How to Create a Blueprint for the Digital Transformation

In 1964, Canadian media analyst Marshall McLuhan noted the dangers of newspaper publishers being so reliant on classified advertising. “As soon as another medium comes along for this information, the business model of the press will collapse.” That’s precisely what happened at the turn of the new millennium. Since then ads for property, automobiles, and jobs have all moved online, and newspaper publishers are experiencing their worst-ever crisis.

However, this is not true for all of them. In a powerful show of strength, publisher Axel Springer reinvented itself as a digital company. Since 2005, the newspaper group has followed a meticulous plan, and has acquired a stake in some 70 digital companies—including successful online advertising portals that are the new home of classified advertising—and has launched around 90 of its own initiatives.

How to Make a Digital Transformation Work

Springer’s 10-year transformation process focused on change at all three levels. By acquiring digital companies, the publishing house ventured into completely new ecosystems, while dramatically reshaping its business architecture. It strengthened its foundations by overhauling its technical infrastructure and setting the corporate culture to digital. Springer went on the offensive in five areas:

1. Subscription offensive: By offering the subscription service BILDplus, the publisher destroyed the belief that journalistic content should be offered online for free. In 2016, more than 300,000 subscribers paid between €4.99 and €14.99 a month to read the best articles and view videos.
2. Integration offensive: Launched in 2013, WeltN24 is the group’s first offering across the three platforms of print, TV, and online. The heart is the newsroom, where the journalistic content is written for Welt online and the various print editions of Die Welt, and where the videos for news broadcaster N24 are filmed, all according to the motto “online first.” As is the trend, the website has an increasing emphasis on video content from N24.
3. Early-stage offensive: In 2013, Springer founded Axel Springer Plug and Play, an incubator for new digital start-ups. The start-ups received €25,000 for their initial costs, office space for three months, mentors, and technical support from the publisher. If business went well, further funding was provided. By 2016, the publisher had a stake in more than 70 promising young start-ups.
4. U.S. offensive: In 2016, Springer acquired the business portal Business Insider, often referred to as the Wall Street Journal for the digital generation. With 200 million users a month, Springer is now one of the world’s six biggest media groups in terms of reach.
5. Collaborative offensive: Digital companies deliberately seek out alliances. Thus, Springer partnered with Samsung to offer South Korean smartphone customers an attractive news portal. The UpDay app delivers important need-to-know news, as well as updates from personal areas of interest. As a tailored news service for the mobile generation, it offers a playground for the journalism of tomorrow.

Springer needed a decade to reinvent itself for the digital age. As this example shows, just as with any complex transformation, a digitization program needs a structure and a plan. Short-term thinking and simply optimizing isolated solutions are not enough.

Holistic Thinking

When it comes to getting the company in shape for the digital future, piecemeal thinking isn’t enough. By the time the impact of an isolated digital project has spread throughout the organization, the traditional competitors will have overtaken you and new players may even have conquered the market. The digitization plan must take an overarching view of the company and be implemented at all three levels, spread across several years. It must lead the business into new ecosystems, modernize its business architecture, and equip the technical and organizational base for the digital challenges ahead.

A modern strategy process is the best starting point: but what does modern mean? A modern strategy isn’t drafted on a desk or conjured up in an ivory tower. New ideas are needed. The business must dive in and explore new thinking right from the start. Whereas the 1990s and early 2000s were marked by innovative benchmarking approaches, today there are other sources of inspiration. New ecosystems are emerging between the traditional industries, taking flight with new technologies, and being driven forward by real entrepreneurs. They are everywhere, along with their start-ups from Silicon Valley to Israel, from South Korea to Japan and increasingly China, and sometimes even not too far away from home. Seek them out, contact them, and maybe even arrange a visit.

It’s easy to find exciting new companies. Take a look at the finalists in the start-up competitions run by McKinsey, for example. They include the Digital Top 50 (across Europe, and in conjunction with Google and Rocket Internet) and “The Spark.” Three start-ups—Relayr, Konux, and NavVis—were chosen as winners of “The Spark” from almost 100 high-quality applicants with incredible ideas, 10 of which made it into the final round. Some of these start-ups have the potential to change your ecosystem, and perhaps one of these could be a potential partner, a source of top talent, or even an attractive acquisition.

The changes needed to the business architecture are much easier to identify, as the importance of a multichannel offering is clear. The best indication of what customers really expect is their behavior. The same is true for product innovations. However, changes to the supply chain, production, and service require a little more groundwork, where typical questions include: Which algorithm offers the greatest potential for predictive maintenance? Which sensors will improve the supply chain?

A digital walk-through, studying and evaluating available digital technology, is no longer enough to appreciate the full impact of these new technologies. Instead, a feasibility study or a proof of concept (POC) is needed, usually with the construction and testing of a prototype of the product or process to be improved. The digital transformation is no trivial undertaking. To ensure its success, two considerations are vital right at the planning stage.

Prioritize by Value Contribution

Once the overarching plan is in place, it’s no longer about the What, but about the When. Which area will we tackle first? To decide, management must assess what value contribution is generated using which measures at which point in the value chain, and with how much effort over what period. Will the most potential be gained from diving into the new ecosystems? Or will there be better returns from an improved understanding of customer needs using big data and advanced analytics? Perhaps the fastest value contribution will be realized from a digital restructuring of production or logistics.

It’s not an easy decision. After all, companies are often entering new territory here, and they lack experience. It’s also important to determine whether the organization in its current form is capable of handling the transformation. In many cases, the schedule is ultimately determined by the talent available. Once the list of priorities has been set, the digital transformers define their timetable. This often spans several years, and includes milestones for achieving targets.

Close the Gaps

After considering the positives, the greatest value contributions, we now consider the negatives. Wherever a capability analysis reveals dangerous shortfalls, fast action is required. Most companies find they come up short when it comes to handling big data and using advanced analytics to analyze it. In 2016, a global survey conducted by McKinsey on the topic revealed that 86 percent of CEOs felt their companies were at best only partially successful in the area, and 25 percent even rated their businesses as complete failures in their big data and advanced analytics operations.

However, intelligent analysis of big data is the primary way to optimize digital products and services, and companies that lack the necessary expertise must decisively invest in building the required skills fast. This is where partnerships can help. When Michael Nilles, chief digital officer at elevator manufacturer Schindler, wanted to speed up his company’s capabilities in data analysis, artificial intelligence, and self-learning machines, he targeted partnerships with GE and Huawei. The partners even established a shared office for their teams in Silicon Valley.

A lack of agility in production was the first gap that jewelry maker Swarovski sought to close on its journey into the digital world. The Austrians invested almost €5 million and 50,000 engineering hours in a production line that cost-effectively processes even small order volumes. Their digital product palette now includes assortments that can satisfy ever more individual customer needs.

However, today’s customers also want a multichannel offering with payment options across all channels, and this is another area where Swarovski set about closing its other expensive gap. Today, Swarovski not only runs brick-and-mortar stores in cities around the world, but also operates a digital sales platform that sells its own products and even acts as a marketplace for luxury accessories of other manufacturers.

To shore up another weakness, the jewelry maker invested a further €5 million. Swarovski had been unable to form partnerships to help leverage ideas and technology, so the company renovated an old factory and transformed it into loft offices where new high-tech companies work alongside Swarovski developers. Those businesses with the most promising ideas are rewarded with investment from the Austrian crystal specialist, and several successful partnerships have already been formed. One example is a partnership with fitness band manufacturer Misfit. To power the display and tracking instruments in the bands, Swarovski engineers supply tiny solar cells, which they developed for decorative crystals that convert solar energy into colorful displays. Misfit and Swarovski are already looking at further collaboration in the field.

Siemens also saw potential for improvement in its partnership management, at least where start-ups are concerned. In 2016, the firm founded next47 as part of its digitization program. The Start-up Unit, as Siemens calls the department, has been given €1 billion over the next five years to support young and innovative companies and to buy a stake in them. The unit focuses on the areas of artificial intelligence, autonomous machines, decentralized electrification, connected mobility, and blockchain applications.

The transformation into a digital company is a marathon, not a sprint. A road map lasting several years should be planned that addresses all three levels covered in our What chapters: Which new ecosystems does the company want to break into, and what role will it play there? How will digitization change the business architecture from marketing through to production? And how should the organizational and technological foundations be strengthened to achieve this?

Optimizing Critical Processes

Thus, successful digital companies all prioritize processes that are targeted at the customer. It’s generally a manageable number. A telecom firm that analyzed its interaction with customers identified five key processes: contract selection and signing, the payment process, contract management (adding or canceling services), customer communication in the event of disruptions or problems, and contract termination.

Customers who place an order today no longer tolerate their order slowly making its way through the various organizational functions until it’s eventually dispatched and completed. Instead, they expect streamlined, seamless processes across all functions—an end-to-end process. They expect it to be digital and possible in just a few clicks, regardless of whether they have a query, want to change a contract, or are submitting a complaint. Companies that can offer this will have a competitive edge.

In digitizing and restructuring their processes, companies should focus on the customer journey and their touch points with the customer—an idea shaped by the successful online retailers. Each point along the journey from first contact to final purchase is planned to make the process as easy and as convenient as possible for the customer, and to provide excellent support. The customer experience is at the heart of the process. The concept can also easily be applied to the B2B space, and even to internal customers.

When digitizing processes, ask yourself at each touch point: What does the customer expect? What does the process depend on, and where are the pain points if something goes wrong? As obvious as these questions may be, the philosophy is still far from standard. Conventional organizations tend to focus on efficiency rather than customers. So what really is important to customers? Which customer journeys are relevant? Which customer journey should I start with? How do I move from the first customer journey to the next? And how can I generate digital momentum throughout the organization?

Direct banks like ING-DiBa have clearly correctly identified their customer pain points. They have reduced the time it takes to open a bank account from weeks to minutes. With user-friendly digitized processes they have successfully captured large numbers of customers from traditional banks.

Processes related to investment products all focus on a smooth experience for the customer, and in the event of problems the pain point is quickly identified. Elevator manufacturer Schindler, whose elevators carry one billion passengers globally each day, has shifted its focus to predictive maintenance in its digitization efforts. “We fix problems before our customers even know there is one,” according to Michael Nilles, CDO at Schindler.

The Swiss firm has partnered with Apple to drive the strategy forward. Using the iOS operating system and apps specifically developed for Schindler, the firm’s service technicians now receive meticulous plans for their service deployments. Sensors in the elevators enable remote monitoring, and continuously measure critical data such as elevator routes, speed, and temperature. No fewer than 200 million units of information are transmitted each day, which are then transmitted to a computer platform where the information is analyzed and translated into service jobs. Each morning, Schindler field technicians then receive a work list on their FieldLink app together with suggestions for the most efficient routes between the service deployments, and a list of spare parts that will likely be needed for the work. The technicians can even order these spare parts on the app to ensure they are ready and waiting before they arrive at the service location. Once at the location, the engineers can check the FieldWiki app to read through repair instructions or view videos. “Our customer service is now faster and more efficient,” according to CDO Nilles.

For some customers, simply not having the right information is a pain point. Maersk, the world’s biggest container shipping group, developed an app for its customers that allows them to track their containers in real time. The app can send notifications if delays are likely or if early delivery is expected. Customers can also view information about Maersk schedules or find the address of the nearest shipping office.

Concept Iteration: Learning with the Customer

Since digitization makes product and service offerings possible that never before existed, there is no way of knowing what customers really appreciate and what they don’t use. Companies have few options, then, but to look once again at how the digital companies do it.

To save time and costs, they first develop a product that only meets basic requirements and offers core essential functions. This is known as the minimum viable product (MVP). Rapid improvements are then implemented based on customer reactions. Tesla and iPhone were initially launched with limited features, but effectively addressed a customer pain point. Tesla offered the world’s first luxury electric car, while the iPhone did away with clumsy number pads and keyboards. Both products were then continuously improved with the help of customers and their feedback. Until a new hardware product is released, the manufacturers keep their existing products fresh by releasing new software solutions in rapid cycles.

Driving Digitization According to Value Contribution

Of course, it’s not just the positives that are revealed by customer feedback. By carefully analyzing customer behavior, pain points can be identified where customers migrate and revenues are damaged. In retail and gastronomy, long lines are certainly one of these weak points.

In 2015, Starbucks added mobile ordering and payment to its app. This allows customers to order their coffee from the nearest store on the go, prepared to their precise preferences. It’s also linked to the Starbucks loyalty scheme, and since it allows payment, customers can simply walk into the branch, stroll past the lines, grab their coffee, and go. The app has been a real success and is well used, resulting in increasing revenues. However, the company also gains something equally valuable, if not more so—a treasure trove of data on the buying habits of its customers. This gives it a direct route into that most difficult of fields, one-to-one marketing. Starbucks can now send its customers tailored offers through its app based on their preferences.

Amazon identified the more mundane aspects of shopping, such as buying household supplies like washing detergent, as a pain point for its customers. The online retailer therefore introduced a Wi-Fi-enabled replenishment device for customers, Dash Button. Now, when customers notice their detergent is running out, they can simply press the button, which sends a replenishment order to Amazon via Wi-Fi. No further steps are necessary because the delivery address and credit card number are already stored in the customer’s Amazon account.

While the traditional analog companies largely rely on conjecture when it comes to ascertaining customer desires or pain points, digital companies are able to draw on a vast pool of data. They can precisely analyze which product variant is well received or poorly received, by whom, at what time, and where. They also know the exact point of the customer journey where potential customers leave the process after experiencing a pain point. This knowledge enables data-driven decisions on customer targeting, giving a huge advantage to digital companies.

How Digitally Advanced Is the Company?

There’s no one-size-fits-all policy toward becoming a digital company. The road depends on the company’s current level of digital experience. From a pragmatic perspective, we distinguish three levels:

• Level 1: Companies with very little experience of digital and whose core business rarely enters digital territory. This segment includes many traditional machinery manufacturers such as makers of turbines, transmission systems, clutches, powertrains, and so on.
• Level 2: Companies that have already confronted the subject of digital, and whose business is attacked by digital companies. These include insurers, telecom companies, energy suppliers, and automakers. They all face the challenge of systematically restructuring their large organizations.
• Level 3: This is the fully digital company. It already possesses all the critical capabilities needed for the digital age, and decisively seeks to expand its business.

Naturally, all manner of in-between stages is possible, but for our purposes we will use these classifications. This book deals with Level 1 and Level 2 companies. Where are you? A quick stocktaking exercise and external benchmarking helps to find out. The Digital Quotient (DQ) that we briefly introduced in Chapter 3.1 enables very precise stocktaking. If you are interested and want to know where your own company stands, read more at www.mckinsey.com/business-functions/digital-mckinsey/how-we-help-clients/digital-quotient.

In general, Level 1 companies making the break into digital should first focus on establishing a digital business unit. This unit is typically autonomous and has its own mandate, often separate from the core business. It needs a team with digital experience to develop an ambitious business plan, and initiate its own pilot projects while being strictly managed with milestones. Level 2 companies, in contrast, are aiming to restructure their entire organization in stages. To this end, a digital competence center should be established that dovetails with the operations of the business units.

Establishing a New Digital Business Unit

The first step is always the most difficult, and this is certainly the case when establishing the first digital business unit in a traditional company. These early pioneers have to start almost from scratch, and have no structured processes on which to build digital capabilities or develop digital products and services. They find themselves isolated in a traditional organization, and often don’t even have their own budget. But one thing they do have is freedom. They can establish fast decision paths, they don’t need to worry about the existing IT systems, and they can employ modern methods such as agile scrum development that breaks down complex development projects into short sprints on the road to developing a final product. The people involved should include freshly recruited talent, the best people from the core business of the parent company, and sometimes a recently acquired start-up form the crystallizing core from which the pioneers can grow.

A wealth of experience on what is most important for digital business units reveals four factors that clearly determine the success or failure of companies that have introduced agile methods:

1. The organizational structure must be specifically geared toward products for which fixed teams have autonomous responsibility.
2. The product owners and their teams must collaborate as closely as possible with IT.
3. Managers must see themselves more as coaches and coordinators as part of an overarching strategy, and transfer responsibility to their teams.
4. Just as with start-ups, budgets start off low at first for products offering the minimum necessary features. This budget is then increased for further development if the product is a success.

The fourth point is critical: this is where the old and new worlds collide. Can the existing management team productively manage such a business unit? In many cases, the answer is no. Traditional organizations often lack the crucial digital skills and experience. Instead, the management team should hire an experienced expert, or alternatively invite a venture capitalist whose network of experts would greatly increase the chances of success, to invest with them in their digital business unit.

Establishing a Digital Competence Center

Level 2 companies face a myriad of very different paths, and it’s vital that they choose the one that best suits their needs. Much can be learned from those companies that broke into the digital world early, starting off with successful pilot projects, and then firmly digitizing their core processes. The next step is now about switching the entire organization to digital, which is where the digital competence center comes in.

Under this concept, the digital competence center primarily acts as a service provider to the business units. The digital transformation office (DTO) sets the pace, and coordinates and manages the transformation as an engine of change, working closely with the DTOs of the individual business units. The competence center is responsible for recruiting digital talent and for their career development. A digital ventures unit helps to identify acquisition targets and prepare for the purchase. If these new acquisitions can’t immediately be integrated into one of the existing business units, a digital division could be established to accommodate them. The partner management function helps establish the new digital ecosystem.

Now we need a digital expertise lab that brings together all the experts with their new skills. This includes agile coaches, user experience/user interface (UX/UI) designers responsible for the user interfaces of the apps and websites, and project managers for the upcoming innovations. It also includes data analysts and employees with experience in digital media. The digital expertise lab and its assorted team will drive the first wave of digitization through the company.

This means the IT department also needs to be ready. To establish the two-speed IT architecture that we looked at earlier in the book, we now need to strengthen its systems and ability to process data and information. Three capabilities are particularly important: adaptive IT, data processing for the core business, and authority for IT guidelines. Adaptive IT processes the data collected by the apps, and builds the infrastructure for processing big data as well as the software tools and interfaces. Adaptive IT also consolidates and runs the IT environments of desktop computers, mobile devices, and servers. Another team looks after shared network elements and platforms such as Skype, the cloud, and identity management. Finally, an overarching team ensures that the intellectual property rights (IPR) of all digital products are clearly and consistently managed according to common guidelines.

The competence center and IT support the business units through the digitization process, and each unit has its own DTO to liaise with the competence center and drive the transformation forward. Product owners manage the cross-functional teams for digitizing the customer-facing processes, and initiate corresponding pilot projects by drawing on the central resources of the competence center. In most cases, business-specific skills are also needed—for example, the deployment of sensors for the Internet of Things, or data analysis capabilities to analyze the data delivered by those sensors.

Granted, establishing a functioning competence center and digitizing the relevant business units are complex tasks. This is why some companies use the digital build-operate-transfer (DBOT) approach, especially when time is of the essence. DBOT aims to significantly accelerate the establishment of digital skills and digital business units. Companies employing this approach use temporary external expert teams, and first establish their new business models in a separate business unit. This approach means that experts who are well-connected in the digital world can provide valuable services, such as helping in the recruitment of digital talent and establishing new business units. The managers of the unit build up their core team and then get to work. Once the team is fully assembled, the first positive results can be expected in just a few months, after which time the external experts can gradually be replaced with in-house talent.

Assigning a Mandate and Building Digital Talent

The digital competence center as the driving force of digitization and as a service provider to the business units can start work with around 15 employees. This includes a manager, perhaps two employees for the central digital transformation office, and one person each for HR and participating units. The digital expertise lab should be staffed with around 10 experts who are familiar with agile methods and analytics. Another two employees in IT are responsible for the area of adaptive IT. First, the back-end systems of the apps, the infrastructure for big data, the software tools, and the interfaces need to work. Depending on the company size and its level of digitization, additional resources may be needed to operate the systems for desktop PCs, mobile devices, and servers.

A large technology firm gradually switched its organization to digital by first training five teams in agile methodologies, and then sending them to work. The experiences they gained from their training and work deployments were fed back into the training material, which was then used to benefit the next wave of 20 teams. In turn, their experiences were used to train the next teams. At the same time, the company assigned fixed, cross-functional teams to the products, moved IT closer to the customer, and reduced not only the time for developments, but also the error rate.

The term digital natives doesn’t necessarily apply only to people, but can also refer to companies that were born digital. Google and Amazon are the best examples, but there are many others such as Spotify that have long moved on from the start-up phase. In terms of their digitization processes, only a little optimization work remains, but they serve as a good example to all the rest. Digital companies share many commonalities, the most important of which is the fact that decisions are data-driven and never based on gut instinct. Their employees form hypotheses from this often incomplete data and translate it into a product that is also often incomplete. This product is then tested on the market, and its success or failure is quickly analyzed. Google, for example, tests several thousand ideas each year, and fosters a culture that celebrates failure, because that’s where we learn most. Another thing that digital natives have in common is speed. Agile teams quickly develop prototypes, test them on the market, and either ditch them quickly or improve them based on collected data. This is a huge challenge for traditional firms.

In the next chapter, we describe how Level 2 companies—those that have already confronted the issue of digital and gained some initial experiences—lay the foundations in terms of personnel and organization required to implement the digitization plan outlined in this chapter. Chapter 9 then explains how to scale up the plan throughout the organization.