Digital Transformation and Organisation Evolution

Written by

Sergio Caredda

Posted on

March 5, 2020

Edited on

September 30, 2020

Impacts of Digital Technology on Organisation Evolution

Fig.1 – The Organisation Evolution Framework

It is essential to acknowledge that Digital impacts Organisations across all organisational dimensions. We might not be aware of this, or intentionally cater for these changes, but we need to reflect on how the new environment and the choices we take impact each dimension differently.

Assessing Visible Artefacts

To ensure an easier understanding, I have created a map that links Elements with their definitions, the critical elements and a selection of Visible Artefacts. These are elements that are notably present in organisations and that can be used to help visualise each core element of the model. This concept is linked to the polarities we have seen between Emergence and Intentional Design. Not all organisations have clearly designed each of the elements, but all elements that are visible, and that can be referred to choices made linked to each core element.

The list below is partial, but shows a number of elements that each of you might recognise in their organisation.

Fig.2: Organisation Evolution Framework – Visible Artefacts

Digital Patterns in Organisation

A typical pattern that many organisations are taking today is to identify Digital as a Strategic Choice. This translates normally in making technology investment a Business Priority. Capital allocation is modified to give technology a priority, measures are often specifically targeted at specific competitors. Depending on the industry, Digital becomes a way to develop a specific channel (B2C or B2B). Protective measures are put in place to protect the other, more traditional channels.

However, the Core Building Blocks of Organisation Design do not live in isolation. Ideally, an organisation should reflect on the impact that technologies can have on the other building blocks. This does not happen often, unfortunately. For example, many organisation then translate their Strategic Choice directly in tactical solutions (like the choice of a specific technology) without understanding the impacts on the other blocks. A typical scenario is that of organisations that have activated a Digital Sales Channel, and decide to activate Scrum and Agile to support that channel, failing to understand the necessary adaptations to the rest of the organisation.

Digital impacts organisations at all levels, altering the way organisations acquire, process and use data. The speed at which this happens critically impacts traditional ways on which organisation manage external forces, creating nothing less than a revolutionary force.

In figure three we try to explore precisely this. On the right I have identified a number of elements that Digital is causing at market, industry or organisation level. Each of these elements of Digital Impact “challenges” one of the component of current organisation. We can trace these impacts through patterns whereby a Digital Impact challenges one of the Visible Artefacts we have already seen. All these patterns create some form of unbalance, as often the organisation does not see them in their full picture, and rather adresses them individually, or ignores them fully. In many ways, these impacts appear as “weak signals”, showing the need for the organisation to holistically “link the dots”.

Fig.3: Organisation Evolution Framework – Impacts of Digital

Let’s follow two quick examples.

Alternative Revenue Models are one of the more visible characteristics brought in by the exploitation of digital technologies. Google is able to provide free email and a ton of other namely free tools, because in reality drives revenues through advertising and sales of data. This challenges directly the Revenue Sources of traditional Business Models, exposing them to dilution and margin pressure.
Big Data is another very visible characteristic of current technology innovation. Digital native companies are able to link in information about customers across all their touchpoints, because they have been developed with this in mind. But traditional organisation still mostly operate by segmenting data across their organisational siloes, making iot difficult to connect multiple sources into a holistic view. This challenges directly the Value Delivery Chain of the organisation and its capability to deliver value.

But, let’s see this a bit more in detail. I will use an example taken from recent history: the disruption that digital file formats 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, often leading to court actions. Some started working on some alternatives, prioritising investments on Digital, through different Capital Allocations. Over time most majors developed their own download portals. What companies did not realise, however, was the shift in consumer behaviors that new technologies had enabled.

Customers started displaying a preference for downloading individual songs, rather than entire albums, showing progressive discomfort on one of the main revenue strategies that majors had historically put in place.
Customers also started displaying a different view on Intellectual Property Rights. Accessing a song through Napster felt similar to listening to it through the radio and recording it. The problem was, however, the big difference in technology reach: once an MP3 was made available, this could be copied all around the world in a matter of minutes.
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 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 how this would dramatically affect their Business Model. The effects can be seen in Figure Four. Just to give a historical perspective, Napster launched on June 1st, 1999 and iTunes Launched on April 28th, 2003.

Fig. 4: 40 years of Music Industry Sales in the US. Source: Visual Capitalist.

Revenue Sources are the most defining artefact of a Business Model. What has happened in the Music Industry today is the fact that with the emergence of New Business Models with Innovative Value Propositions (think about Pandora or Spotify), entirely new Alternative Revenues channels have formed and gained substance (concerts and merchandising above all). Music Revenue is growing again in recent years, but is moving to entirely different players.

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 how Spotify builds its music suggestions, and how much personal data we release to such a platform. Roles have also been impacted at all levels: just think about the importance of social media presence for performers and bands, (not always managed by the Music Major). Or the role of YouTube in the making of new stars without the intermediation of the traditional talent scout.

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 the customer is more and more ready to get a differentiated experience. The recent Covid-19 pandemics have seen a multiplying effect, with penetration rate of ecommerce over the total retail increasing tenfold in a matter of months. This has partially reverted the assumption that retail digital disruption would have taken more time, because the “retail experience” could not be fully dematerialised.

Yet, most retailers have started changing solely at some levels, without necessarily reflecting on the effects of the broader transformation imposed by Digital. I made the example about the implementation of Agile to support the e-commerce channel of some retails. Question: is this sufficient?

Definitely not. Solely changing a way of working as a consequence of a full transformation of market dynamics is akin to taking an aspirin in the face of the global warming. I seldom see organisations addressing questions like: what is the impact of Digital on our entire Value Delivery Chain, and then taking consequential actions on this. Instead, the typical reaction is to try to identify a “best practice” that some player has been doing, trying to replicate that instance within our organisation.

Continuing with the agile example, we can think of 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 adaptation. That model, however, works because it is part of a broader intentional design of the organisation, that spans all its components and blocks. And this is immediately visible when you look at how such an implementation reacts when faced to traditional processes and structures that are not adapted, like Budgeting, Command and Control structure, traditional performance management and so on.

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 change. So far we have instead mentioned specifically the more “hard” building blocks of organisation desig. Why?

The approach is not different. Culture is an element that permeates and transcends all the Building Blocks of our organisation, same way as Leadership enables consistency among its components. This is visible through the illustration we have already seen of the Organisation Evolution Framework.

Culture sits behind and supports all of the building blocks. Many of the cultural artefacts (like core assumptions and behavioral patterns) are often influenced by the Business Model. But it is difficult to find a one-to-one correlation across all of these items. Leadership is what we should continuously focus in creating an intentional alignment of the different Building Blocks. Digital Transformation is about finding coherence and consistency between these building blocks, to truly enable a new way of thinking and working. As we have seen, however, this consistency needs to be the result of dynamic tensions, 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 Digital Transformation programme needs to touch all of the different organisation components? No: but we need to ensure we always consider dependencies and influences, and coherently decide the items that we want to intentionally change for good, and those where emergent features are fine to develop on their own.

A new definition of Digital Transformation.

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

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.
In many ways, Business Models are the one that are 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.
We need to align our Operating Models first, before addressing the Organisation Model.
Last but not least, we need to ensure we consider this as a continuous innovation cycle, not a point transformation.

Today we can see two main views on Digital Transformation. The external one that looks at the technology and market forces that push organisations to transform, while the internal one looks at how organisations react to these disruptions. I think that both sides are needed to define this transformation successfully.

Hereby my definition of Digital Transformation

Digital Transformation is a societal evolution that, by embedding a constant flow of new technologies in the daily lives of individuals, disrupts the operations, strategies and business models of traditional organisations.
This reverberates internally.
From this perspective Digital Transformation is the process by which organisations redefine their organisational DNA to adapt and compete in the Digital Age.

Not all organisations need to transform themselves fully. Some are lucky enough to have just to adapt some elements of their fabric. Which is why there are many talks about different types of Digital Transformation. What we need to ensure is in any case a systemic view of the current transformation and of its impact on our organisation.

This is also what makes Digital Transformation one of the key domains for Intentional Design in our current scenario. Carefully balancing Intentionality and Emergence, and building a coherent organisation for adaptability and networking is vital for the sustainability of our organisations.

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.

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