How to optimize digital strategies for effective transformation

Companies must be clear on where to target digital adoption, how the costs will be offset and what the right pace of change is.

In brief

• Digitalization and sustainability are interconnected trends shaping strategic decision-making.
• A holistic approach, supported by an innovative culture and a clear vision from the top, is needed for effective digital transformation.
• Overcoming digital and environmental, social and governance disruptions can be expensive but is crucial to business survival and success.

The rapid advancement of technology in recent years is blurring the lines between previously separate sectors. Against a backdrop of increasing digitalization, a wide range of industries are converging as they seek to ride out the impact of disruptive technological shifts.

This convergence has been playing out for many years in media and telecommunications, where consumers have long subscribed to television content through their telcos or purchased novels and music albums through online platforms. The trend is now spreading to other sectors, such as manufacturing, health care and financial services.

To navigate the disruption, which has been accelerated by the COVID-19 pandemic, companies are investing heavily in digital innovation that can help them explore beyond their core sector and find new ways to deliver their products and services to customers.

The need to undergo digital transformation in the current uncertain environment is clear. In a 2020 EY-Parthenon survey, nearly two-thirds of executives agree that organizations must radically transform their operations over the next two years.

To do that, they are turning to emerging technologies, such as Internet of Things, artificial intelligence and cloud computing, which are considered “table stakes” or minimum requirements, for businesses today. Executives surveyed also predict large spikes in investments in automation and digital collaboration tools.

Digitalization is also linked to sustainability and these two trends are shaping strategic decision-making. Organizations are on the cusp of a large systemic change that will fundamentally shape industries. This will play out over the next 50 years and the winners will emerge in the next 10 years. To succeed, firms will need to win on two fronts: digitalization and ESG (environmental, social and governance).

While not always the case, the two trends can mutually reinforce each other. Adopting the correct digital strategy can boost a company’s ESG efforts. For example, electric car makers leverage digital innovation to design and develop cars with lower or zero carbon emissions, thereby enhancing their ESG credentials and helping them overtake traditional leaders in the automotive industry.

Digital strategy is a business imperative

Importantly, whether companies can realize ESG ambitions, business goals or superior returns from digital investments will depend on their digital strategy. The EY-Parthenon survey found that firms with higher returns from their digital investments demonstrate a clear digital strategy. These leading firms have also shifted their focus from developing digital solutions in-house to M&As and partnerships to accelerate digital initiatives.

There is a clear correlation between companies that underwent proper digital transformation and their ability to truly disrupt existing business models and change their business portfolio. This will have an impact on how these businesses are valued.

There are potential pitfalls of equating buying an IT solution with a digital strategy. Companies must be more proactive when it comes to adopting digital to enhance the sustainability of their organizations. Digital transformation will allow companies to create new value chains. And when value chains converge, they establish new ecosystems.

A focused and holistic approach

Digital transformation can be expensive and making changes to incumbent operating models may be painful. Indeed, many firms grapple with failures in initial digital efforts and find it hard to link them to value.

A successful digital transformation strategy requires an innovative culture and a clear vision from the top, which can be translated into a concrete business strategy that is farsighted and resilient. This path is difficult as it may lead to lower margins and cannibalization of historical cash cows. But if the vision is clear, the positive outcomes in the long run are certain.

Firms often tinker with digital adoption and back away at the first signs of discord. One way to break this impasse is to bring digitalization changes into the core of the business. Companies also must be prepared to infuse digital capabilities throughout the business and make it part of their organizational DNA. While companies recognize the urgency of investing in digital, many fail to scale up these efforts.

This is because many organizations do not take a strategic and focused approach toward digital transformation. In such cases, different groups and functions within the organization undertake digitalization efforts in silos.

It can be challenging to execute large-scale digital transformation successfully across an entire company. Companies may wish to take a minimum viable product approach to test, learn and adapt fast, and drive wider confidence in the benefits of digitalization. As long as digitalization is seen as a means to meet and exceed core business goals, there will be greater collaboration and emphasis.

Importantly, companies should view digitalization in terms of how it solves real user needs, and in doing so, how they can differentiate themselves with a distinct technology platform, monetize data and create customer stickiness.

Scaling up through M&As

Companies can choose to speed up their digital efforts by either building internal capabilities or acquiring them. The optimal approach is one that pursues a balance of both organic and inorganic strategies for value and speed. There is evidence to suggest that scaling up through investment vehicles like M&As is more likely to result in performance that exceeds expectations.

Nearly three-quarters of the executives surveyed in the aforementioned EY-Parthenon study are shifting to M&As and partnerships to accelerate digital initiatives. The research also found that digital leaders are shifting an average of five percentage points of their investment mix from building internally to acquisitions.

There are numerous benefits from pursuing the M&A route. It is an effective strategy for acquiring both the technology and talent needed to fuel digital transformation, as well as a quicker and more flexible way to capture emerging opportunities ahead of the competition.

However, there are challenges that come with acquisitions, including the risk of failure in post-merger integration. Furthermore, if the acquisition target is a start-up, it may be difficult to estimate the value of the firm’s technology and arrive at the correct price.

In Southeast Asia, many corporates know the benefits of going digital but have yet to leverage opportunities in M&A to acquire technology and talent. As companies look to pursue more deals to advance their digital strategy, they are also considering divestment as an attractive option to fund these investments.

Leveraging ecosystems

It takes time for companies to develop and scale up their own technology platforms. Forging partnerships and participating in digital ecosystems is another strategy that companies can pursue to facilitate transformation.

Ecosystems have become more relevant today as the world moves toward platform-based business models that may eventually evolve into one-stop solution platforms. Driving this trend is the convergence of industries and increasingly borderless markets.

Being part of an ecosystem allows firms to access new opportunities to deliver products or services, and potentially leads to the creation of new assets that can be monetized. In pursuing this route, however, companies may face difficulties in identifying the right ecosystem partner, balancing valuable insights with customer data privacy, managing overlaps in operations and determining ownership of the end-user relationship. Furthermore, companies will need to determine if they wish to become the platform where other firms connect to, or join an existing ecosystem or platform led by another player.

The future is here now

The pandemic has highlighted the urgent need for companies to accelerate their digital journeys to create long-term value. Yet, merely implementing digital technology in business processes on a piecemeal basis will not suffice for success.

For digital transformation to work, companies need to critically review their business strategy and determine how gaps can be plugged with digital solutions through organic investments, strategic alliances, or tapping into the broader digital ecosystem.

To survive and thrive, firms need to overcome the twin disruptions of digital and ESG. While these efforts can be expensive, painful and may result in lowering of financial projections, it is imperative to make these investments. A focused approach of adopting digital at the core and allowing for these investments to reinforce one another is key. This will result in a calibrated path where investments will lead to growth and costs will be offset by growing multiples in the capital markets.