Digital Transformation, One Discovery at a Time

CURT NICKISCH:  Welcome to the HBR IdeaCast from Harvard Business Review.  I’m Curt Nickisch.

If your organization is not native to the digital economy, there’s one question that can strike fear in the hearts of its leaders.  And that is, what is your digital strategy?  Answering that question has accrued more offsite retreats, consulting hours and digital transformation meetings than anyone could ever count.  And suddenly like it or not, organizations everywhere are having to answer that question on the fly: what is our digital strategy?

Because the coronavirus pandemic has been such a titanic shift in worker and consumer behavior that if you didn’t have a digital strategy before, you’re figuring it out now.  As the CEO of Box, Aaron Levie said on Twitter, some companies will move faster in this new reality and others will grind to a halt.

The good news according to our guest today is that this rapid change of past decision making can feed right into a proven strategy for bridging the divide – a process called “Discovery-Driven Digital Transformation.”  In fact, that’s the title of her new article in the May-June 2020 issue of Harvard Business Review that she cowrote.

Our guest today is Rita McGrath.  She’s a professor at Columbia Business School and she joins me now.  Rita, thanks for being here.

RITA MCGRATH:  It’s a pleasure.  Thanks for having me.

CURT NICKISCH:  Let’s just start with what do you mean by discovery-driven digital transformation?  Digital transformation naturally is something that we all know.  What’s the discovery-driven part?

RITA MCGRATH:  Well the tendency when people see a big shift in their context coming, is to make a big move of some kind.  So there’s this sort of philosophy that says, if the shift in the environment is substantial, that you need to make an equivalently big shift in your strategy.  And the dilemma with that is that in a high uncertainty context, to make a big plan, to make a big splash you’re highly likely not to have that, right?

And so, what the process that I’m recommending is much more akin to the way you might approach an innovation program.  Where instead of launching it like a great big bang and running the risk of a huge failure, you take it more step by step.  So you plan to the limit of what you know and then you stop and say, well what have we learned since the last checkpoint that we had?  And depending on what your answer is, you plan and take the next step.  So it’s building up digital capability but in a very step-by-step kind of way.  And that also allows the organization to much more readily absorb the change.

CURT NICKISCH:  Is that something that you’re seeing more of today?  Because certainly everyone knew that the economy is becoming more digital and that eventually people needed to work in different ways and that consumers that were going to buy in different ways, and suddenly we have this window where that is just happening very quickly and is more apparent and it’s still very unclear how much things are going to return to the way they are or adapt and pivot to something new.

RITA MCGRATH:  Well, I’m going to quote my coauthor, Ryan McManus on this.  If you think about the evolution of digital in our lives, right? So what he would say is that to be digital, means you’re adding information and connectivity to things.  So that could be to people.  That could be to physical objects.  That could be between systems, right.  But it’s that quality of information and connectivity.

So digital really had its start when it got, when you got out of sort of the mainframe era and essentially where it was easy, right.  So we digitized written material and we digitized office communications.  And then we digitized music.  And then we started to digitize video.  And at that time, in the evolution, digital people were kind of in marketing, right.  But the real core operations of the business were not really touched yet.  Then digital moved onto products.

But still, the core operations weren’t really being touched.  What you got now, and I think the coronavirus crisis is just going to accelerate this, is you have digital moving into business models.  So what you got now is digitally-enabled businesses that are being incredibly disruptive to incumbents because they’re doing things orders of magnitude better, orders of magnitude less expensively, orders of magnitude faster.

And so what you’re seeing now is as digital moves into business models, now you got the C-suites attention.  So I think when you think about what life after the coronavirus is going to be, is I don’t think we’re going back – digital’s certainly not going to be in retreat.  And we’re not going to go back to doing things the old analog way.

CURT NICKISCH: And I suppose that just means that the experiment-driven process that you’re writing about here, this situation is demanding many experiments – whether they’re voluntary or not?     And it sounds like also it’s, it sounds like this is also rewarding companies that had made plans, but just hadn’t gotten there yet.  So at least they had plans in place even though that they were going to have taskforces working on it for months?

RITA MCGRATH:  Yeah.  I mean I think the companies that survive strategic inflection points, which are right about a lot, tend to have been in motion already.  We’ll call this part of the new strategy playbook.  You know, they tended to be already doing experimentation.  They have teams that are sort of trained in how to do this.  They’re a few steps ahead.

So, if I put this all into context, the original idea behind discovery-driven planning came from the world of innovation.  And when you’re thinking of doing something that’s innovative, your ratio of assumptions that you have relative to knowledge is very high.  So you’re making a ton of assumptions relative to what you actually know.  And you can’t really plan sensibly in a world with that much uncertainty to it.

So, for many, many years we kind of had the core business and everybody understood what that was and it was basically repeating the same business model over and over.  And then you had your innovation businesses which were much more experimental and test and learn, and pivot and that kind of thing.  Well, with Covid-19, what’s happened is everybody’s core business has lurched over into the high-uncertainty space.  And what, the good news is we know a lot about what you need to do in highly uncertain spaces like that.  The bad news is many people don’t have that toolkit and so they’re going to have to learn it really from scratch.  So its things like rapid-fire experimentation, containing your risks by making sure your exposure is limited.  You know, making sure that you’re planning through a series of very, disciplined checkpoints.  So its real discipline, it’s just really different than what you do in your normal day to day business.

CURT NICKISCH:   So you said that we know how to do this, it’s just that you have to do it quickly now, and people don’t have the tools.  But what do we know?  What, do we know our proven practices for, for these experiments and changes?

RITA MCGRATH:  So, I think at a what-do-I-do-first kind of level, what you really want to be doing now is assessing what’s going on very quickly in your portfolio.  So, any company of any complexity has a lot of junk sitting around in their portfolio.  There are businesses nobody’s really looked at critically for some time.  There’s new ventures that are kind of zombies.  They haven’t made progress and so forth, and so forth.  So, you want to really just understand where you are.  I think that’s a very important point of departure.

Next, you have to really look at what are the capabilities that you bring to bear and if you’re existing business is not going to be able to deliver the revenue or the returns that you’d been planning on, think about where else those capabilities might be relevant.

So I want to steal from my coauthor Ryan McManus here.  He’s on the board of a publicly-traded firm called Nortech.  And he happened to be meeting with someone who said, well you know the whole problem with ventilators is not a problem with the tubes and the pumps and all that stuff.  Those things can be pretty quickly gotten.  The problem ventilators is the circuit boards required to control them.  And Ryan was like what?  That’s the real problem.  So he called up a couple of his other members on the Board and sort of told this to them.  They reached out to management and Nortech is a circuit producing company.  And now they’re you know, reached out to a few of their big possible customers.  Got a big contract with GE.  And now they’re full bore helping with the ventilator shortage.

So that’s an example of in a very sort of step by step way, saying hey, I have a capability.  And normally they would sell into telecoms and they’d sell into communication companies, but here’s a huge opportunity that just opened up in healthcare that nobody was even thinking of.  So I think a lot of those kinds of discoveries and pivots are what we’re going to be seeing the more successful companies doing.

So, step one is really look at your portfolio.  Step two is figure out where your capabilities might be relevant.  Step three possibly in parallel with step two, is stop doing stupid stuff.  You know.  And any company that we’ve worked with has some stupid stuff going on and so you can, you can pull resources out of that so that you can really redirect them into what the futures likely to hold.  And as you’re doing all this, you really have to bring your people with you.

CURT NICKISCH:  What about your people?  Because it’s perhaps even more difficult now with people working remotely for an uncertain amount of time to train people even.  Or, help them have the time to be able to devote to onboarding some of those skills.  So, what, what are some things that, that you think companies need to do to, to position themselves for, you know, for a newer world?

RITA MCGRATH:  Well I think, so let’s start off with what kind of leadership I think is helpful in this situation.  And I draw a lot on the work of Tom Kolditz who wrote a wonderful book called In Extremis Leadership, about what he calls danger professionals.  You know, crisis professionals.  And his thesis is that a lot of what we know about leading in a crisis is derived from crisis amateurs.  You know, these are people who got themselves into trouble and either they got out or they didn’t, but that’s a different situation than someone who’s deliberately putting themselves into a dangerous situation so people in the military, or first responders in an emergency situation.

And a couple of things that he would observe is the first thing you need to do is bring the emotional temperature down.  Don’t add to the chaos by being chaotic yourself. Second thing is get people focused on some specific tasks, external to themselves.  It kind of gets their minds off the crisis and the worry, and the anxiety, and gets them really focused on you know, for now right.  And this is the discovery-driven part, for now here’s what I want you to do.  And you know, I’ll let you know more when I know more, but let’s be very transparent and open about what we know and what we don’t know.

And then leading people with a sense of competence.  So I think this notion of breaking down, figuring all this out into pieces and getting people focused on how they can make a contribution to the whole, especially in a digital way.  I think those kinds of practices are going to be very important.

So, if I go back to the toolkit for a minute, the kinds of things that we talk about in the article are exactly the kinds of practices people need to start getting more comfortable with.  So, for instance, don’t ask me what the ROI is of something because I don’t know yet and I won’t know for a while.  It’s an impossible question to answer.  What I could tell you is if I had $500 to spend, here’s the three customer-related experiments I could run, and here’s what I think we would learn.  So I can answer that question.  I can’t answer questions about ROI, or those kinds of things because the answer’s you know, months down the road.

CURT NICKISCH:  It’s funny, in your article you gave Best Buy the box store consumer electronics chain in the United States as an example.  And of course, you wrote this article before the pandemic and it was interesting reading about how Best Buy really worked on a digital transformation to be able to stay as an in-store retailer but compete against e-commerce sites such as Amazon.

And one of the things that they did was set up a program where people could have something shipped for free to the store and picked up.  So they put in processes of being able to order, and pick something up on-site and I just had to think to myself, they must be so thankful that they did that because they have that in place now at a time when people want to just be able to drive up and load something in their car and go off and not even go into the store anymore?

RITA MCGRATH:  Exactly.  Oh exactly.  And that’s, I mean that’s also a lovely example of this philosophy that I was describing where you know, they didn’t go to that all at once you know.  They started with a couple of stores and set it up in a few places and when that started getting customer traction they said oh, we can then roll this out chain-wide.  So is a great example of experimenting with, would customers even want that?  And it turns out a lot of them do.  A lot of them really want the ability to order online, but then they want the immediate gratification of being able to go in and pick something up.

CURT NICKISCH:  Right.  It’s still a very chaotic time and there’s probably a lot of learning that’s happening on the fly in a lot of different places of your organization.  And it’s also probably a lot harder to collect those and pull them together and process them when you’re also dealing with a lot of just immediate financial and other concerns.  So, what advice do you have for organizations to be able to, yeah, just handle the flow of information and the experiments that are happening automatically or by design – how can they process all of that and also be able to step back and figure out what they’re learning and move forward with it?  How do you do that?

RITA MCGRATH:  So you know, a great practice that’s an example of the kind of decision making and information sharing, I’m talking about, was described by Stanley McChrystal in his book, Team of Teams.  And he talked about trying to coordinate this massive military effort against an enemy that was constantly changing shapes.  So, it’s kind of similar to the situation we’re in now, where we’re trying to figure out what our strategies and plans should be, and the information we have to work with changes by the day.

So what he instituted was a nonhierarchical call, a daily call where anybody who had relevant information could dial in and share what they knew.  And at one point he told me he had up to 7,000 people on the same call.  So everybody knew what was going on, all the way across this very complex organization.  And the other principle that he used was to push decision-making authority as far down the chain of command as one could.  He said if a lot of decisions come to me it means I haven’t been doing my job well.

And so a second thing that was done in that case, which I think is very relevant for what people are going through today, is you want to the extent that you can, to push decision making as close to the phenomenon as you can.  So things are moving so fast you really don’t have time to wait for information to sort of make its way to the quote, quote, top of the organization.  You really want people to be able to make decisions on the fly as you go.

So another company that I use as an example in the article is the German metals distributor Klöckner, and one of the things they did to facilitate this kind of learning was they put in what they called nonhierarchical communication.  So, very hierarchical German, traditional company, but they put in this system where anybody could send a message to anybody and Gisbert Rühl, their CEO, made it very clear that he would personally accept these messages and respond to them.  And so, if you think about how many layers of bureaucracy and how many meetings that cuts through and how much really valuable information you can convey in a very efficient, short period of time.  That’s pretty remarkable.

And then I think the third exemplar is something that Alan Mulally the former CEO of Ford and before that he was at Boeing.  He had what he calls a weekly business plan review meeting.  And what that is, is everybody that is part of the plan has a responsibility for their part of the plan and once a week they just go around the room and share where they are.  And if they’re in trouble, it might be color-coded red.  If they’re in good shape it might be color-coded green.  But everybody knows what’s going on and they can collectively work on the problems that they got in front of them.  So I think those, those all have this common theme of rapid sharing of information, even if it’s just the status.  And rapidly getting everybody either virtually or personally in the same space.

CURT NICKISCH:  Yeah, I remember listening to a podcast interview with General McChrystal and he talked about one important shift for that meeting, with all those people, was to really up the candor.  It had to be someplace where people could share things frankly and directly, and not polish a message for an environment like that, but really just give unvarnished information so that, so that people could process it and act on it.  And he had to create a culture that brought that out.

I want to ask about digital native companies because some of those like the Airbnb’s and the Lyft’s of the world are also hurting from this coronavirus pandemic.  And they, you know, just being, just having successfully made a digital transformation or being a digital native company doesn’t protect you from having to do this maybe again.

RITA MCGRATH:  Well right.  I mean I think you know, strategy, the fundamentals of strategy still apply, even if you’re a digital native.  So if you don’t have entry barriers, or if you’re suffering from a demand shock, or if any Tom, Dick, and Harry can imitate what you do, you know Strategy 101  says that’s not going to be an advantage that’s very sustainable.  So, if you think about Airbnb, clearly they’re suffering from a huge demand shock.  And you know, will it change our view of getting into strangers’ cars or sleeping in strangers’ houses, or this whole gig economy, sharing economy thing that’s become so popular, doesn’t look so great to be hanging out with strangers when you don’t know where those strangers have been, or what bugs they might have with them.

So, there’s some things that are really changed overnight.  You know, the other thing that I think it’s important to understand about a lot of these born-digital companies, and in the article, we talk about dollar shave clubs, an example.  In a lot of cases, these are very easy companies to start, but because they’re so easy to start they’re also really hard to sustain.

So an example of this would be Casper, you know, the mattress in a box people.  And it, you know, they innovated.  It was great.  Very, very upbeat, hip advertising and everything, but then they tried to go public and the public looks at the business and says hang on.  There are 172 other mattress-in-a-box companies.  Why would we invest in yours?  You know, there’s nothing to protect that business.  And you know, if you wanted to this afternoon, you could start a mattress in a box company.  So you know, there’s, the rules of strategy haven’t really changed.  I think what has changed is the mechanisms through which some of these get expressed.

CURT NICKISCH:  Rita, thanks so much for coming on the show to talk about this.

RITA MCGRATH:  Oh, it’s been a pleasure.  Thank you.

CURT NICKISCH:  That’s Rita McGrath, professor at Columbia Business School and a co-author of the article “Discovery-Driven Digital Transformation.”  You can find it in the May-June 2020 issue of Harvard Business Review, or at HBR.org.  This episode was produced by Mary Dooe.  We get technical help from Rob Eckhardt.  Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast.  I’m Curt Nickisch.