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5 Dimensions of Digital Transformation Every CXO Should Know

Roland Alston, Appian
November 14, 2017

An interview with Vijay Gurbaxani: The latest conversation in an on-going series of thought-provoking interviews with big thinkers, authors, scholars, and visionaries on all things digital transformation.

Vijay Gurbaxani, Director, Center for Digital Transformation, University of California, Irvine

Vijay Gurbaxani, Director, Center for Digital Transformation, University of California, Irvine

Vijay Gurbaxani is the Founding Director of the Center for Digital Transformation (CDT) and Taco Bell Professor of Business & Computer Science at The Paul Merage School of Business at the University of California, Irvine. He is an expert in the economics of digital technologies. His research and teaching focuses on digital strategy, tech-enabled business transformation, and the valuation of digital technology investments.

Gurbaxani has lectured worldwide on management issues, and consulted for and provided research expertise to many organizations, including Fortune 500 companies, technology service providers, and leading consulting firms. His advice to traditional, non-tech companies? You don't have to be a software company to think like one.

In this thought-provoking Digital Trailblazer interview, Gurbaxani reveals the five dimensions of digital transformation that every organization must address.

Read the full Q&A below.

Appian: Thanks for participating in our digital thought leadership series. Among other things, you're a highly-respected big thinker on digital leadership, and the founding director of the Center for Digital Transformation. Tell our readers about your mission at the Center.

Gurbaxani: We started CDT in 2012. What's interesting is that when I started the Center, we got a lot of push back on the name. Most people didn't understand what digital transformation was. Fast forward to 2017, and now there are numerous consulting firms with digital transformation labels.

Appian: So, what motivated you to start CDT?

Gurbaxani: The reason we started CDT is because business schools tend to be organized around the traditional academic disciplines we're familiar with Finance, Accounting, Information Systems, Marketing, Operations, Organizational Behavior, etc.

But in my view, schools were inadequately focused on developing leaders for a digitally-driven world. Which was a shortcoming, because businesses in all industries are trying to adapt to a digital world.

Appian: And how would you define your mission?

Think Like a Software Company

Gurbaxani:We define our mission as "advancing the productivity and competitiveness of business in the digital economy." And we focus primarily on incumbent companies, helping them to learn how to adapt and succeed in an ever more digital world... Our point of view is that you don't have to be a software company to think like one.

Appian: Which is especially relevant for senior execs at traditional companies.

Gurbaxani: Yes. We believe that increasingly, more and more of the value for business is going to derive from software. It is software that allows a business to scale innovative ideas. We're familiar with the kinds of large physical assets, like large factories, that give you economies of scale.

"But increasingly global supply chains can deliver the kinds of things that custom factories delivered in the past. What distinguishes you now is ideas. But ideas don't scale, unless you put them into software. So every business will need to think like a software company."

So, if you're Google and Facebook, you've got one set of challenges and opportunities. On the other hand, if you're a more traditional company, or a smaller company, you may not have the same access to talent and resources.

The takeaway is that you need ways to build the apps that distinguish you in more cost-effective ways.

Appian: Last year, Forbes reported that 86% of companies fail at digital transformation. Based on your conversations with business and IT leaders, what are the biggest barriers to getting transformation right?

Gurbaxani: I think the answer varies with the company. I like to think of it in terms of dimensions. The first is having the right vision. A lot of businesses think that digital transformation is a marketing activity or a customer experience initiative. Or you can have pockets of digital here and there.

But digital transformation is about operating in a whole new way.

Think about it like this. Amazon recently bought Whole Foods. And there was a $35 billion drop in the stock market evaluation of other grocery retailers and suppliers in one day after that announcement came out.

Then, Amazon said that it was going to drop the prices on many food items. And the valuation of Kroger, one of Whole Foods' biggest competitors, fell a significant amount.

Are you Digital-Ready?

Appian: So, there's a sense among investors that many traditional companies aren't ready for the digital world?

Gurbaxani: It speaks to me about how vulnerable traditional players are. Actually, Kroger has done a lot digitally. But the market just didn't perceive them as being prepared to take on an Amazon. So the question is, if you're a traditional, incumbent, company, how are you preparing for the disruption that is coming your way?

"If you're talking to Lyft, they're not saying they want to be a better taxi cab company. They're talking about a transportation revolution. So you're really seeing the signs of a very, very different future. Which makes vision a top priority item."

Appian: Okay, what's the second dimension?

Gurbaxani: The second dimension is about going all in with digital transformation. It demands a lot in terms of money, resources, and courage in terms of missteps you're going to make, in terms of investor perceptions. This is a tough road.

You're in the software industry, so you understand this better than anybody. Software is really hard. You're going to have bumps in the road. You're going to make mistakes. Things are not going to workÖThere is no piece of software that is entirely bug free, if it's large and complex.

Additionally, large-scale transformation also requires a third dimension which is the commitment of senior leadership.

"The fourth dimension would be culture, because some people don't understand the kind of culture it takes to succeed in the digital economy. You need a culture where it's okay to make mistakes, and people understand the importance of moving fast."

The fifth dimension is talent and tech infrastructure many companies don't have the technology infrastructure that would allow them to innovate in the digital world.

Appian: Some pundits have called this the age of constant accelerations. How can companies stay relevant in these times of constant change?

Gurbaxani: I think you have to play the long game. We're caught between two worlds. We live in a physical world, and we're moving towards a digital world. We're in a transitory phase. That's the first thing people need to appreciate. When I started teaching back in the late 80s, people talked about 5-year plans. It was very predictable, and to some degree, very boring. But we were very much in a physical world.

Stay Relevant. Focus on Customers

Appian: So we're transitioning to a digital world...

Gurbaxani: But we haven't gotten there yet. One of the things that makes it exciting, is that technology keeps improving. But the goalposts keep shifting, because the technology keeps getting better.

And then we have this smart infrastructure, the smart phone, internet connectivity, IoT, sophisticated software as a service, massive data storage, all these things. When you put them all together, we have a completely wired world.

Think about the business models that are now possible, like Uber and Lyft. They couldn't exist without a smartphone. The trick is to stay focused on the customer, but to also understand that your customer may not always know what the future holds.

Appian: So what's the trick to staying relevant, and keeping up with expectations?

"Staying relevant means always thinking about whether your customers are deriving value from your offering. It's thinking about reducing the obstacles that keep customers from accessing your product or service. It's about continually enhancing the value proposition of your products and services."

Gurbaxani: Beyond that, we have to re-imagine how we do what we do, and ask ourselves: What does digital make possible?

You have to re-imagine your offerings for a digital world. Digital is always pushing the boundaries, pushing you to do things today that you couldn't do before.

In Digital Economy, Fast Tech Adoption Wins Big

Appian: You've said that the economics of the digital world are different than the economics of the physical worldÖ.What did you mean by that. And what's the takeaway for C-Suite execs?

Gurbaxani: Many of these digital businesses have experienced first mover or early mover advantage winner takes most. So, it's more important to be early, and less important to be perfect. That's the takeaway.

Appian: Which means that the early movers win big?

Gurbaxani: Yes. The analogy I like to use is the Triple Crown winner Secretariat the horse that won the Kentucky Derby by 2 Ω lengths in a field of 15 horses. And won the Belmont by 31 lengths in a field of 5. That's the dynamic we see in the digital world.

The point is, things start out with lots of competitors. And then somebody takes the lead. And the lead gives them more data and better predictions. And then they become the dominant player a juggernaut like Google for example.

That's the dynamic of the digital world.

Appian: But why is it more important to be first than to be perfect?

Gurbaxani: Think about it. In the past, you didn't release a car that was imperfect, because you didn't have a chance to make it better after you sold it.

"But in a digital world, you can improve cars after you sell them, because you can keep downloading improvements, as Tesla has shown. That's what I mean when I say the economics are different. So if the economics are different, your strategy has to be different, because strategy depends on the economics."

Appian: In a recent tweet, you said that the Amazon-Walmart showdown explains how digital economics drives strategy. What lessons can we learn from this showdown?

Digital Mojo: Platform Economics

Gurbaxani: In the past, retail used to function as completely different segments. You had bookstores, you had grocery stores, and at most you had a department store. And in the predigital world, all of these things co-existed. Now, once you have a platform, you have what economists call economies of scope.

And, you can sell pretty much anything people want to buy. So once you've got a platform, the economics are incredible. And the marginal cost of adding products is close to zero.

The second thing that Amazon does better than almost anybody else is using software to drive efficiency and productivity.

Appian: Which brings us to the next question. Is digital transformation more about driving costs savings and efficiency or productivity and revenue?

Gurbaxani: I separate it into two different pieces. First, I need to know if I'm making a product or service that people want to buy.

"Think about GE. They've figured out that the locomotives or other industrial products that they're making and selling are just one piece of the solution. The other critical component is the software and services they're developing and offering to make railroads and other industries run more efficiently. The point is, you've got to make sure you're comprehensively addressing customers' needs."

Another example is that you can now pay GE for its MRI machines per image. Which means the customer does not incur a large capital expense or the associated risk. GE may even make more money this way, compared to selling machines outright and bundling them with service contracts.

You've also got to make sure that your products and services are current. About five years ago, I was talking to a major auto company that I will not name. And I said: "Do you know where your cars are"? And they said when they sell cars to dealers, they're done.

I explained that Tesla knows where their cars are 24x7. That's the world we live in today.

A.I. and Machine Learning: Firing up Productivity

Appian:Yes, back in the day, global sourcing and global supply chain were king. Now you've got business models like Lyft and Uber, which are very different ways of doing business.

Gurbaxani: That's right. And, we're also training people to work with the machines of the digital economy. In games, when you match people against machines, machines will make moves that people would never think of.

What if you extrapolate that? What if you were doing cancer diagnosis, and you turned the machines loose on cancer data? Could they find new ways to diagnose cancer because machines can find patterns in data, that humans can't? Could you use that experience to educate physicians?

In the old days, data was two dimensional or three dimensional, and you could plot it and locate it. Now we've got tens of thousands of columns, and millions of rows of data. And it's impossible to visualize anything, to see patterns in multi-dimensional data with the naked eye.

Appian: Speaking of patterns and trends, as you look into the near future, what are the big trends you would advise senior executives to focus on in 2018 and beyond?

Gurbaxani: I think Artificial Intelligence and Machine Learning are among the biggest things on the radar, because they drive enormous productivity gains, along with Cyber Security which is of course a defensive play.

"But I would say that the bigger challenge is to think about how all of this comes together. I think we get caught up in seeing the trees and not the forest. We need to see how the world is changing. Not worry about a specific technology."

Appian: So, as you look at the big picture, why should senior executives make digital transformation a strategic priority?

Gurbaxani: It should be a priority, because just like natural species, you adapt to your environment, or go extinct if you don't.Every industry has different risks. But every industry will need to adapt to a digital world.

The status quo is not an option.

P.S. One more thing. Be sure to check out the Transformer's Almanac before implementing your digital transformation plan. Even if you've already started, this digital forecast will save you time, money and grief.