Digital Transformation Of The Firm: New Strategies, New Structures by [email protected]

Data analytics and social networks increasingly drive the digital transformation of the firm, says Eric Clemons, a Wharton professor of operations, information and decisions, in this opinion piece.

For corporations, the keys to successful change lie in the digital transformation of strategy and organizational structure, he also notes. Yet, while the general direction of the digital transformation wave is increasingly clear, successful implementation “throughout the organization is far more complex.” Below he offers ideas about how to approach the challenge.

We are immersed in a sea of information, provided by cheap and powerful information technology. For the first time in human history, most of us no longer think of information as an asset or a liability, or as a source of power or of weakness. Instead we think of iPads and Droids, Google and Apple. Mostly, we no longer think about information at all, any more than fish think about the water that surrounds them. But information tides, information currents and information tsunami affect us in our information oceans as profoundly as tides, currents and tsunami affect the fish in their oceans. We really have begun the digital transformation of everything.

At regular intervals, technology makes enough progress that we in the punditry believe that technology now must now transform management, business and politics. High-speed data communications have indeed altered the business of securities trading beyond recognition, and have given individual traders both financial rewards and the ability to bring the global economy to its knees from time to time. What about the impact of database management? What about the impact of model-based management? What about wearable computing devices? Individually, each has had at least some impact. But collectively they are now producing the ultimate in corporate transformations, the Digital Transformation of the Firm.

Why is Digital Transformation Interesting Now?

There are two trends, and they are pulling every firm in two directions at the same time.

  1. Big data analytics: It looks at everything. It looks at information the firm already has, so it is available almost immediately, and it is not subject to a number of the limitations associated with survey data. It is often based on machine learning — using the data to discover patterns that no expert might have predicted — rather than on traditional hypothesis testing, so it shifts moral authority away from traditional experts and towards the technicians most able to crawl through and analyze truly enormous data sets. And these data sets truly are too large to share, so they create local fiefdoms around the sites where terabytes, petabytes, exabytes and zettabytes of data are stored.
  2. Online social networks: They potentially connect everyone, but we know from social sciences research that they do not. What they do do, and they do it well, is strengthen existing connections among individuals and groups, and allow those groups to remain connected over time and across time zones and huge spatial distances. Where big data analytics may create local fiefdoms, online social networks create distributed pockets of autonomous connection, affiliation and even affection. Digital natives place different values on data driven analytics from big data people, but they have a similarly dismissive attitude towards traditional “old guy expertise.” I have had students in my MBA classes text each other and vote on what they believed to be the correct answer to a discussion question in class. I have had an online reporter for the Seattle Post-Intelligencer explain to me that a hive mind may not be deep in knowledge but it is broad enough to be self correcting, and the views of 500 members of her hive were more reliable than any small group of experts.

“With different information flows, organizations almost certainly will adopt different designs. The most basic examples involve centralization or decentralization of decision rights.”

The first trend divides the firm by employees’ locations, while the second divides the firm by their affiliations. Surprisingly, neither of the two digital technologies at present actually integrates the firm. One values data-driven analytics, and the other values consensus and shared experience. Surprisingly, both devalue traditional experience-based expertise. Both are real, and both are becoming more important. And both will affect the strategy and the structure available to the firm.

Both are driving a new digital transformation.

What is Digital Transformation of the Firm?

There are two distinct components.

The first component is the Digital Transformation of business strategy. There are new gateway-centered businesses, like Google, that can advance or destroy almost any company simply by facilitating their access to customers or by cutting them off. The power of these gateway-centered businesses cannot be overstated, as evidenced in their ever-expanding profits and their ever-expanding legal difficulties.

But even the most mundane businesses, like consumer credit cards and fast-moving consumer products, have been transformed as well. For example, in credit cards decades ago all issuers charged all customers the same annual fee, and all issuers charged all customers the same interest rate on their finance charges. Today the best card issuers offer thousands, even tens of thousands of different combinations of annual fees, interest rates, cash back rewards and other incentives. And the best issuers use sophisticated models to determine which existing customers and which new card applicants should receive which offers, in order to maximize the risk-reward profiles of the issuer’s entire portfolios.

A couple of decades ago we all drank products from Budweiser, Miller, or Coors, and it looked like we were going to have no other choices. Beer would be adequate but mediocre, and success would be determined by a beer company’s advertising staff, not by its brewers. Today, we have tens of thousands of beer choices in America, and a company’s success is largely determined by the quality of the beer itself; social networks, online reviewing sites, user-generated content, word of mouth, and word of mouse have replaced advertising as keys to the success of new product offerings. This is true not only in beer and soft drinks, but in a range of new resonance marketing products like snacks, blue jeans, coffees and teas, artisanal breads, and sea salts. Gateway businesses, differential pricing, and resonance marketing are only three of most prominent changes resulting from the digital transformation of business strategy.

The second component of the Digital Transformation of the Firm is the Digital Transformation of the structure of the organization itself. This is best understood through historical examples. When Benjamin Franklin was the American Colonies’ ambassador to France in 1776 he had enormous discretion in determining his actions, which were directed at gaining critical French support against the British in the Revolutionary War. This personal discretion was inescapable, despite or even because of the critical importance of his mission. Communications between Franklin in Paris, and the American capital in Philadelphia took weeks to accomplish. In contrast, American ambassadors today are subject to much tighter control from Washington because secure international communications are almost instantaneous.

Snipers since the introduction of the rifle have had enormous autonomy, because only the shooter on location had sufficient information to select a target and execute a mission. In contrast, today’s drone attacks are conducted from half a world away, by a flight control with far more information than could ever have been made available to

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