At this point, most small business owners know that digital transformation is necessary for their businesses to survive in today’s continuously disruptive times. And yet, according to David Rogers, a professor at Columbia University and the author of The Digital Transformation Roadmap (available in September), 70% of digital transformation efforts fail. He says that’s because “companies view these efforts as technology problems rather than the organizational challenges they truly are.”
But entrepreneurs can’t let those dreary stats stop them. And don’t assume that failure is a given for your small business.
Rogers says, “The imperative of digital transformation is less understood among small businesses. Some owners have started efforts, while others may not even be sure exactly what digital transformation means.”
In his book, Rogers lays out a framework that companies of any size can use to tackle the barriers to change. He says, “It gives leaders a hands-on tool kit to unlock the potential of every person inside their organization to drive growth.”
I interviewed Rogers (via email) about how small business owners can demystify the digital transformation they must undertake to survive in this digital era.
Rieva Lesonsky: Can you explain the importance of digital transformation for businesses that want to grow?
David Rogers: My definition of digital transformation is simple: transforming an established business to thrive amid continuous digital change.
This is the challenge facing every established business today. They must continuously test, discover, and try out new customer experiences and operating models. The reason is that new digital technologies are driving such rapid changes in customer behaviors, business models, competition, and new entrants in every sector. No matter the size of your business, the fundamental challenge you face is the need to adapt so you can continue to grow.
We see in companies like Netflix that it’s not enough to have one great idea and build a digital business based on it. Netflix’s first business model was streaming content it licensed from others, but once that service proved incredibly popular with customers, the licenses became cost-prohibitive. Netflix had to shift to a model where they created the content themselves, becoming a film and television producer. Then they pivoted to becoming an international network, translating content from all over the world into different markets. Most recently, they discovered that total subscriber growth is topping out, so they’re testing cheaper advertising-based offerings while they revisit how easily they let people share their passwords.
Every company that has grown continuously in the digital era—whether Netflix, Amazon, or Domino’s Pizza—has succeeded by constantly transforming their businesses and approaching them from new directions.
Lesonsky: What are some common reasons digital transformation efforts fail?
Rogers: I’ve been researching this topic for years. I wrote the first book about digital transformation. That book [The Digital Transformation Playbook: Rethink Your Business for the Digital Age (2016)] focused on how companies must rethink their strategies for the digital era. But what I’ve learned in the years since is that even if you do rethink your strategy for growth, it can be very hard to make change happen within your organization.
That is where so many companies struggle. It’s why we see [so much] failure. It is why my latest research focused on digging into the root causes of that failure. Where do organizations get off track?
I discovered five fundamental barriers to change faced by companies of all sizes. These are the key barriers that prevent digital transformation and real innovation from happening:
1. No shared vision. There’s no alignment of everyone in the business around a single view of where their industry is going, what role they want to play in it, and how they will pull together to achieve that outcome.
2. No discipline in priorities. I see companies moving in 100 directions because there’s always a new technology, trend, fad, or opportunity that might be relevant to your business. Most companies lack the discipline to focus on a few strategic priorities and say no to the rest. The worst is when I see companies focus on technology first rather than starting with the customer problems they’re trying to solve.
3. No habits of experimentation. Companies are used to dealing with any new problem or opportunity through planning. Whenever they see a new digital opportunity, they say, “Give me a business case. Show me the benchmarks, and let’s gather lots of third-party data. Then, we’ll do a detailed plan of action and give everyone their marching orders.”
But in a dynamic and unpredictable environment, which is the digital world, that’s a recipe for failure. The only companies that succeed are those that develop a real skill set for constantly testing, making small investments, moving quickly, and experimenting to learn what does and doesn’t work in the market.
4. No flexibility in governance. As a result, companies struggle to allocate funding between their existing core business and new opportunities. They struggle to allocate people. And they struggle because they apply the same metrics, rules, and operating model to new ventures that they use to run the well-established parts of their businesses.
5. No growth in capabilities. I see companies trying to keep up and pursue new strategies for a rapidly changing market, but they’re not investing in the right digital technologies, data, talent, and skill sets. And they are not focusing on building the right digital culture within their organizations.
Lesonsky: What are the first steps to take if you haven’t started digitally transforming?
Rogers: The first step is to define a shared vision that must be unique to your business and understood by every employee, investor, and stakeholder.
A shared vision starts with knowing where you’re going and why. Begin by defining your “future landscape”—a shared point of view on how your industry is changing. What do you see as the biggest forces defining the future for your business? It also means defining your “right to win.” That means understanding your company’s unique capabilities or advantages that enable you to play a key role in the digital future and create value for your customers.
But knowing your future landscape and your right to win is not enough. You also need to ensure everyone has a clear motivation for change—because this kind of transformation requires everybody in the company to be involved. And change is difficult! It’s much easier to keep showing up at your office and doing the same job you did yesterday.
That motivation for change comes from two things. One is what I call a “North Star impact.” And that’s a clear answer to this question: “If you can transform, how will that make a difference in the world? How will it change the lives of your customers, your employees, and maybe society as a whole in a positive way?” That’s critical to motivating your employees.
At the same time, you also need another piece of motivation, what I call your “business theory.” This is an explanation of how investing in your digital strategy is going to generate financial returns for the business. And that piece is critical to gain the backing of specific stakeholders: your chief financial officer, anyone in charge of a P&L, and outside investors. All these people need to agree on a theory of how investing in digital transformation will drive financial growth if you want them to be aligned and support the change.
Lesonsky: If you have started, how do you measure success?
Rogers: The key to measuring success in any digital transformation is to first have that shared vision in place. That is, you know where you’re trying to go and why and how your particular digital strategy will generate an impact for the customer and financial gain for your business. With that understood, you’re in a position to know how to measure things and see if you’re moving in the right direction.
Far too many companies try to start with measurement. They just say, oh, we’re going to become a digital company. And then they start looking for generic, off-the-shelf assessment tools that look at things like, “What kind of technology do you have in place?” This is meaningless in terms of business outcomes, which is the whole point of any digital transformation effort.
Again, you have to know the impact you’re trying to have on the customer and how you believe this will generate a return—whether that’s revenue from new products, reaching new customers, or reducing operating costs. There are many ways digital strategies can generate financial returns.
Once you know these [two things], you can start to pick the key performance indicators (KPIs) that will guide your investments and let you know if you’re making progress. I call this defining success. It should include metrics for customer and business impact. If you define success this way, measuring digital transformation is very straightforward.
Lesonsky: What lessons can small, growing businesses learn from the well-known big brands that have successfully undergone digital transformation?
Rogers: Smaller businesses actually have an easier job changing. They can learn a lot from all the mistakes made by bigger, older companies as they tried to transform into the digital era. As businesses get larger, it becomes much harder to drive change.
For small, growing businesses, the key is to be on the lookout for those five barriers to transformation. Make sure you have a shared vision, that you are disciplined in setting clear strategic priorities, that you learn and master the process of experimentation, that you maintain flexibility in your governance (how you manage people working on your existing business versus those working on new opportunities), and that you keep investing in and growing your technology, your talent, and your culture.
But the main thing is to not let myopia set in. For any company, the longer you’re in business and the more successful you are, the harder it is to overcome the natural tendency to define your future by the products that have been successful for you in the past.
Large businesses struggle with this problem, but small businesses face it too. The more you grow, the more successful you are, the harder you have to push back against this mental trap. Instead of focusing on what products have gotten you where you are today, keep focusing on, Who is your customer? What are their problems? And how can you keep adapting and finding new ways to solve their problems and create new value for them?
In the words of Andy Grove, famed CEO of Intel, “Only the paranoid will survive.”
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Forbes
