we could call it ethical responsibility. It’s also important that management provides that vital stability to the company, its customers, its employees, and its business partners in these times of turbulent change. Managers need to take time out to reflect. Or, as a colleague of mine says: sometimes you don’t need to saw faster, you just need to take the time out to sharpen the saw.

Let’s look forward to the next S curve of digitisation: Artificial intelligence, avatars, robots dashing about. Humans will still be needed, and will be responsible for progress, prosperity, and success. New, exciting roles are emerging – not least when it comes to ensuring the success of your digital transformation.

Excerpted with permission of the publisher, Wiley, from [email protected]: The Playbook You Need To Transform Your Company by Anand Swaminathan and Jürgen Meffert. Copyright (c) 2017 by McKinsey & Company. All rights reserved. This book is available at all bookstores and online booksellers.

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About the Authors 

Anand Swaminathan is a Senior Partner based in San Francisco and is a leader at the intersection of Digital McKinsey and McKinsey New Ventures. He helps companies across industries leverage technology and digital capabilities to evolve their operating models and transform their businesses to effectively serve their customers, while scaling operations efficiently. He focusses on the retail, high tech, finance, and infrastructure sectors.

Dr. Jürgen Meffert is a Senior Partner in the Düsseldorf office of McKinsey & Company. He is both the Director of the Global Digital Practice in the area of B2B, and founder of McKinsey’s initiative for SME growth companies. He advises global firms in the telecommunications, high-tech, and media industries, and has overseen extensive transformation programs in various fields: from growth and innovation strategies, marketing and sales, through to processes and organisation.

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