Digital Transformation and Organisation Evolution

Digital Transformation and Organisation Evolution

You probably noticed that in the recent period, I have focused on structuring a few organisation design concepts on this blog. I tried to clarify the distinction between Business Model, Strategy, Operating Model and Organisation Model. I have spoken about Consistency and Intentional Design. I have done a deep dive on the different models existing for Organisation, the various Business Model theories as well as the different existing frameworks for Operating Models. I have then introduced and synthesized most of these concepts into the Organisation Evolution Framework which I recently presented. Let’s see this framework in action now.

Digital Transformation is one of the areas where the impact of each of these components is more visible. The reason is simple: the current technological advancement impacts industries and companies in different ways, which means that as an organisation you need to analyse the impact of Digital differently depending on your specific situation.

Impacts of Digital Technology on Organisation Evolution

It is essential to acknowledge that Digital impacts Organisations in many different ways. In the figure below, I have tried to recap the definitions we have seen so far of each Building Block, the Critical Element that each block carries, and what I have defined visible consequences. These are elements that are visible in an organisation (or traceable through behaviours). It is a partial list, used to highlight some key focus areas.

Fig. 1: Organisation Evolution: Organisation Building Blocks, Definitions and Elements.
Fig. 1: Organisation Evolution: Organisation Building Blocks, Definitions and Elements.

A typical pattern that many organisations are taking today is to identify Digital as a Strategic Choice. What this means is that the organisation allocates more investments to digital technology investments, for example, makes priority choices in that area (for example to focus more on eCommerce), some time might even select new competitors to focus on.

Because all these building blocks don’t live in isolation, ideally, an organisation should reflect on the impact that technologies can have on the other building blocks. Unfortunately, this does not happen often. Many organisation then translate their strategic choice directly in tactical solutions without understanding the impacts on the other Models. For example, we might decide to activate Scrum and Agile in the digital department we have set up, without reflecting on how exactly this translates in reality.

The reality is that Digital Technology changes are impact organisations at all levels, and these need to be taken into account understanding the reach of each one of the impacts on the fabric of the organisation.

Figure two tries to do precisely this. Each element on the right is an area of impact that current Digital transformation is causing at market or organisation level. Each of these somehow “challenges” one of the Visible Consequences driven by the building block. In some instances, it can stimulate the need to rethink the entire building block.

Fig. 2: Digital Transformation impact on the Organisation Building Blocks.
Fig. 2: Organisation Evolution: Digital Transformation impact on the Organisation Building Blocks.

Let’s see this a bit more in detail. I will use an example taken from history: the disruption that digital music and streaming have caused on the Music Industry.

An illustrative example: the Music Industry Transformation

When the MP3 appeared (the technology innovation that allowed the disruption), the first reaction that many companies did was purely at the level of Protective Measures within their Strategy. We all recall the fact that the Majors of the Music Industry fiercely opposed the development of Napster with all legally available tools, which often led to court actions. Some started working on some alternatives, prioritising some investments on Digital, through different Capital Allocations. Most majors developed their download portals. What many did not realise however was that a) customers started displaying a different view on Intellectual Property Rights, and especially on the consolidated habit to “bundle” songs together in albums and b) that competition was forming at the Edge of the Music Market.

When Apple entered the market with iTunes, it did so not by producing a new technology innovation (MP3 readers were already existing, and many were more advanced than the first iPod). What they did was creating a new Platform Economy which challenged not just the Strategy of the majors, but their Business Models. Steve Jobs managed to convince most of them to join its platform; few realised that this meant changing their Business Model dramatically. The effects can be seen in Figure Three. Just to give a historical perspective, Napster launched on June 1st, 1999 and iTunes Launched on April 28th, 2003.

Fig. 3: 40 years of Music Industry Sales in the US. Source: Visual Capitalist.
Fig. 3: 40 years of Music Industry Sales in the US. Source: Visual Capitalist.

As we have seen, Revenues are a vital element of the Business Model. Which is why what has happened in the Music Industry today is the fact that New Business Models have emerged, with Innovative Value Propositions (think about Pandora or Spotify). Alternative Revenues channels have formed and gained substance (concerts and merchandising above all).

Seen from these perspectives, the impacts at the Operating Model or Organisation Model seems trivial. But they also have to be considered. The customer has been redefining endlessly what their perception of value is: the Album (which was the unit of efficiency for many years) has lost appeal because customers want to access individual songs. But customers have been willing to give up incredible volumes of their data to inform new ways on how business is conducted. Think about the music suggestions of Spotify. Roles have been impacted at all levels: just think about the importance of Music Stars about their social media presence (not always managed by the Music Major anymore).

This analysis should show how pointless it is to address the challenge imposed by Digital by just focusing on one of the building blocks. Thinking that we can become “more digital” simply changing one system, implementing an AI algorithm or hiring a Chief Digital office is non-sense.

Managing Impacts

Some industries like Retail are today at a similar inception point to that one of the Music Industry. The indicators that Digital is transforming the industry are available at many levels. Some new entrants are born fully digital, there are entire digital ecosystems today, platforms like Amazon have reached full maturity, and above all, the customer is more and more ready to get a different experience. Unfortunately, the process is slower than in the case of music because the product cannot always be dematerialised.

Yet, most organisations have started operating solely at some levels, without necessarily reflecting at the consequences of this. I made an example of Agile implementation, and de facto most eCommerce operations of large retailers are supported by teams that work with some kind of agile methodology. Question: is this sufficient?

Probably not, because if as a consequence of a change in market dynamics, I solely change some bits of the organisation without asking myself if the Value Delivery Chain needs to be modified, I will have issues in the medium term. Because I’m losing the consistency that needs to exist among all of the building blocks. To continue with the parallel with the Music industry, one example is Spotify. Many organisations are trying to copy the so-called Spotify Model to scale agile ways of working, but they do this as a simple organisation change. That model, however, works because it is part of the Operating Model of Spotify (the original videos refer to the Engineering Culture as a way to deliver value for the business). Which is aligned to the Strategy and, above all, is an expression of the current Spotify Business Model.

A partial answer will only lead to merely tactical results.

What about Culture?

In a previous post, I have extensively spoken about how Digital Transformation is essentially a culture changeWhy this different approach today?

The approach is not different. Culture is an element that permeates and transcends the Building Blocks of our organisation, same way as Leadership enables consistency between the components. I have tried to illustrate my thinking through the model I have created as an Organisation Evolution Framework.

Culture sits behind all of the building blocks of the organisation. Many of the cultural artefacts (like core assumptions and patterns) are often linked to the Business Model. But it is difficult to find a one-to-one correlation between all of these items. Leadership is what should continuously focus on the constant alignment between the different Building Blocks to ensure consistency. As we have seen, however, this consistency needs to be the result of the dynamic tension, not a static status which ultimately hinders innovation. Finally, there is the territory where the border between the organisation and the market sits: this is the Ecosystem of network and relationship that each organisation creates. If the organisation has defined a Purpose, this element would sit at the crossroad of Culture and the Ecosystem and would work as an “attractor” for all the building blocks, similar to the Magnetic North.

Does this mean that any Change programme needs to touch all of the different parts? No: we need just to ensure we always consider the right element to be addressed and discussed, depending on the scope of change and its objectives.

The Organisation Design Series of Article. Access them all here.

What is Organisation Design

What is Organisation Design?

Organisation Design is a foundational skill for all HR professionals as well as managers. Yet from my experience, it is relegated to very few…

Business Model: the theory and practice

Business Models: the theory and practice

I have recently started endeavour in trying to define the essential elements of the design fabric of an organisation. Business Models are a crucial element of…

A new definition of Digital Transformation.

All of the above leads to probably a new definition of Digital Transformation. There are some elements to be considered.

  1. Digital impacts organisations and industries in different ways. We need to evaluate the entire set of implications and the impact on all the building blocks of our organisation.
  2. In many ways, Business Models are the one that is more challenged. If we’re not ready to look at the necessary innovation for our Business Models, we risk losing sight of the Value Proposition we generate, which will soon become outdated.
  3. We need to align Operating Models first, before addressing the Organisation Model.
  4. Last but not least, we need to ensure we consider this as a continuous development cycle, not a point transformation.

There are two views on Digital Transformation that make it pretty unique: the external one that looks at the technology and market forces that push organisations to transform, and the internal one that looks at how the organisation reacts. I think that both sides are needed to define this transformation successfully.

Digital Transformation is the process that, by embedding new technologies in the daily lives of consumers, challenges organisations Business Models, Strategies and Operating Models. Seen from an internal perspective, Digital Transformation is the process by which organisations redefine their Business Models, Strategies and Operating Models to compete in the Digital Age.

Not all organisations need to transform themselves fully. Some are lucky enough to have just to adapt some components of their fabric. Which is why there are many talks about different types of Digital Transformation. The issue is that often these views give a partial view of the phenomenon, while it’s essential to get a more holistic one.

Conclusion

We live in a very dynamic moment, where technology change is disrupting significant parts of the business and entire markets. Yet, in many industries, there are people still failing to see the effects on this. The only possible way to understand how to cope is to use the tools provided by Design Thinking and apply them in terms of Intentional Design to your organisation. At the same time, adopt a Systems Thinking view to allow a genuinely holistic approach.

Digital Transformation is de facto, the next level of Organisation Evolution.

Unfortunately, this means, once more, that there are no easy recipes, nor off-the-shelf solutions that you can simply buy and apply. It also shows how important it is to develop strong Organisation Design competencies in your organisation, at all levels to allow understanding at what level will external transformation hit the most.

Please don’t hesitate to send your feedback through the comment form below.

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Cover Photo by Oleg Sergeichik on Unsplash

  1. Pingback: Introducing the Organisation Evolution Framework | Sergio Caredda

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