Is Your Digital Transformation Focused on Wright Strategy?
This combination of greater capability and lower costs is making digital transformation ever more important to every company. Indeed, in our Deloitte study, The Fourth Industrial Revolution is here—are you ready?, 94% of respondents agreed that digital transformation is a top strategic priority for their organizations.
But even though respondents appear to understand the strategic importance of digital transformation, not all are fully exploring its strategic possibilities. Our survey suggests that some leaders are finding it difficult to keep up with the rapid pace of technological change, as well as the new rules and challenges that go with it. We see this evidenced in a couple of ways:
- Budgeting for today
When it comes to digital transformation, most respondents reported investing a significantly higher percentage of their operational and IT budgets, while spending a relatively low proportion of the future R&D spending. On average, companies plan to invest a median of 30% of their operational/IT budget in digital transformation initiatives—and only 11% of their R&D budget in the same.
- Relatively low emphasis on profitability
When we asked respondents if these technologies are critical to maintaining profitability, only 68% agreed. In fact, this was the lowest-rated response of any of the statements presented. CEOs had an even more sobering view; only 50% indicated the importance of digital transformation to maintaining profitability.
This mindset—a focus on digital transformation for operational investments, coupled with a relatively small emphasis on profitability—suggests that, while most leaders may associate operational improvements with strategic growth, they do not associate them with revenue growth resulting from R&D-driven new products or business models.
Even when executives are implementing digital transformations that result in significant time and cost savings through operational improvements, they may not intellectually translate that into higher profits. Instead, these may be viewed as “defensive” investments intended to protect rather than grow the business.
This suggests many executives still look to digital technologies to avoid disruption rather than be the cause of it.
- The challenges to transcending a defensive mindset
A little over a decade ago, analytics was an emerging trend. Now big data, robotic process automation, and sensor technology are a bigger part of an ever-proliferating list of technologies and capabilities organizations are seeking to adopt. In this environment, it can be challenging to determine, prioritize, and invest in the tools that can best help organizations meet their strategic objectives.
Many organizations remain frozen in place, fending off competitive pressures by focusing technology on defending and maintaining their current positions. These businesses seem to be experiencing what behavioral economists call choice overload: That is, when we are faced with too many paths to choose from, oftentimes we defer making any new choices at all.
To move past the defensive mindset, executives may face several key challenges:
- Trapped in organizational inertia
Our study showed that many organizations remain mired in inertia. They regard advanced technologies largely as a means of protecting their current offerings rather than a means to build new business models and products. The study found many organizations are investing to enhance legacy systems. For instance, most organizations are using desktop productivity tools (87%) and ERP software analytics (85%) to analyze and leverage their data. These are typically long-standing organizational tools that are enhanced by digital technologies. Other tools, such as physical robotics (24%) and sensor technologies (26%), are newer—and leveraged considerably less.
While that is a practical approach to implementation, over-indexing on legacy improvements comes with risk. This is especially true as we see that cloud computing capabilities and big data platforms appear to be used by a large portion of respondents (with 60% or more indicating they currently apply the technologies). This suggests a real opportunity to integrate newer, future state technologies (such as cloud computing) into legacy platforms (such as ERP and desktop tools) to leverage those capabilities.
In addition, the rise of disruptive competitors with fresh approaches to applying digital technologies can leave older, more accomplished organizations behind. Organizations may want to transition from these defensive positions to more proactive uses that integrate future state technologies into legacy tools and applications.
- Still searching for a common focus
When we asked respondents to identify their top three organizational challenges, “finding, training, and retaining the right talent” topped the list. It can be difficult for any individual to keep up with the pace of technological change; building a deep bench of adequately prepared talent can be more difficult still. Adapting to changes in the marketplace and reaching consensus on the best path forward also can constitute significant hurdles. The second-most-cited challenge is “lack of internal alignment” on which strategies to pursue, closely followed by the “emergence of new business models.” These three concepts are linked: It can be difficult, if not impossible, to pursue new business models without the right people in place—or a clear consensus on strategy.
- Technical complexity brings risks
The shift to Industry 4.0 connectivity requires organizations to confront unfamiliar, more nuanced risks. When polled about technology-related challenges, respondents highlighted cybersecurity (37%) and intellectual property risks (27%) as the top two issues. Absent a thorough understanding of these issues, many may feel it simply does not pay to pursue alternative uses of technology that can lead to new revenue streams—and new potential threats.
- Thinking strategically about digital transformation
To quickly arrive in an era when organizations are embracing digital transformation as a top strategic objective is no small feat. However, with it come both increased complexity and opportunity. While organizations can benefit from deploying Industry 4.0 technologies for legacy operations, there are many paths to drive strategy and realize the full breadth of opportunities offered by digital transformation.
To move beyond a defensive approach, organizations can consider the following steps:
- Incrementally move beyond operational upgrades
Digital transformation can lead to revenue growth in the form of improved products or services. This does not require an immediate overhaul of business models but rather an evolution of current offerings.
- Invest in the long run
Don’t neglect longer-term opportunities in pursuit of shorter-term objectives. This mindset shift requires a willingness to enact change whose impact may not be felt immediately—a challenge for many organizations.
In fact, a large portion of digital transformation efforts start out well, plateau, and then fall flat; business is back to usual with just incremental improvements, even though research suggests that transformative benefits often take time to accrue.
- Consider increasing time spent on R&D initiatives—as well as budget
One area where this could be most prevalent is supply chain, where we see an increased future focus for organizations. Here, opportunities exist to pilot a number of digital technologies.
Starting small and expanding beyond defensive spending can unlock new organizational capabilities and move an organization along the path toward innovation. Keeping implementations simple and building upon the successes can pave the way for future business models—while also allowing your organization to grow with the technologies.
Do you want to learn more about how leading organizations are approaching digital transformation, join our group Digital Transformation.