The strategy paradox A defensive position on digital transformation
10 October 2018
Most leaders understand that digital transformation can aid strategic growth, but, for them, this translates more to operational improvements than revenue growth—potentially leaving money on the table.
Industry 4.0 technologies continue to evolve both in technical capability and organizational reach. Simultaneously, many of these technologies, such as cloud computing and big data platforms, are becoming more affordable and therefore more accessible to organizations of all sizes.1
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This combination of greater capability and lower cost has contributed to an environment that is perhaps more hospitable to digital transformation. And, in fact, our study reflects executives’ positive view of the position digital transformation occupies within their organizations. For example, when asked to indicate which statements best aligned to their perspective, 94 percent of respondents agreed that digital transformation is a top strategic priority for their organizations.
Just because respondents appear to understand its strategic importance, however, doesn’t necessarily mean they are fully exploring the realm of strategic possibilities made possible by digital transformation. Our survey suggests that some leaders may be finding it difficult to keep up with the rapid pace of technological change, as well as the new rules and challenges that go along 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 lower proportion of the future R&D spending. On average, companies plan to invest a median of 30 percent of their operational/IT budget on digital transformation initiatives—and only 11 percent of their R&D budgets on the same.
- Relatively lower emphasis on profitability. When we asked respondents if these technologies are critical to maintaining profitability, only 68 percent agreed. In fact, this was the lowest-rated response of any of the statements presented. CEOs had an even more sobering view; only 50 percent indicated the importance of digital transformation to maintaining profitability.
On average, companies plan to invest a median of 30 percent of their operational/IT budget on digital transformation initiatives—and only 11 percent of their R&D budgets on the same.
This mindset—a focus on digital transformation for operational investments, coupled with a relatively smaller emphasis on profitability—suggests that, while most leaders may associate operational improvements with strategic growth, they do not necessarily 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. Deloitte’s study The Fourth Industrial Revolution is here—are you ready? reinforces this mindset as many look to digital technologies to “avoid” disruption rather than be the “cause” of it.2
Even when executives implement digital transformations, they may be viewed as “defensive” investments intended to protect, rather than grow, the business.
The challenges to transcending a defensive mindset
A little over a decade ago, analytics was an emerging trend.3 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.4 In this environment, it can be challenging to determine, prioritize, and invest in the tools that can best help organizations meet their strategic objectives. As such, many organizations remain frozen in place, fending off competitive pressures by isolating their technology usage to defending and maintaining their current positions. The behavioral concept of choice overload gives credence to this mindset.5 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 recent study, The Fourth Industrial Revolution is here—are you ready? also showed that many organizations remain mired in inertia, wherein their future plans for digital transformation closely mirror their current objectives.6 That is, they regard advanced technologies largely as a means of protecting their current offerings rather than deploying them to build new business models and products (we explore this notion further in The innovation paradox). In our analysis, we see that many organizations are investing to enhance legacy systems. For instance, most organizations are using desktop productivity tools (87 percent) and ERP software analytics (85 percent) to analyze and leverage their data (figure 1). These are typically familiar and longstanding organizational tools that are enhanced by digital technologies. Other tools, like physical robotics (24 percent) and sensor technologies (26 percent), are both newer—and leveraged considerably less.
While certainly a practical approach to implementation, over-indexing on legacy improvements comes with risk. This is especially true as we see from figure 1 that cloud computing capabilities and big data platforms appear to be used by a large portion of respondents (with 60 percent or more indicating they currently apply the technologies). This suggests a real opportunity to integrate newer, future state technologies (like 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.7 As such, organizations may want to transition from these defensive positions to more proactive, offensive 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 (figure 2). It can understandably be difficult for any individual to keep up with the pace of technological change (see The talent paradox for a detailed discussion); building a deep bench of adequately-prepared talent can be more difficult still. Further, adapting to changes in the marketplace and reaching consensus on the best path forward constitute significant hurdles. The second most cited challenge is “lack of internal alignment” about 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, unfamiliar business models without the right people in place—or a clear consensus on which strategies are the right ones.
Technical complexity brings risks. The shift to Industry 4.0 connectivity requires many organizations to confront unfamiliar, more nuanced risks. When polled about technology-related challenges, respondents highlighted cybersecurity (37 percent) and intellectual property risks (27 percent) 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 to face.
Thinking strategically about digital transformation
These are exciting times. To quickly arrive at an era where 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 most certainly can benefit from deploying Industry 4.0 technologies for legacy operations, there are myriad paths to drive strategy and realize the full breadth of opportunities that digital transformation can bring. To move beyond a “defensive” approach to digital transformation strategy, 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.8 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.9
- 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 (see The supply chain paradox for a more detailed discussion). Here, opportunities exist to pilot a number of digital technologies.
Digital transformation can lead to revenue growth in the form of improved products or services.
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.
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Get in touch
- Mark Cotteleer
- Research Director, Deloitte Center for Integrated Research
- Deloitte Services LP
- mcotteleer@deloitte.com
- +1 414 977 2359
