The American Marketing Association has identified seven greatest challenges for marketers. High on that list is “digital transformation.”  We asked John Hagel for his take on digital transformation and how it impacts the business landscape of the future.  

What is transformation?

Transformation has become one of the most over-used and loosely used words in the business world globally. Everyone’s talking about it and everyone’s claiming to be doing it.

Virtually every large company that I know has a “digital transformation” program. They’re all totally committed to “transformation.”

But, when I look under the covers, what do I find? With few exceptions, those “digital transformation” programs are focused on deploying digital technology across the company to do what the company has always done, just faster and cheaper. It is the latest manifestation of the scalable efficiency mindset that has driven all our institutions over at least the past century. The goal is to get more efficient, by whatever means necessary.

But, is that really transformation? Here we get into semantics and, of course, the word can mean whatever you want it to mean.
Let me just say that, for me, transformation is something much more fundamental. The metaphor I like to use is the caterpillar transforming into a butterfly. The caterpillar isn’t just slimming down and crawling faster. The caterpillar is now a completely different entity, not just in terms of appearance, but in terms of actions, needs and capabilities. Looking at the two side by side, you would never imagine that the two were in any way related, much less the same. That’s transformation.

So, if we move from caterpillars to companies, what does transformation mean? It means going back to the most basic questions of all and using them to redefine your identity – to become a butterfly. Those questions include:

• What market are we in?
• What business are we in?
• How do we compete?
• What are our metrics for success?

If the answers to those questions are not fundamentally different from what they were yesterday, you may be evolving, but you’re not transforming.

Does this matter? Yes, because we’re living in an exponential world where change is accelerating. If we remain the same, or settle for incremental change, we’re likely to be increasingly marginalized and ultimately meet an unfortunate demise. The imperative for transformation is made clear by the significant and sustained erosion in return on assets for all public companies in the US and the compression of corporate life spans on the S&P 500.

So, if transformation is an imperative and incremental change is a death sentence, how do we embark on that transformation journey?

Rethink strategy

We can begin by rethinking strategy. We need to move beyond the five year plan and instead focus on two very different time horizons – 10-20 years and 6-12 months. This is the zoom out, zoom in approach to strategy that I’ve written about elsewhere.

The 10-20 year horizon forces us out of our comfort zone and challenges us to provide very different answers to the questions I framed earlier. If you truly understand the exponential forces that are re-shaping our global economy, you could not possibly believe you will be in the same market or operating the same kind of business 10-20 years from now. Your most basic assumptions about the business will be challenged.

The 6-12 month horizon forces us to commit to near-term action that will begin to drive the transformation process. It helps us to focus in a more challenging world where the temptation is to spread ourselves too thinly as we seek to sense and respond to everything that is going on.

Reframe innovation

There’s another approach that can help us on our transformation journey. That involves reframing innovation.Today, when executives focus on innovation, they quickly narrow their focus to product or service innovation. Some manage to even address process innovation or business model innovation. But that’s where they stop.

They fail to recognize that there’s a deeper level of innovation that needs to be addressed – something that I call “institutional innovation” and explored in this report.

Institutional innovation goes to the most basic question of all, which is why do we have large organizations? The traditional answer has been scalable efficiency – it’s far easier and lower cost to coordinate activity across a large number of people if they’re all in one institution, than when they’re spread out across many institutions. There’s reason to believe that reason is becoming much less compelling.

If that reason is less compelling, is there another rationale that will drive the success of large institutions in the future? I believe there is – it’s scalable learning. The reason we will come together in large institutions in the future is the opportunity to learn faster than we ever could if we stayed on our own or as part of a smaller institution.

That’s a fundamentally different institutional rationale and conflicts deeply with the rationale of scalable efficiency. If we take scalable learning seriously, it will force us to re-think and innovate across all dimensions of our institutions – how we organize, how we mobilize, how we measure success and how we connect with others outside our institution. It’s ultimately the most powerful form of innovation because it will unleash the potential for far more innovation at the product, process and business model levels.

Scale the edge

Recognizing the need for institutional innovation will then increase our commitment to transformation. Everything will need to change in our institutions. That caterpillar will need to become a butterfly.

But how? The traditional approach to transformation – what I call the “top down, big bang” approach to transformation – has a very high failure rate. The failure rate is driven by the strength of the immune system and the antibodies that reside in every large institution and that are very effective at mobilizing at the first sign of an effort to change the way things are done. Never, ever underestimate the power of the immune system.

Rather than trying to confront the immune system with a massive spending program that will endure for years in an effort to transform the core of the institution, my advice is to drive transformation by scaling an edge of the institution. An edge is a part of the institution that today has limited revenue or impact but, if you understand the exponential forces that are shaping the broader economy and society, has the potential to scale very rapidly to the point where it becomes the new core of the institution – it is not just a diversification effort or a growth effort, it is an effort to replace the existing core with a new, transformed core.

Resist the temptation to take that edge and try to push it back into the existing core to serve as a catalyst for transformation there. The immune system and antibodies are very effective at recognizing that foreign body and mobilizing to crush it quickly. Instead, focus on scaling the edge as rapidly as possible and, over time, pull more and more of the people and resources from the core out to the edge. That edge can serve as the cocoon for the birth of a beautiful butterfly that can fly to places that the caterpillar would never have imagined, much less attempted to reach.

The bottom line

Transformation is an imperative in a world of exponential change. But the “transformations” that we are currently attempting are unlikely to get us from where we are today to where we need to be.

We need to take inspiration from the caterpillar that somehow finds a way to transform into a butterfly.

One problem with the caterpillar/butterfly metaphor is it suggests we need to embark on a journey from one fixed object to another fixed object. The real win in an exponential world is to find out how to transform into something that will keep transforming as the pace of change further accelerates. That’s the power of the scalable learning institutional model – it provides us with the tools and approaches to embark on a continual transformation journey.

John Hagel is co-chairman for Deloitte LLP’s Center for the Edge with nearly 30 years of experience as a management consultant, author, speaker and entrepreneur. He is the author of numerous books, including “The Power of Pull,” “Net Gain,” “Net Worth,” “Out of the Box” and “The Only Sustainable Edge.” Previously, he was Global Leader of McKinsey’s Strategy Practice and Electronic Commerce Practice (which he founded and led from 1993-2000). John holds a B.A. from Wesleyan University, a B.Phil from Oxford University and a J.D. and MBA from Harvard University. Learn more about John’s insights here >>