Going digital means more than sticking tech onto legacy business models.
Electrification of factories and plants took a long time. Usable electric lightbulbs were invented in the 1870s. Yet, by 1900, less than 5% of mechanical drive power was supplied by electric motors. Instead, the last-generation technology – steam power – stubbornly remained the go-to technology for manufacturers. The norm for factories at the time was that they were powered by a central source – a massive steam engine or a river, for instance. That meant that every operation within the complex was designed around the logic of a central driveshaft, with ingenious devices connected to it by pulleys, ropes and ties.
Once small electric motors were introduced, it became possible for every station in a factory to operate on its own power, when and as needed. But to take advantage of that new capability required rethinking everything – how equipment was built and used, how workers were recruited, trained and paid, how costs were allocated, and myriad other major shifts in operations. No wonder early factory owners balked at making such a momentous change. Indeed, just as many leaders today persist with what they have always done but use digital to make it faster and cheaper, leaders then tried to use electricity but otherwise kept their factories largely the same.
Eventually, of course, the old steam engines simply were not able to compete with new firms taking advantage of the capabilities that electrification offered. Consider Ford’s invention of the production line. It revolutionized manufacturing, making formerly expensive and inaccessible goods affordable, and ushering in an era of skyrocketing productivity. It is analogous to where we are with digital today. While companies that have embraced digital technologies are reaping massive rewards, most are still lumbering along with their steam engine equivalent.
Leaders are on the cusp of needing to make fundamentally important business-model choices. They begin with deciding whether you see the potential offered by digital as a big opportunity to be seized, or a big problem to be avoided. You are much more likely to succeed if you take an opportunity lens to the digital revolution. One of the better-known stories of a company that used digital smartly to give itself an edge is Domino’s Pizza. After its 2004 IPO – which observers charitably called “uninspiring” – the company caught the public’s imagination with an audacious ad campaign that acknowledged that, for many customers, the product itself was lacking. Simultaneously, the company began to aggressively invest in its digital strategy to make ordering as simple as possible.
One early – controversial – decision was to insist that all franchise operators adopted a single Point of Sale system. In many other companies, franchisees were given leeway to purchase their own systems. But this undermined the potential of a digital architecture by locking valuable data away in separate systems. Every aspect of the customer experience that could be enhanced via digital technologies was explored – and funded. The company also forged an unusual alliance between its technology and marketing arms – leveraging the new potential of digital to connect authentically with customers. In 2009, 20% of Domino’s sales were online. By 2018, that figure was up to 65%. More digital ordering means more rich data collection for Domino’s, and the ability to push more users to its loyalty programmes.
Building a digital business model offers a tremendous advantage. Many organizations are using technology to reframe how they do business. At ING, for instance, conventional silo structures were replaced with more agile ones in which small teams could move quickly to solve complex problems with an architecture suitable to fast-moving technology-enabled work. Now that technology can replace much of what ‘management’ used to do in terms of coordinating work and communicating across the organization, those who remain stuck in the old ways are likely to go the way of the steam engine. They might linger for a while, but their destiny is set.
Rita Gunther McGrath is professor of management at Columbia Business School.