Digital transformation and artificial intelligence (AI) are not only reshaping the way we live and work but also transmuting the way companies operate. The way companies navigate the world of constant technological innovation to attain a sustainable competitive advantage is one of the biggest business challenges in a world where digital and AI are playing an increasingly important role.
Many companies are struggling to leverage digital and AI technologies and realise the expected revenue benefits.
However, there a many compelling examples showing that digitally transformed companies outperform their peers with regard to return on tangible equity, P/E ratio, and total shareholder returns.
In their book, Rewired: The McKinsey Guide to outcompeting in the Age of Digital and AI, published in June 2023, senior McKinsey partners, Eric Lamarre, Kate Smaje and Rodney Zemmel share their recipe for outcompeting the competition.
They emphasise that the outperformance of competitors is driven by “a deeper integration of technology across end-to-end core business processes”. High performance companies were able to closely integrate business, technology and operations to digitally innovate and transform. This necessarily implies the upskilling of staff and the building of a distributed technology data environment to empower teams to digitally innovate.
This is the deepest reason why digital and AI transformations are so difficult – companies need to use the tools to enhance various aspects of business operations, decision-making, customer experiences, and overall performance. Digital transformation is not a quick-fix or merely the implementation of a system or technology, but numerous technology-driven solutions and employees across various units working together to constantly innovate, improve customer experiences, lower unit costs and generate value.
When successful companies are studied, it becomes evident that there are a number of interconnected enterprise capabilities that organisations need to outperform the competition in the digital transformation and AI age.
Alignment of the C-suite around a business-led digital road map: It is important to inspire and align the top team through a shared vision, values, commitments and a digital transformation roadmap. Instead of a few unco-ordinated small interventions, it is better to focus efforts on a few important business domains, such as a production process or the customer journey, and transform them from end to end.
Alignment further entails that the transformation outcomes of each business domain are linked to specific improvements in operational key performance indicators (KPIs), such as a reduction in customer churn or improvements in process yield.
A digital roadmap should be developed where the digital solutions that underpin the KPIs are sequenced in a way to produce meaningful value in the short term and transformational value in the medium term. C-suite leaders should commit to the KPI improvements.
Build digital talent: It is not possible for a company to outsource its way to digital excellence. Organisations should ensure that they have the right skills and capabilities (for example, designers, cloud engineers, software developers and AI specialists) to innovate and execute. The talent pool should include more experienced technologists and fewer novices.
Only 20 to 30% of talent should be outsourced when specialised skills are needed. To foster excellence, granular skill progression grids, supported by credentials, should be developed to ensure recognition and adequate compensation. Many organisations are, unfortunately, hampered by slow recruiting processes, rigid compensation frameworks, and outdated learning and development programs. Building a digital team requires a transformation of the entire HR organisation and processes to become digital ready.
Build an agile and collaborative work environment: Digital technologies and AI enable businesses to innovate at a faster pace and respond quickly to changing market dynamics. Digital transformation therefore promotes a more agile and collaborative work culture. Cloud-based collaboration tools, project management platforms and communication applications enable teams to work together efficiently and cross-functionally, regardless of their physical location. The real-time collaboration leads to increased productivity, innovation, and employee satisfaction.
By fostering a culture of innovation and embracing agile methodologies, companies can experiment with new ideas, adapt to emerging trends, and stay ahead of the competition.
Implement a new scalable operating model: In the digital age, the operating model has the pivotal task of increasing the metabolic rate of the organisation by bringing business, operations and technology together to become digital.
Over the past few years, it has become evident that small, multidisciplinary agile teams, or pods, are the most effective and efficient way to develop software. The pods work together most effectively when some are focused on directly improving a customer or user experience (product or journey pods) while others focus on creating reusable services to accelerate the work of all pods (platform pods).
The operating model should support the strategy of the company. Companies often initially select a “digital factory” model where people work together to build digital solutions for the business units or functions. Later, when companies are making a major strategic decision to realign large parts of the organisation to better exploit technology in their core business, they move to a product and platform model (for example, Google and Amazon) and incorporate an enterprise agile approach.
Embrace digital transformation and technology: Digital transformation involves integrating digital technologies into all areas of a business to change how it operates and delivers value to customers. It is a process of adopting and implementing digital technologies into their operations, strategies and culture to drive significant improvements in efficiency, innovation and competitiveness.
It also means making technology easier for teams to use so they can innovate rapidly and release digital innovations. To achieve this, a developer platform is needed to allow pods access to the software development tools, data, and applications.
Frequent updates are made possible by software delivery automation, also known as continuous integration and continuous delivery (CI/CD). With CI/CD, pods can release incremental improvements weekly or even daily and thus shorten the innovation cycle.
Enable easy access to data: Continually organise and enrich data, and make it easily accessible across the organisation, to improve the customer experience and operational performance.
A data-pipeline is of the utmost importance for the scaling of AI. The best method is to create reusable building blocks or data products with ready-to-use datasets that are easily accessible. To enable access, new architectural patterns such as the “data lakehouse” (a combination of the capabilities of a data lake and a data warehouse into a single, integrated platform) makes it easier to fulfil the business intelligence and AI needs of companies.
Adoption and scaling: Value capture should be maximised by ensuring the adoption and enterprise scaling of digital solutions and by tightly managing the transformation progress and risks. It is important to focus equally on adoption and development. The development of great technology solutions that offer an excellent customer experience promotes user adoption. But this is not enough. Digital leaders are differentiated by an end-to-end system approach, with a focus on the people side of the equation.
Outperforming the competition in the digital and AI age requires a strategic and holistic approach. By effectively leveraging the above capabilities, businesses can gain a competitive advantage and position themselves for success in the evolving digital landscape.
Digital excellence translates into financial performance.
Professor Louis C H Fourie is an Extraordinary Professor in Information Systems of the University of the Western Cape.
BUSINESS REPORT